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 in conjunction with the financial statements and the notes thereto contained
elsewhere in this Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements
that involve risks and uncertainties – See “CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS”.
Overview
We are an independent oil and natural gas company
based in Texas and formed in 2017 that is focused on the acquisition, development, exploration, production and divestiture of oil and
natural gas properties in the Permian Basin. The Permian Basin is located in west Texas and southeastern New Mexico and is characterized
by high oil and liquids-rich natural gas content, multiple vertical and horizontal target horizons, extensive production histories, long-lived
reserves and historically high drilling success rates. our properties are in the Grayburg-Jackson Field in Eddy County, New Mexico, which
is a sub-area of the Permian Basin. Pogo focuses primarily on production through waterflooding recovery methods.
The Company’s assets as mentioned above
consist of contiguous leasehold positions of approximately 13,700 gross (13,700 net) acres with an average working interest of 100%. We
operate 100% of the net acreage across the Company’s assets, all of which is net operated acreage of vertical wells with average
depths of approximately 3,810 feet.
Our average daily production for the year ended
December 31, 2024, was 798 barrel of oil equivalent (“BOE”) per day, and for the year ended December 31, 2023, was 1,022 BOE
per day. The decrease in production is due to an increase in well downtime, field conditions requiring certain enhancements, and the conveyance
of the 10% Override royalty interest to Pogo Royalty.
Selected Factors That Affect Our Operating
Results
Our revenues, cash flows from operations and future
growth depend substantially upon:
● the timing and success of production and development activities;
● the prices for oil and natural gas;
● the quantity of oil and natural gas production from our wells;
● the level of our operating expenses.
In addition to the factors that affect companies
in our industry generally, the location of substantially all of our acreage discussed above subjects our operating results to factors
specific to these regions. These factors include the potential adverse impact of weather on drilling, production and transportation activities,
particularly during the winter and spring months, as well as infrastructure limitations, transportation capacity, regulatory matters and
other factors that may specifically affect one or more of these regions.
The price at which our oil and natural gas production
are sold typically reflects either a premium or discount to the New York Mercantile Exchange (“NYMEX”) benchmark price. Thus,
our operating results are also affected by changes in the oil price differentials between the applicable benchmark and the sales prices
we receive for our oil production. Our oil price differential to the NYMEX benchmark price during the years ended December 31, 2024 and
2023, was $(1.03) and $(4.95) per barrel, respectively. Our natural gas price differential during the years ended December 31, 2024 and
2023, was $0.08 and $(0.06) per one thousand cubic feet (“Mcf”), respectively. Fluctuations in our price differentials and
realizations are due to several factors such as gathering and transportation costs, takeaway capacity relative to production levels, regional
storage capacity, gain/loss on derivative contracts and seasonal refinery maintenance temporarily depressing demand.
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Market Conditions
The price that we receive for the oil and natural
gas we produce is largely a function of market supply and demand. Because our oil and gas revenues are heavily weighted toward oil, we
are more significantly impacted by changes in oil prices than by changes in the price of natural gas. World-wide supply in terms of output,
especially production from properties within the United States, the production quota set by OPEC, and the strength of the U.S. dollar
can adversely impact oil prices.
Historically, commodity prices have been volatile,
and we expect the volatility to continue in the future. Factors impacting the future oil supply balance are world-wide demand for oil,
as well as the growth in domestic oil production.
Prices for various quantities of natural gas and
oil that we produce significantly impact our revenues and cash flows. The following table lists average NYMEX prices for oil and natural
gas for the years ended December 31, 2024 and 2023.
For the years ended December 31,
Average NYMEX Prices (1)
Natural gas (per Mcf) $ 2.19 $ 2.54
(1) Based on average NYMEX closing prices.
For the year ended December 31, 2024, the average
NYMEX oil pricing was $76.55 per barrel of oil or 1% lower than the average NYMEX price per barrel for the year ended December 31, 2023.
Our settled derivatives decreased our realized oil price per barrel by $1.91 and $3.63 in the years ended December 31, 2024, and 2023,
respectively. Our average realized oil price per barrel after reflecting settled derivatives and location differentials was $73.61 for
the year ended December 31, 2024 compared to $69.06 for the year ended December 31, 2023.
The average NYMEX natural gas pricing for the
year ended December 31, 2024, was $2.19 per Mcf, or 14% lower than the average NYMEX price per Mcf for the year ended December 31, 2023.
Pogo Royalty Overriding Royalty Interest Transaction
Effective July 1, 2023, the Predecessor transferred
to Pogo Royalty, a related party, an assigned and undivided overriding royalty interest (“ORRI”) equal in amount to ten percent
(10%) of Pogo Resources, LLC’s and LH Operating, LLC’s interest all oil, gas and minerals in, under and produced from each
lease. The consideration received for the 10% ORRI was $10. Thus, a loss of $816,011 was recorded as a result of the conveyance during
the period from January 1, 2023 to November 14, 2023 of the Predecessor. Additionally, because of this transaction, our reserve balance
was decreased as well our current net production volumes and revenues. Additional details are discussed in Note 1 and Note 13 of notes
to the consolidated financial statements.
Results of Operations
For the year ended December 31, 2024, 86% and
14% of sales volumes from the assets were attributable to crude and natural gas, respectively. As of December 31, 2024, the company was
continuing development of the Seven River waterflood interval. Further, as of December 31, 2024, the Company owned an interest in approximately
342 gross (342 net) producing wells.
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The following table sets forth selected operating
data for the periods indicated. Average sales prices are derived from accrued accounting data for the relevant period indicated.
Successor Successor Predecessor
Revenues
Average sales prices:
Oil net of settled oil derivatives (per Bbl) 73.61 62.45 73.75
Expenses
Costs and expenses (per BOE):
Production taxes, transportation, and processing $ 5.89 $ 5.20 $ 5.80
Depreciation, depletion, and amortization expense 8.27 8.09 4.10
Accretion of asset retirement obligations 0.50 0.25 2.32
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Oil and Natural Gas Sales
Our revenues vary from year to year primarily
as a result of changes in realized commodity prices and production volumes. For the year ended December 31, 2024, our oil and natural
gas sales decreased 15% from the year ended December 31, 2023 on a combined Successor and Predecessor basis, driven by a 28% decrease
in production volumes offset by a 6% increase in realized prices, excluding the effect of settled commodity derivatives. The higher average
price in the year ended December 31, 2024 compared to the combined year 2023, was driven by higher average NYMEX oil and natural gas prices
during the first nine months of the year. Realized production from oil and gas properties decreased due to an increase in well downtime.
Production for the comparable periods is set forth
in the following table:
For the year ended December 31,
Production:
Average daily production:
Derivative Contracts
We enter into commodity derivatives instruments
to manage the price risk attributable to future oil production.
We recorded a loss on derivative contracts of
$850,374 for the year ended December 31, 2024 compared to a gain of $392,765 on a combined Successor and Predecessor basis for the year
ended December 31, 2023. Lower commodity prices in 2024, resulted in realized losses of $489,084 for the year ended December 31, 2024
compared to realized losses of $1,266,277 on a combined Successor and Predecessor basis for the year ended December 31, 2023. For the
year ended December 31, 2024, our average realized oil price per barrel after reflecting settled derivatives was $73.61, compared to $73.82
on a combined Successor and Predecessor basis for the year ended December 31, 2023.
As of December 31, 2024, we ended the period with
a $106,397 net derivative asset compared to $467,687 as of December 31, 2023.
Other Revenue
Other revenue was $487,109 for the year ended
December 31, 2024, compared to $571,189 on a combined Successor and Predecessor basis for the year ended December 31, 2023. The revenue
is related to providing water services to a third party and the slight decrease is due to lower volumes in 2024 from supply line disruptions
during the third quarter of 2024
Lease Operating Expenses
Lease operating expenses were $8,614,080 for the
year ended December 31,2024, compared to $10,146,119 on a combined Successor and Predecessor basis for the year ended December 31, 2023.
On a per unit basis, production expenses increased 19% from $27.20 per BOE for the combined Successor and Predecessor year ended December
31, 2023, to $29.59 per BOE for the year ended December 31, 2024, due to increases in proactive maintenance activities, higher labor costs,
and increased oil field service and supplies costs. Additionally, because of the conveyance of the 10% ORRI in July 2023, the net production
volumes decreased, which increases the “per BOE” amounts.
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Production Taxes, Transportation and Processing
We pay production taxes, transportation and processing
costs based on realized oil and natural gas sales. Production taxes, transportation and processing costs were $1,715,792 for the year
ended December 31, 2024 compared to $2,343,862 on a combined Successor and Predecessor basis for the year ended December 31, 2023. As
a percentage of oil and natural gas sales, these costs were 8.7% and 8.9% for the years ended December 31, 2024 and 2023 respectively.
Production taxes, transportation, and processing as a percent of total oil and natural gas sales are consistent with historical trends.
Depletion, Depreciation and Amortization
Depletion, depreciation and amortization (“DD&A”)
was $2,407,098 as of December 31, 2024, compared to $1,849,876 on a combined Successor and Predecessor basis for the year ended December
31, 2023. DD&A was $8.27 per BOE for the year ended December 31, 2024, compared to $4.53 per BOE on a combined Successor and Predecessor
basis for the year ended December 31, 2023. The aggregate increase in DD&A expense for the year ended December 31, 2024 compared to
2023 was driven by a 48% increase in the DD&A rate per BOE, partially offset by a 28% decrease in production levels. The increase
in the DD&A rate per BOE was driven by the increase in the oil and gas properties balance due to the development of the Seven Rivers
waterflood interval and the decrease in the reserves balance due to the conveyance of the 10% overriding royalty interest to Royalty.
Accretion of Asset Retirement Obligations
Accretion expense was $144,988 as of December
31, 2024, compared to $859,102 on a combined Successor and Predecessor basis for the year ended December 31, 2023. Accretion expense was
$0.50 per BOE for the year ended December 31, 2024, compared to $2.32 per BOE on a combined Successor and Predecessor basis for the year
ended December 31, 2023. The aggregate decrease in accretion expense for the fiscal year ended December 31, 2024 compared to 2023 was
driven by changes in certain assumptions, specifically the inflation factor and discount rate as a result of the acquisition date where
we revised our estimates as part of its fair value estimates for the acquired business.
General and Administrative
General and administrative expenses were $10,381,095
as of December 31, 2024 compared to $7,253,384 on a combined Successor and Predecessor basis for the year ended December 31, 2023. The
increase for general and administrative expenses is primarily due to increased cost of outsourced legal, professional, and accounting
services as a result of the transaction disclosed in Note 1 in the notes to the consolidated financial statements and the costs of
being a public company, and includes stock-based compensation expense of $2,778,991 for the year ended December 31, 2024. The general
and administrative expense total of $3,553,117 for the period from November 15, 2023 to December 31, 2023 for the Successor includes $1,500,000
from the 138,122 shares of Class A common stock issued to White Lion for the commitment fee on the Common Stock Purchase Agreement, $910,565
in stock-based compensation to certain Founders under the Founder Pledge Agreement, and $135,400 in other stock-based compensation.
Acquisition costs
There were no acquisition costs as of December
31, 2024, compared to $9,999,860 during the Successor period from November 15, 2023 to December 31, 2023, and included an aggregate of
$7,854,660 in costs related to the Forward Purchase Agreement and the Non-Redemption Agreements, due diligence and broker fees related
to closing the Purchase.
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Interest Expense and amortization of debt discount
Interest expense was $7,643,200 as of December
31, 2024, compared to $1,043,312 for the period from November 15, 2023 to December 31, 2023 (Successor), $1,834,208 for the period from
January 1, 2023 to November 14, 2023 (Predecessor), The Successor period interest expense is driven by the Senior Secured Term loan entered
into as part of the Closing, and the Private Notes Payable. The interest expense during the Predecessor period from January 1, 2023 to
November 15, 2023 was primarily due to an increase in the average amount of the Predecessor’ revolving credit facility outstanding
and an increase in the weighted average interest rate. The revolving credit facility was not assumed in the Acquisition.
Amortization of debt discount was $2,361,627 as
of December 31, 2024 compared to $1,191,553 period from November 15, 2023 to December 31, 2023 (Successor), and attributable to deferred
finance costs paid on the Senior Secured Term Loan, and discounts associated with the Private Notes Payable during 2023.
Change in fair value of forward purchase agreement
The change in fair value of forward purchase agreement
consisted of a gain of $561,099 for the year ended December 31, 2024, for the Successor related to the inputs used in the Company’s
fair value estimate of the FPA Put Option. The key inputs to the fair value estimate include the Company’s stock price, which declined
during the Successor period, and the likelihood, timing and price of a potential dilutive offering.
Gain on extinguishment of liabilities
The Company recognized a gain on extinguishment
of liabilities of $1,638,138 during the year ended December 31, 2024. In November 2024, the Company entered into a settlement agreement
with the FPA Seller to fully release the Company from the terms of the FPA. We agreed to issue to the FPA Seller 450,000 restricted Class
A Common shares which had a fair value of $450,000 based on the closing price of the Company’s common stock at the agreement date.
The Company recognized a gain on settlement of the FPA liability of $82,998, which is included in Gain on Extinguishment of Liabilities
on the Company’s consolidated statement of operations for the year ended December 31, 2024.
The Company also recognized a gain of $1,720,000
related to the settlement of royalties payable and other claims with the Sellers. The Company recognized a loss on extinguishment of accounts
payable of $76,200, and recognized a loss of $88,660 related to the exchange of certain notes payable and warrant liabilities for convertible
note agreements.
Change in fair value of warrant and convertible
note liabilities
The change in fair value of warrant liabilities
consisted of a loss of $804,004 as of December 31, 2024, compared to a gain of $187,704 for the period from November 15, 2023 to December
31, 2023 for the Successor related to fluctuations in the trading price of the Company’s warrants, a portion of which are accounted
for as liabilities due to the redemption provisions in those issued to Private Note holders. The Company also recognized a loss of $192,744
from the change in fair value of its convertible note liabilities during the year ended December 31, 2024.
Loss on asset sales
Loss on asset sales was $816,011 on a combined
Successor and Predecessor basis for the year ended December 31, 2023, compared to $0 for the year ended December 31, 2024. The decrease
was due to the loss that was recognized as a result of the conveyance of the 10% overriding royalty interest to Pogo Royalty in July 2023.
Liquidity and Capital Resources
Liquidity
Our main sources of liquidity have been internally
generated cash flows from operations, credit facility borrowings and equity line financing sales and issuances. Our primary use of capital
has been for the development of oil and gas properties, payment to vendors, payment of debt obligations [and the return of initial invested
capital to our founders]. We continually monitor potential capital sources for opportunities to enhance liquidity or otherwise improve
our financial position.
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As of December 31, 2024, we had outstanding debt
of $23,641,517 under our Senior Secured Term Loan, $15,000,000 under the Seller Promissory Note, $3,556,750 of outstanding private notes
payable, and $948,982 from short term merchant loans. A total of $9,080,910 of this is due within one year. As of December 31, 2024, we
had $2,971,558 of cash and cash equivalents on hand, of which approximately $2,600,000 is in an escrow account pursuant to the requirements
of the Senior Secured Term Loan. At December 31, 2024 we had a working capital deficit of $31,213674. These conditions raise substantial
doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.
The Company had positive cash flow from operations
of $3,700,686 for the year ended December 31, 2024. Additionally, management’s plans to alleviate this substantial doubt include
improving profitability through streamlining costs, maintaining active hedge positions for its proven reserve production, and the issuance
of additional shares of Class A common stock.
We have a three-year equity line (ELOC) Common
Stock Purchase Agreement with a maximum funding limit of $150,000,000 that can fund our operations and production growth, and be used
to reduce liabilities. Through the date of this filing, we have received $6,992,906 in cash proceeds related to the sale of 7,000,000
shares of common stock under this agreement and expect to continue to utilize it to fund current operational needs. We cannot assure you,
however, that any additional capital will be available to us on favorable terms or at all. Our capital expenditures could be curtailed
if our cash flows decline from expected levels.
Cash Flows
Sources and uses of cash for the years ended December
31, 2024, and 2023, are as follows:
Successor Predecessor
Operating Activities
The decrease in net cash flow provided by operating
activities for the year ended December 31, 2024, as compared to 2023 on a combined Successor and Predecessor basis is primarily due to
increased net loss as a result of decreased prices and production volumes, and higher general and administrative costs associated with
public filings.
Investing Activities
Net cash used in investing activities for the
year ended December 31, 2024 was primarily due to the development of crude oil and gas properties. Net cash provided by investing activities
in the Successor period from November 15, 2023 to December 31, 2023 was primarily due to Trust Account withdrawals associated with the
Closing in November 2023 of $49,362,479, partially offset by the cash paid to the Sellers of EON of $30,827,804 at the Closing, net of
cash acquired. Cash flows used in investing activities in the Predecessor period ending November 14, 2023 consisted of $6,769,557 of cash
paid for oil and gas property costs, primarily due to significant expenditures in the previous year to upgrade certain wells and meet
compliance requirements.
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Financing Activities
Net cash used in financing activities for the
year ended December 31, 2024 was primarily due to repayments of long-term debt offset by the proceeds from the sale of common stock under
the Common Stock Purchase Agreement. Net cash used by financing activities during the Successor period from November 15, 2023 to December
31, 2023 were primarily related to the redemptions of common stock of Public Shares at Closing of $44,737,839, partially offset by the
net proceeds from the Senior Secured Term Loan of $27,191,008.
Off Balance Sheet Arrangements
As of December 31, 2024 and 202, the Company did
not have any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission (SEC).
Contractual Obligations
We have contractual commitments under our Senior
Secured Term Loan, the Seller Promissory Note and the Private Notes Payable which include periodic interest payments. See Note 5 to our
interim condensed consolidated unaudited financial statements. We have contractual commitments that may require us to make payments upon
future settlement of our commodity derivative contracts. See Note 4 to our interim condensed consolidated unaudited financial statements.
Our other liabilities represent current and noncurrent
other liabilities that are primarily comprised of environmental contingencies, asset retirement obligations and other obligations for
which neither the ultimate settlement amounts nor their timings can be precisely determined in advance.
Critical Accounting Estimates
The following is a discussion of our most critical
accounting estimates, judgements and uncertainties that are inherent in the Company’s application of GAAP.
Proved Reserve Estimates
Estimates of our proved reserves included in this
report are prepared in accordance with GAAP and SEC guidelines. The accuracy of a proved reserve estimate is a function of:
● the quality and quantity of available data;
● the interpretation of that data;
● the accuracy of various mandated economic assumptions; and
● the judgment of the persons preparing the estimate.
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Our proved reserve information included in this
filing as of December 31, 2024 and 2023, was prepared by independent petroleum engineers. Because these estimates depend on many assumptions,
all of which may substantially differ from future actual results, proved reserve estimates will be different from the quantities of oil
and gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate may justify,
positively or negatively, material revisions to the estimate of proved reserves.
It should not be assumed that the standardized
measure included as of December 31, 2024, is the current market value of our estimated proved reserves. In accordance with SEC requirements,
we based the 2024 standardized measure on a twelve-month average of commodity prices on the first day of each month in 2024 and prevailing
costs on the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs utilized
in the estimate. See Note 13 of notes to the consolidated financial statements for additional information.
Our estimates of proved reserves materially impact
depletion expense. If the estimates of proved reserves decline, the rate at which we records depletion expense will increase, reducing
future net income. Such a decline may result from lower commodity prices, which may make it uneconomical to drill for and produce higher
cost fields. In addition, a decline in proved reserve estimates may impact the outcome of our assessment of our proved properties for
impairment.
Impairment of Proved Oil and Gas Properties
We review our proved properties to be held and
used whenever management determines that events or circumstances indicate that the recorded carrying value of the properties may not be
recoverable. Management assesses whether or not an impairment provision is necessary based upon estimated future recoverable proved reserves,
commodity price outlooks, production and capital costs expected to be incurred to recover the reserves, discount rates commensurate with
the nature of the properties and net cash flows that may be generated by the properties. Proved oil and gas properties are reviewed for
impairment at the level at which depletion of proved properties is calculated. See Note 2 of notes to the consolidated financial statements.
Asset Retirement Obligations
We have significant obligations to remove tangible
equipment and facilities and to restore the land at the end of crude oil and natural gas production operations. Our removal and restoration
obligations are primarily associated with plugging and abandoning wells. Estimating the future restoration and removal costs is difficult
and requires management to make estimates and judgments because most of the removal obligations are many years in the future and contracts
and regulations often have vague descriptions of what constitutes removal. Asset removal technologies and costs are constantly changing,
as are regulatory, political, environmental, safety and public relations considerations.
Inherent in the present value calculation are
numerous assumptions and judgments including the ultimate settlement amounts, credit-adjusted discount rates, timing of settlement and
changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact
the present value of the existing asset retirement obligations, a corresponding adjustment is generally made to the crude oil and natural
gas property or other property and equipment balance. See Note 5 of notes to the consolidated financial statements.
Litigation and Environmental Contingencies
We make judgments and estimates in recording liabilities
for ongoing litigation and environmental remediation. Actual costs can vary from such estimates for a variety of reasons. The costs to
settle litigation can vary from estimates based on differing interpretations of laws and opinions and assessments on the amount of damages.
Similarly, environmental remediation liabilities are subject to change because of changes in laws and regulations, developing information
relating to the extent and nature of site contamination and improvements in technology. A liability is recorded for these types of contingencies
if we determine the loss to be both probable and reasonably estimable. See Note 10 of notes to the consolidated financial statements.
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Forward Purchase Agreement Valuation
The Company has determined
that the FPA Put Option, including the Maturity Consideration, within the Forward Purchase Agreement is (i) a freestanding financial instrument
and (ii) a liability (i.e., an in-substance written put option). This liability was recorded as a liability at fair value on the consolidated
balance sheet as of the reporting date in accordance with ASC 480. The fair value of the liability was estimated using a Monte-Carlo Simulation
in a risk-neutral framework. Specifically, the future stock price is simulated assuming a Geometric Brownian Motion (“GBM”).
For each simulated path, the forward purchase value is calculated based on the contractual terms and then discounted back to present.
Finally, the value of the forward is calculated as the average present value over all simulated paths. The model also considered the likelihood
of a dilutive offering of common stock.
Derivative Instruments
The Company uses derivative financial instruments
to mitigate its exposure to commodity price risk associated with oil prices. The Company’s derivative financial instruments are
recorded on the consolidated balance sheets as either an asset or a liability measured at fair value. The Company has elected not to apply
hedge accounting for its existing derivative financial instruments, and as a result, the Company recognizes the change in derivative fair
value between reporting periods currently in its consolidated statements of operations. The fair value of the Company’s derivative
financial instruments is determined using industry-standard models that consider various inputs including: (i) quoted forward prices
for commodities, (ii) time value of money and (iii) current market and contractual prices for the underlying instruments, as
well as other relevant economic measures. Realized gains and losses from the settlement of derivative financial instruments and unrealized
gains and unrealized losses from valuation changes in the remaining unsettled derivative financial instruments are reported in a single
line item as a component of revenues in the consolidated statements of operations. Cash flows from derivative contract settlements are
reflected in operating activities in the accompanying consolidated statements of cash flows. See Note 4 for additional information
about the Company’s derivative instruments.
New Accounting Pronouncements
The effects of new accounting pronouncements are
discussed in Note 2 to the consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We are a smaller reporting company as defined
by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears following Item 16
of this report and is included herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls
and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed
in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive
Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial Officer) and Controller (Principal Accounting Officer),
as appropriate to allow timely decisions regarding required disclosure.
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As required by Rules 13a-15 and 15d-15 under the
Exchange Act, our Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial Officer) and Controller
(Principal Accounting Officer) carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2024. Based upon his evaluation, our Chief Executive Officer (Principal Executive Officer), Chief Financial
Officer (Principal Financial Officer) and Controller (Principal Accounting Officer) concluded that, our disclosure controls and procedures
were not effective related to the lack of sufficient accounting personnel to manage the Company’s financial accounting process,
lack of segregation of duties, proper accounting for complex financial instruments and lack of design and implementation of controls related
to oil and gas activities which combined constituted a material weakness in our internal control over financial reporting. As a result,
we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. generally
accepted accounting principles. Accordingly, management believes that the financial statements included in this Annual Report on Form
10-K present fairly in all material respects our financial position, results of operations and cash flows for the period presented.
A material weakness is a deficiency, or combination
of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement
of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management concluded
that a deficiency in internal control over financial reporting existed relating to the lack of sufficient accounting personnel to manage
the Company’s financial accounting process, lack of segregation of duties, proper accounting for complex financial instruments and
lack of design and implementation of controls related to oil and gas activities constituted a material weakness as defined in the SEC
regulations.
Management’s Report on Internal Controls Over Financial Reporting
As required by SEC rules and regulations implementing
Section 404 of the Sarbanes-Oxley Act, our management is responsible for establishing and maintaining adequate internal control over financial
reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of our consolidated financial statements for external reporting purposes in accordance with GAAP. Our internal
control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of our company, (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts
and expenditures are being made only in accordance with authorizations of our management and directors, and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect
on the consolidated financial statements.
Management assessed the effectiveness of our internal
control over financial reporting at December 31, 2024. In making these assessments, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on our assessments
and those criteria, management determined that we did not maintain effective internal control over financial reporting as of December
31, 2024 due to the material weakness in our internal control over financial reporting described above.
We plan to enhance our processes to identify and
appropriately apply applicable accounting requirements to better evaluate and understand the nuances of the complex accounting standards
that apply to our financial statements. Our plans at this time include providing enhanced access to accounting literature, research materials
and documents and increased communication among our personnel and third-party professionals with whom we consult regarding complex accounting
applications. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives
will ultimately have the intended effects.
This Annual Report on Form 10-K does not include
an attestation report on internal control over financial reporting from our independent registered public accounting firm due to our status
as an emerging growth company under the JOBS Act.
Changes in Internal Control over Financial Reporting
During the most recently completed fiscal quarter,
there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
During the three months ended December 31, 2024,
none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, modified or terminated a “Rule 10b5-1
trading arrangement” or a “non-Rule 10b5-1 trading arrangement” as such terms are defined under Item 408 of Regulation
S-K.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT
INSPECTIONS.
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
Our Board of Directors consists of five directors. Three of the five
directors are independent. Our current directors and executive officers are as follows:
Name Age Title
Dante Caravaggio 67 Chief Executive Officer, President and Director
Mitchell B. Trotter 65 Chief Financial Officer and Director
David M. Smith 69 General Counsel and Secretary
Joseph V. Salvucci Sr 68 Director and Chairman
Joseph V. Salvucci Jr. 39 Director
Byron Blount 66 Director
Dante Caravaggio — Chief Executive
Officer, President and Director. Mr. Caravaggio joined the company and has served as our Chief Executive Officer, President, and Director
since December 2023. Since April 2021, Mr. Caravaggio has served as Chairman of SWI Excavating, one of the leading regional underground
utility contractors in Colorado. From January 2020 to April 2022, Mr. Caravaggio served on the board of directors of McCarl’s Inc.,
a leading energy constructor in the northeast United States. Prior to joining McCarl’s Inc., Mr. Caravaggio was Senior Vice President,
Hydrocarbons Americas for KBR (US) since January 2018. Prior to his role with KBR (US), Mr. Caravaggio held a number of roles as an executive
and project manager with Parsons Corp. and Jacobs Engineering, overseeing upstream and downstream hydrocarbon projects. Mr. Caravaggio
received his MBA at Pepperdine University in Malibu, California and his BS and MS in Petroleum Engineering at the University of Southern
California.
Mr. Caravaggio is qualified to serve as CEO
and as a member of our board of directors based on our review of his qualifications, attributes, and skills, including his oil and gas
management experience and oil and gas acquisition experience.
Mitchell B. Trotter — Chief
Financial Officer and Director. Mr. Trotter joined the company and has served as our Senior Vice President of Finance since
October 2022 and became Chief Financial Officer and Director in November 2023. Mr. Trotter has 41 years of experience beginning
his career in 1981 as an auditor with Coopers & Lybrand for seven years. He then served as CFO of two private investor backed
private companies where the first was in real estate development and the latter in the engineering and construction industry. For the
next 30 years, Mr. Trotter served in various CFO and Controller positions with three publicly traded companies in the engineering
and construction services industry which were: Earth Tech to 2002; Jacobs Engineering to 2017; and AECOM to 2022. In those roles Mr. Trotter
managed up to 400 plus staff across six continents supporting global operations with clients in multiple industries across private, semi-public
and public sectors. Mr. Trotter earned his BS Accounting from Virginia Tech in 1981 and his MBA from Virginia Commonwealth University
in 1994. He professional credentials are: Certified Public Accountant in Virginia; Certified Management Accountant; and Certified in Financial
Management.
David M. Smith, Esq. — Vice President, General
Counsel and Secretary of the Company. Mr. Smith has served as our General Counsel and Secretary since November 2023.Mr.
Smith is a licensed attorney in Texas with over 40 years’ experience in the legal field of oil and gas exploration and production,
manufacturing, purchase and sale agreements, exploration agreements, land and leaseholds, right of ways, pipelines, surface use, joint
operating agreements, joint interest agreements, participation agreements and operations as well as transactional and litigation experience
in oil and gas, real estate, bankruptcy and commercial industries. Mr. Smith purchased 142,500 shares as a founder. Mr. Smith has represented
a number of companies in significant oil and gas transactions, mergers and acquisitions, intellectual property research and development
and sales in the oil and gas drilling business sector. Mr. Smith began his career by serving in a land and legal capacity as Vice President
of Land and, subsequently, as President of a public Canadian company until beginning his legal practice as a partner with several law
firms and ultimately creating his own independent legal practice. Mr. Smith holds a degree in Finance from Texas A&M University, a
Doctor of Jurisprudence from South Texas College of Law and is licensed before the Texas Supreme Court.
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Joseph V. Salvucci, Sr. — Independent
Director and Chairman of the Board. Joseph V. Salvucci, Sr. has served as a member of our board of directors since December 2021.
JVS Alpha Property, LLC, an entity which the majority is beneficially owned by Mr. Salvucci, with the balance owned by his immediate
family, purchased 940,000 shares as a founder. Mr. Salvucci acquired PEAK Technical Staffing USA (“PEAK”), peaktechnical.com
in 1986 and has grown the business to be a premier provider of USA-based contract engineers and technical specialists, on assignment worldwide
through a comprehensive, customer focused, enterprise-wide Managed Staffing Solution. During his 35-year tenure as owner of the company,
PEAK has expanded from Pittsburgh to do business in all 50 States, Canada, Europe, South America, India, and the Philippines. He served
10 years on the board of directors culminating as President and Board Chairman of the National Technical Services Association, a
trade association representing 300,000 contractors on assignment in the technical staffing industry that later merged with the American
Staffing Association. He is an active member of the Young Presidents Organization (YPO GOLD), formerly known as the World Presidents Organization
(WPO) and has served as a member of the WPO International Board, as well as chairman of East Central US (ECUS) Region and Pittsburgh chapters
as Chairman of the Board. As a 1976 Civil Engineering graduate of the University of Pittsburgh, he was a member of the Triangle (Engineering)
Fraternity and its Alumni Association. He earned the Triangle Fraternity Distinguished Alumnus Citation in 2011 and currently serves on
the Board of Directors. After earning the rank of Eagle Scout in 1970, he has remained active with the Boy Scouts of America, having served
as the founding Chairman of the Board of the Pittsburgh Chapter of the National Eagle Scout Association, earning the NOESA (National Outstanding
Eagle Scout Award) and the Silver Beaver Award and is past VP of Development and a board member of the Laurel Highlands Council in Western
Pennsylvania. He was awarded the Manifesting the Kingdom of God Award by the Catholic Diocese of Pittsburgh in 2011. He was awarded the
“Big Mac Award” from the Ronald McDonald Charities. As well as earning his BS in Civil Engineering from the University of
Pittsburgh in 1976 and attended Harvard Business School’s OPM 33, graduating in 2003.
Joseph V. Salvucci, Jr. — Independent
Director. Joseph V. Salvucci, Jr. has served as a member of our board of directors since December 2021. Mr. Salvucci began
his career with PEAK Technical Staffing USA in November 2010 and is currently serving as the Chief Executive Officer overseeing nine
branches with several hundred employees, and managing strategic initiatives for the company, including Staff Training, Career Pathing,
and Organic Growth. Mr. Salvucci Jr received his Executive MBA from the University of Pittsburgh. In addition to his responsibilities
as President/COO of PEAK, Mr. Salvucci serves on the board of Temporary Services Insurance Limited, a Workers’ Compensation
company serving staffing companies.
Byron Blount — Independent
Director. Mr. Blount joined the board of directors and is the chair of the audit committee since November 2023. Mr. Blount has extensive
experience in finance, investments, and acquisitions. He was Managing Director for the Blackstone Real Estate Group from 2011 to 2021
where he: had Primary Asset Management responsibilities for several industries and portfolio companies; oversaw the onboarding of acquisitions
and establishment of Blackstone-affiliated portfolio companies; and had Primary Disposition responsibilities for several portfolios and
companies across several industries. Mr. Blount was the LXR/Blackstone Executive Vice President from 2005 to 2010. His primary responsibilities
involved: underwriting and acquisition of domestic and international property and mortgage loan portfolios; asset management; renovation
and reconstruction projects, debt, and business model restructuring; and dispute resolution. He was a Principal of Colony Capital from
1993 to 2004 and was responsible for sourcing and structuring new investments, consummating transactions valued in excess of $5 billion.
His Primary Acquisitions responsibilities included domestic and international acquisitions of real property, distressed mortgage debt,
and real estate-related assets and entities. From 1987 to 1992, Mr. Blount was Vice President of WSGP which was formed to capitalize on
the struggles of the US Savings and Loan industry and the FSLIC. He was responsible for structuring and managing/working out new investment
opportunities, generally acquired from failed financial institutions. He graduated from University of Southern California in 1982 with
a B.S. in Business Administration. Mr. Blount earned his MBA from University of Southern California’s Marshall School of Business
in 1987 and is a member Beta Gamma Sigma (International Business Honor Society).
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Family Relationships
There are no family relationships between any
of our officers and directors, except that Mr. Joseph V. Salvucci, Sr. and Mr. Joseph V. Salvucci, Jr. are father and son, respectively.
Number and Terms of Office of Officers and Directors
Our board of directors has five directors. Our
board of directors is divided into two classes with only one class of directors being elected in each year and each class (except for
those directors appointed prior to our first annual meeting of stockholders) serving a two-year term. The class I directors consist of
Dante Caravaggio and Joseph V. Salvucci, Jr., and their term will expire at the annual meeting of stockholders in even-numbered years.
The class II directors consist of Mitchell Trotter, Byron Blount, and Joseph V. Salvucci, Sr. and their term will expire at the annual
meeting of stockholders in odd-numbered years.
Our officers are elected by the board of directors
and serve at the discretion of the board of directors, rather than for specific terms of office. Our board of directors is authorized
to appoint persons to the offices set forth in our bylaws as it deems appropriate. Our bylaws provide that our officers may consist of
a Chief Executive Officer, President, Chief Financial Officer, Vice Presidents, Secretary, Assistant Secretaries, Treasurer and such other
offices as may be determined by the board of directors.
Director Independence
The NYSE American listing standards require that
a majority of our board of directors be independent. An “independent director” is defined generally as a person other than
an officer or employee of the company or its subsidiaries or any other individual having a relationship which in the opinion of the company’s
board of directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of
a director. Of the current members of our board of directors, Messrs. Salvucci Sr., Salvucci Jr., and Byron Blount are each considered
an “independent director” under the NYSE American listing standards and applicable SEC rules. Our independent directors will
have regularly scheduled meetings at which only independent directors are present.
Committees of the Board of Directors
The standing committees of our Board of Directors
consist of an audit committee (the “Audit Committee”), a compensation committee (the “Compensation Committee”),
and a Nominating and Corporate Governance Committee (the “Nominating Committee”). The Audit Committee, Compensation Committee,
and the Nominating Committee report to the Board of Directors.
Audit Committee
The members of our Audit Committee are Messrs.
Blount and Salvucci Sr., and Mr. Blount serves as chairman of the Audit Committee. As a smaller reporting company under the NYSE
American listing standards, we are required to have at least two members on the Audit Committee. The rules of the NYSE American and Rule 10A-3
of the Exchange Act require that the audit committee of a listed company be comprised solely of independent directors. Each of Messrs.
Salvucci Sr. and Blount qualifies as an independent director under applicable rules. Each member of the Audit Committee is financially
literate and our board of directors has determined that Mr. Blount qualifies as an “audit committee financial expert” as defined
in applicable SEC rules.
We have adopted an audit committee charter, which
details the principal functions of the audit committee, including:
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Compensation Committee
The members of our Compensation Committee are
Messrs. Salvucci Sr., Salvucci, Jr., and Blount. Mr. Salvucci, Jr. serves as chairman of the Compensation Committee. Under the NYSE
American listing standards and applicable SEC rules, we are required to have at least two members on the Compensation Committee, all of
whom must be independent.
We have adopted a compensation committee charter,
which details the principal functions of the compensation committee, including:
● reviewing our executive compensation policies and plans;
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The charter also provides that the Compensation
Committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, legal counsel or other adviser and will
be directly responsible for the appointment, compensation and oversight of the work of any such adviser. However, before engaging or receiving
advice from a compensation consultant, external legal counsel or any other adviser, the compensation committee will consider the independence
of each such adviser, including the factors required by the NYSE American and the SEC.
Nominating and Corporate Governance Committee
The members of our Nominating Committee are Messrs.
Blount, Salvucci Sr. and Salvucci Jr. Mr. Salvucci Jr. serves as chair of Nominating Committee.
The primary purposes of our Nominating Committee
is to assist the board in:
The Nominating Committee is
governed by a charter that complies with the rules of the NYSE American.
A copy of each of our Nominating Committee Charter,
Compensation Committee Charter, and Audit Committee Charter are accessible at https://hnra-nyse.com/.
Director Nominations
Our Nominating Committee will recommend to the
board of directors candidates for nomination for election at the annual meeting of the stockholders. The board of directors will also
consider director candidates recommended for nomination by our stockholders during such times as they are seeking proposed nominees to
stand for election at the next annual meeting of stockholders (or, if applicable, a special meeting of stockholders).
We have not formally established any specific,
minimum qualifications that must be met or skills that are necessary for directors to possess. In general, in identifying and evaluating
nominees for director, the board of directors considers educational background, diversity of professional experience, knowledge of our
business, integrity, professional reputation, independence, wisdom, and the ability to represent the best interests of our stockholders.
Compensation Committee Interlocks and Insider
Participation
None of our future executive officers currently
serves, and in the past year has not served, as a member of the board of directors or compensation committee of any entity that has one
or more executive officers serving on our board of directors.
Short Swing Profit Disgorgement
Dante Caravaggio, our Chief Executive Officer,
has disbursed $[ ] to us in order for us to recapture short swing profits received by him when he sold shares and repurchased them for
a profit in 2025.
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Code of Ethics
We have adopted a Code of Ethics applicable to
our directors, officers and employees. The Code of Ethics is available on our website accessible at https://hnra-nyse.com/. In
addition, a copy of the Code of Ethics will be provided without charge upon request from us. We intend to disclose any amendments to or
waivers of certain provisions of our Code of Ethics in a Current Report on Form 8-K.
Insider Trading Policy
Our board of directors has adopted
an Insider Trading Policy which prohibits trading based on “material, nonpublic information” regarding our company or any
company whose securities are listed for trading or quotation in the United States. The policy covers all officers and directors of the
company and its subsidiaries, all other employees of the company and its subsidiaries, and consultants or contractors to the company or
its subsidiaries who have or may have access to material non-public information and members of the immediate family or household of any
such person. The policy is reasonably designed to promote compliance with insider trading laws, rules and regulations, and Nasdaq listing
standards. The policy is filed as an exhibit to this Annual Report on Form 10-K.
Clawback Policy
Our board of directors has adopted
a clawback policy, which provides that in the event we are required to prepare an accounting restatement due to noncompliance with any