Item 3. Legal Proceedings
Item 3. Legal Proceedings.
From time to time, we may be party to or otherwise
involved in legal proceedings arising in the ordinary course of business. We recognize provisions for legal proceedings in our financial
statements, in accordance with accounting rules, when we are advised by independent outside counsel that (i) it is probable that an outflow
of resources will be required to settle the obligation and (ii) a reliable estimate can be made of the amount of the obligation. The assessment
of the likelihood of loss includes analysis by outside counsel of available evidence, the hierarchy of laws, available case law, recent
court rulings and their relevance in the legal system. Our provisions for probable losses arising from these matters are estimated and
periodically adjusted by management. In making these adjustments our management relies on the opinions of our external legal advisors.
On December 23, 2025, the State of New Mexico
filed a lawsuit against the Company and other parties, including Chief Executive Officer E. Will Gray II, in the First Judicial District
Court for Santa Fe County (“New Mexico Litigation”). The complaint alleges several causes of action, including for unjust
enrichment, violations of the New Mexico Oil and Gas Act, violations of the Uniform Voidable Transactions Act, Fraud Against Taxpayers
Act, civil conspiracy, and veil piercing, and seeks, among other relief, damages, civil penalties, costs, and attorneys’ fees. The
New Mexico Litigation was stayed shortly after it was initiated because of the ongoing bankruptcy proceedings for several unrelated defendants. The
case is in its early stages and will remain in abeyance until the bankruptcy court lifts the stay.
In response to the New Mexico Litigation and reports
by purported short sellers on subject matters similar to those alleged in the lawsuit, the independent members of the Board promptly initiated
and conducted an internal investigation into the allegations, with the assistance of independent outside counsel. The investigation
considered, among other things, the State of New Mexico’s allegations that the Company’s subsidiary, Solis Partners, LLC,
and the Company’s Chief Executive Officer, Mr. Gray, tried to place the burden of plugging, abandoning, and reclaiming numerous
oil and gas wells owned by Acacia Resources, LLC on the State of New Mexico. The investigation included review of documents and many interviews. No
limits were placed on the scope of the investigation. The investigation found no facts supporting the allegations of wrongdoing in
the short seller reports or the New Mexico Litigation by Solis Partners, LLC, Mr. Gray, the Company, or any entities associated with Mr.
Gray.
We may incur significant legal and other fees
and costs to resolve the New Mexico Litigation. We are not currently able to estimate the possible cost to us from the New Mexico Litigation,
as this matter is currently at an early stage and we cannot be certain how long it may take to resolve this matter or the possible amount
of any damages that we may be required to pay. We could, in the future, incur an adverse judgment or enter into a settlement for monetary
damages as a result of the New Mexico Litigation. During the pendency of our litigation, we may be unable to consummate our contemplated
sale of legacy natural gas assets. If the New Mexico Litigation results in the payment of substantial damages by us or our ability to
monetize existing assets, it could adversely affect our business, financial condition or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
34
PART II