Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
The following discussion
and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and
the related notes appearing elsewhere in this Form 10-K. The discussion and analysis should also be read together with the section entitled
“Business”. This discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs
that involve risks and uncertainties that may be outside our control. As a result of many factors, such as those set forth under the headings
“Risk Factors” and elsewhere in this Form 10-K, our actual results may differ materially from those anticipated in these forward-looking
statements. Unless the context otherwise requires, all references in this section to “we,” “us,” “our,”
“AleAnna,” or the “Company” refer to AleAnna, Inc.
Overview
AleAnna is a natural gas resource
company focused on delivering critical natural gas supplies to Europe through both onshore conventional natural gas exploration and renewable
natural gas development in Italy. We have several conventional natural gas discoveries including the Longanesi field, located in the Po
Valley in Northern Italy, which is one of Italy’s largest modern gas discoveries. We retain a 33.5% working interest in the Longanesi
field with our working interest partner, and operator, Padana. We acquired our working interest in the Longanesi field through a 2016
transaction with Enel. We also retain wholly owned concessions, permits, and pending applications on other exploration and development
prospects across Italy which are supported by proprietary modern 3D seismic reservoir imaging. In 2021, we launched a renewable natural
gas development business focused on bringing to market carbon-negative renewable natural gas derived from animal and agricultural waste.
Planned principal
operations have not yet commenced. As of December 31, 2024, although we had generated revenue from electricity sales from two
renewable natural gas assets, we had not generated any revenues from our principal business activities to date. Our recent
activities involve the drilling and testing of three Longanesi development wells (2022 and 2023) as well as the completion of two
original discovery wells. We had no drilling activity during the year ended December 31, 2024, and drilled and completed one gross
Longanesi development well and worked over and completed one additional Longanesi development well (0.335 net to our interest)
during the year ended December 31, 2023. We had no other exploratory or development drilling during years ended
December 31, 2024 or 2023. Our Longanesi, Trava and Gradizza wells were classified by DeGolyer as proved undeveloped reserves
as such wells had not yet started production as of December 31, 2024 and require future investments to install production pipelines
and production facilities prior to being fully completed and producible. Following tie-in of these wells and the installation of a
temporary processing facility, we and Padana achieved first production of the five wells in the Longanesi field in March 2025. The
permanent processing facility is expected to be constructed over the remainder of 2025 and early 2026 and commissioned in
mid-2026.
The Transactions
On December 13, 2024,
we consummated the previously announced business combination pursuant to the Merger Agreement, dated June 4, 2024, by and among Swiftmerge,
HoldCo, Swiftmerge Merger Sub LLC, a Delaware limited liability company and wholly-owned subsidiary of HoldCo, and AleAnna Energy. Pursuant
to the terms of the Merger Agreement, on December 13, 2024, SPAC migrated to and domesticated as a Delaware corporation in accordance
with Section 388 of the Delaware General Corporation Law, as amended, and the Companies Act (As Revised) of the Cayman Islands and
changed its name to AleAnna, Inc. The transactions contemplated by the Merger Agreement are collectively referred to herein as the “Business
Combination.”
The Business Combination was
accounted for as a common control transaction with respect to AleAnna Energy which is akin to a reverse recapitalization. This conclusion
was based on the fact that Nautilus Resources LLC (“Nautilus”) had a controlling financial interest in AleAnna Energy prior
to the Business Combination and has a controlling financial interest in AleAnna, which includes AleAnna Energy as a wholly owned subsidiary.
The net assets of SPAC are stated at their historical carrying amounts with no goodwill or intangible assets recognized in accordance
with the accounting principles generally accepted in the United States of America (“GAAP”). The Business Combination
with respect to AleAnna Energy was not treated as a change in control primarily due to Nautilus receiving the controlling voting stake
in AleAnna and the ability of Nautilus to nominate the full board of directors and management of AleAnna.
Under a reverse recapitalization,
SPAC is treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the Business
Combination is treated as the equivalent of AleAnna Energy issuing stock for the net assets of SPAC, accompanied by a recapitalization.
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We incurred $9.5 million in
transaction costs related to the Business Combination. Approximately $0.6 million of these costs were recorded as a reduction to additional
paid-in capital, up to the amount of cash proceeds received in the transaction. Of the remaining $8.9 million, approximately $0.5 million
represented prepaid directors and officers insurance premiums that were recorded to other assets in the consolidated balance sheet, and
$8.4 million represented legal, accounting, consulting and advisory fees which were recorded as Business Combination transaction expenses
in the consolidated statement of operations and comprehensive loss.
Recent Developments
First Production at Longanesi
On March 13, 2025, AleAnna
achieved a key milestone with the first production from its five wells in the Longanesi field.
In connection with this milestone,
AleAnna will be required to reserve $3.1 million related to the contingent consideration liability due to Enel (see Note 6). These funds
will be classified as restricted cash in future balance sheets and may be used to satisfy the contingent consideration liability as payments
become due.
Gas Sale Agreement
On October 29, 2024, we
entered into a gas sale agreement (“GSA”) with Shell Energy Europe Limited (“SEEL”), whereby SEEL became the exclusive
buyer of our share of the natural gas produced from the Longanesi field net of (i) any consumption and/or losses incurred in the
transport, treatment and compression of gas before delivery; (ii) any volume to be allocated for regulated royalties auctions, if
applicable; and (iii) any other volume contractually allocated to other parties before August 31, 2022. Future sales under the
GSA are contingent upon the commencement of gas production.
Renewable Natural Gas Acquisitions
Between March 2024 and
July 2024, we successfully completed three separate strategic acquisitions of renewable natural gas plant projects in Italy for an
aggregate of approximately $9.5 million. The plants are fully permitted and are in various stages of the development lifecycle, with one
greenfield plant (Campagnatico) that is a new development and two brownfield plants (Casalino and Campopiano) that are currently operational.
Capital Contributions
Between January 2024 and
May 2024, we received an aggregate of $62.1 million in capital contributions from our members, resulting in the issuance of
62,100 Class 1 Preferred Units, to fund operating costs and capital expenditures and provide working capital to meet our liabilities
and commitments as they become due for at least the upcoming 12 months. These capital contributions were the final capital contributions
to AleAnna Energy before the Business Combination and that all equity of AleAnna Energy, including the Class 1 Preferred Units, were exchanged
for Class A and Class C Common stock as part of the December 13, 2024. We are using these funds to fulfill Longanesi gas pipeline and
plant activity obligations, as well as general and administrative expenses.
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Blugas Settlement
On
May 28, 2024, we reached a settlement agreement (the “Blugas Settlement Agreement”) with Blugas Infrastructure S.r.l.
(“Blugas”) regarding the Blugas overriding royalty interest (“ORRI”) whereby Blugas was entitled to physical delivery
of 20% of the first 350 million standard cubic meters (approximately 2,472 106ft3) produced from the Longanesi
field. Under the terms of the Blugas Settlement Agreement, we paid Blugas approximately €5 million, plus an additional €1.1 million
in applicable VAT. In exchange, we were released from any future liability related to the Blugas ORRI. As a result of the transactions
contemplated by the Blugas Settlement Agreement, our 33.5% working interest (net revenue interest) in the Longanesi field, as established
under the terms of the Unified Operating Agreement arrangement originally signed between ENI and Grove and dated September 26, 2009,
is now unencumbered except for normal government royalties (10%). The Blugas Settlement Agreement
was accounted for as an acquisition of the Blugas ORRI claim with a corresponding increase to the expected future cash flows from our
reserves. Our year-end December 31, 2023 reserve quantities included the 20% of 350 million standard cubic meters (approximately
2,472 106ft3) allocable to the Blugas ORRI in our proved gas reserves. However, the required payments to Blugas
associated with the sale of such quantities were reflected as cash outflows (costs) in our year-end December 31, 2023 reserve report as
if such amounts were paid to Blugas. Following settlement, our year-end December 31, 2024 reserve quantities continue to include the 20%
of 350 million standard cubic meters (approximately 2,472 106ft3), however, the previously required payments to
Blugas associated with the sale of such quantities are no longer reflected as cash outflows (costs) as if such amounts were paid to Blugas.
As the cash outflows (costs) are no longer reflected as if paid to Blugas, such amounts are reflected in our December 31, 2024 reserve
report as allocable to our unencumbered 33.5% working interest.
Key Factors Affecting our Performance, Prospects
and Future Results
We believe that our performance
and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including
competition from other carbon-based and non-carbon-based fuel producers, regulatory hurdles posed by the Italian government, and other
factors discussed under the section titled “Risk Factors.” We believe the factors described below are key to our success.
Achieving First Production at Longanesi
As previously discussed, we
and Padana achieved first production of the five wells in the Longanesi field in March 2025 through use of a temporary processing facility.
The permanent processing facility is expected to be constructed over the remainder of 2025 and early 2026 and commissioned mid 2026.
We believe our achieving first
production of the Longanesi field is a key milestone that will fuel our potential growth. We also have potentially viable discoveries
in our Gradizza and Trava fields that are expected to achieve first production in the future.
Commencing and Expanding Renewable Natural
Gas Operations
In 2021, we launched a renewable
natural gas development business focused on bringing to market carbon negative renewable natural gas derived from animal and agricultural
waste. As previously discussed, the first three renewable natural gas assets were purchased between March 2024 and July 2024,
with additional renewable natural gas projects expected to be purchased in the future.
We believe expanding the renewable
natural gas business is another key to our potential growth and may unlock potential partnership or joint venture opportunities.
Key Components of Results of Operations
We are an early-stage company
and our historical results may not be indicative of our future results. Accordingly, the drivers of our future financial results, as well
as the components of such results, may not be comparable to our historical results of operations or our future results of operations.
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Revenue
During the year ended December
31, 2024, we generated approximately $1.4 million of revenue from electricity sales at two renewable natural gas assets acquired
in July 2024 (the “Casalino” and “Campopiano” plants). The plant assets are fully permitted for production
of electricity through conversion of crop and animal waste bio feedstocks. The plant assets are currently biomethane to electricity conversion
assets. It is our intention to begin upgrading the sites to refine biomethane into renewable natural gas through upgrading units. Following
the upgrade process to transition the assets to biomethane to renewable natural gas conversion, we expect to sell renewable natural gas
to customer(s) by trucking or piping the renewable natural gas to the interstate pipeline system (SNAM). Until the plant assets are
upgraded, we will actively source bio feedstocks for the assets in order to produce biomethane which will be processed through reciprocating
generators in order to generate electricity which is then sold onto the grid through a metered interconnection. Casalino and Campopiano
derive revenues from the sale of such electricity to the local state-owned electrical utility (Gestore dei Servizi Energetici SpA or “GSE”).
Energy generation revenue is recognized as the electricity generated by the Casalino and Campopiano assets is delivered to GSE. Revenues
are based on actual output and “on-the-spot” predetermined prices for small renewable energy producers.
In addition to sales of renewable
natural gas, we expect to generate a significant portion of our future revenue from the sale of conventional natural gas.
Expenses
General and Administrative (G&A) Expense
G&A expenses consist of
compensation costs for personnel in executive, finance, accounting, and other administrative functions. G&A expenses also include
legal fees, professional fees paid for accounting, auditing and consulting services, and insurance costs. As a newly public company, we
expect that we will incur higher G&A expenses for public company costs such as compliance with the regulations of the Securities and
Exchange Commission (the “SEC”) and the Nasdaq Capital Market.
Business Combination transaction expenses
Business Combination transaction
expenses represent legal, consulting, advisory, accounting and other transaction fees and expenses related to the Business Combination,
accounted for as a common control reverse recapitalization, that were expensed in connection with the Business Combination. A portion
of the total costs incurred were recorded as a reduction in additional paid-in capital, up to the $0.6 million of proceeds received from
the Trust, with costs in excess of funds raised from the Business Combination required to be expensed under GAAP. Management separated
these expenses on its audited consolidated statement of operations for the year ended December 31, 2024 due to the significant and discrete
nature of the expenses.
Income Tax Effects
AleAnna’s income tax consequences
have been reflected in its consolidated financial statements in accordance with ASC 740, Income Taxes. Given AleAnna’s
history of losses, and because future production remains uncertain, a full valuation allowance was applied against deferred tax assets
as of December 31, 2024 and December 31, 2023, and no income tax liabilities or expenses were recognized as of or for the years
ended December 31, 2024 or 2023.
We are also subject to a Valued-Added
Tax (“VAT”) which is a broadly-based consumption tax that is assessed to the value that is added to goods and services. The
VAT applies to nearly all goods and services that are bought and sold within the EU. Italian law allows for certain VAT payments
to be recovered through ongoing applications for refunds. We have incurred higher VAT input paid (i.e., VAT paid on purchases) than the
VAT output collected (i.e., VAT collected on sales), resulting in a net VAT refund receivable. As of December 31, 2024 and 2023,
we had VAT receivables of $6.6 million, and $4.4 million, respectively.
Operations
Our net losses were $12.4 million
and $5.2 million for the years ended December 31, 2024 and 2023, respectively. As of December 31, 2024 and December 31, 2023,
we had an accumulated deficit of $191.0 million and $146.4 million, respectively. The majority of these losses stem from costs
associated with the Longanesi field drilling and development, including asset impairments from previous years, as well as seismic
imaging, exploratory costs for other conventional natural gas prospects, and general and administrative expenses. The accumulated deficits
also include historical deemed dividends to the redemption value of AleAnna Energy’s previous Class 1 Preferred Units (exchanged
for Class A and Class C common stock in connection with the Business Combination) based on the redemption features of those units and
the related accounting requirements. See “Note 10 — Equity” to the audited condensed consolidated
financial statements for further details. We expect to continue to incur substantial expenses related to our operations, exploration,
and development activities, including pre-commercialization efforts as we continue our development of, and seek regulatory approval for,
our discoveries and exploration prospects. Since inception, we have incurred net losses annually
and do not expect to achieve sustained profitability until 2025. These shares were all exchanged for Class A and Class C common stock
in connection with the Business Combination.
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Results of Operations
Comparison
of the year ended December 31, 2024 and 2023:
For the Year Ended December 31, Dollar Percentage
Operating Expenses:
Other Income (Expense):
Noncontrolling interests in earnings of subsidiaries 87,511 - 87,511 NM
Other Comprehensive Income (Loss)
Revenues and Cost of Revenues
During the year ended December
31, 2024, all of our revenue was earned through electricity generation and sales at the Casalino and Campopiano renewable natural gas
plants that were purchased in July 2024. Cost of revenues consists of feedstock costs, direct labor and overhead necessary to produce
RNG and generate electricity. All cost of revenues was related to the RNG assets that were purchased in 2024. See Critical Accounting
Policies and Estimates for further details of our revenue recognition accounting policies.
General and Administrative (G&A) Expenses
General and administrative
expenses consist of salaries and benefits, outside professional services including legal, human resources, audit and accounting services,
and development stage expenses. We expect to continue to incur expenses to support operations as a public company, including expenses
related to existing and future compliance with rules and regulations of the SEC and the Nasdaq, insurance expenses, investor relations,
audit fees, professional services and general overhead and administrative costs.
General and administrative
expenses (exclusive of Business Combination transaction expenses) increased by $0.6 million, or 11%, for the year ended December
31, 2024, compared to the year ended December 31, 2023. The increase was primarily due to increases in legal, audit and consulting fees.
Business Combination transaction expenses
See “Expenses” above
for a description of the Business Combination transaction expenses. These expenses were specific to the Business Combination that closed
on December 13, 2024, with no similar expenses incurred in 2023.
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Contingent Consideration Liability
As of December 31, 2024 and
December 31, 2023, the contingent consideration liability was recorded at $25.0 million and $26.5 million, respectively.
The estimate of the contingent consideration liability was determined based on inputs including the following as of December 31, 2024
and December 31, 2023: the intercontinental exchange futures prices for European natural gas, Euro to USD exchange rates of 1.04
and 1.11, respectively, and management’s future expected annual Longanesi production. We are required to make formulaic deferred
consideration payments effectively equating to 20% to 50% of revenue above certain European natural gas threshold prices. The calculation
and timing of such payments are primarily driven by future expected Longanesi production, as modeled by DeGolyer, as well as forward European
natural gas prices. While the timing and quantities of expected Longanesi production were unchanged from December 31, 2023 to December
31, 2024, and we had fully accrued the total capped Euro amount of the liability, average annual European natural gas forward prices declined
slightly.
Since the total capped Euro-denominated
liability was recorded as of December 31, 2024, December 31, 2023, and December 31, 2022, any changes in the USD-equivalent amount were
entirely due to foreign exchange rate fluctuations. As such, these changes were included in currency translation adjustment for the years
ended 2024 and 2023.
Interest and Other Income (Expenses)
Interest and other income (expenses)
primarily includes interest earned on cash and cash equivalents. Interest and other income increased by $2.1 million during the year
ended December 31, 2024 compared to the same period in 2023, primarily due to interest earned on larger average cash balances during the
2024 period compared to the 2023 period presented. The larger cash balances were a result of the previously mentioned capital contributions
in January and May of 2024. In 2023, the activity primarily related to lease operating expenses with minimal interest earned on lower
cash and cash equivalents balances.
Change in Fair Value of Derivative Liability
The change in the fair value
of derivative liability related to the Class 1 Preferred Units was $0.2 million during the year ended December 31, 2024,
compared to $0.7 million during the same period in 2023. The fair value gain recorded during the year ended December 31, 2024 (representing
a decrease in the liability) was primarily due to a higher liquidation threshold which was driven by capital contributions made during
the first quarter of 2024 through the Class 1 Preferred Units. Part of the change was also driven by a lower estimated business value
as of September 30, 2024 compared to December 31, 2023 due to a decline in forward natural gas prices. The derivative liability was
reduced from $0.2 million as of December 31, 2023 to zero as of September 30, 2024 and was ultimately derecognized in conjunction
with the Business Combination.
Currency Translation Adjustment
For the purposes of presenting
consolidated financial statements, the assets and liabilities of our Euro operations are translated to USD at the exchange rate on the
reporting date. The income and expenses are translated using average exchange rates. Foreign currency differences that arise on translation
for consolidated purposes are recognized as a currency translation adjustment in other comprehensive loss on the consolidated statements
of operations and comprehensive loss.
The currency translation adjustment
decreased by $1.8 million for the year ended December 31, 2024 compared to the same period in 2023. This decrease was due to
the fluctuation of the exchange rates between the Euro and the U.S. Dollar as well as the level of our activities.
Segment Considerations
Our operations consist of one
reportable segment reflecting the manner in which operations are managed and the criteria used by the chief operating decision maker (“CODM”),
our Executive Chairman and Chief Executive Officer, collectively, to evaluate performance, develop strategy, and allocate resources.
AleAnna’s principal products
include conventional natural gas produced from onshore exploration and development, and electricity and RNG derived from animal and agricultural
waste. As of December 31, 2024, we had not yet generated revenue from our conventional natural gas activities and had only recently begun
deriving revenue from sales of electricity related to our RNG business.
While we have recently acquired
three RNG assets, these assets are still in the early stages of development which may include expansion and installation of upgrading
units to refine biomethane into renewable natural gas (rather than conversion to electricity). These assets have not generated significant
revenues or incurred material expenses. As of and for the year ended December 31, 2024, the CODM was primarily focused on capital investing
decisions, strategy, and forward-looking investment economics. While the CODM monitors cash reserves and overall enterprise liquidity,
extensive review and analysis of the our performance and loss statements is not performed beyond review of the consolidated financial
statements. As such, the CODM continues to assess our financial performance as a single enterprise on a consolidated basis, without distinguishing
between conventional natural gas and RNG operations. Given we have not generated significant revenue or profits and are focused on development
activities, the CODM does not utilize a specific measure of profit or loss to assess performance. The CODM does not monitor specific expense
categories separately. The financial information reviewed by the CODM is consistent with the audited consolidated balance sheets and statements
of operations and cash flows included herein.
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All of the Company’s
primary operating activities and assets remain located in Italy. We will continue to assess the need for including multiple reportable
segments as the business evolves.
Liquidity, Capital Resources and Operations
We have generated minimal revenues
from our operations to date and we had an accumulated deficit of $191.0 million as of
December 31, 2024. We had $28.3 million in cash and cash equivalents on December 31, 2024. The Company’s continuing operations,
as intended, are dependent upon its ability to generate cash flows or obtain additional financing. Between January 2024 and May 2024,
prior to the Business Combination, we received an aggregate of $62.1 million in capital contributions from AleAnna Energy members
resulting in the issuance of 62,100 Class 1 Preferred Units, to fund operating costs, capital expenditures, Business Combination
related transaction expenses, and to provide working capital to meet our liabilities and commitments as they become due. In addition,
we are exploring Resource Backed Loan (“RBL”) financing and renewable natural gas project loan products with several financial
institutions; however, there is no guarantee that such financing will be available to us. As a normal part of our business, depending
on market conditions, we may from time to time consider opportunities to repay, redeem, repurchase or refinance the indebtedness of our
subsidiaries or issue equity securities to raise additional capital. Changes in our operating plans, lower than anticipated revenues,
increased expenses, acquisitions or other events may cause us to seek additional debt or equity financing in future periods. There can
be no guarantee that financing will be available on acceptable terms or at all.
Presently, Padana is the operator
of the Longanesi field under a Unitized Operating Agreement, and other companies in the future may operate some of the properties in which
we have an interest. The failure of an operator of our wells or joint venture participant to adequately perform operations, an operator’s
breach of the applicable agreements or an operator’s failure to act in ways that are in our best interest could reduce our production
and revenues.
To mitigate operator risks,
we monitor the operational risks, credit risk, financial position and liquidity of Padana. Operational risks are monitored and acted on
through: (i) periodic meetings with Padana, through a formal committee known as the “Technical Committee”, to examine
upcoming activities and discuss questions and concerns, (ii) through the receipt and analysis of daily reports, (iii) through
requesting unscheduled calls with Padana where areas of concern are identified, and (iv) through occasional site visits. Further,
Padana’s credit risk, financial position, and liquidity are periodically evaluated through review of the financial condition of
Padana’s parent organization, Gas Plus S.p.A., which is a publicly-traded company on the Italian Stock Exchange (Euronext Milan).
We are able to continuously monitor financial health of Gas Plus S.p.A. through exchange-required public disclosures, including half-annual
and annual financial statements, corporate presentations, and press releases.
Cash Flows
The following table includes
our cash flow data for the years ended December 31, 2024 and 2023:
For the Year Ended December 31,
Consolidated Statement of Cash Flows Data:
Cash used in operating activities
Cash used in operating activities
increased by $11.1 million for the year ended December 31, 2024, compared to the year ended December 31, 2023. Overall, increases
in cash used in operating activities reflect increased operating expenditures primarily related to legal, consulting and audit fees and
salaries and wage expenses, in addition to the Business Combination transaction expenses.
Cash used in investing activities
Cash used in investing activities
increased by $14.1 million for the year ended December 31, 2024, compared to the year ended December 31, 2023.
In all periods presented, cash
used in investing includes continued drilling, completion, and tie in of Longanesi-2D and Longanesi-3D wells. In year ended December 31,
2024, cash used in investing activities also reflects approximately $9.5 million of cash used to purchase three separate renewable natural
gas assets, and approximately $5.1 million paid to Blugas as part of the Blugas Settlement (exclusive of VAT). These transactions
are discussed in more detail in the Recent Developments section.
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Cash provided by financing activities
Cash provided by financing
activities in all periods presented reflects pre-Business Combination issuances of AleAnna Energy Class 1 Preferred Units used
to fund our operations. Such Class 1 Preferred Units were exchanged for Class A and Class C commons stock as part of the Business Combination.
The cash proceeds from the Business Combination, net of expenses allowed to be capitalized, had a negligible impact on financing cash
flows as the majority of the Business Combination transaction expenses were required to be expensed and were included in net loss within
operating cash flows.
Contractual Obligations and Other Commitments
Participation Agreements and Blugas ORRI
In the normal course of business,
we enter into agreements with other entities to assist in the performance of drilling of the Longanesi field. On June 26, 2009, we
entered into a Participation Agreement with Padana for the drilling of the ‘Longanesi 1 exploration well, ’San Potito’
concession and ‘Abbadessee 1’ exploration,’ collectively referred to as the Longanesi field.
The Unified Operating Agreement
arrangement was originally signed between Eni and Grove and dated September 26, 2009. However, Padana has succeeded Eni as the operator
and 66.5% working interest owner, and we succeeded Grove as the non-operator and 33.5% working interest owner. On July 13, 2016,
we acquired a 33.5% working interest in the Longanesi field from Enel, and, as part of the purchase, acquired a legacy contingent liability
arising from an agreement between the Longanesi working interest’s original owner Grove Energy and Blugas. Blugas retained an interest
akin to an ORRI, whereby Blugas was entitled to physical delivery of 20% of the first 350 million standard cubic meters (approximately
2,472 106ft3) produced from the Longanesi field. Prior to the Blugas settlement in May 2024 (as further described
below), in accounting for the acquisition of the 33.5% working interest, we did not recognize an asset or liability in the consolidated
financial statements related to the Blugas ORRI as our SEC Case reserves estimates contemplated the contractual arrangement and physical
gas delivery to Blugas, such that the gas revenues attributable to our 33.5% working interest were reduced to reflect sale of the Blugas
quantity and payment of such revenues (cash outflows to Blugas).
The physical volumes due to
Blugas were being contested by us as usury because we considered, among other reasons, that extraction services and all associated risks
are executed by us and that participation by Blugas was limited to financing a part of the sum necessary to start drilling, without participation
in the construction and exploitation of the reservoir, and therefore do not share the risks or costs, which had increased compared to
the initial forecast of the investment.
On May 28, 2024, we entered
into the Blugas Settlement Agreement regarding the Blugas ORRI whereby Blugas was entitled to physical delivery of 20% of the first 350 million
standard cubic meters (approximately 2,472 106ft3) produced from the Longanesi field. Under the terms of the Blugas
Settlement Agreement, we paid Blugas approximately €5 million, plus an additional €1.1 million in applicable VAT,
or a total of approximately $6.6 million. In exchange, we were released from any future liability related to the Blugas ORRI. As
a result of the transactions contemplated by the Blugas Settlement Agreement, our 33.5% working interest in the Longanesi field is now
unencumbered except for normal government royalties (10%). The Blugas Settlement Agreement was accounted for as an acquisition of the
Blugas ORRI claim with a corresponding increase to the expected future cash flows from our reserves. Our
year-end December 31, 2023 reserve quantities included the 20% of 350 million standard cubic meters (approximately 2,472
106ft3) allocable to the Blugas ORRI in our proved gas reserves. However, the required payments to Blugas associated
with the sale of such quantities were reflected as cash outflows (costs) in our year-end December 31, 2023 reserve report as if such amounts
were paid to Blugas. Following settlement, our year-end December 31, 2024 reserve quantities continue to include the 20% of 350 million
standard cubic meters (approximately 2,472 106ft3), however, the previously required payments to Blugas associated
with the sale of such quantities are no longer reflected as cash outflows (costs) as if such amounts were paid to Blugas. As the cash
outflows (costs) are no longer reflected as if paid to Blugas, such amounts are reflected in our December 31, 2024 reserve report as allocable
to our unencumbered 33.5% working interest.
Contingent Consideration Liability
In connection with our purchase
of our 33.5% working interest in the Longanesi field, consideration paid included €7 million cash and up to €24 million
of deferred consideration payable upon production of the Longanesi field. The deferred consideration is payable based on a formulaic calculation
which is predominantly dependent on sales volumes and spot natural gas prices during the first 12 years of production (the “Earn-Out
Period”). There will be no deferred consideration due if Longanesi is not developed and no deferred consideration due if average
annual gas prices are less than €3.65/Mcf over the Earn-Out Period. Upon first production, AleAnna will also be required to reserve
cash collateral of €3 million related to the contingent consideration liability which will be classified as restricted cash in future
balance sheets and may be used to satisfy the contingent consideration liability as payments become due.
We recognized a liability for
the contingent consideration in accounting for the asset acquisition in accordance with ASC 450, Contingencies (“contingent
consideration liability”). As of December 31, 2024, and December 31, 2023, the total contingent consideration liability was
recorded at $25.0 million and $26.5 million, respectively.
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Internal Control over Financial Reporting
Effective internal controls
are necessary to provide reliable financial reports and prevent fraud. AleAnna is a newly public company that is in the process of adding
resources with the appropriate level of experience and technical expertise to oversee AleAnna’s business processes and controls.
At this time, AleAnna does not have the necessary business processes and related internal controls formally designed and implemented.
As a result, AleAnna previously
identified material weaknesses in its internal control over financial reporting. A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement
of annual or interim financial statements would not be prevented or detected on a timely basis.
In connection with the preparation
of AleAnna’s financial statements as of and for the years ended December 31, 2024 and 2023, management of AleAnna identified
material weaknesses in its internal control over financial reporting as follows:
We are in the early stages
of designing and implementing a plan to remediate the material weaknesses identified. Our plan includes the below:
The Company cannot assure you
that these measures will remediate the material weaknesses described above. The implementation of these remediation measures is in the
early stages and will require validation and testing of the design and operating effectiveness of the Company’s internal controls
over a sustained period of financial reporting cycles and, as a result, the timing of when the Company will be able to remediate the material
weaknesses is uncertain and the Company may not remediate these material weaknesses during the year ended December 31, 2024. If the
steps the Company takes do not remediate the material weaknesses in a timely manner, there could be a reasonable possibility that these
control deficiencies or others may result in a material misstatement of its annual or interim financial statements that would not be prevented
or detected on a timely basis. This, in turn, could jeopardize the Company’s ability to comply with its reporting obligations, limit
its ability to access the capital markets and adversely impact its stock price.
Emerging Growth Company Accounting Election
Section 102(b)(1) of
the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until
private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company
can elect not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies,
and any such election to not take advantage of the extended transition period is irrevocable. We expect to be an emerging growth company
at least through 2025.
Critical Accounting Policies and Estimates
Our unaudited consolidated
financial statements are based on the selection and application of significant accounting policies. The preparation of our management’s
discussion and analysis of our financial condition and results of operations is based on our audited consolidated financial statements
as of and for the years ended December 31, 2024 and 2023, which have been prepared in accordance with GAAP. In preparing
these financial statements, we make estimates and assumptions impacting asset and liability amounts, disclosure of contingent liabilities,
and expenses incurred.
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The estimates are based on
our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We
regularly assess these estimates; however, actual amounts could differ materially from those estimates under different assumptions or
conditions. The most significant items involving management’s estimates include estimates of contingencies including the contingent
consideration liability discussed below. The impact of changes in estimates is recorded in the period in which they become known.
The accounting policies discussed
below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving
management’s judgments and estimates.
Conventional Natural Gas Properties
We use the successful efforts
method of accounting for conventional gas-producing activities. Under this method, the cost of productive wells and related equipment,
development dry holes, and any permits related to productive acreage are capitalized, and depleted using the unit-of-production method.
These costs include other internal costs directly attributable to production activities. We are not yet recognizing depletion as assets
are not yet producing and therefore have not yet been placed in service. Costs for exploratory dry holes, exploratory geological and geophysical
activities, and delay rentals as well as other property carrying costs are charged to exploration expense.
There were no exploratory wells
drilled or capitalized exploratory well costs in the years ended December 31, 2024 or 2023. All asset additions in the years ended
2024 and 2023, relate to the drilling of three Longanesi development wells. Such wells began production in March 2025.
Proved gas reserves, are those
quantities of gas that, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically
producible from a given date forward from known reservoirs and under existing economic conditions, operating methods and government regulations
prior to the time at which contracts providing the right to operate expire unless evidence indicates that renewal is reasonably certain
regardless of whether deterministic or probabilistic methods are used for the estimation.
The estimates of proved natural
gas reserves (“SEC Case”) utilized in the preparation of our consolidated financial statements are estimated in accordance
with the rules established by the SEC and the Financial Accounting Standards Board (“FASB”). These rules require that reserve
estimates be prepared under existing economic and operating conditions using a trailing 12-month average price with no provision for price
and cost escalations in future years except by contractual arrangements. The development of our natural gas reserve quantities requires
management to make significant estimates and assumptions related to the intent and ability to complete undeveloped proved reserves within
a five-year development period, as prescribed by SEC guidelines. Management engaged DeGolyer to prepare reserves estimates for our estimated
proved reserves at December 31, 2024, and 2023. The technologies used in the estimation of our net proved undeveloped reserves include,
but are not limited to, empirical evidence through drilling results and well performance, production data, decline curve analysis, well
logs, geologic maps, core data, seismic data, demonstrated relationship between geologic parameters and performance, and the implementation
and application of statistical analysis.
Management has confirmed that
none of the Unitized Operating Agreement’s reserves nor the Proved Undeveloped Reserves (“PUDs”) are scheduled to be
developed on a date more than five years from the date the reserves were initially recognized as PUDs as prescribed by SEC guidelines.
PUDs are converted from undeveloped to developed as applicable wells begin production.
Reserve estimates are inherently
imprecise. Accordingly, the estimates are expected to change as more current information becomes available. Such estimates are subject
to the uncertainties inherent in the application of judgmental factors in interpreting such information. It is possible that, because
of changes in market conditions or the inherent imprecision of reserve estimates, the estimates of future cash inflows, future gross revenues,
the volume of natural gas reserves, the remaining estimated lives of natural gas properties, or any combination of the above may be increased
or decreased. Increases in recoverable economic volumes generally reduce per-unit depletion rates, while decreases in recoverable economic
volumes generally increase per-unit depletion rates.
Revenue Recognition
General — We
follow the guidance of FASB Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”).
The core principle underlying revenue recognition under ASC 606 is that revenue should be recognized as goods or services are transferred
to customers in an amount that reflects the consideration to which we expect to be entitled. ASC 606 defines a five-step process
to achieve recognition and mandates additional disclosure about the nature, amount, timing and uncertainty of revenues and cash flows
arising from customer contracts, including significant judgments, and changes in judgments and assets recognized from costs incurred to
obtain or fulfill a contract.
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Renewable Natural Gas — As
of December 31, 2024, we primarily earn revenue through electricity generation revenue from the conversion of bio feedstocks to biomethane
which is then converted to electricity through reciprocating generators. Such electricity is then delivered onto the grid through a metered
interconnection and sold to the local state-owned electrical utility responsible for the purchase and marketing of energy produced by
small-scale renewable energy assets. Upon delivery of the electricity to the grid, all performance obligations have been satisfied and
energy generation revenue is recognized based on actual output and non-company specific predetermined prices for small renewable energy
producers of €280/MWh, established under Ministerial Decree (D.M.) 18 December 2008, which sets tariff rates for small renewable
energy producers in Italy.
Revenue is recognized over
time as we transfer the electricity to the grid at a metered interconnection. The customer obtains control of the product upon delivery
onto the electrical grid. We generally have a single performance obligation in our arrangements with our customers. We have no long-term
contracts containing quantity or electricity volume production requirements and there is no variable consideration present in our performance
obligations. Per ASC 606-10-25-27(a), delivery of units of power that are simultaneously received and consumed by the customer would
satisfy the criteria to be accounted for as a performance obligation satisfied over time and the same method would be used to measure
the entity’s progress towards complete satisfaction of the performance obligation to transfer each distinct unit of power in the
series to the customer. Our performance obligation related to the sales of electricity are satisfied over time upon delivery to the customer.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring our products. We apply a practical
expedient in FASB ASC 606-10-55-18 applicable to our sales by assessing whether our right to consideration corresponds directly with
the value to our customers (the “invoice practical expedient”). We concluded that pricing corresponds to the value provided
to the customer. Consideration for each transaction is based upon non-company specific predetermined prices for small renewable energy
producers of €280/MWh, established under Ministerial Decree (D.M.) 18 December 2008, which sets tarrif rates for small renewable
energy producers in Italy. Payment terms are typically two months after the invoice date and there are no return or refund rights.
Business Combinations and Asset Acquisitions
We evaluate whether a transaction
meets the definition of a business. We first apply a screen test to determine if substantially all of the fair value of the gross assets
acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen test is met, the transaction
is accounted for as an asset acquisition. If the screen test is not met, we further consider whether the set of assets acquired have,
at a minimum, inputs and processes that have the ability to create outputs in the form of revenue. If the assets acquired meet this criteria,
the transaction is accounted for as a business combination.
Acquisitions that qualify as
an asset acquisition are accounted for using a cost accumulation model where the purchase price of the acquisition is allocated to the
assets acquired on a relative fair value basis on the date of acquisition. We generally account for acquisitions of renewable natural
gas assets as asset acquisitions. Inputs used to determine such fair values are primarily based upon internally-developed estimates, estimates
developed by third-party valuation firms, and publicly-available data regarding renewable natural gas asset transactions consummated by
other buyers and sellers, as applicable. These fair values are considered Level 3 assets in the fair value hierarchy. Any associated acquisition
costs are generally capitalized.
Acquisitions that qualify as
a business combination are accounted for using the acquisition method of accounting. The fair value of consideration transferred for an
acquisition is allocated to the assets acquired and liabilities assumed based on their fair value on a nonrecurring basis on the acquisition
date and are subject to fair value adjustments under certain circumstances. The excess of the consideration transferred over the fair
value of assets acquired and liabilities assumed is recorded as goodwill. Conversely, in the event the fair value of assets acquired and
liabilities assumed is greater than the consideration transferred, a bargain purchase gain is recognized.
Determining the fair value
of assets acquired and liabilities assumed requires judgment and often involves the use of significant estimates and assumptions as fair
values are not always readily determinable. Different techniques may be used to determine fair values, including market prices (where
available), comparisons to transactions for similar assets and liabilities and the discounted net present value of estimated future cash
flows, among others. We engage third-party valuation firms when appropriate to assist in the fair value determination of assets acquired
and liabilities assumed. Acquisition-related expenses and transaction costs associated with business combinations are expensed as incurred.
We may adjust the amounts recognized in an acquisition during a measurement period not to exceed one year from the date of acquisition,
as a result of subsequently obtaining additional information that existed at the acquisition date.
Where applicable, asset acquisitions
may be owned together with unaffiliated outside parties. In acquisitions where we have a majority direct controlling interest, the unaffiliated
outside ownership is shown as noncontrolling interests in members’ equity in our consolidated financial statements.
Contingent Consideration Liability
On July 13, 2016, AleAnna
Europa S.r.l., a former subsidiary of AleAnna Resources LLC (which was subsequently merged into AleAnna Italia S.p.A. in December 2022),
purchased a 33.5% working interest in the Longanesi field, which was accounted for as an asset acquisition. Consideration paid included
€7 million cash and up to €24 million of deferred consideration payable upon production of the Longanesi field. The
deferred consideration is payable based on a formulaic calculation which is predominantly dependent on sales volumes and spot natural
gas prices during the first 12 years of the Earn-Out Period. There will be no deferred consideration due if Longanesi is not developed
and no deferred consideration due if average annual gas prices are less than €3.65/Mcf over the Earn-Out Period.
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We recognized a liability for
the contingent consideration in accounting for the asset acquisition in accordance with ASC 450, Contingencies(the “contingent
consideration liability”) based on our assessment of probability of the occurrence of payment and deemed the liability estimable
based on the formulaic nature. See Note 3 for more information.
Income Taxes
The Company follows the asset
and liability method of accounting for income taxes under ASC 740, “Income Taxes.” Deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences between the consolidated financial statements carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment
date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
ASC 740
prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions
taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be
sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits
as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of December 31, 2024
or 2023. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material
deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.
Asset Retirement Obligation
We recognize a liability for
asset retirement obligations (“AROs”) based on an estimate of the amount and timing of settlement at the time a legal obligation
is incurred. Upon initial recognition of an ARO, we increase the carrying amount of the long-lived asset by the same amount as the liability.
The initial capitalized costs will be depleted over the useful (productive) lives of the related assets.
Our asset retirement obligations
relate to the abandonment of gas production facilities including reclaiming well pads, reclaiming water impoundments, plugging wells and
dismantling related structures. Estimates are based on historical experience of plugging and abandoning wells and reclaiming of disposing
other assets and estimated remaining (productive) lives of the wells and assets.
No
incremental ARO liabilities were incurred during the year ended December 31, 2024. During the year ended December 31, 2023,
we incurred incremental ARO liabilities, for one new development area associated with Longanesi (Casale Cocchi 1). Otherwise, changes
in ARO between periods presented only relate to the accretion of the liability. We do not have any assets that are legally restricted
for purposes of settling these obligations.
Item 7A: Quantitative and Qualitative Disclosure About Market Risk
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the
Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as
defined by Rule 229.10(f)(1).
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Item 8. Financial Statements and
Supplementary Data
Report of Independent Registered Public Accounting Firm (PCAOB ID: 34) F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations and Comprehensive Loss F-4
Statements of Consolidated Changes in Stockholders’ and Members’ Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to the Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of AleAnna, Inc.
Opinion on the Financial Statements
We have audited the
accompanying consolidated balance sheets of AleAnna, Inc. and subsidiaries (the “Company”) as of December 31, 2024 and
2023, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash
flows, for each of the two years in the period ended December 31, 2024, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of
the two years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United
States of America.