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Item 2. Management’s Discussion and Analysis

2025-05-14 compared with 2024-11-12 · 82 added, 187 removed, 111 unchanged (71% of the section changed)

MANAGEMENT’S DISCUSSION A ND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in understanding our results of operations for the nine months ended September 30, 2024 and 2023 and should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and with the consolidated financial statements, notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

The following discussion is intended to assist in understanding our results of operations for the three months ended March 31, 2025 and 2024 and should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and with the consolidated financial statements, notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024.

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

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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 $450.0 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.

On April 24, 2024, pursuant to an amendment to the Merger Agreement dated April 16, 2024, Parent paid to us $0.1 million to be used by us to pay our costs and expenses associated with printing and mailing the definitive Proxy Statement for the Merger to our stockholders.

On May 3, 2024, Parent provided Equity Financing Subscription Agreements evidencing agreements by the financing sources party thereto to provide an aggregate amount of equity financing to Parent equal to $160.0 million.

Of such $160.0 million equity financing commitments, $10.0 million has been drawn by Parent and was used to fund the initial $10.0 million deposit into escrow at the time the Merger Agreement was signed, and such deposit was released to the Company on January 24, 2024.

With respect to the remaining $150.0 million of equity financing commitments, under the terms of the applicable Equity Financing Subscription Agreements, the obligation of the relevant financing sources to fund their portion of the equity financing is conditioned upon the satisfaction of certain conditions, including Parent entering into Equity Financing Subscription Agreements evidencing an aggregate amount of equity financing equal to $200.0 million and the other parties to such Equity Financing Subscription Agreements providing the related equity funding in escrow concurrently with or prior to the closing of the transactions contemplated by the Merger Agreement.

On September 19, 2024, pursuant to an amendment to the Merger Agreement, the amount of merger consideration payable to the holders of the Company’s Common Stock in connection with the transactions contemplated by the Merger Agreement would be reduced from $9.80 per share of Common Stock to $7.00 per share of Common Stock.

This amendment further amended the Merger Agreement such that the existing holders of the Company’s Series A through Series A-4 preferred stock, par value $0.0001 per share (collectively, the “Preferred Stock”), who are the holders of all of the issued and outstanding Preferred Stock of the Company, will roll over 100% of the Preferred Stock held by them into new preferred equity of Parent following the Merger (such proposed rollover, the “Rollover Transaction”).

In addition, this amendment further amended the Merger Agreement to (a) delete the Company’s right to terminate the Merger Agreement at any time prior to delivering the Evidence of Funding by Parent (as defined in the Merger Agreement), (b) add a right for the Company to terminate the Merger Agreement by written notice to Parent if the Closing (as defined in the Merger Agreement) has not occurred on or before 11:59 p.m.

Central Time on November 29, 2024 so long as the Company’s breach of the Merger Agreement is not the primary cause of the Closing not to have occurred, (c) add a customary non-solicitation covenant, in substantially the same form as was present in the Merger Agreement before such covenant was amended, prohibiting us from soliciting, providing non-public information in response to, or engaging in discussions or negotiations with respect to, proposals relating to alternative business combination transactions, except as permitted under the Merger Agreement, and (d) consistent with the changes to the amount of the Amended Merger Consideration (as defined in the Merger Agreement) and the structure of the Rollover Transaction contemplated, reduce the amount of aggregate equity financing sufficient to consummate the transactions contemplated by the Merger Agreement (as amended) reflected in the definition of “Evidence of Funding” in the Merger Agreement from $200,000,000 to $160,000,000 (“Sufficient Equity Financing”).

Furthermore, as of September 19, 2024, Parent had delivered to us sufficient binding equity financing commitments that, in the aggregate, reflect the Sufficient Equity Financing and constitute Qualifying Additional Financing Documents (as defined in the Merger Agreement) for purposes of the Merger Agreement, and the amendment reflected an acknowledgement by Parent and the Company that such delivery had taken place.

We will hold a special meeting of the Company stockholders on November 19, 2024 (the “special meeting”) in connection with the Merger.

Company stockholders will be asked to vote to adopt the Merger Agreement and approve related matters, as described in the notice of special meeting of stockholders and proxy statement.

Adoption of the

Merger Agreement requires the affirmative vote at the special meeting or by proxy of holders of a majority of the outstanding shares of the Company common stock as of the record date.

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 $4.6 million as of November 8, 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 27, 2024, we sold, in a private placement, the remaining 20,000 shares of Series A-3 Convertible Preferred Stock (the “Series A-3 Preferred Stock”) under a 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 Series A-4 Redeemable Convertible Preferred Stock (the “Series A-4 Preferred Stock”) (together with the Series A-3 Preferred Stock, the “preferred stock”) to the Investors.

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

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 May 14, 2024, proceeds from the sale of the Series A-4 Preferred Stock were used to make a $17.3 million prepayment of outstanding borrowings under the Amended Term Loan Agreement to cure noncompliance of the Total Net Leverage Ratio as of March 31, 2024.

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

The preferred stock is entitled to 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 (defined below) of the preferred stock.

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

Battalion also has 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 $138.0 million, increased for any PIK accruals) determined according to the redemption date.

Additionally, in the event of a change of control, holders of the preferred stock 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 Note 9, “ Redeemable Convertible Preferred Stock” to the unaudited condensed consolidated financial statements.

Term Loan Credit Facility.

On December 26, 2024 (the “Initial Closing Date”), we and our wholly-owned subsidiary Halcón Holdings, LLC entered into the Second Amended and Restated Senior Secured Credit Agreement (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 (the “Incremental Term Loans”), of which such incremental borrowings in the amount of $63.0 million were incurred on January 9, 2025 pursuant to a first amendment to our 2024 Term Loan Agreement (as amended, the “2024 Amended 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 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 and $22.5 million in 2025 and 2026, respectively.

We recognized a loss on extinguishment of debt for the year ended December 31, 2024 in the amount of $7.5 million resulting from the credit agreement refinancing on December 26, 2024 which included 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.

Additionally, the Company deferred $4.3 million of original issue discount and financing costs on the condensed consolidated balance sheet at December 31, 2024 in conjunction with entry into the 2024 Term Loan Agreement and deferred an additional $1.7 million of original issue discount and financing costs on the condensed consolidated balance sheet at March 31, 2025 in conjunction with the issuance of the Incremental Term Loans in January 2025.

H 2 S 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 “AGI Facility”) in Winkler County, Texas.

The joint venture, operating as Wink Amine Treater, LLC (“WAT”) (previously Brazos Amine Treater, LLC (“BAT”)), has also entered into a Gas Treating Agreement (“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 AGI 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 CO2.

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

However, during 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 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 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 that 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, none of which would occur until the expiration of the current tolling agreement between the parties.

The AGI Facility has been processing gas since March 9, 2024 and continued to process gas in the third quarter of 2024.

Additional projects have been completed causing interruption in the daily rates;

however, the facility has processed over 3.7 Bcf through the third quarter of 2024.

The delays during the second and third quarters of 2024 have resulted in higher than expected gathering and treating costs.

It is possible that the existing remedial facility work by WAT could extend past the third quarter of 2024, and any delays in fully commissioning the facility or shut downs of the plant past the third quarter of 2024 will result in higher processing fees than currently forecast until such time the facility becomes fully operational.

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.

The acid gas injection facility (“AGI Facility”) to which we are a party to a joint venture 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 interruptions in processing due to the completion of improvement and maintenance projects, including pump and other facility equipment replacement.

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

Under a gas treating agreement (“GTA”) with the AGI Facility, 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.

We generated a net loss of $33.2 million for the nine months ended September 30, 2024 and had negative working capital of $64.5 million as of September 30, 2024.

As of September 30, 2024, we had $29.8 million of cash and cash equivalents, no additional borrowing capacity under the Amended Term Loan Agreement (as defined in Note 4, “ Debt ” to the unaudited condensed consolidated financial statements) and a total of $50.0 million in debt repayments due through September 2025, including $15.0 million due at the end of each 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 $97.7 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 Note 4, “Debt” to the unaudited condensed consolidated financial statements) 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 our 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 of preferred equity funding during 2023 and an additional $19.5 million during the quarter ended March 31, 2024 from our three largest existing stockholders.

At March 31, 2024, we were not in compliance with the Total Net Leverage Ratio covenant under our Amended Term Loan Agreement.

On May 13, 2024, we issued 20,000 additional shares of preferred equity and received net proceeds of $19.5 million, net of original issue discount and issuance costs.

On May 14, 2024, the proceeds were used to make an optional prepayment of outstanding borrowings in the amount of $17.3 million under the Amended Term Loan Agreement.

Such prepayment cured the noncompliance of the Total Net Leverage Ratio as of March 31, 2024.

We continue 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 as of September 30, 2024 .

Changes to our current business estimates and forecasts, based primarily on recent commodity prices and modifications to our planned drilling schedule to achieve better overall well economics, indicate that we will require additional liquidity to continue our operations, satisfy our debt payment requirements and meet our debt covenant requirements for the next 12 months from the issuance of these condensed consolidated financial statements.

In response to these events and conditions, we have continued to execute on a plan to reduce operating and capital costs to improve cash flow.

We also obtained support letters from our three largest current investors to purchase up to $30.0 million of additional preferred equity securities.

We believe that, based upon our operational forecasts, cash and cash equivalents on hand, cost reduction measures, and the commitment of the investors to purchase up to $30.0 million in additional preferred equity if needed, 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 Note 4, “ Debt, ” for the next 12 months from the issuance of these condensed consolidated financial statements.

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

the refinancing of our Amended Term Loan), 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.

We generated net income of $6.0 million for the three months ended March 31, 2025 and had working capital of $15.4 million at March 31, 2025.

At March 31, 2025, we had $73.6 million of cash and cash equivalents, no additional borrowing capacity under the 2024 Amended Term Loan Agreement (as defined in Note 5, “ Debt ” to the unaudited condensed consolidated financial statements) and a total of $22.5 million in debt repayments due through March 2026 .

At March 31, 2025, $30.0 million remained available for issuance on or before August 29, 2025 under a support letter from our investors.

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.

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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.

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.

Additionally, in periods of increasing commodity prices, we continue to be at risk to supply chain issues, including, but not limited to, labor shortages, pipe restrictions and potential delays in obtaining frac and/or drilling related equipment that could impact our business.

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The unavailability or high cost of drilling rigs and/or frac crews, pressure pumping equipment, tubulars and other supplies, and of qualified personnel can materially and adversely affect our operations and profitability.

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 United States 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.

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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Debt Obligations.

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

On November 14, 2022, we paid approximately $2.4 million and entered into a further Amended Credit Agreement (the “Amended Term Loan Agreement”) with our lenders which modified certain provisions of its original Term Loan Agreement including, but not limited to, our Current Ratio financial covenant, interest rate benchmark, and prepayment premiums, all as further described below.

On March 28, 2024, we entered into the Third Amendment to the Amended Term Loan Agreement (the “Third Amendment”) with our lenders.

The Third Amendment, amended the Amended Term Loan Agreement to, among other things, (a) amend the approved plan of development (“APOD”) for certain properties, (b) remove the Proved Developed Producing (“PDP”) Production Test and APOD Economic Test (each defined in the Term Loan Agreement), (c) require the Borrower to receive cash proceeds from equity issuances and/or cash contributions in an aggregate amount of not less than $38.0 million during the period from Amendment Effective Date through March 31, 2024 (the “Specified Additional Equity Capital”), which such Specified Additional Equity Capital shall be excluded from the calculation of Consolidated Cash Balance (as defined in the Term Loan Agreement) through December 31, 2024, and (d) make amendments to certain other affirmative covenants in connection with the foregoing.

On August 23, 2024, we entered into the Fourth Amendment to the Amended Term Loan Agreement (the “Fourth Amendment”) with our lenders.

The Fourth Amendment amended the Amended Term Loan Agreement to allow for a Current Ratio (as defined in the Amended Term Loan Agreement) of not less than 0.90 to 1.00 for the fiscal quarter ending September 30, 2024.

As of September 30, 2024, we had $147.7 million of indebtedness outstanding and $0.3 million of letters of credit outstanding under the Amended Term Loan Agreement.

We currently, as of November 8, 2024, have $147.7 million in borrowings outstanding and $5.0 million available for the issuance of letters of credit.

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

Borrowings under the Amended Term Loan Agreement bear a variable interest rate based on the Secured Overnight Financing Rate (“SOFR”) plus 0.15% plus a fixed applicable margin of 7.5%.

The weighted average interest rate on our borrowings for the quarter ended September 30, 2024 was approximately 12.98%.

Our Amended Term Loan Agreement contains a mandatory repayment schedule with $15.0 million due at the end of the fourth quarter in 2024 and in the aggregate, $35.0 million due from the first quarter ending March 31, 2025 through the fiscal quarter ending September 30, 2025 as well as a $97.7 million payment due upon 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 all 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.

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) )

Make-whole amount equal to 12 months of interest plus 2.00%

(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, or 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 our Consolidated Cash Balance, as defined in the Amended Term Loan Agreement, exceeds $20.0 million.

Until December 31, 2024, the forecasted APOD capital expenditures for the succeeding fiscal quarter are excluded for purposes of determining the Consolidated Cash Balance.

As of September 30, 2024, the Consolidated Cash Balance, as defined in the Amended Term Loan Agreement and excluding the Specified Additional Equity Capital, did not exceed $20.0 million;

therefore, no mandatory prepayment was necessary.

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

● Asset Coverage Ratio of not less than 1.80 to 1.00 as of September 30, 2024 and each fiscal quarter thereafter

● Total Net Leverage Ratio of not greater than 2.50 to 1.00 as of September 30, 2024, and each fiscal quarter thereafter, and

● Current Ratio of not less than 0.90 to 1.00 for the fiscal quarter ending September 30, 2024 and not less than 1.00 to 1.00, determined as of the last day of any fiscal quarter period, as of December 31, 2024 and for each fiscal quarter thereafter.

At March 31, 2024, subject to the cure provision discussed below, we were not in compliance with the Total Net Leverage Ratio covenant but were in compliance with the remaining financial covenants under the Amended Term Loan Agreement.

Under the Amended Term Loan Agreement, we have a right to cure noncompliance with the Total Net Leverage Ratio covenant within 15 days of delivery of financial statements by making an optional prepayment in an amount not greater than the amount required for purposes of complying with the Total Net Leverage Ratio and such prepayment shall not be subject to the applicable prepayment premium.

Once such prepayment is made, the Total Net Leverage Ratio shall be recalculated giving effect to the reduction in the outstanding amount of borrowings as if such prepayment had occurred on the last day of the quarter.

Accordingly, on May 14, 2024, we made a prepayment of outstanding borrowings under the Amended Term Loan Agreement in the amount of $17.3 million resulting in total borrowings outstanding of $172.7 million.

Upon giving effect to such prepayment for the calculation of the Total Net Leverage Ratio at March 31, 2024, we were in compliance with such financial covenant.

As of September 30, 2024, we were in compliance with the financial covenants under the Amended Term Loan Agreement.

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

The 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.

Under our 2024 Amended Term Loan, 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 and such payments total $22.5 million through March 2026.

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 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 Fourth Amendment in August 2024 and the Third Amendment in March 2024, 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, 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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Net decrease in cash and cash equivalents is summarized as follows (in thousands):

Nine Months Ended

September 30,

Cash flows provided by (used in) operating activities

Three Months Ended

Cash flows provided by operating activities

Cash flows used in investing activities

Cash flows (used in) provided by financing activities

Net decrease in cash, cash equivalents and restricted cash

Cash flows provided by financing activities

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

Operating Activities .

Net cash flows provided by operating activities for the nine months ended September 30, 2024 were $28.7 million compared to net cash flows provided by operating activities of $11.1 million for the nine months ended September 30, 2023.

Items impacting the increase in operating cash flows were primarily driven by changes in working capital offset by lower total operating revenues resulting from an approximate $2.22 per Boe decrease in average realized prices (excluding the impact of hedging arrangements), lower production volumes for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, and the impact of settled derivative contracts period over period .

Net cash flows provided by operating activities for the three months ended March 31, 2025 and 2024, were $12.7 million and $3.9 million, respectively.

Items impacting the increase in operating cash flows were primarily driven by a decrease in operating expenses coupled with changes in working capital for the three months ended March 31, 2025 compared to the three months ended March 31, 2024.

Investing Activities.

Net cash flows used in investing activities for the nine months ended September 30, 2024 and 2023 were approximately $52.6 million and $37.1 million, respectively, primarily for drilling and completion activities.

During the nine months ended September 30, 2024, we spent $51.8 million on oil and natural gas capital expenditures, of which $46.8 million related to drilling and completion costs and $4.1 million related to the development of our treating equipment and gathering support infrastructure.

During the first half of 2024, our cash capital expenditures included amounts related to the drilling and completion activities that occurred in the fourth quarter of 2023.

In the first nine months of 2024, we ran one 1 operated rig in the Delaware Basin, drilled and cased four 4 gross

(3.73 net), and completed and put online two 2 gross (1.925 net) operated wells.

We also received $7.0 million in proceeds from the sale of oil and natural gas assets that were deemed to be unnecessary for future operations.

During the nine months ended September 30, 2023, we spent $36.7 million on oil and natural gas capital expenditures, of which $31.6 million related to drilling and completion costs and $4.1 million related to the development of our treating equipment and gathering support infrastructure.

In the first nine months of 2023, we ran one operated rig in the Delaware Basin and completed and put online one operated well.

Net cash flows used in investing activities for the three months ended March 31, 2025 and 2024 were approximately $20.1 million and $31.8 million, respectively, primarily for drilling and completion activities.

During the three months ended March 31, 2025, we spent $19.8 million on oil and natural gas capital expenditures, of which $17.4 million related to drilling and completion costs and $2.1 million related to the development of our treating equipment and gathering support infrastructure.

In the first three months of 2025, we ran one operated rig in the Delaware Basin, drilled and cased four gross (4.0 net) operated wells, and did not complete and put online any operated wells.

During the three months ended March 31, 2024, we spent $31.8 million on oil and natural gas capital expenditures, of which $23.7 million related to drilling and completion costs, $7.2 million related to AGI Facility expenditures which were initially recorded as a contract asset and $0.5 million related to the development of our treating equipment and gathering support infrastructure.

In the first three months of 2024, we ran one operated rig in the Delaware Basin and drilled and cased two gross (2.0 net) operated wells.

Financing Activities.

Net cash flows used in financing activities for the nine months ended September 30, 2024 were $3.8 million and net cash flows provided by financing activities for the nine months ended September 30, 2023 were $35.9 million.

During the nine months ended September 30, 2024, we repaid $52.3 million under our Amended Term Loan Agreement and received $38.8 million from our preferred stock equity issuances.

Our net cash flows provided by financing activities during the nine months ended September 30, 2024 also reflect the receipt of the $10.0 million distributed from the Merger escrow account to the Company.

During the nine months ended September 30, 2023, we received $61.4 million from our preferred stock equity issuance and repaid $25.1 million under our Amended Term Loan Agreement.

Net cash flows provided by financing activities for the three months ended March 31, 2025 and 2024 were $61.2 million and $19.3 million, respectively.

During the three months ended March 31, 2025, we received net proceeds of $61.3 million from the incurrence of the Incremental Term Loans on January 9, 2025.

During the three months ended March 31, 2024, we received $19.5 million from our preferred stock equity issuance and repaid $10.0 million under our 2021 Amended Term Loan Agreement.

Our net cash flows provided by financing activities during the three months ended March 31, 2024 also reflect the receipt of $10.0 million distributed from escrow to the Company in accordance with the terms of a merger agreement that was subsequently terminated on December 20, 2024.

Critical Accounting Policies and Estimates

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Three Months Ended

Nine Months Ended

September 30,

In thousands (except per unit and per Boe amounts)

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Operating Revenues.

Oil, natural gas and NGLs revenues were $45.1 million and $53.4 million for the three months ended September 30, 2024 and 2023.

The decrease in revenues is primarily attributable a decrease in average realized prices combined with our lower production volumes in 2024 compared to 2023.

Average realized prices (excluding the effects of hedging arrangements) decreased approximately $5.07 per Boe for three months ended September 30, 2024 when compared with the same period in 2023.

Oil, natural gas and NGLs revenues were $143.7 million and $171.6 million for the nine months ended September 30, 2024 and 2023, respectively.

The decrease in revenues is primarily attributable to a decrease in our average realized prices and lower production volumes in 2024 compared to 2023.

Average realized prices (excluding the effects of hedging arrangements) decreased approximately $2.22 per Boe for the nine months ended September 30, 2024 when compared with the same period in 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.

Production averaged 12,076 Boe/d and 12,717 Boe/d for the three months ended September 30, 2024 and 2023, respectively, and 12,639 Boe/d and 14,377 Boe/d for the nine months ended September 30, 2024 and 2023, respectively.

Production was lower in the third quarter and year to date period 2024 compared with the same period in 2023 due largely to the timing of capital expenditures spent to bring new wells online and natural production declines on our existing producing wells.

Also impacting 2024 production volumes was curtailment in Monument Draw due to downstream throughput limitations causing increased downtime and shut-in production.

Oil, natural gas and NGLs revenues were $47.4 million and $49.5 million for the three months ended March 31, 2025 and 2024.

The decrease in revenues is primarily attributable to a decrease in production volumes in 2025 compared to 2024.

Production averaged 11,900 Boe per day for the three months ended March 31, 2025 compared to 12,989 Boe per day for the three months ended March 31, 2024.

Production was lower in the first quarter period of 2025 compared to the same period in 2024 due largely to the timing new wells coming online as no new wells came online during the first quarter of 2025.

Average realized prices (excluding the effects of hedging arrangements) increased approximately $2.33 per Boe for three months ended March 31, 2025 when compared with the same period in 2024.

Lease Operating Expenses.

Lease operating expenses were $11.6 million and $11.2 million for the three months ended September 30, 2024 and 2023, respectively, and $34.2 million for each of the nine months ended September 30, 2024 and 2023.

On a per unit basis, lease operating expenses were $10.44 per Boe and $9.53 per Boe for the three months ended September 30, 2024 and 2023, respectively, and $9.87 per Boe and $8.72 per Boe for the nine months ended September 30, 2024 and 2023, respectively.

The increase in lease operating expenses on a per unit basis in the third quarter and first nine months of 2024 is primarily a result of an inflationary market increase in maintenance, power, and chemical costs combined with lower production .

Lease operating expenses were $10.4 million and $11.6 million for the three months ended March 31, 2025 and 2024, respectively.

On a per unit basis, lease operating expenses were $9.67 per Boe and $9.80 per Boe for the three months ended March 31, 2025 and 2024, respectively.

The decrease in lease operating expenses on a per unit basis in the first quarter of 2025 compared to the first quarter of 2024 is primarily a result of lower water production and reduced repairs and maintenance costs.

Workover and Other Expenses.

Workover and other expenses were $1.2 million and $0.7 million for the three months ended September 30, 2024 and 2023, respectively and $3.1 million and $4.7 million for the nine months ended September 30, 2024 and 2023, respectively.

On a per unit basis, workover and other expenses were $1.12 per Boe and $0.60 per Boe for the three months ended September 30, 2024 and 2023, respectively, and $0.89 per Boe and $1.19 per Boe for the nine months ended September 30, 2024 and 2023, respectively.

The year to date September 30, 2024 decrease in workover and other expenses compared to the same period in 2023 relate to more significant workover projects undertaken in the prior year.

Workover and other expenses were $1.4 million and $0.9 million for the three months ended March 31, 2025 and 2024, respectively.

On a per unit basis, workover and other expenses were $1.34 per Boe and $0.75 per Boe for the three months ended March 31, 2025 and 2024, respectively.

The increase in workover and other expenses for the first quarter 2025 compared to the same period in 2024 relates to slightly higher workover activity during the first quarter of 2025.

Taxes Other than Income.

Taxes other than income were $2.5 million and $3.3 million for the three months ended September 30, 2024 and 2023, respectively, and $8.9 million and $9.7 million for the nine months ended September 30, 2024 and 2023, respectively.

Taxes other than income were $2.8 million and $3.0 million for the three months ended March 31, 2025 and 2024, respectively.

Severance taxes are based on realized prices and volumes at the wellhead, while ad valorem taxes are tied to the annual valuation of our properties.

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

On a per unit basis, taxes other than income were $2.28 per Boe and $2.83 per Boe for the three months ended September 30, 2024 and 2023, respectively, and $2.56 per Boe and $2.47 per Boe for the nine months ended September 30, 2024 and 2023, respectively.

On a per unit basis, taxes other than income were $2.61 per Boe and $2.53 per Boe for the three months ended March 31, 2025 and 2024, respectively.

Gathering and Other Expenses.

Gathering and other expenses were $12.4 million and $15.5 million for the three months ended September 30, 2024 and 2023, respectively, and $41.9 million and $48.9 million for the nine months ended September 30, 2024 and 2023, respectively.

Gathering and other expenses were $12.0 million and $17.3 million for the three months ended March 31, 2025 and 2024, respectively.

Gathering and other expenses include gathering fees paid to third parties on our oil and natural gas production and operating expenses of our gathering support infrastructure.

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 our own hydrogen sulfide treating plant or through third parties.

On a per unit basis, gathering and other expenses were $11.20 per Boe and $13.26 per Boe for the three months ended September 30, 2024 and 2023, respectively, and $12.09 per Boe and $12.45 per Boe for the nine months ended September 30, 2024 and 2023, respectively.

The decrease in

gathering and other expenses per Boe for the three and nine months ended September 30, 2024 is primarily related to the commencement of volumes being treated by the AGI facility during 2024.

On a per unit basis, gathering and other expenses were $11.20 per Boe and $14.62 per Boe for the three months ended March 31, 2025 and 2024, respectively.

The decrease in gathering and other expenses per Boe for the three months ended March 31, 2025 compared to the same period in 2024 is primarily related to a full quarter of volumes being treated by the AGI facility during 2025.

The AGI facility did not come online until March 2024.

General and Administrative Expense.

General and administrative expense was $3.8 million and $3.9 million for the three months ended September 30, 2024 and 2023, respectively, and $11.1 million and $14.8 million for the nine months ended September 30, 2024 and 2023, respectively.

On a per unit basis, general and administrative expenses were $3.46 per Boe and $3.31 per Boe for the three months ended September 30, 2024 and 2023, respectively, and $3.21 per Boe and $3.77 per Boe for the nine months ended September 30, 2024 and 2023, respectively.

The decreases in general and administrative expense for the three and nine months ended September 30, 2024 compared with the prior year periods is primarily associated with a decrease in payroll and benefits in connection with the headcount reduction in 2023 partially offset by an increase in legal fees associated with the merger.

General and administrative expense was $4.4 million and $4.0 million for the three months ended March 31, 2025 and 2024, respectively.

On a per unit basis, general and administrative expenses were $4.08 per Boe and $3.36 per Boe for the three months ended March 31, 2025 and 2024, respectively.

The increase in general and administrative expense for the three months ended March 31, 2025 compared with the same prior year period is primarily due to higher payroll and benefits costs.

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 $12.1 million and $13.1 million for the three months ended September 30, 2024 and 2023, respectively, and $37.6 million and $43.2 million for the nine months ended September 30, 2024 and 2023, respectively.

On a per unit basis, depletion expense was $10.91 per Boe and $11.17 per Boe for the three months ended September 30, 2024 and 2023, respectively, and $10.85 per Boe and $11.02 per Boe for the nine months ended September 30, 2024 and 2023, respectively.

The decreases in our depletion rates per Boe are primarily due to a period over period decrease in future development costs associated with proved reserves relative to the associated period over period decrease in proved reserves.

Depletion expense was $12.7 million and $12.6 million for the three months ended March 31, 2025 and 2024, respectively.

On a per unit basis, depletion expense was $11.83 per Boe and $10.68 per Boe for the three months ended March 31, 2025 and 2024, respectively.

The increase in our depletion rate per Boe is primarily due to a period over period increase in future development costs associated with proved reserves combined with the associated period over period decrease in proved reserves.

Net gain (loss) on derivative contracts.

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Consistent with prior years, we have elected not to designate any positions as cash flow hedges for accounting purposes, and accordingly, we recorded the net change in the mark-to-market value of these derivative contracts in the unaudited condensed consolidated statements of operations.

For the three months ended September 30, 2024, we recorded a net derivative gain of $26.9 million ($28.1 million net gain on unsettled contracts and $1.2 million net realized loss on settled contracts).

For the three months ended September 30, 2023, we recorded a net derivative loss of $53.7 million ( $46.8 million net loss on unsettled contracts and $6.9 million net realized loss on settled contracts ).

For the nine months ended September 30, 2024, we recorded a net derivative gain of $3.9 million ($12.7 million net gain on unsettled contracts and $8.8 million net realized loss on settled contracts).

For the nine months ended September 30, 2023, we recorded a net derivative loss of $29.7 million ($23.5 million net loss on unsettled contracts and $6.3 million net realized loss on settled contracts).

At September 30, 2024, we had a $12.9 million derivative asset ($5.7 million current) and a $19.5 million derivative liability ($9.8 million current).

For the three months ended March 31, 2025, we recorded a net derivative gain of $9.3 million ($11.8 million net gain on unsettled contracts and $2.5 million net realized loss on settled contracts).

For the three months ended March 31, 2024, we recorded a net derivative loss of $24.2 million ( $19.8 million net loss on unsettled contracts and $4.4 million net realized loss on settled contracts ).

At March 31, 2025, we had a $24.5 million derivative asset ($15.7 million current) and a $21.0 million derivative liability ($14.7 million current).

Interest Expense and Other.

Interest expense and other was $6.3 million and $6.9 million for the three months ended September 30, 2024 and 2023, respectively, and $19.8 million and $24.2 million for the nine months ended September 30, 2024 and 2023, respectively.

Interest expense and other primarily decreased in the current year periods compared to the same periods in the prior year due to a lower average debt balance resulting from repayment of borrowings associated with our Amended Term Loan Agreement.

Our weighted average interest rate was approximately 12.98% for the quarter ended September 30, 2024 and 12.97% for the nine months ended September 30, 2024 .

For the fourth quarter of 2024, our interest rate will be approximately 12.25% on outstanding borrowings .

Interest expense and other totaled $6.7 million and $7.0 million for the three months ended March 31, 2025 and 2024, respectively.

Interest expense and other primarily decreased in the current year periods compared to the same periods in the prior year due to a lower weighted average interest rate for the quarter ended March 31, 2025 on borrowings associated with our 2024 Amended Term Loan Agreement compared to the weighted average interest rate for the quarter ended March 31, 2024 on borrowings associated with our 2021 Amended Term Loan Agreement.

Our weighted average interest rate was approximately 12.21% for the quarter ended March 31, 2025 .

For the second quarter of 2025, our interest rate will be approximately 12.20% on outstanding borrowings .

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-Q

Item 2. Management’s Discussion and Analysis