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Item 8. Financial Statements and Supplementary Data

2024-03-06 compared with 2023-03-06 · 394 added, 549 removed, 568 unchanged (62% of the section changed)

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Consolidated Balance Sheets as of December 31, 2023 and 2022

Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021, the Period from August 22, 2020 through December 31, 2020 and the Period from January 1, 2020 through August 21, 2020

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2022 and 2021 and the Period from August 22, 2020 through December 31, 2020

Consolidated Statements of Changes in Partners’ Capital for the Period from January 1, 2020 through August 21, 2020

Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021, the Period from August 22, 2020 through December 31, 2020 and the Period from January 1, 2020 through August 21, 2020

Consolidated Statements of Operations for the Years Ended December 31, 2023, 2022 and 2021

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2023, 2022 and 2021

Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021

Notes to Consolidated Financial Statements

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We have audited the accompanying consolidated balance sheets of HighPeak Energy, Inc.

and its subsidiaries (the Company) as of December 31, 2022 and 2021 (Successor Company), and the related consolidated statements of operations, changes in stockholders’

equity, and cash flows for the years ended December 31, 2022 and 2021 and the period from August 22, 2020 through December 31, 2020 (Successor Company), and the consolidated statements of operations, changes in partners’

capital, and cash flows for the period from January 1, 2020 through August 21, 2020 (Predecessor Company), and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years ended December 31, 2022 and 2021 and the period from August 22, 2020 through December 31, 2020 (Successor Company) and the period from January 1, 2020 through August 21, 2020 (Predecessor Company), in conformity with accounting principles generally accepted in the United States of America.

and its subsidiaries (the Company) as of December 31, 2023 and 2022, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these financial statements based on our audits.

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

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We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ WEAVER AND TIDWELL, L.L.P.

We have served as the Company’s auditor since 2020.

Fort Worth, Texas

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Accounts receivable

Derivative instruments

Prepaid expenses

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Other property and equipment, net

Derivative instruments

Other noncurrent assets

LIABILITIES AND STOCKHOLDERS ’

LIABILITIES AND STOCKHOLDERS ’ EQUITY

Current liabilities:

Accounts payable –

Current maturities of long-term debt

Accounts payable – trade

Accrued capital expenditures

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Other accrued liabilities

Derivative instruments

Accrued interest

Operating leases

Advances from joint interest owners

Other current liabilities

Total current liabilities

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Asset retirement obligations

Derivative instruments

Commitments and contingencies (Note 10)

Stockholders’

Stockholders’ equity:

Preferred stock, $ 0.0001 par value, 10,000,000 shares authorized, none issued and outstanding at December 31, 2023 and 2022

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Additional paid-in capital

Retained earnings (accumulated deficit)

Total stockholders’

Total liabilities and stockholders ’

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders ’ equity

The accompanying notes are an integral part of these consolidated financial statements.

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(in thousands, except per share data)

Year Ended December 31,

Years Ended December 31,

Operating Revenues:

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Total operating costs and expenses

Income (loss) from operations

Other expense

Income from operations

Interest and other income

Interest expense

Derivative loss, net

Other expense

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

Earnings (loss) per share:

Basic net income (loss)

Diluted net income (loss)

Gain (loss) on derivative instruments, net

Loss on extinguishment of debt

Income before income taxes

Provision for income taxes

Earnings per share:

Basic net income

Diluted net income

Weighted average shares outstanding:

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HighPeak Energy, Inc.

Consolidated Statements of Changes in Stockholders ’ 

Equity (Successor)

Consolidated Statements of Changes in Stockholders ’ Equity

(in thousands)

Years ended December 31, 2022 and 2021 and Period from August 22, 2020 through December 31, 2020

Stockholders ’

Balance, August 21, 2020

HighPeak business combination with HPK LP

Conversion of Pure Common Stock

Forward Purchases

Offering costs (including costs incurred at Pure prior to HighPeak business combination)

Deferred income tax liability at HighPeak business combination

Exercise of warrants

Stock-based compensation costs:

Compensation costs included in net loss

Years ended December 31, 2023, 2022 and 2021

Stockholders’

Balance, December 31, 2020

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Balance, December 31, 2022

The accompanying notes are an integral part of these consolidated financial statements.

HighPeak Energy, Inc.

Consolidated Statement of Changes in Partners' Capital (Predecessor)

(in thousands)

Period from January 1, 2020 through August 21, 2020

Dividends declared ($ 0.100 per share)

Dividend equivalents declared on outstanding stock options ($ 0.100 per share)

Stock issued in public offering

Stock issuance costs

Exercise of warrants

Stock-based compensation costs:

Shares issued upon options being exercised

Restricted shares issued to outside directors

Compensation costs included in net income

Balance, December 31, 2023

Cash capital contributions

Distribution to partners

Balance, August 21, 2020

The accompanying notes are an integral part of these consolidated financial statements.

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(in thousands)

Year Ended December 31,

Years Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:

Exploration and abandonment expense

Depletion, depreciation and amortization expense

Accretion expense

Stock-based compensation expense

Adjustments to reconcile net income to net cash provided by operations:

Provision for deferred income taxes

Loss on extinguishment of debt

(Gain) loss on derivative instruments, net

Cash paid on settlement of derivative instruments

Amortization of debt issuance costs

Amortization of discounts on 10.000% Senior Notes and 10.625% Senior Notes

Derivative-related activity

Loss on terminated acquisition

Deferred income taxes

Amortization of discounts on long-term debt

Stock-based compensation expense

Accretion expense

Depletion, depreciation and amortization expense

Exploration and abandonment expense

Changes in operating assets and liabilities:

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Accounts payable, accrued liabilities and other current liabilities

Net cash provided by (used in) operating activities

Net cash provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Additions to crude oil and natural gas properties

Changes in working capital associated with crude oil and natural gas property additions

Changes in working capital associated with oil and gas property additions

Acquisitions of crude oil and natural gas properties

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Other property additions

Issuance of notes receivable

Extension payment on acquisition

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings under Credit Agreement

Repayments under Credit Agreement

Proceeds from issuance of 10.000% Senior Notes and 10.625% Senior Notes, net of discount

Debt issuance costs

Proceeds from issuance of common stock in private placement

Proceeds from public stock offering

Borrowings under Term Loan Credit Agreement, net of discount

Borrowings under Prior Credit Agreement

Proceeds from issuance of senior notes, net of discount

Repayments under Prior Credit Agreement

Repayments of 10.000% Senior Notes and 10.625% Senior Notes

Premium on extinguishment of debt

Proceeds from issuance of common stock

Proceeds from exercises of warrants

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Proceeds from exercises of stock options

Debt issuance costs

Stock offering costs

Dividends paid

Dividend equivalents paid

Stock offering costs

Cash from non-successors in HighPeak business combination

Contribution from partners

Distribution to partners

Net cash provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of period

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Additions to asset retirement obligations

Subscription receivable from exercise of warrants

Stock offering costs of accounting acquiree

The accompanying notes are an integral part of these consolidated financial statements.

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HighPeak Energy, Inc.

(“HighPeak Energy,”

the “Company,”

or the “Successor”) is a Delaware corporation, initially formed in October 2019 as a wholly owned subsidiary of Pure Acquisition Corp (“Pure”), a Delaware corporation, formed in November 2017, which was a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving Pure and one or more businesses.

See Note 11 regarding the business combination which resulted in the Company becoming the parent company and Pure becoming a wholly owned subsidiary along with the businesses acquired.

HighPeak Energy’s common stock and warrants are listed and traded on the Nasdaq Global Market (the “Nasdaq”) under the ticker symbols “HPK”

and “HPKEW,”

respectively.

("HighPeak Energy" or the "Company,") is a Delaware corporation, formed in October 2019.

HighPeak Energy’s common stock and warrants are listed and traded on the Nasdaq Global Market (the "Nasdaq") under the ticker symbols “HPK” and “HPKEW,” respectively.

The Company is an independent crude oil and natural gas exploration and production company that explores for, develops and produces crude oil, NGL and natural gas in the Permian Basin in West Texas, more specifically, the Midland Basin primarily in Howard and Borden Counties.

Our acreage is composed of two core areas, Flat Top primarily in the northern portion of Howard County extending into southeastern Borden, southwestern Scurry and northwestern Mitchell Counties and Signal Peak in the southern portion of Howard County.

Our acreage is composed of two core areas, Flat Top primarily in the northern portion of Howard County extending into southern Borden County, southwest Scurry County and northwest Mitchell County and Signal Peak in the southern portion of Howard County.

Basis of Presentation and Summary of Significant Accounting Policies

Presentation.

The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

In the opinion of management, all adjustments, consisting of normal and recurring accruals considered necessary for a fair presentation, have been included.

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All material intercompany balances and transactions have been eliminated.

Certain reclassifications have been made to prior period amounts to conform to the current period’s presentation.

Use of estimates in the preparation of financial statements.

Preparation of the Company's consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

Depletion of crude oil and natural gas properties and evaluations for impairment of proved and unproved crude oil and natural gas properties, in part, is determined using estimates of proved, probable and possible crude oil, NGL and natural gas reserves.

Certain reclassifications have been made to prior period amounts to conform to the current period’s presentation, which had an immaterial effect on the previously reported total assets, total liabilities, stockholders’ equity, results of operations or cash flows.

Use of estimates in the preparation of consolidated financial statements.

Preparation of the Company's consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

Depletion of crude oil and natural gas properties is determined using estimates of proved crude oil, NGL and natural gas reserves and evaluations for impairment of proved and unproved crude oil and natural gas properties, in part, is determined using estimates of proved and risk adjusted probable and possible crude oil, NGL and natural gas reserves.

There are numerous uncertainties inherent in the estimation of quantities of proved, probable and possible reserves and in the projection of future rates of production and the timing of development expenditures.

Similarly, evaluations for impairment of proved crude oil and natural gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves, commodity price outlooks and future undiscounted and discounted net cash flows.

Similarly, if needed, evaluations for impairment of proved crude oil and natural gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves, commodity price outlooks and future undiscounted and discounted net cash flows.

In addition, evaluations for impairment of unproved crude oil and natural gas properties on a project-by-project basis are also subject to numerous uncertainties including, among others, estimates of future recoverable reserves, results of exploration activities, commodity price outlooks, planned future sales or expirations of all or a portion of such projects.

Other items subject to such estimates and assumptions include, but are not limited to, the carrying value of crude oil and natural gas properties, asset retirement obligations, equity-based compensation, fair value of derivatives and estimates of income taxes.

Actual results could differ from the estimates and assumptions utilized.

Cash and cash equivalents.

The Company’s cash and cash equivalents include depository accounts held by banks with original issuance maturities of 90 days or less.

The Company’s cash and cash equivalents are generally held in financial institutions in amounts that may exceed the insurance limits of the Federal Deposit Insurance Corporation.

However, management believes that the Company’s counterparty risks are minimal based on the reputation and history of the institutions selected.

The Company’s cash and cash equivalents include depository accounts held by banks with original issuance maturities of 90 days or less.

The Company’s cash and cash equivalents are generally held in financial institutions in amounts that may exceed the insurance limits of the Federal Deposit Insurance Corporation.

However, management believes that the Company’s counterparty risks are minimal based on the reputation and history of the institutions selected.

Accounts receivable.

As of December 31, 2022 and 2021, the Company’s accounts receivables primarily consist of amounts due from the sale of crude oil, NGL and natural gas of $ 81.6 million and $ 29.0 million, respectively, and are based on estimates of sales volumes and realized prices the Company anticipates it will receive, $ 4.9 million and zero , respectively, of receivables related to electric power infrastructure installed throughout Flat Top by the Company that it will be reimbursed for, current U.S.

federal income tax receivables of $ 3.2 million and $ 3.2 million, respectively, joint interest receivables of $ 2.2 million and $ 3.1 million, respectively, receivables related to settlements of derivative contracts of $ 4.7 million and $ 771,000 , respectively, and receivables related to refunds from pipe suppliers of zero and $ 3.3 million, respectively.

The Company’s share of crude oil, NGL and natural gas production is sold to various purchasers who must be prequalified under the Company’s credit risk policies and procedures.

The Company’s credit risk related to collecting accounts receivables is mitigated by using credit and other financial criteria to evaluate the credit standing of the entity obligated to make payment on the accounts receivable, and where appropriate, the Company obtains assurances of payment, such as a guarantee by the parent company of the counterparty or other credit support.

The Company routinely reviews outstanding balances and establishes allowances for bad debts equal to the estimable portions of accounts receivable for which failure to collect is considered probable.

As of December 31, 2022 and 2021, the Company had no allowance for doubtful accounts.

As of December 31, 2023 and 2022, the Company’s accounts receivables primarily consist of amounts due from the sale of crude oil, NGL and natural gas of $ 82.5 million and $ 81.6 million, respectively, and are based on estimates of sales volumes and realized prices the Company anticipates it will receive, receivables related to settlements of derivative contracts of $ 4.5 million and $ 4.7 million, respectively, joint interest receivables of $ 4.4 million and $ 2.2 million, respectively, current U.S.

federal income tax receivables of $ 3.2 million and $ 3.2 million, respectively, and zero and $ 4.9 million, respectively, related to receivables from electric power infrastructure installed throughout Flat Top by the Company for which it was reimbursed.

The Company’s share of crude oil, NGL and natural gas production is sold to various purchasers who must be prequalified under the Company’s credit risk policies and procedures.

The Company adopted ASU 2016-13 and the subsequent applicable modifications to the rule on January 1, 2023.

Accounts receivable are stated at amounts due from purchasers or joint interest owners, net of an allowance for expected losses as estimated by the Company when collection is doubtful.

For receivables from joint interest owners, the Company typically has the ability to withhold future revenue disbursements to recover any non-payment of joint interest billings.

Accounts receivable from purchasers or joint interest owners outstanding longer than the contractual payment terms are considered past due.

The Company determines its allowance for each type of receivable by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the debtor’s current ability to pay its obligation to the Company, the condition of the general economy and the industry as a whole.

The Company writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for expected losses.

As of December 31, 2023 and 2022, the Company had no allowance for credit losses related to accounts receivable and no allowance for doubtful accounts, respectively.

Concentration of credit risk.

The Company is subject to credit risk resulting from the concentration of its crude oil and natural gas receivables with significant purchasers.

For the years ended December 31, 2022 and 2021, sales to the Company’s largest purchaser accounted for approximately 88 % and 94 %, respectively, of the Company’s total crude oil, NGL and natural gas sales revenues.

The Company generally does not require collateral and does not believe the loss of this particular purchaser would materially impact its operating results, as crude oil and natural gas are fungible products with well-established markets and numerous purchasers in various regions.

For the years ended December 31, 2023, 2022 and 2021, sales to the Company’s largest purchaser accounted for approximately 82 %, 88 % and 94 %, respectively, of the Company’s total crude oil, NGL and natural gas sales revenues and for the year ended December 31, 2023, sales to the Company’s second largest purchaser accounted for approximately 14 % of the Company’s total crude oil, NGL and natural gas revenues.

The Company generally does not require collateral and does not believe the loss of these particular purchasers would materially impact its operating results, as crude oil and natural gas are fungible products with well-established markets and numerous purchasers in various regions.

Inventory is comprised primarily of crude oil and natural gas drilling and completion or repair items such as pumps, tubing, casing, vessels, operating supplies and ordinary maintenance materials and parts.

The materials and supplies inventory is primarily acquired for use in future drilling and completion or repair operations and is carried at the lower of cost or net realizable value, on a weighted average cost basis.

Valuation allowances for materials and supplies inventories are recorded as reductions to the carrying values of the materials and supplies inventories in the Company’s consolidated balance sheet and as charges to other expense in the consolidated statements of operations.

The Company’s materials and supplies inventory as of December 31, 2023 and 2022 is $ 7.3 million and $ 13.3 million, respectively, and the Company has not recognized any valuation allowance to date.

Prepaid expenses.

Prepaid expenses are comprised primarily of caliche that will be used on future locations and roads in our development areas, tubulars and proppant that the Company has prepaid the suppliers to guarantee their availability when needed for our current drilling program, prepaid insurance costs that will be amortized over the life of the policies, prepaid agency fees and software maintenance fees that will be amortized over the life of the contracts.

Prepaid expenses are comprised primarily of prepaid insurance costs that will be amortized over the life of the policies, caliche that will be used on future locations and roads in our development areas, tubulars and proppant that the Company has prepaid the suppliers to guarantee their availability when needed for our current drilling program and prepaid agency fees and software maintenance fees that will be amortized over the life of the contracts.

Prepaid expenses as of December 31, 2023 and 2022 are $ 1.0 million and $ 4.1 million, respectively.

Inventory is comprised primarily of crude oil and natural gas drilling or repair items such as tubing, casing, pumps, vessels, operating supplies and ordinary maintenance materials and parts.

The materials and supplies inventory is primarily acquired for use in future drilling or repair operations and is carried at the lower of cost or net realizable value, on a weighted average cost basis.

The Company’s materials and supplies inventory as of December 31, 2022 and 2021 is $ 13.3 million and $ 3.3 million, respectively, and the Company has not recognized any valuation allowance to date.

Crude oil and natural gas properties.

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Due to the capital-intensive nature and the geographical location of certain projects, it may take an extended period of time to evaluate the future potential of an exploration project and the economics associated with making a determination on its commercial viability.

production data in the area, transportation or processing facilities and/or getting partner approval to drill additional appraisal wells.

In these instances, the project’s feasibility is not contingent upon price improvements or advances in technology, but rather the Company’s ongoing efforts and expenditures related to accurately predict the hydrocarbon recoverability based on well information, gaining access to other companies’ production data in the area, transportation or processing facilities and/or getting partner approval to drill additional appraisal wells.

These activities are ongoing and are being pursued constantly.

Consequently, the Company’s assessment of suspended exploratory well costs is continuous until a decision can be made that the project has found sufficient proved reserves to sanction the project or is noncommercial and is charged to exploration and abandonment expense.

See Note 6 for additional information.

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However, gain or loss is recorded from the sale of less than an entire amortization base if the disposition is significant enough to materially impact the depletion rate of the remaining properties in the amortization base.

The Company performs assessments of its long-lived assets to be held and used, including proved crude oil and natural gas properties accounted for under the successful efforts method of accounting, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable.

An impairment loss is indicated if the sum of the expected future cash flows is less than the carrying amount of the assets.

The Company performs assessments of its long-lived assets to be held and used, including proved crude oil and natural gas properties accounted for under the successful efforts method of accounting, whenever changes in events or circumstances indicate that the carrying value of those assets may not be recoverable.

If there is an indication the carrying value of the assets may not be recovered, an impairment loss is recognized if the sum of the expected future cash flows is less than the carrying amount of the assets.

In these circumstances, the Company recognizes an impairment charge for the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.

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Furniture and fixtures

Information technology

Total other property and equipment, net

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Land is not depreciated.

Transportation equipment is generally depreciated over five years, buildings are generally depreciated over forty years, field equipment is generally depreciated over seven years, furniture and fixtures is generally depreciated over five years and information technology is generally depreciated over three years.

Transportation equipment is generally depreciated over five years, buildings are generally depreciated over forty years, field equipment is generally depreciated over seven years and furniture and fixtures is generally depreciated over five years.

Leasehold improvements are amortized over the lesser of their estimated useful lives or the underlying terms of the associated leases.

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As of December 31, 2023 and 2022, the Company had aid-in-construction assets totaling $ 5.2 million and $ 6.1 million, respectively, included in other noncurrent assets.

The Company contracted with the natural gas gatherer and processor in its Flat Top area to expand its low-pressure natural gas gathering system to transport the Company’s natural gas to its processing facility which was contracted to be expanded during the third quarter of 2022 at an additional cost to the Company of $ 2.6 million.

The Company is receiving and will continue to receive payments based on gross system throughput, including any third-party natural gas that is potentially tied into the system in the future.

The contract calls for future aid-in-construction fundings if expansions of the system are necessary as determined in the sole discretion of the Company.

The Company has received and will continue to receive payments based on gross system throughput, including any third-party natural gas that is potentially tied into the Flat Top gathering system in the future.

The contract calls for future aid-in-construction funding if expansions of the system are necessary as determined in the sole discretion of the Company.

The Company enters into leases for drilling rigs, storage tanks, equipment and buildings and recognizes lease expense on a straight-line basis over the lease term.

Lease right-of-use assets and liabilities are initially recorded on the lease commencement date based on the present value of lease payments over the lease term.

As most of the Company’s lease contracts do not provide an implicit discount rate, the Company uses its incremental borrowing rate, which is determined based on information available at the commencement date of a lease.

Leases may include renewal, purchase or termination options that can extend or shorten the term of a lease.

The exercise of those options is at the Company’s sole discretion and is evaluated at inception and throughout the contract to determine if a modification of the lease term is required.

Leases with an initial term of 12 months or less are generally not recorded as lease right-of-use assets and liabilities.

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Current liabilities.

Accounts payable, accrued liabilities and derivative liabilities included in current liabilities as of December 31, 2022 and 2021 totaled approximately $ 266.1 million and $ 103.0 million, respectively, including trade accounts payable, accrued capital expenditures, derivative liabilities, revenues and royalties payable and accruals for operating and general and administrative expenses, interest expense, operating leases, dividends and dividend equivalents and other miscellaneous items.

Current liabilities as of December 31, 2023 and 2022 totaled approximately $ 287.4 million and $ 266.1 million, respectively, including current maturities of long-term debt, trade accounts payable, accrued capital expenditures, revenues and royalties payable, derivative liabilities and accruals for operating and general and administrative expenses, interest expense, operating leases, dividends and dividend equivalents and other miscellaneous items.

Debt issuance costs and original issue discount.

The Company paid a total of $ 19.7 million in debt issuance costs, $ 17.1 million of which was incurred during the year ended December 31, 2022, related to the issuance of the 10.000 % Senior Notes and 10.625 % Senior Notes and amendments to the Credit Agreement.

Amortization based on the straight-line method over the terms of the 10.000 % Senior Notes, 10.625 % Senior Notes and the Credit Agreement which approximates the effective interest method was $ 5.6 million and $ 498,000 during the years ended December 31, 2022 and 2021, respectively.

In addition, the company realized $ 34.8 million in original issuer discounts on the issuance of its 10.000 % Senior Notes and 10.625 % Senior Notes that is being amortized over the life of the notes which approximates the effective interest method and was $ 7.7 million and zero during the year ended December 31, 2022 and 2021, respectively.

As of December 31, 2022 and 2021, the net debt issuance costs and discount are netted against the outstanding long-term debt on the accompanying balance sheets in accordance with GAAP.

The Company has paid a total of $ 48.1 million in debt issuance costs, $ 28.4 million of which was incurred during the year ended December 31, 2023 primarily related to the completion of the Term Loan Credit Agreement and Senior Credit Facility Agreement and amendments to the Prior Credit Agreement.

Amortization based on the straight-line method over the terms of the Term Loan Credit Agreement, Senior Credit Facility Agreement, Prior Credit Agreement, 10.000 % Senior Notes and 10.625 % Senior Notes which approximates the effective interest method was $ 11.4 million, $ 5.6 million and $ 498,000 during the years ended December 31, 2023, 2022 and 2021, respectively.

In addition, the Company realized a total of $ 64.8 million in original issue discounts on the issuance of its Term Loan Credit Agreement, 10.000 % Senior Notes and 10.625 % Senior Notes that is being amortized over the life of the agreements which approximates the effective interest method and was $ 15.1 million, $ 7.7 million and zero during the years ended December 31, 2023, 2022 and 2021, respectively.

All unamortized debt issuance costs and discounts as of the termination of the Prior Credit Agreement and redemption of the 10.000% Senior Notes and 10.625% Senior Notes during September 2023 were charged to expense and included in loss on extinguishment of debt in the accompanying consolidated statements of operations.

See Note 7 for more information.

As of December 31, 2023 and 2022, the remaining net debt issuance costs and discounts related to the Term Loan Credit Agreement and Senior Credit Facility Agreement are netted against the outstanding long-term debt on the accompanying consolidated balance sheets.

Asset retirement obligations.

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Revenue recognition .

The Company follows FASB ASC 606, “Revenue from Contracts with Customers,”

(“ASC 606”) whereby the Company recognizes revenues from the sales of crude oil and natural gas to its purchasers and presents them disaggregated on the Company’s consolidated statements of operations.

The Company enters into contracts with purchasers to sell its crude oil and natural gas production.

The Company follows FASB ASC 606, “Revenue from Contracts with Customers,” (“ASC 606”) whereby the Company recognizes revenues from the sales of crude oil, NGL and natural gas to its purchasers and presents them disaggregated on the Company’s consolidated statements of operations.

The Company enters into contracts with purchasers to sell its crude oil, NGL and natural gas production.

Revenue on these contracts is recognized in accordance with the five-step revenue recognition model prescribed in ASC 606.

Specifically, revenue is recognized when the Company’s performance obligations under these contracts are satisfied, which generally occurs with the transfer of control of the crude oil and natural gas to the purchaser.

Control is generally considered transferred when the following criteria are met:

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Crude Oil Contracts.

The Company’s crude oil marketing contracts transfer physical custody and title at or near the wellhead, which is generally when control of the crude oil has been transferred to the purchaser.

The crude oil produced is sold under contracts using market-based pricing which is then adjusted for the differentials based upon delivery location and crude oil quality.

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Natural Gas Contracts.

The majority of the Company’s natural gas is sold at the lease location, which is generally when control of the natural gas has been transferred to the purchaser.

The natural gas is sold under (i) percentage of proceeds processing contracts or (ii) a hybrid of percentage of proceeds and fee-based contracts.

Under the majority of the Company’s contracts, the purchaser gathers the natural gas in the field where it is produced and transports it to natural gas processing plants where NGL products are extracted.

The NGL products and remaining residue natural gas are then sold by the purchaser.

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Since each unit of product represents a separate performance obligation, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

All the Company’s derivatives are accounted for as non-hedge derivatives and are recorded at estimated fair value in the consolidated balance sheets.

All changes in the fair values of its derivative contracts are recorded as gains or losses in the earnings of the periods in which they occur.

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The Company classifies the fair value amounts of derivative assets and liabilities executed under master netting arrangements as net current or noncurrent derivative assets or net current or noncurrent derivative liabilities, whichever the case may be, by commodity and counterparty.

The Company’s credit risk related to derivatives is a counterparties’

failure to perform under derivative contracts owed to the Company.

The Company’s credit risk related to derivatives is a counterparties’ failure to perform under derivative contracts owed to the Company.

The Company uses credit and other financial criteria to evaluate the credit standing of, and to select, counterparties to its derivative instruments.

Although the Company does not obtain collateral or otherwise secure the fair value of its derivative instruments, associated credit risk is mitigated by the Company’s credit risk policies and procedures.

The Company has entered into International Swap Dealers Association Master Agreements (“ISDA Agreements”) with each of its derivative counterparties.

The terms of the ISDA Agreements provide the Company and the counterparties with rights of set off upon the occurrence of defined acts of default by either the Company or a counterparty to a derivative, whereby the party not in default may set off all derivative liabilities owed to the defaulting party against all derivative asset receivables from the defaulting party.

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The Company has not established a valuation allowance as of December 31, 2023 and 2022.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based upon the technical merits of the position.

If all or a portion of the unrecognized tax benefit is sustained upon examination by the taxing authorities, the tax benefit will be recognized as a reduction to the Company’s deferred tax liability and will affect the Company’s effective tax rate in the period it is recognized.

See Note 13 for addition information.

The Company records any tax-related interest charges as interest expense and any tax-related penalties as other expense in the consolidated statements of operations of which there have been none to date.

The Predecessor recognizes in its consolidated financial statements the effect of a tax position, if that position is more likely than not to be sustained upon examination, including resolution of any appeals or litigation processes, based upon the technical merits of the position.

Tax positions taken related to the Predecessor’s status as a limited partnership, and state filing requirements have been reviewed, and management is of the opinion that they would more likely than not be sustained by examination.

Accordingly, the Company has not recorded an income tax liability for uncertain tax benefits for periods prior to August 21, 2020.

Under the new centralized partnership audit rules effective for tax years beginning after 2017, the IRS assesses and collects underpayments of tax from the partnership instead of from each partner.

The partnership may be able to pass the adjustments through to its partners by making a push-out election or, if eligible, by electing out of the centralized partnership audit rules.

The collection of tax from the partnership is only an administrative convenience for the IRS to collect any underpayment of income taxes including interest and penalties.

Income taxes on partnership income, regardless of who pays the tax or when the tax is paid, is attributed to the partners.

Any payment made by the Company as a result of an IRS examination will be treated as an expense from the Company in the consolidated financial statements.

Tax benefits from an uncertain tax positions are recognized only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based upon the technical merits of the position.

See Note 13 for additional information.

Tax-related interest charges are recorded as interest expense and any tax-related penalties as other expense in the consolidated statements of operations of which there have been none to date.

The Company is also subject to Texas Margin Tax.

The Company realized no Texas Margin Tax in the accompanying consolidated financial statements as we do not anticipate owing any Texas Margin Tax for the periods presented.

The Company realized no current Texas Margin Tax in the accompanying consolidated financial statements as we do not anticipate owing any Texas Margin Tax for the periods presented.

Stock-based compensation.

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The fair value of stock option awards is determined on the grant date or modification date, as applicable, using a Black-Scholes option valuation model with the following inputs;

(i) the grant date’s closing stock price, (ii) the exercise price of the stock options, (iii) the expected term of the stock option, (iv) the estimated risk-free adjusted interest rate for the duration of the option’s expected term, (v) the expected annual dividend yield on the underlying stock and (vi) the expected volatility over the option’s expected term.

Stock-based compensation for HighPeak Energy common stock issued to outside directors with no restrictions thereon, is measured at the grant date using the fair value of the award and is recognized as stock-based compensation in the accompanying financial statements immediately.

Stock-based compensation for restricted stock awarded to outside directors and employee members of the Board and certain other employees is measured at the grant date using the fair value of the award and is recognized on a straight-line basis over the requisite service period of the respective award.

Based on the Company’s organizational structure, the Company has one operating segment, which is crude oil and natural gas development, exploration and production.

Stock-based compensation for restricted stock awarded to outside directors, employee members of the Board and certain other employees is measured at the grant date using the fair value of the award and is recognized on a straight-line basis over the requisite service period of the respective award.

Based on the Company’s organizational structure, the Company has one operating segment, which is crude oil and natural gas development, exploration and production.

In addition, the Company has a single, company-wide management team that allocates capital resources to maximize profitability and measures financial performance as a single enterprise.

Recently adopted accounting pronouncements.

In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848) –

Deferral of the Sunset Date of Topic 848.”

This update extended the use of the optional expedient through December 31, 2024.

The Company adopted this update effective December 31, 2022.

The adoption of this update did not have a material impact on its financial position, results of operations or liquidity.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses.” This update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income.

The amendments affect loans, debt securities, trade receivables, net investment in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.

The Company adopted this update effective January 1, 2023.

The adoption of this update did not have a material impact on the Company’s financial position, results of operations or liquidity since it does not have a history of credit losses.

New accounting pronouncements not yet adopted.

In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805) –

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.”

This update requires the acquirer in a business combination to record contract asset and liabilities following Topic 606 –

“Revenue from Contracts with Customers”

at acquisition as if it had originated the contract, rather than at fair value.

This update is effective for public business entities beginning after December 15, 2022 with early adoption permitted.

The Company continues to evaluate the provisions of this update but does not believe the adoption will have a material impact on its financial position, results of operations or liquidity.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures,” which enhances the transparency and decision usefulness of income tax disclosures.

The amendments address more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information.

The ASU also includes certain other amendments to improve the effectiveness of income tax disclosures.

The amendments in this ASU are effective for public business entities for annual periods beginning after December 15, 2024 on a prospective basis.

Early adoption is permitted.

The Company is currently evaluating the impact of the adoption of this guidance.

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures.” This ASU updates reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and information used to assess segment performance.

The amendments in this ASU are effective for public entities for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted.

The Company is still evaluating the effect of the adoption of this guidance.

The Company considers the applicability and the impact of all ASUs.

ASUs not discussed above were assessed and determined to be either not applicable, the effects of adoption are not expected to be material or are clarifications of ASUs previously disclosed.

ASUs were assessed and determined to be either not applicable, the effects of adoption are not expected to be material or are clarifications of ASUs previously disclosed.

Acquisitions and Divestitures

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Other Acquisitions .

During the year ended December 31, 2022, the Company also incurred an additional $ 23.0 million in acquisition costs to acquire various undeveloped crude oil and natural gas properties largely contiguous to its Signal Peak and Flat Top operating areas primarily in Howard and Borden counties.

During the year ended December 31, 2021, the Company incurred a total of $ 54.0 million in acquisition costs related to multiple bolt-on producing property acquisitions and lease acquisitions to acquire interests in non-operated producing wells and undeveloped acreage in and around the Company’s existing properties.

During the year ended December 31, 2020, the Company incurred a total of $ 4.5 million to acquire primarily undeveloped acreage, three vertical producing wells and two salt-water disposal wells in and around the Company’s existing properties.

Grenadier Acquisition.

In June 2019, HighPeak Energy Assets II, LLC (“HighPeak Assets II”) signed a purchase and sale agreement with Grenadier Energy Partners II, LLC (“Grenadier”) to acquire substantially all the crude oil and natural gas assets of Grenadier, effective June 1, 2019, subject to certain customary closing adjustments for a total purchase price of $ 615.0 million.

Since HighPeak Assets II was contributed to the Predecessor in the HPK LP business combination, this purchase and sale agreement became part of the Predecessor effective October 1, 2019.

A nonrefundable deposit of $ 61.5 million was paid to Grenadier in 2019 in addition to a $ 15.0 million nonrefundable extension payment in 2020 to extend the potential closing to May 2020.

The Grenadier Acquisition was terminated in April 2020 and was not consummated and therefore a charge to expense of $ 76.5 million was recognized during the year ended December 31, 2020.

During the years ended December 31, 2023 and 2022, the Company also incurred an additional $ 15.1 million and $ 23.0 million, respectively, in acquisition costs primarily to acquire various undeveloped crude oil and natural gas properties largely contiguous to its Signal Peak and Flat Top operating areas primarily in Howard, Borden, Mitchell and Scurry counties.

Divestitures.

During the year ended December 31, 2021, the Company realized net proceeds of $ 3.3 million, which reduced the Company’s proved properties with no gain or loss recognized when it divested of 1 gross ( 0.2 net) non-operated horizontal well and acquired 4 gross ( 3.7 gross) operated vertical wells in a trade with another operator whereby the Company traded an approximate equal number of net mineral acres to increase its working interest in certain areas of Flat Top where it serves as operator and decrease its working interest in other areas of Flat Top where the other party serves as operator.

Fair Value Measurements

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Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable.

Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort.

The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.

The three input levels of the fair value hierarchy are as follows:

Level 1 –

quoted prices for identical assets or liabilities in active markets.

Level 2 –

quoted prices for similar assets or liabilities in active markets;

Level 1 – quoted prices for identical assets or liabilities in active markets.

Level 2 – quoted prices for similar assets or liabilities in active markets;

quoted prices for identical assets or liabilities in markets that are not active;

inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means.

Level 3 –

unobservable inputs for the asset or liability, typically reflecting management’s estimate of assumptions that market participants would use in pricing the asset or liability.

Level 3 – unobservable inputs for the asset or liability, typically reflecting management’s estimate of assumptions that market participants would use in pricing the asset or liability.

The fair values are therefore, determined using model-based techniques, including discounted cash flow models.

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As of December 31, 2023

Commodity price derivatives

Commodity price derivatives –

Commodity price derivatives – current

Commodity price derivatives – noncurrent

Commodity price derivatives – current

Commodity price derivatives – noncurrent

Total liabilities

Net recurring fair value measurements

Total recurring fair value measurements

As of December 31, 2022

Commodity price derivatives

Commodity price derivatives –

Commodity price derivatives– current

Commodity price derivatives – current

Commodity price derivatives – noncurrent

Total liabilities

Net recurring fair value measurements

Total recurring fair value measurements

Commodity price derivatives.

The Company’s commodity price derivatives are currently made up of crude oil swap contracts and deferred premium put options.

The Company’s commodity price derivatives are currently made up of crude oil swap contracts, enhanced collars and deferred premium put options.

The Company measures derivatives using an industry-standard pricing model that is provided by the counterparties.

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Fair value is determined using Level 2 inputs.

The Company’s senior unsecured notes are quoted, but not actively traded on major exchanges;

The Company’s senior unsecured notes are quoted, but not actively traded, on major exchanges;

therefore, fair value is based on periodic values as quoted on major exchanges.

See Note 7 for additional information.

The Company has other financial instruments consisting primarily of cash and cash equivalents, accounts receivable, accounts payable, long-term debt (specifically the Credit Agreement), and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities.

The Company has other financial instruments consisting primarily of cash and cash equivalents, accounts receivable, accounts payable, long-term debt (specifically the Term Loan Credit Agreement, Senior Credit Facility Agreement and the Prior Credit Agreement), and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities.

Derivative Financial Instruments

The Company primarily utilizes commodity swap contracts and deferred premium put options to (i) reduce the effect of price volatility on the commodities the Company produces and sells, particularly on the down side, and (ii) support the Company’s capital budgeting and expenditure plans, (iii) protect the Company’s borrowing base under the Credit Agreement and (iv) support the payment of contractual obligations.

The following table summarizes the effect of derivatives on the Company’s consolidated statements of operations (in thousands):

The Company primarily utilizes commodity swap contracts, deferred premium put options and enhanced collars to (i) reduce the effect of price volatility on the commodities the Company produces and sells, (ii) support the Company’s capital budgeting and expenditure plans, (iii) protect the Company’s commitments under the Term Loan Credit Agreement and Senior Credit Facility Agreement and (iv) support the payment of contractual obligations.

The following table summarizes the effect of derivative instruments on the Company’s consolidated statements of operations (in thousands):

Year Ended December 31,

Noncash derivative loss, net

Cash payments on settled derivatives, net

Derivative loss, net

Noncash gain (loss) on derivative instruments, net

Cash paid on settlement of derivative instruments, net

Gain (loss) on derivative instruments, net

Crude oil production derivatives.

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As such, the Company uses NYMEX WTI derivative contracts to manage future crude oil price volatility.

The Company’s outstanding crude oil derivative contracts as of December 31, 2022 and the weighted average crude oil prices per barrel for those contracts are as follows:

Crude Oil Price Swaps –

Volume (MBbls)

Price per Bbl

Deferred Premium Put Options –

Volume (MBbls)

Price per Bbl (Put Price)

Price per Bbl (Net of Premium)

Deferred Premium Put Options –

Volume (MBbls)

Price per Bbl (Put Price)

Price per Bbl (Net of Premium)

The Company’s outstanding crude oil derivative instruments as of December 31, 2023 and the weighted average crude oil prices and premiums payable per barrel for those contracts are as follows:

Enhanced Collars

The Company uses credit and other financial criteria to evaluate the credit standings of, and to select, counterparties to its derivative financial instruments.

Although the Company does not obtain collateral or otherwise secure the fair value of its derivative financial instruments, associated credit risk is mitigated by the Company’s credit risk policies and procedures.

Net derivative liabilities associated with the Company’s open commodity derivatives by counterparty are as follows (in thousands): 

As of December 31,

Net derivative assets associated with the Company’s open commodity derivative instruments by counterparty are as follows (in thousands):

Mercuria Energy Trading SA

Wells Fargo Bank, National Association

Fifth Third Bank, National Association

Bank of America, National Association

Citizens Bank, National Association

Macquarie Bank Limited

Exploratory/Extension Well Costs

The Company capitalizes exploratory/extension wells and project costs until a determination is made that the well or project has either found proved reserves, is impaired or is sold.

The Company’s capitalized exploratory/extension well and project costs are included in proved properties in the consolidated balance sheets.

If the exploratory/extension well or project is determined to be impaired, the impaired costs are charged to exploration and abandonments expense.

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Long-Term Debt

The components of long-term debt, including the effects of debt issuance costs, are as follows (in thousands):

Credit Agreement due 2024

10.625% Senior Notes, due 2024

10.000% Senior Notes, due 2024

The components of long-term debt, including the effects of discounts and debt issuance costs, are as follows (in thousands):

Term Loan Credit Agreement due 2026

Senior Credit Facility Agreement due 2026

Prior Credit Agreement

10.625% Senior Notes

10.000% Senior Notes

Discounts, net (a)

Debt issuance costs, net (b)

Less current portion of long-term debt

Less current maturities of long-term debt

Long-term debt, net

Discounts as of December 31, 2022 and 2021 consisted of $ 34.8 million and zero , respectively, in discounts less accumulated amortization of $ 7.7 million and zero , respectively.

Debt issuance costs as of December 31, 2022 and 2021 consisted of $ 19.7 million and $ 2.6 million, respectively, in costs less accumulated amortization of $ 6.1 million and $ 502,000 , respectively.

Credit Agreement .

In December 2020, the Company entered into a Credit Agreement with Fifth Third Bank, National Association (“Fifth Third”) as the administrative agent and sole lender to establish a revolving credit facility (the “Credit Agreement”) that matures on June 17, 2024.

The Credit Agreement had an initial borrowing base of $ 40.0 million.

However, the Company elected to reduce the aggregate elected commitments under the Credit Agreement to $ 20.0 million.

In June 2021, the Company entered into the First Amendment to, among other things, (i) complete the semi-annual borrowing base redetermination process which increased the borrowing base from $ 40.0 million to $ 125.0 million and (ii) modify the terms of the Credit Agreement to increase the aggregate elected commitments from $ 20.0 million to $ 125.0 million.

Discounts as of December 31, 2023 and 2022 consisted of $ 30.0 million and $ 34.8 million, respectively, in discounts less accumulated amortization of $ 2.9 million and $ 7.7 million, respectively.

Debt issuance costs as of December 31, 2023 and 2022 consisted of $ 25.0 million and $ 19.7 million, respectively, in costs less accumulated amortization of $ 2.4 million and $ 6.1 million, respectively.

Term Loan Credit Agreement.

On September 12, 2023, the Company entered into a Term Loan Credit Agreement with Texas Capital Bank (“Texas Capital”) as the administrative agent and Chambers Energy Management, LP (“Chambers”) as collateral agent and lenders from time-to-time party thereto to establish a term loan (“Term Loan Credit Agreement”) totaling $ 1.2 billion in borrowings, less a 2.5 % original issue discount of $ 30.0 million at closing and customary debt issuance costs which totaled approximately $ 24.0 million.

The Term Loan Credit Agreement matures on September 30, 2026.

Loans under the Term Loan Credit Agreement bear interest at a rate per annum equal to the Adjusted Term SOFR (as defined in the Term Loan Credit Agreement) plus an applicable margin of 7.50 %.

To the extent that a payment default exists and is continuing, at the election of the Required Lenders (as defined in the Term Loan Credit Agreement) under the Term Loan Credit Agreement, all amounts outstanding under the Term Loan Credit Agreement will bear interest at 2.00 % per annum above the rate and margin otherwise applicable thereto.

The Company is able to repay any amounts borrowed prior to the maturity date, subject to a concurrent payment of (i) the Make-Whole Amount (as defined in the Term Loan Credit Agreement) for any optional prepayment prior to the date 18 months after the closing date, (ii) 1.00 % of the principal amount being repaid for any optional prepayment on or after the date 18 months after the closing date but prior to the date 24 months after the closing date and (iii) without any premium for any optional prepayment on or after the date that is 24 months after the closing date.

The Term Loan Credit Agreement is guaranteed by the Company and certain of its subsidiaries and is secured by a first lien security interest in substantially all assets of the Company and certain of its subsidiaries.

The Term Loan Credit Agreement also contains certain financial covenants, including (i) an asset coverage ratio that may not be less than 1.50 to 1.00 as of the last day of any fiscal quarter and (ii) a total net leverage ratio that may not exceed 2.00 to 1.00 as of the last day of any fiscal quarter.

Additionally, the Term Loan Credit Agreement contains additional restrictive covenants that limit the ability of the Company and its restricted subsidiaries to, among other things, incur additional indebtedness (with such exceptions including, among other things, a super priority revolving credit facility limited to $ 100 million), incur additional liens, make investments and loans, enter into mergers and acquisitions, materially increase dividends and other payments, enter into certain hedging transactions, sell assets, engage in transactions with affiliates and make certain capital expenditures based on the Company’s total net leverage ratio.

The Term Loan Credit Agreement contains customary mandatory prepayments, including quarterly installments of $ 30.0 million in aggregate principal amount beginning March 31, 2024, the prepayment of gross proceeds from an incurred indebtedness other than Permitted Indebtedness (as defined in the Term Loan Credit Agreement), the prepayment of net cash proceeds for asset sales and hedge terminations in excess of $ 20.0 million within one calendar year, and prepayments of Excess Cash Flow (as defined in the Term Loan Credit Agreement) beginning with the fiscal quarter ending March 31, 2024.

In addition, the Term Loan Credit Agreement is subject to customary events of default, including a change in control.

If an event of default occurs and is continuing, the collateral agent or the majority lenders may accelerate any amounts outstanding and terminate lender commitments.

Collateral Agency Agreement.

On September 12, 2023, the Company entered into a collateral agency agreement (the “Collateral Agency Agreement”) among the Company, Texas Capital, as collateral agent, Chambers, as term representative, and Mercuria Energy Trading SA, as first-out representative prior to giving effect to that certain Collateral Agency Joinder – Additional First-Out Debt, dated as of November 1, 2023 and Fifth Third Bank, National Association as first-out representative after giving effect to that certain Collateral Agency Joinder – Additional First-Out Debt, dated as of November 1, 2023.

The Collateral Agency Agreement provides for the appointment of Texas Capital, as collateral agent, for the present and future holders of the first lien obligations (including the obligations of the Company and certain of its subsidiaries under the Term Loan Credit Agreement) to receive, hold, administer and distribute the collateral that is at any time delivered to Texas Capital or the subject of the Security Documents (as defined in the Collateral Agency Agreement) and to enforce the Security Documents and all interests, rights, powers and remedies of Texas Capital with respect thereto or thereunder and the proceeds thereof.

Senior Credit Facility Agreement.

On November 1, 2023, the Company entered into a credit agreement with Fifth Third Bank, National Association (“Fifth Third”) as the administrative agent and as the collateral agent and a number of banks included in the syndicate to establish a senior revolving credit facility (“Senior Credit Facility Agreement”) that matures on September 30, 2026.

The Senior Credit Facility Agreement has aggregate maximum commitments of $ 100.0 million with current commitments of $ 75.0 million.

Loans under the Senior Credit Facility Agreement bear interest at either the Adjusted Term SOFR (as defined in the Senior Credit Facility Agreement) or the Base Rate (as defined in the Senior Credit Facility Agreement) at the Company’s option, plus an applicable margin ranging (i) for Adjusted Term SOFR loans, from 4.00% to 5.00%, and (ii) for Base Rate loans, from 3.00% to 4.00%, in each case calculated based on the ratio at such time of the outstanding principal loan amounts to the aggregate amount of lenders’ commitments.

To the extent that a payment default exists and is continuing, at the election of the Required Lenders (as defined in the Senior Credit Facility Agreement) under the Senior Credit Facility Agreement, all amounts outstanding under the Senior Credit Facility Agreement will bear interest at 2.00% per annum above the rate and margin otherwise applicable thereto.

The Company is able to repay any amounts borrowed prior to the maturity date without premium or penalty.

The Senior Credit Facility Agreement is guaranteed by the Company and certain of its subsidiaries and is secured by a first lien security interest in substantially all assets of the Company and certain of its subsidiaries.

Prior Credit Agreement .

In December 2020, the Company entered into a credit agreement with Fifth Third as the administrative agent and sole lender to establish a revolving credit facility (the “Prior Credit Agreement”) that was set to mature on June 17, 2024.

In June 2021, the Company entered into the First Amendment to, among other things, (i) complete the semi-annual borrowing base redetermination process which increased the borrowing base from $ 40.0 million to $ 125.0 million and (ii) modify the terms of the Prior Credit Agreement to increase the aggregate elected commitments from $ 20.0 million to $ 125.0 million.

A syndicate of banks joined the credit facility at differing levels of commitments with Fifth Third remaining the administrative agent.

In October 2021, the Company entered into the Second Amendment to, among other things, (i) complete a semi-annual borrowing base redetermination process, which increased the borrowing base from $ 125.0 million to $ 195.0 million and (ii) modify the terms of the Credit Agreement to increase the aggregate elected commitments from $ 125.0 million to $ 195.0 million.

In February 2022, the Company entered into the Third Amendment to, among other things, (i) reduce the borrowing base from $ 195.0 million to $ 138.8 million, (ii) modify the terms of the Credit Agreement to reduce the aggregate elected commitments from $ 195.0 million to $ 138.8 million, (iii) update the maturity date to a springing maturity date, which will cause the Credit Agreement to mature on October 1, 2023 if the 10.000% Senior Notes are not redeemed or refinanced by that date or the terms of the 10.000% Senior Notes have not been amended to extend the scheduled repayment thereof to no earlier than October 1, 2024, (iv) allow the Company to redeem the 10.000% Senior Notes with proceeds of a refinancing, with proceeds of an equity offering or with cash, in each case, subject to certain customary conditions and (v) replace the USD LIBOR rates with Term SOFR rates.

In October 2021, the Company entered into the Second Amendment to, among other things, (i) complete a semi-annual borrowing base redetermination process, which increased the borrowing base from $ 125.0 million to $ 195.0 million and (ii) modify the terms of the Prior Credit Agreement to increase the aggregate elected commitments from $ 125.0 million to $ 195.0 million.

In February 2022, the Company entered into the Third Amendment to, among other things, (i) reduce the borrowing base from $ 195.0 million to $ 138.8 million, (ii) modify the terms of the Prior Credit Agreement to reduce the aggregate elected commitments from $ 195.0 million to $ 138.8 million, (iii) update the maturity date to a springing maturity date, which will cause the Prior Credit Agreement to mature on October 1, 2023 if the 10.000% Senior Notes are not redeemed or refinanced by that date or the terms of the 10.000% Senior Notes have not been amended to extend the scheduled repayment thereof to no earlier than October 1, 2024, (iv) allow the Company to redeem the 10.000% Senior Notes with proceeds of a refinancing, with proceeds of an equity offering or with cash, in each case, subject to certain customary conditions and (v) replace the USD LIBOR rates with Term SOFR rates.

In June 2022, the Company entered into the Fourth Amendment to, among other things, (i) increase (a) the aggregate elected commitments to $ 400.0 million, (b) the borrowing base to $ 400.0 million and (c) the maximum credit amount to $ 1.5 billion, (ii) increase the excess cash threshold to $ 75.0 million, (iii) modify the affirmative hedging requirement so that if total debt to EBITDAX is greater than 1.25 to 1.00 but less than or equal to 1.75 to 1.00, notional volumes covering the first 24 months following the measurement date shall be hedged in an amount equal to not less than 25 % of the projected production and if total debt to EBITDAX is greater than 1.75 to 1.00, notional volumes covering the first 24 months following the measurement date shall be hedged in an amount equal to not less than 50 % of the projection production and (iv) increase the number of banks included in the syndicate at differing levels of commitments, with Fifth Third remaining the administrative agent.

In October 2022, the Company entered into the Fifth Amendment to, among other things, (i) increase the elected commitments to $ 525 million and the borrowing base to $ 550 million, (ii) require an additional borrowing base redetermination on or about December 1, 2022, (iii) modify the permitted dividends and distributions conditions such that minimum availability under the credit facility must be 25% percent (as opposed to 30% before giving effect to the Fifth Amendment) and (iv) appoint Wells Fargo Bank, National Association (“Wells Fargo”) as the new administrative agent to replace Fifth Third.

In addition, in connection with the Fifth Amendment, to the extent the Company incurs any additional specified unsecured senior, senior subordinated or subordinated future indebtedness in an aggregate amount of up to $250.0 million before June 30, 2023, the Company’s obligation to reduce the borrowing base by an amount equal to 25% of the principal amount of such additional future indebtedness shall be waived.

In connection with the Fifth Amendment, the lenders waived two technical events of default existing with the Credit Agreement, as it existed prior to giving effect to the Fifth Amendment, related to entering into and maintaining certain minimum hedges as of the fiscal quarters ending June 30, 2022 and September 30, 2022 and complying with the required current ratio as of the fiscal quarter ending September 30, 2022.

In October 2022, the Company entered into the Sixth Amendment to, among other things, (i) change the period to 120 days following the maturity date for which there can be no scheduled principal payments, mandatory redemption or maturity date for the 10.000% Senior Notes (as defined in the Credit Agreement) and the Specified Senior Notes (as defined in the Credit Agreement), (ii) clarify that the Specified Senior Notes are subject to the restriction on the voluntary redemption by the Company of certain specified additional debt, including the 10.000% Senior Notes, (iii) add a permitted lien basket in connection with the escrow account to be opened in connection with the Specified Senior Notes and (iv) provide for an exception for the restriction on mandatory redemptions of the Specified Senior Notes in connection with the special mandatory redemption provided for with respect to the Specified Senior Notes.

In October 2022, the Company entered into the Fifth Amendment to, among other things, (i) increase the elected commitments to $ 525 million and the borrowing base to $ 550 million, (ii) require an additional borrowing base redetermination on or about December 1, 2022, (iii) modify the permitted dividends and distributions conditions such that minimum availability under the credit facility must be 25 % percent (as opposed to 30 % before giving effect to the Fifth Amendment) and (iv) appoint Wells Fargo Bank, National Association (“Wells Fargo”) as the new administrative agent to replace Fifth Third.

In addition, in connection with the Fifth Amendment, to the extent the Company incurs any additional specified unsecured senior, senior subordinated or subordinated future indebtedness in an aggregate amount of up to $ 250.0 million before June 30, 2023, the Company’s obligation to reduce the borrowing base by an amount equal to 25 % of the principal amount of such additional future indebtedness shall be waived.

In connection with the Fifth Amendment, the lenders waived two events of default existing with the Prior Credit Agreement, as it existed prior to giving effect to the Fifth Amendment, related to entering into and maintaining certain minimum hedges as of the fiscal quarters ending June 30, 2022 and September 30, 2022 and complying with the required current ratio as of the fiscal quarter ending September 30, 2022.

In October 2022, the Company entered into the Sixth Amendment to, among other things, (i) change the period to 120 days following the maturity date for which there can be no scheduled principal payments, mandatory redemption or maturity date for the 10.000% Senior Notes and the Specified Senior Notes, (ii) clarify that the Specified Senior Notes are subject to the restriction on the voluntary redemption by the Company of certain specified additional debt, including the 10.000% Senior Notes, (iii) add a permitted lien basket in connection with the escrow account to be opened in connection with the Specified Senior Notes and (iv) provide for an exception for the restriction on mandatory redemptions of the Specified Senior Notes in connection with the special mandatory redemption provided for with respect to the Specified Senior Notes.

In December 2022, the Company entered into the Seventh Amendment to, among other things, increase the amount of Specified Senior Notes from $ 225.0 million to $ 250.0 million.

The borrowing capacity under the Credit Agreement is equal to the lowest of (i) the borrowing base (which stands at $ 550 .0 million as of December 31, 2022), (ii) the aggregate elected commitments (which stands at $ 525.0 million as of December 31, 2022) and (iii) $ 1.5 billion.

As of December 31, 2022 and 2021, the Company had $ 270.0 million and $ 100.0 million, respectively, outstanding borrowings under the Credit Agreement.

Borrowings under the Credit Agreement prior to February 2022 bore interest, at the option of the Company, based on (a) a rate per annum equal to the higher of (i) the prime rate announced from time to time by Fifth Third, (ii) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System during the last preceding business day plus 0.5 percent and (iii) the Adjusted LIBO Rate for one-month Interest Period, plus a margin (the “Applicable Margin”) which was determined by the Borrowing Base Utilization Percentage as defined in the Credit Agreement or (b) the LIBO Rate for a one, three or six month Interest Period multiplied by the Statutory Reserve Rate.

As of February 2022, borrowings under the Credit Agreement bear interest at the option of the Company, based on (a) the prime rate announced from time to time by the administrative agent or (b) a rate equal to the higher of (i) zero percent per annum and (ii) SOFR relating to quotations for 1 or 3 months.

Letters of credit outstanding under the Credit Agreement are subject to a per annum fee, representing the Applicable Margin plus 0.125 percent.

The Company also pays commitment fees on undrawn amounts under the Credit Agreement equal to 0.50 percent.

Borrowings under the Credit Agreement are secured by a first lien security interest on substantially all assets of the Company and its restricted subsidiaries, including mortgages on the Company’s and its restricted subsidiaries’

crude oil and natural gas properties.

The Credit Agreement is scheduled to have the borrowing base redetermined in early 2023 and semiannually in April and October thereafter.

Additionally, the Company and Wells Fargo each have the option for a wild card evaluation between redeterminations.

The Credit Agreement requires the maintenance of a ratio of total debt to EBITDAX, subject to certain adjustments, not to exceed 3.00 to 1.00 as of the last day of any fiscal quarter and a current ratio, subject to certain adjustments, of at least 1.00 to 1.00 as of the last day of any fiscal quarter.

The Company has limited equity cure rights for a breach of the above-listed financial covenants.

Additionally, the Credit Agreement contains additional restrictive covenants that limit the ability of the Company and its restricted subsidiaries to, among other things, incur additional indebtedness, incur additional liens, make investments and loans, enter into mergers and acquisitions, make or declare dividends and other payments, enter into certain hedging transactions, sell assets and engage in transactions with affiliates.

The Credit Agreement contains customary mandatory prepayments, including a monthly mandatory prepayment if the Consolidated Cash Balance (as defined in the Credit Agreement) is in excess of $ 75.0 million.

In addition, the Credit Agreement is subject to customary events of default, including a change in control.

If an event of default occurs and is continuing, the administrative agent or the majority of the lenders may accelerate any amounts outstanding and terminate lender commitments.

In March 2023, the Company entered into the Eighth Amendment to, among other things, (a) increase the borrowing base to $ 700.0 million, (b) add an aggregate elected commitments concept at an initial amount of $ 575.0 million, (c) provide that the applicable margin shall be determined in reference to such aggregate elected commitments (as opposed to being determined in reference to the borrowing base before giving effect to the Eighth Amendment), (d) modify the permitted dividends and distributions conditions such that minimum availability under the credit facility must be 25 % of such aggregate elected commitments (as opposed to the borrowing base before giving effect to the Eighth Amendment), (e) permit quarterly dividends and distributions in an amount not to exceed $ 4.0 million provided that there is no default and that after giving effect thereto and any concurrent borrowing, the Company is in pro forma compliance with its financial covenants, (f) require the Company, on or before June 30, 2023, to redeem or refinance the 10.000% Senior Notes, allocate a portion of its cash flow that will retire the 10.000% Senior Notes on or before November 30, 2023 or amend the terms of the 10.000% Senior Notes to extend the scheduled repayment thereof to no earlier than February 15, 2025, (g) permit the redemption of Specified Additional Debt (defined in the Prior Credit Agreement to mean any unsecured senior, senior subordinated or subordinated Debt of the Borrower incurred after the Effective Date and any refinancing of such Debt, including without limitation, the 10.000% Senior Notes;

provided that any such Debt may be refinanced only to the extent that the aggregate principal amount of such refinanced Debt does not result in an increase in the principal amount thereof plus amounts to fund any original issue discount or upfront fees relating thereto plus amounts to fund accrued interest, fees, expenses and premiums, with all Capitalized terms defined in such Prior Credit Agreement) with the proceeds of Loans if pre-approved by all Lenders provided that there is no default and that after giving effect thereto, the Company is in pro forma compliance with its financial covenants and (h) add Texas Capital Bank as a Lender.

In July 2023, the Company entered into the Ninth Amendment to, among other things, provide for (i) a waiver of the minimum current ratio covenant for the fiscal quarter ended June 30, 2023 under the Prior Credit Agreement, (ii) a waiver of the failure to subject one or more certain accounts to an Account Control Agreement within the period provided in the Prior Credit Agreement, (iii) a postponement of the April 2023 borrowing base redetermination until September 2023, (iv) a postponement of the date on which the Company was previously obligated thereunder to either extend the maturity of the 10.000% Senior Notes due February 2024, redeem or refinance the 10.000% Senior Notes or allocate a portion of the Company’s cash flow satisfactory to the Administrative Agent and the Majority Lenders that will retire the 10.000% Senior Notes on or before November 30, 2023 to September 1, 2023 or such later date as agreed to in writing by the Majority Lenders in their reasonable discretion, (v) certain pricing increases and additional minimum hedging requirements, (vi) an additional requirement to deliver a 13-week cash flow forecast on a weekly basis through completion of the September 2023 borrowing base redetermination and (vii) a temporary restriction on borrowing further amounts under the Prior Credit Agreement until the Company has received at least $ 95 million of net proceeds from the sales of the Company’s equity securities, which has been subsequently satisfied and the restriction no longer applies.

In connection with the entry into the aforementioned Term Loan Credit Agreement, the Prior Credit Agreement was terminated, all outstanding obligations for principal, interest and fees were paid off in full, and all liens securing such obligations and guarantees of such obligations and securing any letter of credit or hedging obligations (other than those novated pursuant to the terms of the Term Loan Credit Agreement) permitted by the Prior Credit Agreement to be secured by such liens were released.

In addition, unamortized debt issuance costs as of the termination date of $ 2.7 million were charged to expense and included in the accompanying consolidated statements of operations in loss on extinguishment of debt.

10.000% Senior Notes.

In February 2022, the Company issued $ 225.0 million aggregate principal amount of its 10.00 0% Senior Notes due 2024 (“10.000% Senior Notes”), which will mature on February 15, 2024.

The Company received proceeds, net of $ 22.1 million of issuance costs and discounts, of $ 202.9 million.

The net proceeds were used to pay down the balance of the Credit Agreement to zero at closing and to fund our ongoing capital development program with subsequent draws on the Credit Agreement.

Interest on the 10.000% Senior Notes will be payable on February 15 and August 15 of each year.

The indenture governing the 10.000% Senior Notes contains restrictive covenants that limit the ability of the Company and, with respect to certain restrictive covenants, its restricted subsidiaries to, among other things, incur indebtedness, incur liens, make investments and loans, enter into mergers and acquisitions, make or declare dividends and other payments, sell assets and engage in transactions with affiliates.

In addition, the indenture governing the 10.000% Senior Notes contains customary events of default, including payment events of default and events of default upon certain bankruptcy and insolvency events of default.

If a bankruptcy or insolvency-related event of default occurs, the principal of, and accrued and unpaid interest on all outstanding 10.000% Senior Notes will become immediately due and payable.

With respect to certain other events of default, the trustee may, in certain circumstances, pursue any available remedy to collect the payment of principal of, premium, if any, on and interest, if any, on the 10.000% Senior Notes or enforce performance of any provisions of the 10.000% Senior Notes or the indenture governing such notes.

In February 2022, the Company issued $ 225.0 million aggregate principal amount of its 10.000 % Senior Notes due 2024 (“10.000% Senior Notes”), which were set to mature on February 15, 2024.

The Company received proceeds of $ 202.9 million, net of $ 22.1 million of issuance costs and discounts.

The net proceeds were used to pay down the balance of the Prior Credit Agreement to zero at closing and to fund our ongoing capital development program with subsequent draws on the Prior Credit Agreement.

Interest on the 10.000% Senior Notes was payable on February 15 and August 15 of each year.

In connection with the aforementioned Term Loan Credit Agreement, the 10.000% Senior Notes were redeemed at a redemption price of 100% of the principal amount thereof plus accrued and unpaid interest and fees.

In addition, unamortized discounts and debt issuance costs as of the redemption date of $ 3.2 million and $ 1.5 million, respectively, were charged to expense and included in the accompanying consolidated statements of operations in loss on extinguishment of debt.

10.625% Senior Notes.

In November 2022 and December 2022, the Company issued $ 225.0 million and $ 25.0 million, respectively, for a total of $ 250 million aggregate principal amount of its Senior Notes due 2024 (“

10.625 % Senior Notes”), which will mature on November 15, 2024.

The Company received proceeds, net of $ 26.3 million of issuance costs and discounts, of approximately $ 223.7 million.

The net proceeds were used to reduce the outstanding balance of the Credit Agreement at closing and for general corporate purposes.

Interest on the 10.625% Senior Notes will be payable on May 15 and November 15 of each year.

The indentures governing the 10.625% Senior Notes contain restrictive covenants that limit the ability of the Company and, with respect to certain restrictive covenants, its restricted subsidiaries to, among other things, incur indebtedness, incur liens, make investments and loans, enter into mergers and acquisitions, make or declare dividends and other payments, sell assets and engage in transactions with affiliates.

In addition, the indentures governing the 10.625% Senior Notes contain customary events of default, including payment events of default and events of default upon certain bankruptcy and insolvency events of default.

If a bankruptcy or insolvency-related event of default occurs, the principal of, and accrued and unpaid interest on all outstanding 10.625% Senior Notes will become immediately due and payable.

With respect to certain other events of default, the trustee may, in certain circumstances, pursue any available remedy to collect the payment of principal of, premium, if any, on and interest, if any, on the 10.625% Senior Notes or enforce performance of any provisions of the 10.625% Senior Notes or the indenture governing such notes.

The Credit Agreement and the indentures governing the 10.00 0% Senior Notes and 10.625 % Senior Notes have hedging obligations to which the Company adheres.

In November 2022 and December 2022, the Company issued $ 225.0 million and $ 25.0 million, respectively, under separate indentures, of its 10.625% Senior Notes due 2024 (“ 10.625 % Senior Notes”), which were set to mature on November 15, 2024.

The Company received proceeds of $ 223.7 million, net of $ 26.3 million of issuance costs and discounts.

The net proceeds were used to reduce the outstanding balance of the Prior Credit Agreement at closing and for general corporate purposes.

Interest on the 10.625% Senior Notes was payable on May 15 and November 15 of each year.

In addition, the Company paid additional interest of $ 8.3 million in June 2023 in accordance with the indentures whereby if the Company did not receive a rating increase by June 30, 2023, it was required to pay said additional interest that is included in interest expense during the nine months ended September 30, 2023.

In connection with the aforementioned Term Loan Credit Agreement, the 10.625% Senior Notes were redeemed at a redemption price of 100% of the principal amount thereof plus accrued and unpaid interest and fees, plus the applicable premium calculated as $ 4.5 million, which was the present value at September 14, 2023 of all required interest payments due on the 10.625% Senior Notes through November 15, 2023.

In addition, unamortized discounts and debt issuance costs as of the redemption date of $ 11.7 million and $ 3.7 million, respectively, were charged to expense and included in the accompanying consolidated statements of operations in loss on extinguishment of debt.

The Term Loan Credit Agreement and the Senior Credit Facility Agreement have hedging requirements to which the Company adheres.

Asset Retirement Obligations

The Company’s asset retirement obligations primarily relate to the future plugging and abandonment of wells and related facilities.

Market risk premiums associated with asset retirement obligations are estimated to represent a component of the Company’s credit-adjusted risk-free rate that is utilized in the calculations of asset retirement obligations.

The Company’s asset retirement obligations primarily relate to the future plugging and abandonment of wells and related facilities.

Asset retirement obligations activity is as follows (in thousands):

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Ending asset retirement obligations

(a) The revisions to the Company’s asset retirement obligation estimates are primarily due to changes in estimated costs based on experience with the properties and their expected useful lives.

As of December 31, 2022 and 2021, all asset retirement obligations are considered noncurrent and classified as such in the accompanying consolidated balance sheet.

The revisions to the Company’s asset retirement obligation estimates are primarily due to changes in the ultimate expected useful lives of the properties.

As of December 31, 2023 and 2022, all asset retirement obligations are considered noncurrent and classified as such in the accompanying consolidated balance sheets.

Incentive Plans

The HighPeak Energy Employees, Inc 401(k) Plan (the “401(k) Plan”) is a defined contribution plan established under Section 401 of the Internal Revenue Code of 1986, as amended (the “Code”).

All regular full-time and part-time employees of the Company are eligible to participate in the 401(k) Plan after three continuous months of employment with the Company.

Participants may contribute up to 80 percent of their annual base salary into the 401(k) Plan.

Matching contributions are made to the 401(k) Plan in cash by the Company in amounts equal to 100 percent of a participant’s contributions to the 401(k) Plan up to four percent of the participant’s annual base salary (the “Matching Contribution”).

Each participant’s account is credited with the participant’s contributions, Matching Contributions and allocations of the 401(k) Plan’s earnings.

Participants are fully vested in their account balances at their eligibility date.

During the year ended December 31, 2022 and 2021 and the period from August 22, 2020 through December 31, 2020, the Company contributed $ 358,000 , $ 227,000 and $ 49,000 to the 401(k) Plan, respectively.

During the years ended December 31, 2023, 2022 and 2021, the Company contributed $ 218,000 , $ 358,000 and $ 227,000 to the 401(k) Plan, respectively.

Long-Term Incentive Plan.

The Company’s Second Amended & Restated Long Term Incentive Plan (“LTIP”) provides for the grant of stock options, dividend equivalents, cash awards and substitute awards to officers and employees of the Company, as well as stock awards to directors of the Company.

The number of shares available for grant pursuant to awards under the LTIP as of December 31, 2022 are as follows:

Approved and authorized awards

Awards issued under plan

Awards available for future grant

The Company’s Second Amended & Restated Long Term Incentive Plan (“LTIP”) provides for the grant of stock options, restricted stock, stock awards, dividend equivalents, cash awards and substitute awards to officers, employees, directors and consultants of the Company.

The number of shares available for grant pursuant to awards under the LTIP as of December 31, 2023 and 2022 are as follows:

Approved and authorized shares

Shares subject to awards issued under plan

Shares available for future grant

Stock options.

Stock option awards were granted to employees on August 24, 2020, November 4, 2021, May 4, 2022 and August 15, 2022.

Stock-based compensation expense related to the Company’s stock option awards for the years ended December 31, 2022, 2021 and period from August 22, 2020 through December 31, 2020 was $ 18.1 million, $ 4.6 million and $ 15.5 million, respectively, and as of December 31, 2022 and 2021 there was $ 1.1 million and $ 1.8 million, respectively, of unrecognized stock-based compensation expense related to unvested stock option awards.

The unrecognized compensation expense will be recognized on a straight-line basis over the remaining vesting periods of the awards, which is a period of less than two years.

Stock option awards were granted to employees on August 24, 2020, November 4, 2021, May 4, 2022, August 15, 2022 and July 21, 2023.

Stock-based compensation expense related to the Company’s stock option awards for the years ended December 31, 2023 and 2022 was $ 11.0 million and $ 18.1 million, respectively, and as of December 31, 2023 and 2022 there was $ 145,000 and $ 1.1 million, respectively, of unrecognized stock-based compensation expense related to unvested stock option awards.

The unrecognized compensation expense will be recognized on a straight-line basis over the remaining vesting periods of the awards, which is a period of less than one year.

The 1,949,000 stock options granted in July 2023 were 100 % vested upon grant on July 21, 2023.

However, to encourage long-term alignment with the Company stockholders, the stock options are not exercisable until the earlier of (i) August 31, 2026, (ii) upon a change in control or (iii) upon the death or disability of the grantee.

The Company estimates the fair values of stock options granted on the grant date using a Black-Scholes option valuation model, which requires the Company to make several assumptions.

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More detailed stock options activity and details are as follows:

Average Exercise

Outstanding at August 22, 2020

Awards granted

Outstanding at December 31, 2021

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Exercisable at December 31, 2023

Restricted Stock Issued to Employee Members of the Board.

Restricted stock issued to employee members of the Board and certain employees.

A total of 1,500,500 shares of restricted stock was approved by the Board to be granted to certain employee members of the Board of the Company on November 4, 2021, which vest on the three -year anniversary of such grant assuming the employees remain in his or her position as of the anniversary date.

Therefore, stock-based compensation expense of $ 7.2 million and $ 1.2 million was recognized during the years ended December 31, 2022 and 2021, respectively, and the remaining $ 13.2 million will be recognized over the remaining restricted period, which was based upon the closing price of the stock on the date of the restricted stock issuance.

Therefore, stock-based compensation expense of $ 7.2 million, $ 7.2 million and $ 1.2 million was recognized during the years ended December 31, 2023, 2022 and 2021, respectively, and the remaining $ 6.0 million as of December 31, 2023 will be recognized over the remaining restricted period, which was based upon the closing price of the stock on the date of the restricted stock issuance.

The Board also cancelled the previously issued equity-based liability bonuses and approved a total of 600,000 shares of restricted stock to be granted to certain employees of the Company on June 1, 2022, which vest on November 4, 2024, assuming the employees remain in his or her position as of that date and cancelled certain contractual equity-based bonuses to such employees.

Therefore, stock-based compensation expense of $ 7.3 million and $ 488,000 was recognized during the years ended December 31, 2022 and 2021, respectively, and the remaining $ 12.9 million will be recognized over the remaining restricted period, which was based upon the closing price of the stock on the date of the restricted stock issuance.

Therefore, stock-based compensation expense of $ 7.0 million, $ 7.3 million and $ 488,000 was recognized during the years ended December 31, 2023, 2022 and 2021, respectively, and the remaining $ 5.9 million as of December 31, 2023 will be recognized over the remaining restricted period, which was based upon the closing price of the stock on the date of the restricted stock issuance.

Stock issued to outside directors.

A total of 58,767 shares of restricted stock was approved by the Board to be granted to the outside directors of the Company on June 1, 2023, which will vest at the next annual meeting, assuming the Board members maintain their positions on the Board.

Therefore, stock-based compensation expense of $ 427,000 was recognized during the year ended December 31, 2022 and the remaining $ 305,000 will be recognized between January and June 2023, which was based upon the closing price of the stock on the date of the restricted stock issuance.

In addition, a total of 67,779 shares of restricted stock was approved by the Board to be granted to the outside directors of the Company on June 1, 2021, which vested in January 2022.

Therefore, the remaining stock-based compensation expense of $ 284,000 was recognized during the year ended December 31, 2022, which was based upon the closing price of the stock on the date of the restricted stock issuance.

Stock was issued to the outside directors of the Company in November 2020 in the amount of 12,500 shares for each outside director, totaling 62,500 shares.

There were no restrictions of these shares.

Therefore stock-based compensation expense was recognized immediately upon the issuance of these shares in the amount of $ 302,000 which was based upon the closing price of the stock on the date the stock issuance was approved by the Board of the Company.

Therefore, stock-based compensation expense of $ 442,000 was recognized during the year ended December 31, 2023 and the remaining $ 316,000 will be recognized between January and May 2024, which was based upon the closing price of the stock on the date of the restricted stock issuance.

In addition, a total of 21,184 shares of restricted stock was approved by the Board to be granted to the outside directors of the Company on June 1, 2022, which vested during the second quarter of 2022.

Therefore, stock-based compensation expense of $ 305,000 , $ 427,000 was recognized during the years ended December 31, 2023 and 2022, respectively, which was based upon the closing price of the stock on the date of the restricted stock issuance.

Finally, a total of 67,779 shares of restricted stock was approved by the Board to be granted to the outside directors of the Company on June 1, 2021, which vested in January 2022.

Therefore, stock-based compensation expense of $ 284,000 and $ 398,000 was recognized during the years ended December 31, 2022 and 2021, respectively, which was based upon the closing price of the stock on the date of the restricted stock issuance.

Commitments and Contingencies

The Company follows ASC Topic 842, “Leases”

to account for its operating and finance leases.

Therefore, as of December 31, 2022 the Company had right-of-use assets totaling $ 333,000 included in other noncurrent assets and operating lease liabilities totaling $ 343,000 , included in other current liabilities, and as of December 31, 2021 the Company had right-of-use assets totaling $ 852,000 included in other noncurrent assets and operating lease liabilities totaling $ 856,000 , $ 513,000 of which are included in other current liabilities and $ 343,000 of which are included in other noncurrent liabilities on the accompanying consolidated balance sheets.

The Company follows ASC Topic 842, “Leases” to account for its operating and finance leases.

Therefore, as of December 31, 2023, the Company had right-of-use assets totaling $ 510,000 included in other noncurrent assets and operating lease liabilities totaling $ 528,000 , all of which are included in current liabilities, and as of December 31, 2022 the Company had right-of-use assets totaling $ 333,000 included in other noncurrent assets and operating lease liabilities totaling $ 343,000 , included in other current liabilities on the accompanying consolidated balance sheets.

The Company does not currently have any finance right-of-use leases.

Maturities of the operating lease obligations are as follows (in thousands):

Total lease payments

Less present value discount

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From time to time, the Company may be a party to various proceedings and claims incidental to its business.

While many of these matters involve inherent uncertainty, the Company believes that the amount of the liability, if any, ultimately incurred with respect to these proceedings and claims will not have a material adverse effect on the Company’s consolidated financial position as a whole or on its liquidity, capital resources or future annual results of operations.

The Company records reserves for contingencies when information available indicates that a loss is probable, and the amount of the loss can be reasonably estimated.

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Crude oil delivery commitments.

In May 2021, the Company entered into a crude oil marketing contract with DK Trading & Supply, LLC (“Delek”) as the purchaser and DKL Permian Gathering, LLC (“DKL”) as the gatherer and transporter.

The contract includes the Company’s current and future crude oil production from the majority of its horizontal wells in Flat Top where DKL is continually constructing a crude oil gathering system and custody transfer meters to most of the Company’s central tank batteries.

The contract contains a minimum volume commitment commencing October 2021 based on the gross barrels delivered at the Company’s central tank battery facilities and is 5,000 Bopd for the first year, 7,500 Bopd for the second year and 10,000 Bopd for the remaining eight years of the contract.

However, the Company has the ability under the contract to cumulatively bank excess volumes delivered to offset future minimum volume commitments.

For the period from October 1, 2021 to December 31, 2022, the Company has delivered approximately 22,800 Bopd under the contract.

The remaining monetary commitment as of December 31, 2022, if the Company never delivers any additional volumes under the agreement, is approximately $ 18.3 million.

For the period from October 1, 2021 to December 31, 2023, the Company has delivered approximately 29,600 Bopd under the contract which is approximately 72 percent of the contracted volume for the life of the contract.

The monetary commitment for the remaining 9.5 MMBbl as of December 31, 2023, if the Company never delivers any additional volumes under the agreement, is approximately $ 7.8 million.

Natural gas purchasing replacement contract.

In May 2021, the Company entered into a replacement natural gas purchase contract with WTG Gas Processing, L.P.

(“WTG”) as the gatherer, processor and purchaser of the Company’s current and future gross natural gas production in Flat Top.

The replacement contract provides the Company with improved natural gas and NGL pricing and requires WTG to expand its current low-pressure gathering system, which eliminates the need for in-field compression in Flat Top to accommodate the Company’s increased natural gas production volumes based on the current plan of development.

The Company will provide WTG with certain aid-in-construction payments to be reimbursed over time based on throughput through the system.

(“WTG”) as the gatherer, processor and purchaser of the Company’s current and future gross natural gas production in Flat Top.

The replacement contract provides the Company with improved natural gas and NGL pricing and required WTG to expand its current low-pressure gathering system, which eliminates the need for in-field compression in Flat Top to accommodate the Company’s increased natural gas production volumes based on the current plan of development.

The Company provides WTG with certain aid-in-construction payments to be reimbursed over time based on throughput through the system.

The replacement contract does not contain any minimum volume commitments.

Power contracts.

In June 2021, the Company entered into a contract with Priority Power Management, LLC (“Priority Power”) whereby Priority Power will develop an electric high-voltage (“EHV”) substation, medium voltage distribution systems and a 13-megawatt direct current solar photovoltaic facility located on approximately 80 acres of land owned by the Company north of Big Spring, Texas in Howard County to provide for the Company’s electrical power needs in its Flat Top operating area including powering drilling rigs and day-to-day operations.

The EHV substation was interconnected with the ERCOT transmission grid in May 2022 via the local electric utility, has an initial capacity of up to fifty megavolt amperes and was designed for future expansion capability.

The solar generation facility will be interconnected with the medium voltage distribution system that will be energized from the new EHV substation.

Priority Power will develop, finance, engineer, construct, operate and maintain the project facilities.

Also in June 2021, the Company entered into a contract with Oncor Electric Delivery Company, LLC (“Oncor”) to construct certain facilities to deliver electricity to the aforementioned substation.

In conjunction with this contract, the Company issued a $ 1.9 million letter of credit to Oncor until such time as the Company’s load meets or exceeds 12 megawatts as measured during any fifteen (15) minute interval on or before May 20, 2023.

This requirement was met in late 2022 and the letter of credit was released during the fourth quarter of 2022 accordingly.

Finally, in June 2022, the Company entered into a contract with TXU Energy Retail Company LLC (“TXU”) to provide a block of electric power via the aforementioned transmission system at an attractive variable rate, which fluctuates based on the usage by the Company through May 31, 2032.

In conjunction with this contract, the Company issued a $ 1.7 million letter of Credit in lieu of a deposit to TXU that is cancellable at the end of the contract term.

In June 2022, the Company entered into a contract with TXU Energy Retail Company LLC (“TXU”) to provide a block of electric power at an attractive variable rate, which fluctuates based on the usage by the Company through May 31, 2032.

In conjunction with this contract, the Company currently has a $ 3.9 million letter of credit issued in lieu of a deposit to TXU that is cancellable at the end of the contract term.

Sand commitments.

The Company is party to an agreement whereby it has agreed to purchase at least 600,000 tons of sand over a two-year period beginning at the commencement date of the sand mine being operational, which was late in the second quarter of 2022.

There are stipulations in the agreement that reduce this commitment should we experience a downturn in crude oil prices.

As of December 31, 2022, the Company has purchased approximately 279,000 tons of sand under the contract.

The Company is party to an amended agreement whereby it has agreed to purchase at least 1.6 million tons of sand over a two-year period beginning July 1, 2022.

There are stipulations in the agreement that reduce this commitment should there be a downturn in crude oil prices.

As of December 31, 2023, the Company has purchased approximately 1.2 million tons of sand under the contract.

However, generally if the Company never takes delivery of any additional sand under the agreement, the monetary commitment that remains as of December 31, 2023 is approximately $ 9.5 million.

Related Party Transactions

Underwritten Equity Offering.

In connection with the Company’s underwritten equity offering in July 2023, certain of the Company’s existing stockholders, John Paul DeJoria Family Trust and Jack Hightower, the Company’s Chairman and Chief Executive Officer, and entities and individuals associated with them, purchased an aggregate of approximately 10 million shares of common stock in the offering at the public offering price per share.

In connection therewith, the Underwriter received a reduced underwriting discount on such shares purchased by these persons or entities compared with other shares sold to the public in the offering.

Water Treatment.

In September 2021, the Company entered into a contract with Pilot Exploration, Inc., (“Pilot”), whose President and CEO is an outside director of the Company, to deploy Pilot’s proprietary water treatment technology in the Company’s Flat Top area to treat up to 25,000 barrels of produced water per day that can be reused in the Company’s completion operations or sold to third parties for their completion operations.

This contract was set to expire on March 1, 2022, however it was extended to October 1, 2022 based on the early results of the project.

During the year ended December 31, 2022, the Company paid $ 2.0 million to Pilot for such services.

In May 2022, the Company entered into an agreement with Pilot to utilize Pilot’s proprietary water treatment technology in the Company’s Flat Top area to treat produced water such that it can be reused in the Company’s completion operations or sold to third parties for their completion operations.

During the one-year term of the agreement, beginning on October 1, 2022, the Company has agreed to a minimum volume commitment of 29.2 million barrels of produced water while maintaining the ability to bank excess produced water processed each month toward the minimum volume commitment.

In September 2021, the Company entered into a contract with Pilot Exploration, Inc., (“Pilot”), whose President and CEO was an outside director of the Company, to deploy Pilot’s proprietary water treatment technology in the Company’s Flat Top area to treat up to 25,000 barrels of produced water per day that can be reused in the Company’s completion operations or sold to third parties for their completion operations.

This contract was set to expire on March 1, 2022;

however, it was extended to October 1, 2022 based on the early results of the project.

During the year ended December 31, 2022, the Company paid $ 2.0 million to Pilot for such services.

The monetary commitment, if the Company never delivers any additional produced water to be treated under the agreement, is approximately $ 4.4 million.

HighPeak Business Combination.

On August 21, 2020, the Company completed the HighPeak business combination between the Company, Pure, HPK LP, HighPeak I, and HighPeak II.

HighPeak I and HighPeak II contributed their partnership interests in HPK LP to the Company in return for 76,383,054 shares of publicly traded common stock of the Company.

The table below shows the construction of the beginning balance sheet of the Company on August 22, 2020 upon the closing of the HighPeak business combination (in thousands).

Cash and cash equivalents

Accounts receivable

Total current assets

Total crude oil and natural gas properties, net

Other property and equipment, net

Current liabilities

Deferred income tax liability

Notes payable (receivable)

Asset retirement obligations

Partners' capital

Additional paid-in capital

Accumulated deficit

Total stockholders' equity/partner's capital

Total liabilities and stockholders' equity/partners' capital

Represents HPK LP’s condensed consolidated balance sheet estimated as of August 21, 2020.

Represents Pure’s condensed consolidated balance sheet estimated as of August 21, 2020 after taking into account:

(i) the closing of its trust account, (ii) the redemption of Pure’s Class A Common Stock by the former public stockholders of Pure that elected to redeem, (iii) paying out the cash consideration to those former public stockholders of Pure who elected to remain and (iv) the conversion of the remaining shares of Pure’s Class A Common Stock to HighPeak Energy common stock upon the closing of the HighPeak business combination.

The $ 13.7 million reduction to equity is considered noncash offering costs on the condensed consolidated statement of changes in stockholders’

Represents the balance sheet of HighPeak Energy Employees, Inc which was acquired by the Company for $ 10.00 upon the closing of the HighPeak business combination.

Represents the issuance by the Company of 91,592,354 shares of common stock, 10,538,183 warrants and 10,209,300 Contingent Value Rights upon the closing of the HighPeak business combination.

The reduction to accounts payable of $ 9.5 million represents those vendors of HPK LP that purchased shares under the Forward Purchase Agreement Amendment (as defined below) in the HighPeak business combination in lieu of being paid cash for the majority of their outstanding balances.

Represents the cash costs paid for the offering of the aforementioned shares in addition to the cash costs that had previously been incurred by Pure of $ 13.7 million in column (b).

Represents the beginning deferred tax liability of the Company given the combination of all the entities, most of which originated from HPK LP which was a partnership for U.S.

federal income tax purposes and therefore did not record a deferred tax liability.

Pursuant to the Business Combination Agreement, among other things, (a) MergerSub merged with and into Pure, with Pure surviving as a wholly owned subsidiary of the Company, (b) each outstanding share of Pure’s Class A Common Stock and Pure’s Class B Common Stock (other than certain shares of Pure’s Class B Common Stock that were surrendered for cancellation by Pure’s Sponsor) were converted into the right to receive (A) one share of HighPeak Energy common stock (and cash in lieu of fractional shares), and (B) solely with respect to each outstanding share of Pure’s Class A Common Stock, (i) a cash amount, without interest, equal to $ 0.62 , which represented the amount by which the per-share redemption value of Pure’s Class A Common Stock that exceeded $ 10.00 per share at the closing, without interest, in each case, totaling approximately $ 767,902 , (ii) one Contingent Value Right (“CVR”) for each one whole share of HighPeak Energy common stock (excluding fractional shares) issued to holders of Pure’s Class A Common Stock pursuant to clause (A), representing the right to receive additional shares of HighPeak Energy common stock (or such other specified consideration as is specified with respect to certain events) under certain circumstances, if necessary, to satisfy a 10 % preferred simple annual return, subject to a floor downside per-share price of $ 4.00 , as measured at the applicable maturity, which occurred on August 21, 2022 and (iii) one warrant to purchase HighPeak Energy common stock for each one whole share of HighPeak Energy common stock (excluding fractional shares) issued to holders of Pure’s Class A Common Stock pursuant to clause (A), (c) the HPK Contributors (A) contributed their limited partner interests in HPK LP to the Company in exchange for HighPeak Energy common stock and the general partner interests in HPK LP to a wholly owned subsidiary of the Company in exchange for no consideration, and (B) contributed the outstanding Sponsor Loans (as defined in the Business Combination Agreement) in exchange for HighPeak Energy common stock and such Sponsor Loans were cancelled in connection with the closing of the HighPeak business combination and (d) following the consummation of the foregoing transactions, the Company caused HPK LP to merge with and into the HighPeak Energy Acquisition (as successor to Pure) and all interests in HPK LP were cancelled in exchange for no consideration.

HighPeak I and HighPeak II collectively received 76,383,054 shares of HighPeak Energy common stock pursuant to the Business Combination Agreement.

Further, certain of the Company’s executive officers and directors received the consideration provided by the HighPeak business combination through their ownership of Pure’s Class A Common Stock.

Tholen, the Company’s Chief Financial Officer received 5,000 shares of HighPeak Energy common stock, 5,000 CVRs and 5,000 warrants in exchange for shares of Pure’s Class A Common Stock owned by him prior to the HighPeak business combination.

Hollis, the Company’s President and member of the Company’s board of directors (the “Board”), received 16,802 shares of HighPeak Energy common stock, 16,802 CVRs and 20,382 warrants in exchange for shares of Pure’s Class A Common Stock and Pure’s warrants, respectively, owned by him prior to the HighPeak business combination.

Further, Rodney L.

Woodard, the Chief Operating Officer of the Company, received 14,000 shares of HighPeak Energy common stock, 14,000 CVRs and 14,000 warrants in exchange for shares of Pure’s Class A Common Stock and Pure’s warrants, respectively, owned by him prior to the HighPeak business combination.

Unaudited Pro Forma Operating Results.

The following unaudited pro forma combined financial information has been prepared as if the HighPeak business combination and the HPK LP business combination had taken place on January 1, 2020.

The unaudited pro forma consolidated financial information has been prepared using the reverse merger business combination method of accounting in accordance with GAAP.

The information reflects pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable and the estimated tax impacts of the pro forma adjustments.

The pro forma condensed combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the business combinations taken place on January 1, 2020;

furthermore, the financial information is not intended to be a projection of future results (in thousands, except per share amounts).

(Unaudited Pro

Total revenues

Net loss attributable to Common Stock

Basic and diluted net loss per share

Contingent Value Rights.

At the closing of the HighPeak business combination, the Company entered into the Contingent Value Rights Agreement (the “CVR Agreement”) by and among, the Company, Pure’s Sponsor, HighPeak I, HighPeak II (together with HighPeak I, the “CVR Sponsors”) and Continental Stock Transfer & Trust Company, in its capacity as Rights Agent (the “Rights Agent”) whereby it issued 10,209,300 CVRs.

The CVR Agreement provided for, among other things, the CVRs, which represented contractual rights to receive a contingent payment (in the form of additional shares of HighPeak Energy common stock, or as otherwise specified in the CVR Agreement) in certain circumstances that were issued to the holders of shares of Pure’s Class A Common Stock that participated in the HighPeak business combination and certain qualified institutional buyers and accredited investors, including certain affiliates and officers of the Company, that purchased forward purchase units of the Company pursuant to the Forward Purchase Agreement Amendment.

Pursuant to the CVR Agreement, holders of CVRs in whose name a CVR was registered in the CVR registrar maintained by the Rights Agent at any date of determination were provided with a significant valuation protection through the opportunity to obtain additional contingent consideration in the form of additional shares of HighPeak Energy common stock if the trading price of HighPeak Energy’s common stock was below the price that would provide the holders of CVRs with a 10 % preferred simple annual return on their shares of common stock held at Closing (based on a $ 10.00 per share price at the closing of the HighPeak business combination), subject to a floor downside per-share price of $ 4.00 (the “Preferred Returns”), either at (i) the date to be specified by the CVR Sponsors, which occurred on August 21, 2022.

If any additional shares of HighPeak Energy common stock were issued to Qualifying CVR Holders pursuant to the CVR Agreement, the CVR Sponsors collectively forfeited an equivalent number of shares they own that are currently in escrow to the Company for cancellation.

The Preferred Returns could entitle a Qualifying CVR Holder to receive up to 2.125 shares of HighPeak Energy common stock per CVR.

Following the closing, the CVR Sponsors collectively placed 21,694,763 shares in escrow, which equaled the maximum number of additional shares of HighPeak Energy common stock issuable pursuant to the CVR Agreement.

The CVRs expired on August 22, 2022 and the 21,694,763 shares held in escrow were released to the CVR Sponsors.

Stockholders ’

At the closing of the HighPeak business combination, Pure’s Sponsor, HighPeak I, HighPeak II, HighPeak Energy III, LP and Jack Hightower (collectively, with each of their respective affiliates and permitted transferees, the “Principal Stockholder Group”), on the one hand, and the Company, on the other hand, entered into a Stockholders’

Agreement (the “Stockholders’

Agreement”), which governs certain rights and obligations following the HighPeak business combination.

Under the Stockholders’

Agreement, the Principal Stockholder Group will be entitled, based on its percentage ownership of the total amount of HighPeak Energy common stock issued and outstanding immediately following the closing (the “Original Shares”) and provided that the Original Shares constitute not less than the percentage of the then outstanding total voting securities of the Company set forth below, to nominate a number of directors for appointment to the Board as follows:

for so long as (i) the Principal Stockholder Group beneficially owns at least 35 % of the Original Shares and (ii) the Original Shares constitute at least 30 % of the Company’s then-outstanding voting securities, the Principal Stockholder Group can designate up to four (4) nominees, and if the Principal Stockholder Group owns less than 50% of the total outstanding voting securities, at least one nominee shall be independent as defined by applicable listing standards;

for so long as (i) the Principal Stockholder Group beneficially owns less than 35% but at least 25 % of the Original Shares and (ii) the Original Shares constitute at least 25 % of the Company’s then-outstanding voting securities, the Principal Stockholder Group can designate up to three (3) nominees;

for so long as (i) the Principal Stockholder Group beneficially owns less than 25% but at least 15 % of the Original Shares and (ii) the Original Shares constitute at least 15 % of the Company’s then-outstanding voting securities, the Principal Stockholder Group can designate up to two (2) nominees;

if (i) the Principal Stockholder Group beneficially owns less than 15% but at least 5 % of the Original Shares and (ii) the Original Shares constitute at least 7.5 % of the Company’s then-outstanding voting securities, the Principal Stockholder Group can designate one (1) nominee.

If at any time the Principal Stockholder Group owns less than 5% of the Original Shares or the Original Shares constitute less than 7.5% of the Company’s then-outstanding voting securities, it will cease to have any rights to designate individuals for nomination to the Board.

For so long as the Principal Stockholder Group has the right to designate at least one director for nomination under the Stockholders’

Agreement, the Company will take all Necessary Action (as defined therein) to ensure that the number of directors serving on the Board shall not exceed seven (7).

For so long as the Principal Stockholder Group owns a number of shares of HighPeak Energy common stock equal to at least (i) 20 % of the Original Shares and (ii) 7.5 % of the then-outstanding voting securities of the Company, the Company and the Principal Stockholder Group shall have the right to have a representative appointed to serve on each committee of the Board (other than the audit committee) for which any such representative is eligible pursuant to applicable laws and the Nasdaq.

For so long as the Principal Stockholder Group has the right to designate one or more individuals for nomination to the Board, the Principal Stockholder Group shall have the right to appoint one (1) non-voting observer to the Board.

The Stockholders’

Agreement also includes customary restrictions on the transfer of equity securities to certain persons acquiring beneficial ownership.

Pursuant to the Stockholders’

Agreement, the Principal Stockholder Group will agree not to transfer, directly or indirectly, any equity securities of the Company for a period of 180 days after the Closing, subject to certain customary exceptions.

The Stockholders’

Agreement will terminate as to each stockholder upon the time at which the Principal Stockholder Group no longer has the right to designate an individual for nomination to the Board under the Stockholders’

Agreement and as to a member of the Principal Stockholder Group that no longer owns any of the Original Shares.

Registration Rights Agreement.

At the closing of the HighPeak business combination, the Company entered into the Registration Rights Agreement (the “Registration Rights Agreement”), by and among the Principal Stockholder Group and certain other security holders named therein, pursuant to which the Company will be obligated, subject to the terms thereof and in the manner contemplated thereby, to register for resale under the Securities Act of 1933, as amended (the “Securities Act”) all or any portion of the shares of HighPeak Energy common stock that the holders named thereto hold as of the date of such agreement and that they may acquire thereafter, including upon the conversion, exchange or redemption of any other security therefor (the “Registrable Securities”).

The Company has agreed to file and cause to become effective a registration statement covering the Registrable Securities held by such holder making a demand for registration, provided that no fewer than the amount of Registrable Securities representing the lesser of (i) $ 25 million or (ii) all Registrable Securities owned by such holder, as applicable, are covered under the holder’s demand for registration.

The holders can submit a request beginning immediately after the HighPeak business combination.

Under the Registration Rights Agreement, the holders also have “piggyback”

registration rights exercisable at any time that allow them to include the shares of HighPeak Energy common stock that they own in certain registrations initiated by the Company, provided that such holder elects to include its Registrable Securities in an amount not less than $ 5 million.

Subject to customary exceptions, holders will also have the right to request one or more underwritten offerings of Registrable Securities, provided, that, they hold at least $5 million in Registrable Securities and each such offering include a number of Registrable Securities equal to the lesser of (i) $25 million and (ii) all of the Registrable Securities owned by such holders as of the date of the request.

In the event that the sale of registered securities under a registration statement would require disclosure of certain material non-public information not otherwise required to be disclosed, the Company may postpone the effectiveness of the applicable registration statement or require the suspension of sales thereunder.

The Company may not delay or suspend a registration statement on more than two (2) occasions for more than sixty (60) consecutive calendar days or more than ninety (90) total calendar days, in each case, during any twelve (12) month period.

Forward Purchases.

In connection with the closing of the HighPeak business combination, the Company also issued shares of HighPeak Energy common stock, warrants and CVRs (the “Forward Purchases”) to certain qualified institutional buyers and accredited investors (the “Forward Purchase Investors”) pursuant to that certain Amended & Restated Forward Purchase Agreement, dated as of July 24, 2020 (the “Forward Purchase Agreement Amendment”), by and among the Company, each party designated as a purchaser therein (including purchasers that subsequently joined prior to the closing of the HighPeak business combination as parties thereto), HighPeak Energy Partners, LP, and, solely for the limited purposes specified therein, Pure.

Prior to the closing of the HighPeak business combination, and subsequent to the Company’s entry into the Forward Purchase Agreement Amendment, an aggregate of 8,976,875 forward purchase units (with each forward purchase unit consisting of one share of HighPeak Energy common stock, one warrant and one CVR), for aggregate consideration of approximately $ 89.8 million in a private placement pursuant to the Assignment and Joinder agreements under and pursuant to the Forward Purchase Agreement Amendment.

The proceeds from the Forward Purchases were used to fund a portion of the minimum equity consideration condition to closing required to effect the HighPeak business combination pursuant to the Business Combination Agreement.

Equity Offering.

On October 25, 2021, the Company completed an underwritten public offering of 2,530,000 shares of its common stock pursuant to a Registration Statement on Form S-1 (File No.

333-258853) filed with the SEC on October 19, 2021 and a Registration Statement on Form S-1MEF (File No.

333-260394) filed with the SEC on October 20, 2021.

Hollis, President of HighPeak Energy, participated in the offering and purchased an aggregate of 45,454 shares at the initial public offering price per share.

The underwriters received a reduced underwriting discount on the shares purchased by Michael L.

General and Administrative Expenses.

The general partner of HPK LP utilized HighPeak Energy Management, LLC (the “Management Company”) to provide services and assistance to conduct, direct and exercise full control over the activities of HPK LP per its Partnership Agreement.

However, the Management Company is funded via payments from the parent companies of HighPeak I and HighPeak II pursuant to their respective Limited Partnership Agreements, as amended.

Therefore, HPK LP reimbursed the parent companies of HighPeak I and HighPeak II for actual costs incurred by the Management Company.

During the period from January 1, 2020 through August 21, 2020, HPK LP paid $ 2.4 million each to the parent companies of HighPeak I and HighPeak II of which $ 4.7 million is included in general and administrative expenses in the accompanying results of operations for the period from January 1, 2020 through August 21, 2020.

Effective upon closing of the HighPeak business combination, the Management Company is no longer being paid by the Company as all costs directly attributable to the Company are paid by the Company going forward.

During the one-year term of the agreement, beginning on October 1, 2022, the Company agreed to a minimum volume commitment of 29.2 million barrels of produced water while maintaining the ability to bank excess produced water processed each month toward the minimum volume commitment.

During the years ended December 31, 2023 and 2022, the Company paid $ 1.5 million and $ 1.6 million, respectively, to Pilot for such services.

In April 2023, the Company terminated the contract with Pilot in exchange for $ 6.5 million that was charged to other expense in the accompanying consolidated statements of operations during the year ended December 31, 2023.

Private Investment in Public Equity.

On August 22 and 23, 2022, HighPeak Energy entered into multiple Subscription Agreements (the “Subscription Agreements”) with certain accredited investors (collectively, the “Investors”) pursuant to which, among other things, the Investors agreed to subscribe for and purchase, and the Company agreed to issue and sell to the Investors, an aggregate 2,855,162 newly issued shares of the Company’s common stock at a price per share of $ 21.61 (as determined by the 5-day volume weighted average trading price per share for the five trading days immediately prior to (and excluding) August 22, 2022), for aggregate gross proceeds of approximately $ 61.7 million.

The Company used the proceeds of the Private Placement for general corporate purposes.

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Specifically, Messrs.

Jack Hightower (the Company’s Chief Executive Officer), Michael Hollis (the Company’s President), Steven Tholen (the Company’s Chief Financial Officer), Rodney Woodard (the Company’s Chief Operating Officer) and John Paul DeJoria as trustee for the John Paul DeJoria Family Trust (a greater than ten percent (10%) holder of the Company’s outstanding common stock) entered into Subscription Agreements to purchase 462,749 , 46,276 , 9,255 , 23,138 and 2,313,744 shares of common stock, respectively, in each case on substantially the same terms as other investors in the private placement.

In addition, each Subscription Agreement with an investor other than Messrs.

Hightower and DeJoria (each of which has existing registration rights with respect to the Company’s securities) provides for customary registration rights with respect to the shares issued thereunder, including the right to have such shares registered for resale on a “shelf”

registration statement.

Major Customers

Delek accounted for approximately 88 % and 94 % of the Company’s revenues during the years ended December 31, 2022 and 2021, respectively.

Delek accounted for approximately 98 % of the Company’s revenues during the period from August 22, 2020 through December 31, 2020.

Delek and Enlink Crude Purchasing, LLC accounted for approximately 49 % and 44 %, respectively, of the Company’s revenues during the period from January 1, 2020 through August 21, 2020.

Based on the current demand for crude oil and natural gas and the availability of other purchasers, management believes the loss of this major purchaser would not have a material adverse effect on our financial condition and results of operations because crude oil and natural gas are fungible products with well-established markets and numerous purchasers.

Delek accounted for approximately 82 %, 88 % and 94 % of the Company’s revenues during the years ended December 31, 2023, 2022 and 2021, respectively.

In addition, Energy Transfer Crude Marketing, LLC (“ETC”) accounted for approximately 14 % of the Company’s revenues during the year ended December 31, 2023.

Based on the current demand for crude oil and natural gas and the availability of other purchasers, management believes the loss of these major purchasers would not have a material adverse effect on our financial condition and results of operations because crude oil and natural gas are fungible products with well-established markets and numerous purchasers.

Enactment of the Inflation Reduction Act of 2022.

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA 2022”).

The IRA 2022, among other tax provisions, imposes a 15 percent corporate alternative minimum tax on corporations with book financial statement income in excess of $1.0 billion, effective for tax years beginning after December 31, 2022.

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corporations, effective for stock repurchases in excess of an annual limit of $1.0 million after December 31, 2022.

The IRA 2022 did not impact the Company’s current year tax provision or the Company’s consolidated financial statements.

The Company is evaluating the accounting and disclosure implications of the IRA 2022 on its future filings.

The Company’s income tax expense attributable to income from operations consisted of the following (in thousands):

Year Ended December 31,

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Year Ended December 31,

2020 through December 31,

Income tax expense at U.S.

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Stock-based compensation

Unrecognized derivative losses

Unrecognized derivative losses, net

Valuation allowance

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Crude oil and natural gas properties, principally due to differences in basis and depreciation and the deduction of intangible drilling costs for tax purposes

Unrecognized derivative gains

Unrecognized derivative gains, net

Deferred tax liabilities

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statutory rate of 21 percent primarily due to reversing a portion of its deferred tax asset related to stock-based compensation, deferred state income taxes and other permanent differences between GAAP income and taxable income.

Periods prior to August 22, 2020 are not shown because the Predecessor was treated as a partnership for U.S.

federal income tax purposes and therefore does not record a provision for U.S.

federal income tax because the partners of the Predecessor report their share of the Predecessor's income or loss on their respective income tax returns.

The Predecessor was required to file tax returns on Form 1065 with the IRS.

The 2019 through 2021 tax years remain open to examination.

As required by ASC Topic 740, “Income Taxes,”

(“ASC 740”) the Company uses reasonable judgments and makes estimates and assumptions related to evaluating the probability of uncertain tax positions.

The Company bases its estimates and assumptions on the potential liability related to an assessment of whether the income tax position will “more likely than not”

be sustained in an income tax audit.

As required by ASC Topic 740, “Income Taxes,” (“ASC 740”) the Company uses reasonable judgments and makes estimates and assumptions related to evaluating the probability of uncertain tax positions.

The Company bases its estimates and assumptions on the potential liability related to an assessment of whether the income tax position will “more likely than not” be sustained in an income tax audit.

Based on that analysis, the Company believes the Company has not taken any material uncertain tax positions, and therefore has not recorded an income tax liability related to uncertain tax positions.

However, if actual results materially differ, the Company’s effective income tax rate and cash flows could be affected in the period of discovery or resolution.

The Company also reviews the estimates and assumptions used in evaluating the probability of realizing the future benefits of the Company’s deferred tax assets and records a valuation allowance when the Company believes that a portion or all the deferred tax assets may not be realized.

However, if actual results materially differ, the Company’s effective income tax rate and cash flows could be affected in the period of discovery or resolution.

If the Company is unable to realize the expected future benefits of its deferred tax assets, the Company is required to provide a valuation allowance.

The Company uses its history and experience, overall profitability, future management plans, tax planning strategies, and current economic information to evaluate the amount of valuation allowance to record.

As of December 31, 2022 and 2021, the Company had not recorded a valuation allowance for deferred tax assets arising from its operations because the Company believed they met the “more likely than not”

criteria as defined by the recognition and measurement provisions of ASC 740.

As of December 31, 2023 and 2022, the Company had not recorded a valuation allowance for deferred tax assets arising from its operations because the Company believed they met the “more likely than not” criteria as defined by the recognition and measurement provisions of ASC 740.

The Company reversed a portion of its deferred tax asset related to stock-based compensation based on the assumption that the tax deduction will be subject to IRC Section 162(m) limits when the stock options are exercised and the restricted stock vests.

IRC Section 162(m) limits compensation deductions to $1.0 million per year for certain Company executives.

This resulted in a $ 3.4 million reduction in the deferred tax asset and reduced the amount of income tax benefit realized during the year ended December 31, 2022.

This resulted in a $ 3.4 million reduction in the deferred tax asset and reduced the amount of income tax expense realized during the year ended December 31, 2022.

The Company is also subject to Texas Margin Tax.

The Company realized no current Texas Margin Tax in the accompanying consolidated financial statements as we do not anticipate owing any Texas Margin Tax for 2023, 2022 or 2021.

However, the Company has recognized a deferred Texas Margin Tax liability of $ 4.1 million and $ 1.8 million as of December 31, 2022 and 2021, respectively, in the accompanying consolidated financial statements.

However, the Company has recognized a net deferred Texas Margin Tax liability of $ 7.1 million and $ 4.1 million as of December 31, 2023 and 2022, respectively, in the accompanying consolidated financial statements.

Earnings Per Share

The Company uses the two-class method of calculating earnings per share because certain of the Company’s stock-based awards qualify as participating securities.

The Company’s basic earnings per share attributable to common stockholders is computed as (i) net income as reported, (ii) less participating basic earnings (iii) divided by weighted average basic common shares outstanding.

The Company’s diluted earnings per share attributable to common stockholders is computed as (i) basic earnings attributable to common stockholders, (ii) plus reallocation of participating earnings (iii) divided by weighted average diluted common shares outstanding.

The following table reconciles the Company’s earnings from operations and earnings attributable to common stockholders to the basic and diluted earnings used to determine the Company’s earnings per share amounts for the years ended December 31, 2022 and 2021 under the two-class method (in thousands):

The Company uses the two-class method of calculating earnings per share because certain of the Company’s stock-based awards qualify as participating securities.

The following table reconciles the Company’s earnings from operations and earnings attributable to common stockholders to the basic and diluted earnings used to determine the Company’s earnings per share amounts for the years ended December 31, 2023, 2022 and 2021 under the two-class method (in thousands):

Year Ended December 31,

2020 through December 31,

Net income (loss) as reported

Net income as reported

Participating basic earnings (a)

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Reallocation of participating earnings

Diluted net income (loss) attributable to common stockholders

Diluted net income attributable to common stockholders

Basic weighted average shares outstanding

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Diluted weighted average shares outstanding

Certain unvested restricted stock awarded to outside directors represent participating securities because they participate in nonforfeitable dividends with the common equity holders of the Company.

Vested stock options represent participating securities because they participate in dividend equivalents with the common equity holders of the Company.

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The calculation for weighted average shares reflects shares outstanding over the reporting period based on the actual number of days the shares were outstanding.

Stockholders ’

Stockholders ’ Equity

Issuance of Common Stock.

In July 2023, the Company issued 14,835,000 shares of its common stock in a public offering discussed below.

The remaining 420,896 shares of HighPeak Energy common stock issued during the year ended December 31, 2023 were the result of warrants ( 350,295 shares) being exercised, the issuance of restricted stock ( 58,767 shares) to outside directors and stock options ( 11,834 shares) being exercised.

On March 25, 2022, June 21, 2022 and June 27, 2022, respectively, the Company issued 6,960,000 , 371,517 and 3,522,117 shares of HighPeak Energy common stock related to the aforementioned crude oil and natural gas property acquisitions.

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The remaining 708,341 shares of HighPeak Energy common stock issued during the year ended December 31, 2021 were the result of warrants ( 554,073 shares) and stock options ( 154,268 shares) being exercised.

Public Offering of Common Stock.

Public Offerings of Common Stock.

On July 19, 2023, the Company completed the offering of 1 4,835,000 shares of its common stock, at a price to the public of $ 10.50 per share, pursuant to a Registration Statement on Form S-3 (File No.

333-261706) filed on December 17, 2021.

The net proceeds to the Company from the offering, after deducting the underwriting discounts and commissions and other offering expenses, were approximately $ 150.4 million.

On October 25, 2021, the Company completed the offering of 2,530,000 shares of its common stock, at a price to the public of $ 10.00 per share, pursuant to a Registration Statement on Form S-1 (File No.

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In October 2023, the Board declared a quarterly dividend of $ 0.025 per share of common stock outstanding which resulted in a total of $ 3.2 million in dividends being paid on November 22, 2023.

In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders of $ 280,000 in November 2022 and will accrue a dividend equivalent per share to all unvested stock option holders which is payable upon vesting of up to an additional $ 5,000 , assuming no forfeitures.

In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders of $ 348,000 in November 2023 and accrued a dividend equivalent per share to all unvested stock option holders which was payable upon vesting, assuming no forfeitures.

In addition, the Company accrued an additional combined $ 54,000 in dividends on the restricted stock issued to directors, management directors and certain employees that will be payable upon vesting.

In July 2023, the Board declared a quarterly dividend of $ 0.025 per share of common stock outstanding which resulted in a total of $ 3.2 million in dividends being paid on August 25, 2023.

In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders of $ 334,000 in August 2023 and accrued a dividend equivalent per share to all unvested stock option holders which was payable upon vesting, assuming no forfeitures.

In April 2023, the Board declared a quarterly dividend of $ 0.025 per share of common stock outstanding which resulted in a total of $ 2.8 million in dividends being paid on May 25, 2023.

In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders of $ 286,000 in May 2023 and accrued a dividend equivalent per share to all unvested stock option holders which was payable upon vesting, assuming no forfeitures.

In addition, the Company accrued an additional combined $ 53,000 in dividends on the restricted stock issued to directors, management directors and certain employees that will be payable upon vesting.

In January 2023, the Board declared a quarterly dividend of $ 0.025 per share of common stock outstanding which resulted in a total of $ 2.8 million in dividends being paid on February 24, 2023.

In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders of $ 282,000 in February 2023 and accrued a dividend equivalent per share to all unvested stock option holders which was payable upon vesting, assuming no forfeitures.

In October 2022, the Board declared a quarterly dividend of $ 0.025 per share of common stock outstanding which resulted in a total of $ 2.8 million in dividends being paid on November 23, 2022.

In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders of $ 288,000 in November 2022 and accrued a dividend equivalent per share to all unvested stock option holders which is payable upon vesting, assuming no forfeitures.

In addition, the Company will accrue an additional combined $ 53,000 in dividends on the restricted stock issued to directors, management directors and certain employees that will be payable upon vesting.

In July 2022, the Board declared a quarterly dividend of $ 0.025 per share of common stock outstanding which resulted in a total of $ 2.7 million in dividends being paid on August 25, 2022.

In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders of $ 263,000 in August 2022 and will accrue a dividend equivalent per share to all unvested stock option holders which is payable upon vesting of up to an additional $ 4,000 , assuming no forfeitures.

In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders of $ 481,000 in August 2022 and accrued a dividend equivalent per share to all unvested stock option holders which is payable upon vesting, assuming no forfeitures.

In April 2022, the Board declared a quarterly dividend of $ 0.025 per share of common stock outstanding which resulted in a total of $ 2.6 million in dividends being paid on May 25, 2022.

In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders of $ 214,000 in May 2022 and will accrue a dividend equivalent per share to all unvested stock option holders which is payable upon vesting of up to an additional $ 2,000 , assuming no forfeitures.

In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders of $ 214,000 in May 2022 and accrued a dividend equivalent per share to all unvested stock option holders which is payable upon vesting, assuming no forfeitures.

In addition, the Company will accrue an additional combined $ 53,000 in dividends on the restricted stock issued to management directors and certain employees that will be payable upon vesting.

In January 2022, the Board approved a quarterly dividend of $ 0.025 per share of common stock outstanding which resulted in a total of $ 2.4 million in dividends being paid on February 25, 2022.

In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders and accrued a dividend equivalent per share to all unvested stock option holders payable upon vesting, which equates to a total payment of $ 214,000 in February 2022 and up to an additional $ 2,000 , assuming no forfeitures.

In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders of $ 214,000 in February 2022 and accrued a dividend equivalent per share to all unvested stock option holders which was payable upon vesting, assuming no forfeitures.

In addition, the Company accrued an additional combined $ 53,000 in dividends on the restricted stock issued to management directors and certain employees that will be payable upon vesting.

In September 2021, the Board approved a quarterly dividend of $ 0.025 per share of common stock outstanding which resulted in a total of $ 2.3 million in dividends being paid on October 25, 2021.

In addition, under terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders and accrued a dividend equivalent per share to all unvested stock option holders payable upon vesting, which equated to a total payment of $ 207,000 during the year ended December 31, 2021 and an additional $ 31,000 in August 2022.

In addition, under terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders of $ 207,000 and accrued a dividend equivalent per share to all unvested stock option holders which was payable upon vesting, assuming no forfeitures.

In July 2021, the Board approved a quarterly dividend of $ 0.025 and a special dividend of $ 0.075 per share of common stock outstanding which resulted in a total of $ 9.3 million in dividends being paid on July 26, 2021.

In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders and accrued a dividend equivalent per share to all unvested stock option holders payable upon vesting, which equated to a total payment of $ 830,000 during the year ended December 31, 2021 and an additional $ 125,000 in August 2022.

In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders of $ 830,000 and accrued a dividend equivalent per share to all unvested stock option holders which was payable upon vesting, assuming no forfeitures.

Outstanding Securities.

At December 31, 2023 and 2022, the Company had 128,420,923 and 113,165,027 shares of common stock outstanding, respectively, and 7,934,977 and 8,285,272 warrants outstanding, respectively, with an exercise price of $ 11.50 per share that expire on August 21, 2025.

Partners ’

Capital (Predecessor)

Allocation of partner ’

s net profits and losses.

Net income or loss and net gain or loss on investments of the Predecessor for the period are allocated among its partners in proportion to the relative capital contributions made to the Predecessor.

The Predecessor realized a net loss of $ 85.0 million for the period from January 1, 2020 through August 21, 2020.

Partner ’

s distributions.

The proceeds distributable by the Predecessor (which shall include all proceeds attributable to the disposition of investments, net of expenses) is distributable in accordance with their respective Partnership Agreements.

The Predecessor made distributions to partners of $ 2.8 million during the period from January 1, 2020 through August 21, 2020.

Subsequent Events

Derivative Financial Instruments.

In January 2024, the Company entered into fixed price basis swaps for the spread between the Cushing crude oil price and the Midland WTI crude oil price.

The weighted average differential represents the amount of premium to the Cushing, Oklahoma crude oil price for the notional volumes covered by the basis swap contracts as shown below.

Settlement Year

Weighted Average

Differential per

Argus WTI Midland

Share Repurchase Program.

In February 2024, the Board approved a repurchase program of up to $ 75 million of the Company’s common stock.

The approval grants HighPeak’s management the authority to repurchase shares opportunistically in the open market from time to time, through block trades, in privately negotiated transactions or by such other means which comply with applicable state and federal laws.

This is the Company’s first authorization for a stock repurchase program since its founding.

The Company intends to fund the repurchases from available working capital, cash provided from operations and borrowings under its Senior Credit Facility Agreement.

The timing, number and value of shares repurchased under the program will be at the discretion of management and the Board of Directors and will depend on a number of factors, including general market and economic conditions, business conditions, the trading price of the Company’s common stock, the nature of other investment opportunities available to the Company and compliance with the Company’s debt and other agreements.

The stock repurchase program does not obligate HighPeak to acquire any particular dollar amount or number of shares of its common stock and the stock repurchase program may be suspended from time to time, modified, extended or discontinued by the Company’s Board of Directors.

The stock repurchase program authority will expire December 31, 2024.

Dividends and dividend equivalents.

In January 2023, the Board approved a quarterly dividend of $ 0.025 per share of common stock outstanding which resulted in a total of $ 2.8 million in dividends being paid on February 24, 2023.

In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders of $ 283,000 in February 2023 and will accrue a dividend equivalent per share to all unvested stock option holders which is payable upon vesting of up to an additional $ 7,000 , assuming no forfeitures.

In February 2024, the Board approved a quarterly dividend of $ 0.04 per share of common stock outstanding which resulted in a total of $ 5.1 million in dividends being paid on March 25, 2024.

In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders of $ 536,000 in March 2024 and will accrue a dividend equivalent per share to all unvested stock option holders which is payable upon vesting, assuming no forfeitures.

In addition, the Company will accrue an additional combined $ 86,000 in dividends on the restricted stock issued to directors, management directors and certain employees that will be payable upon vesting.

NOTE 18 –

Supplemental Crude Oil and Natural Gas Disclosures (Unaudited)

NOTE 17 – Supplemental Crude Oil and Natural Gas Disclosures (Unaudited)

The Company only has one reportable operating segment, which is crude oil and natural gas development, exploration and production in the U.S.

See the Company’s accompanying consolidated statements of operations for information about results of operations for crude oil and natural gas producing activities.

Net Capitalized Costs

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Year Ended December 31,

August 22, 2020 through December 31,

January 1, 2020 through August 21,

Acquisition costs:

8 unchanged sentences

Results of Operations for Crude Oil, NGL and Natural Gas Producing Activities

The following table reflects the Company’s results of operations for crude oil, NGL and natural gas producing activities (in thousands):

Year Ended December 31,

August 22, 2020 through December 31,

January 1, 2020 through August 21,

Crude oil, NGL and natural gas sales

4 unchanged sentences

Accretion of discount on asset retirement obligations

Income tax expense (benefit)

Income tax expense

Results of operations from crude oil and natural gas production activities

1 unchanged sentence

Proved reserves were estimated in accordance with guidelines established by the SEC, which require that reserve estimates be prepared under existing economic and operating conditions based upon the 12-month unweighted average of the first day of the month spot prices prior to the end of the reporting period.

These prices as of December 31, 2022, 2021 and 2020 were $ 93.67 , $ 66.56 and $ 39.57 per barrel for crude oil and $ 6.358 , $ 3.598 and $ 1.985 per MMBtu for natural gas, respectively.

The estimated realized prices used in computing the Company’s reserves as of December 31, 2022 were as follows:

These prices as of December 31, 2023, 2022 and 2021 were $ 78.22 , $ 93.67 and $ 66.56 per barrel for crude oil and NGL and $ 2.637 , $ 6.358 and $ 3.598 per MMBtu for natural gas, respectively.

The estimated realized prices used in computing the Company’s reserves as of December 31, 2023 were as follows:

(i) $ 78.13 per barrel of crude oil, (ii) $ 17.33 per barrel of NGL, and (iii) $ 0.198 per Mcf of natural gas.

The estimated realized prices used in computing the Company’s reserves as of December 31, 2021 were as follows:

The estimated realized prices used in computing the Company’s reserves as of December 31, 2022 were as follows:

(i) $ 94.59 per barrel of crude oil, (ii) $ 36.69 per barrel of NGL, and (iii) $ 4.871 per Mcf of natural gas.

The estimated realized prices used in computing the Company’s reserves as of December 31, 2020 were as follows:

The estimated realized prices used in computing the Company’s reserves as of December 31, 2021 were as follows:

(i) $ 66.10 per barrel of crude oil, (ii) $ 29.76 per barrel of NGL, and (iii) $ 0.786 per Mcf of natural gas.

1 unchanged sentence

The proved reserve estimates as of December 31, 2023, 2022 and 2021 were prepared by Cawley, Gillespie & Associates, Inc.

(“CG&A”), independent reserve engineers, and reflect the Company’s current development plans.

All estimates of proved reserves are determined according to the rules prescribed by the SEC in existence at the time estimates were made.

These rules require that the standard of “reasonable certainty”

be applied to proved reserve estimates, which is defined as having a high degree of confidence that the quantities will be recovered.

These rules require that the standard of “reasonable certainty” be applied to proved reserve estimates, which is defined as having a high degree of confidence that the quantities will be recovered.

A high degree of confidence exists if the quantity is much more likely to be achieved than not, and, as more technical and economic data becomes available, a positive or upward revision or no revision is much more likely than a negative or downward revision.

Estimates are subject to revision based upon a number of factors, including many factors beyond the Company’s control, such as reservoir performance, prices, economic conditions, and government restrictions.

In addition, results of drilling, testing, and production subsequent to the date of an estimate may justify revision of that estimate.

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In addition, due to the lack of substantial, if any, production data, there are greater uncertainties in estimating PUD reserves, proved developed non-producing reserves and proved developed reserves that are early in their production life.

As a result, the Company’s reserve estimates are inherently imprecise.

The meaningfulness of reserve estimates is highly dependent on the accuracy of the assumptions on which they were based.

In general, the volume of production from crude oil and natural gas properties the Company owns declines as reserves are depleted.

Except to the extent the Company conducts successful exploration and development activities or acquires additional properties containing proved reserves, or both, the Company’s proved reserves will decline as reserves are produced.

The following table reflects changes in proved reserves during the periods indicated:

Proved Reserves on December 31, 2020

Purchase of reserves-in-place

Extensions and discoveries

Revisions of previous estimates

Proved Reserves on August 21, 2020

Proved Reserves on August 22, 2020

Extensions and discoveries

Purchase of reserves-in-place

Sales of minerals-in-place

Revisions of previous estimates

2 unchanged sentences

Purchase of reserves-in-place

Sales of minerals-in-place

Revisions of previous estimates

2 unchanged sentences

Purchase of reserves-in-place

Sales of reserves-in-place

Revisions of previous estimates

3 unchanged sentences

(i) drilling 63 gross ( 56.4 net) exploratory/extension wells that were on production as of December 31, 2023, (ii) 7 gross ( 6.6 net) exploratory/extension wells that were in the final stages of completion as of December 31, 2023, and (iii) the addition of 117 gross ( 102.4 net) PUDs.

The Company also acquired 171 MBoe of reserves as part of its acquisition activities and divested of 1,387 MBoe of reserves in a farm out to another operator in return for a carried interest during the year ended December 31, 2023.

Downward revisions of previous estimates of 16,093 MBoe for the year ended December 31, 2023 were the result of negative revisions of approximately 13,729 MBoe primarily due to technical revisions attributable to decreased well performance and adjustments to our estimates, approximately 1,775 MBoe primarily related to decreases in crude oil, NGL and natural gas realized prices and approximately 589 MBoe primarily due to increased forecasted operating expenses.

The aforementioned net increase in proved reserves was partially offset by 16,635 MBoe in production during the year ended December 31, 2023.

The Company’s current development plan reflects allocation of capital with a focus on efficiencies, recoveries and rates of return.

On December 31, 2022, the Company had approximately 122,958 MBoe of proved reserves.

For the year ended December 31, 2022, extensions and discoveries increased proved reserves by 57,987 MBoe as a result of:

(i) drilling 37 gross ( 32.1 net) exploratory/extension wells that were on production as of December 31, 2022, (ii) 16 gross ( 14.8 net) exploratory/extension wells that were in the final stages of completion as of December 31, 2022, and (iii) the addition of 80 gross ( 75.2 net) PUDs.

The Company also acquired 18,906 MBoe of reserves as part of its acquisition activities during the year ended December 31, 2022.

1 unchanged sentence

The aforementioned net increase in proved reserves was partially offset by 8,937 MBoe in production during the year ended December 31, 2022.

The Company’s current development plan reflects allocation of capital with a focus on efficiencies, recoveries and rates of return.

On December 31, 2021, the Company had approximately 64,213 MBoe of proved reserves.

5 unchanged sentences

The aforementioned net increase in proved reserves was partially offset by 3,396 MBoe in production during the year ended December 31, 2021.

The Company’s current development plan reflects allocation of capital with a focus on efficiencies, recoveries and rates of return.

On December 31, 2020, the Company had approximately 22,515 MBoe of proved reserves.

Effective August 21, 2020, the HighPeak business combination included estimated proved reserves totaling 10,274 MBoe.

For the period from August 22, 2020 to December 31, 2020, extensions and discoveries increased proved reserves by 14,279 MBoe as a result of:

(i) drilling 3 gross ( 3.0 net) exploratory wells that were on production as of December 31, 2020, (ii) 9 gross ( 8.9 net) exploratory wells that were in the final stages of completion as of December 31, 2020, and (iii) the addition of 15 gross ( 12.4 net) PUDs.

Downward revisions of previous estimates of 1,603 MBoe for the period from August 22, 2020 to December 31, 2020 were primarily the result of:

(i) negative revisions of 1,112 MBoe due to technical revisions attributable to decreased well performance and adjustments to our PUD estimates, (ii) negative revisions of 409 MBoe related to PUDs removed from the development program, (iii) negative revisions of approximately 98 MBoe primarily due to decreases in crude oil, NGL and natural gas prices and increased price differentials and (iv) partially offset by positive revisions of approximately 16 MBoe related to decreased forecasted operating expenses.

The net increase in proved reserves was partially offset by 435 MBoe in production during the period from August 22, 2020 to December 31, 2020.

On August 21, 2020, the Company had approximately 10,274 MBoe of proved reserves.

During the period from December 31, 2019 to August 21, 2020, the Company acquired interests in three ( 3 ) producing vertical wells near its area of operation which included estimated proved reserves totaling 50 MBoe.

For the period from December 31, 2019 to August 21, 2020, extensions and discoveries increased proved reserves by 1,117 MBoe as a result of:

(i) drilling 3 gross ( 3.0 net) exploratory wells that were on production as of August 21, 2020.

Revisions of previous estimates of 2,120 MBoe for the period from December 31, 2019 to August 21, 2020 were primarily the result of:

(i) negative revisions totaling approximately 1,975 MBoe due to technical revisions attributable to decreased well performance of offset horizontal wells resulting in lessoned projected performance, (ii) negative revisions of approximately 173 MBoe primarily due to decreases in crude oil, NGL and natural gas prices and increased price differentials, and (iii) partially offset by positive revisions of 28 MBoe due to decreased forecasted operating expenses.

Adding to the net decrease in proved reserves was 270 MBoe in production during the period from December 31, 2019 to August 21, 2020.

The following table sets forth the Company’s estimated quantities of proved developed and proved undeveloped crude oil, NGL and natural gas reserves:

The Company’s current development plan reflects allocation of capital with a focus on efficiencies, recoveries and rates of return.

The following table sets forth the Company’s estimated quantities of proved developed and proved undeveloped crude oil, NGL and natural gas reserves:

Proved Developed Reserves (1)

7 unchanged sentences

Natural gas (MMcf)

As of December 31, 2022, 2021, 2020 and 2019, proved developed reserves includes proved developed non-producing reserves of 7,417 , 6,884 , 4,517 and 3,101 MBbl of crude oil, 927 , 793 , 517 and 447 MBbl of NGL and 3,641 , 3,222 , 1,912 and 1,454 MMcf of natural gas, respectively.

On December 31, 2022, the Company’s estimated PUD reserves were approximately 61,700 MBoe, a 26,072 MBoe increase over the reserve estimate at December 31, 2020 of 35,628 MBoe.

As of December 31, 2023, 2022 and 2021 and 2020, proved developed reserves includes proved developed non-producing reserves of 4,598 , 7,417 , 6,884 and 4,517 MBbl of crude oil, 534 , 927 , 793 and 517 MBbl of NGL and 1,889 , 3,641 , 3,222 and 1,912 MMcf of natural gas, respectively.

On December 31, 2023, the Company’s estimated PUD reserves were approximately 74,569 MBoe, a 12,869 MBoe increase over the reserve estimate at December 31, 2022 of 61,700 MBoe.

The following table includes the changes in PUD reserves for 2023 (in MBoe):

Beginning proved undeveloped reserves on December 31, 2022

Undeveloped reserves transferred to proved developed

Purchase of reserves-in-place

Undeveloped reserves transferred to proved developed reserves

Extensions and discoveries

Sales of reserves-in-place

Ending proved undeveloped reserves on December 31, 2023

Standardized Measure of Discounted Future Net Cash Flows

The following table reflects the Company’s standardized measure of discounted future net cash flows relating from its proved crude oil, natural gas and NGL reserves (in thousands):

Future cash inflows

5 unchanged sentences

Standardized measure of discounted future net cash flows (1)

The following table reflects the principal changes in the standardized measure of discounted future net cash flows attributable to the Company’s proved reserves (in thousands):

Year Ended December 31,

11 unchanged sentences

Standardized measure of discounted future net cash flows, end of year (1)

Effective with the HighPeak business combination that closed on August 21, 2020, the crude oil and natural gas properties became owned by HighPeak Energy, which is treated as a corporation for U.S.

federal income tax purposes.

As such, the “Net change in income taxes”

in the table above for the year ended December 31, 2020 reflects the change in tax status applicable to the operations of the crude oil and natural gas properties.

Prior to the HighPeak business combination, the Predecessor was treated as a partnership for U.S.

federal income tax purposes.

Accordingly, federal taxable income and losses relating to the operation of the crude oil and natural gas properties were reported on the income tax returns of the Predecessor’s partners.

The Predecessor was subject to margin / franchise taxes in Texas, which is reflected as “Net change in income taxes”

in the table above.

The year ended December 31, 2020 in the table above reflects the change in standardized measure from that of HPK LP, our Predecessor, as of December 31, 2019 to that of the Company as of December 31, 2020 and amounts are combined for the period from January 1, 2020 to August 21, 2020 of HPK LP and from August 22, 2020 to December 31, 2020 of the Company.

There was no third-party reserve report prepared as of August 21, 2020 from which to compute a standardized measure from as of that date.

We believe the table above accurately reflects the change in standardized measure for the Predecessor and Successor in a meaningful context.

The standardized measure of discounted future net cash flows reflects, within the category for future development costs, all estimated future costs that will be incurred to settle our asset retirement obligations, including costs for dismantlement, restoration, and abandonment of the existing wells (including both active and inactive wells on leases and future proved undeveloped locations), in each case in compliance with FASB ASC 932-235-50-36.

1 unchanged sentence

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 8. Financial Statements and Supplementary Data