Prairie Operating Co. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; filed August 14, 2023. The company changed its name from Creek Road Miners, Inc. after completing its merger with Prairie Operating Co., LLC on May 3, 2023. Because the merger substantially changed the business, the prior-year comparison is to a short period beginning at inception on June 7, 2022, and is not a like-for-like operating comparison.
Business context
Prairie reported two segments: Colorado oil and gas exploration and production (E&P), and cryptocurrency mining. E&P assets comprise undeveloped leases covering approximately 3,157 net mineral acres; there was no E&P production or revenue, and the company was seeking permits before drilling. Cryptocurrency mining, its sole source of reported revenue, began with the merger. The company said Atlas Power Hosting operates and hosts its miners and remits net mining revenue in U.S. dollars; Prairie does not take custody of the Bitcoin rewards.
Key financial metrics
| Metric | Q2 / June 30, 2023 | Six months ended June 30, 2023 |
|---|---|---|
| Revenue | $179,318 | $179,318 |
| Operating expenses | $19,878,254 | $19,942,646 |
| Operating loss | $19,698,936 | $19,763,328 |
| Net loss | $21,146,803 | $21,211,195 |
| Operating cash flow | $(5,060,375) | |
| Investing cash flow | $(3,435,189) | |
| Financing cash flow | $16,967,202 | |
| Cash and cash equivalents | $8,551,483 at June 30 | |
| Working capital | $1.9 million surplus at June 30 | |
| Total assets / liabilities | $16,526,997 / $8,534,605 at June 30 | |
| Debt | $2,872,000 reported, including AR Debentures at $2,722,000 fair value and a $150,000 SBA loan |
Mining revenue was $179,318 against $93,244 of mining costs and $132,851 of depreciation and amortization, before corporate costs and the impairment described below. A conventional consolidated operating margin is not informative given the large impairment charge and minimal revenue.
Material changes and unusual items
- Revenue began with the post-merger mining business; the comparable 2022 period had no revenue. The filing reports no E&P revenue.
- A $16,794,688 impairment of cryptocurrency mining equipment dominated expenses. The company attributed it mainly to reducing the merger-acquired equipment carrying value to estimated fair value, plus shipping and customs costs on subsequently delivered equipment.
- General and administrative expense was $2,857,471 for Q2. Management attributed the increase over the short 2022 comparison period primarily to merger-related legal and other costs, employment and benefits, and professional services.
- Other expense included $741,000 from a fair-value increase in the AR Debentures and $706,185 from a fair-value increase in the obligation to issue shares. These are valuation charges, not equivalent to cash interest or cash payments.
- The May PIPE generated approximately $17.3 million in proceeds through Series D preferred stock and warrants. The company also acquired Exok oil and gas leases for $3 million.
Outlook, liquidity, risks and controls
- Management said its liquidity forecast supported adequate operating liquidity for at least the next 12 months, assuming its cash position and ability to manage spending. The company also disclosed continuing losses, negative operating cash flow, and an accumulated deficit of approximately $21.0 million. It said further capital raises may be needed for operations and E&P development and gave no numerical earnings or production guidance.
- The AR Debentures have $2 million aggregate principal, bear 12% interest, are convertible at an initial $0.175 per share, and are due December 31, 2023. They are secured by certain cryptocurrency mining assets and include restrictive covenants. The filing reports their June 30 fair value as $2.722 million.
- The company disclosed insufficient authorized and unissued shares to satisfy all existing share-delivery commitments, and expected a planned reverse split to address the issue. At June 30, 5,884,872 obligation shares were due; preferred stock, warrants, debentures and options create substantial potential dilution. The filing lists 342,209,901 potential common shares excluded from diluted loss per share as anti-dilutive.
- The company had an option, exercisable through August 15, 2023, to acquire additional Exok acreage for $22.182 million, comprising $18 million cash and $4.182 million in equity and warrants. The filing does not state whether the option was exercised.
- Key operating and market risks include Bitcoin price volatility and the 2024 halving, dependence on Atlas and its custody/security arrangements, energy costs and regulation, and the need to obtain permits and financing before E&P drilling. Oil and gas price, drilling, environmental and climate-related risks also apply.
- Management said disclosure controls were not effective at June 30 because a previously disclosed material weakness involving timely review of SEC filings had not been remediated. Remediation steps had begun, but management said remediation would require successful testing over time.
- The company reported no material pending legal proceedings and no recorded loss-contingency liabilities at June 30. It disclosed office lease commitments of approximately $120,000 for July 2023 through June 2024.
Important facts for investors to verify
- Whether the Exok acreage option was exercised by its August 15, 2023 deadline, and how any purchase was funded.
- Available liquidity and financing plans for the December 2023 debenture maturity, planned drilling, and the next 12 months.
- The terms and potential dilution from Series D preferred stock, PIPE warrants, debenture conversions, obligation shares and other equity commitments; also the status and effect of the planned reverse split.
- The basis and assumptions for the $16.8 million mining-equipment impairment and the recoverability of remaining equipment values.
- Whether the material weakness in financial reporting controls was remediated and independently tested.
- Reconciliation of reported debt and maturities: the filing gives $2.872 million of total debt, while its debt-maturity schedule presents figures that do not clearly reconcile to that carrying amount.