Prairie Operating Co. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The filing was signed November 14, 2023. Comparisons with 2022 are limited: Prairie completed its merger on May 3, 2023, and the prior-year period largely reflects an early-stage company before these operations began.
Business context
Prairie reports two segments: Colorado oil and gas exploration and production (E&P), and cryptocurrency mining. The E&P business held undeveloped leasehold interests, including acreage acquired in the Exok transactions, but had no production or revenue and had not begun drilling or completion operations. All reported revenue came from Bitcoin mining, operated through hosting provider Atlas; Prairie receives U.S. dollars and does not take custody of Bitcoin.
Key financial results and liquidity
| Metric | Q3 2023 | Nine months 2023 |
|---|---|---|
| Revenue | $457,951 | $637,269 |
| Operating expenses | $6.95 million | $26.89 million |
| Loss from operations | $6.49 million | $26.26 million |
| Net loss | $34.42 million | $55.63 million |
| Net cash used in operating activities | — | $7.94 million |
| Net cash used in investing activities | — | $21.55 million |
| Net cash provided by financing activities | — | $36.65 million |
Q3 mining costs were $209,929 and depreciation and amortization was $425,468; together these exceeded mining revenue by about $177,000 before general and administrative costs. The nine-month operating expenses included a $16.79 million impairment of mining equipment. General and administrative expense was $6.31 million in Q3 and $9.24 million for the nine months.
At September 30, cash was $7.24 million, current assets $7.61 million, and current liabilities $11.60 million, producing a roughly $4.0 million working-capital deficit. Total assets were $40.09 million. Total liabilities were $62.34 million, including $50.74 million of warrant liabilities measured at fair value; mezzanine equity was $41.80 million and stockholders’ equity was a deficit of $64.05 million. The $4.86 million carrying value of the secured convertible debentures was measured at fair value; their stated principal was $2.0 million, with a 12% interest rate and December 31, 2023 maturity. The company repaid its $150,000 SBA loan in September.
Cash rose from $79,845 at year-end 2022, principally reflecting $17.4 million raised through the Series D PIPE and $20.0 million through the Series E PIPE, net of financing costs and other cash uses. Investing cash use primarily funded oil and gas property acquisitions.
Material changes, outlook, and risks
- The May merger transformed the business and brought in the mining operations. In August, Prairie acquired an additional approximately 20,328 net mineral acres in Colorado for stated consideration of $25.3 million, including $18.0 million cash and equity and warrants.
- Warrant and debenture fair-value remeasurements materially affected reported losses: Q3 included a $24.86 million warrant-liability loss and a $2.14 million debenture fair-value loss. These are valuation items, not equivalent to current-period cash outflows. Warrant liabilities were classified using Level 3 inputs, including estimated volatility and expected term.
- Management said it expected adequate liquidity for at least the next 12 months, based on cash and spending management, while also warning that further capital may be needed for E&P development and acquisitions and that additional funding is not assured. The company reported a $55.6 million nine-month net loss, $55.4 million accumulated deficit, and working-capital deficit.
- No quantified production, drilling, or earnings guidance was provided. Management said permitting is a current focus; timing and spending depend on permits, commodity prices, costs, equipment, partners, and access to capital.
- Mining revenue depends entirely on Atlas to host and operate equipment. Prairie also disclosed concentration risk because all accounts receivable were due from Atlas. At September 30, it reported 1,386 miners with 159.5 Ph/s of combined hashing capacity.
- A $173,763 registration-rights liquidated-damages expense was recorded after certain Series D resale shares were not registered by the deadline. The filing says damages could continue at $173,763 per month through 2023, subject to a $695,052 aggregate maximum. MD&A also reports a $250,000 accrual related to a contractual legal dispute; the filing says pending matters were not expected to materially harm financial position or results.
- Disclosure controls were deemed ineffective at September 30 because a previously identified material weakness in timely review of quarterly filings had not been remediated. Management described remediation steps, but said the weakness would not be considered remediated until tested and operating effectively.
- After quarter-end, the company effected a 1-for-28.5714286 reverse split. In October, holders converted the debentures into 400,667 common shares. On November 13, a holder exercised Series D B warrants for 2.0 million shares, providing $12 million gross proceeds intended for working capital, potentially including drilling or acquisitions.
Important facts for investors to verify
- Whether required permits are obtained and when Prairie may begin drilling; the filing reports no E&P production or revenue as of September 30.
- Whether cash, the post-quarter $12 million warrant proceeds, and any further financing are sufficient to fund planned operations and obligations.
- Atlas’s ability to continue hosting operations and pay mining revenue, and the economics of mining after power and other costs.
- The assumptions and potential volatility underlying the $50.74 million warrant liability and other fair-value estimates.
- The status of resale registration, related liquidated damages, the $250,000 contractual-dispute accrual, and remediation of the material weakness in disclosure controls.
- The potential dilution and security implications of preferred shares, warrants, and other convertible or exercisable securities; the filing lists substantial anti-dilutive securities.