UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
Commission File No.
| (Exact name of registrant as specified in its charter) |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
| (Registrant’s telephone number, including area code) |
| N/A |
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Warrants, each whole warrant exercisable for three quarters of one share of common stock at an exercise price of $11.50 per whole share |
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☐ | Large accelerated filer | ☐ | Accelerated filer | |
| ☒ | Smaller reporting company | |||
| Emerging growth company |
If an emerging growth company, indicate by check mark
if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act): Yes
As of November 8, 2023, there were
HNR ACQUISITION CORP
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2023
TABLE OF CONTENTS
i
Part I. Financial Information
Item 1. Financial Statements
HNR ACQUISITION CORP
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2023 | December 31, 2022 | |||||||
| ASSETS | (Unaudited) | (Audited) | ||||||
| Cash | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Deferred finance costs | ||||||||
| Marketable securities held in Trust Account | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Income tax payable | ||||||||
| Franchise tax payable | ||||||||
| Excise tax payable | ||||||||
| Related party notes payable, net of discount | ||||||||
| Deferred underwriting fee payable | ||||||||
| Total current liabilities | ||||||||
| Warrant liability | ||||||||
| Deferred underwriting fee payable | ||||||||
| Total for non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (Note 6) | ||||||||
| Redeemable Common Stock, $ | ||||||||
| Stockholders’ (deficit) equity | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ (deficit) equity | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ (deficit) equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
HNR ACQUISITION CORP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||
| Expenses: | ||||||||||||||||
| Formation and operating costs | $ | $ | $ | $ | ||||||||||||
| Franchise taxes | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (expenses) | ||||||||||||||||
| Interest income on marketable securities held in Trust Account | ||||||||||||||||
| Change in fair value of warrant liability | ( | ) | ( | ) | ||||||||||||
| Amortization of debt discount | ( | ) | ( | ) | ||||||||||||
| Dividend income | ||||||||||||||||
| Gain on settlement of liabilities | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Total Other Income | ||||||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax (provision) benefit | ( | ) | ||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| $ | $ | $ | $ | ( | ) | |||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
HNR ACQUISITION CORP
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT)
(UNAUDITED)
| Three and Nine Months Ended September 30, 2023 | ||||||||||||||||||||
| Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||
| Balance – January 1, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Remeasurement of redeemable common stock to redemption value | - | ( | ) | ( | ) | |||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance – March 31, 2023 | ( | ) | ( | ) | ||||||||||||||||
| Remeasurement of redeemable common stock to redemption value | - | |||||||||||||||||||
| Excise tax imposed on common stock redemptions | - | ( | ) | ( | ) | |||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance – June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Remeasurement of redeemable common stock to redemption value | - | ( | ) | ( | ) | |||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance – September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Three and Nine Months Ended September 30, 2022 | ||||||||||||||||||||
| Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||
| Balance – January 1, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Forfeiture of shares by Sponsor | ( | ) | ( | ) | ||||||||||||||||
| Issuance of Private Placement Units | ||||||||||||||||||||
| Fair value of warrants | - | |||||||||||||||||||
| Offering costs allocated to public warrants | - | ( | ) | ( | ) | |||||||||||||||
| Remeasurement of redeemable common stock to redemption value | - | ( | ) | ( | ) | ( | ) | |||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance – March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||
| Remeasurement of redeemable common stock to redemption value | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance – June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Remeasurement of redeemable common stock to redemption value | - | ( | ) | ( | ) | |||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance – September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
HNR ACQUISITION CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(Unaudited)
| September 30, 2023 | September 30, 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Gain on settlement of liabilities | ( | ) | - | |||||
| Interest income on marketable securities held in Trust Account | ( | ) | ( | ) | ||||
| Change in fair value of warrant liability | ||||||||
| Amortization of debt discount | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | ( | ) | ||||||
| Accounts payable and accrued liabilities | ||||||||
| Income tax payable | ||||||||
| Franchise tax payable | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Cash withdrawn from Trust Account for redemptions | ||||||||
| Interest withdrawn from Trust Account to pay for franchise and federal income taxes | ||||||||
| Marketable securities held in Trust Account | ( | ) | ( | ) | ||||
| Net cash provided by investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from Initial Public Offering, net of costs of capital | ||||||||
| Proceeds from Private Placement, net of costs of capital | ||||||||
| Payment of deferred offering and finance costs | ( | ) | ( | ) | ||||
| Proceeds from related party notes payable | ||||||||
| Redemption of common stock | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase in cash | ||||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Fair value of warrant liability issued in connection with notes payable | $ | $ | ||||||
| Remeasurement of redemption value of redeemable Class A common stock | $ | $ | ||||||
| Deferred underwriting fee payable | $ | $ | ||||||
| Excise tax liability accrued for common stock redemptions | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
HNR ACQUISITION CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
Organization and General:
HNR Acquisition Corp (the “Company”) was incorporated in Delaware on December 9, 2020. The Company is a blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (the “Business Combination”). The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the “Securities Act,” as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).
As of September 30, 2023, the Company had not commenced any operations. All activity for the period from December 9, 2020 (inception) through September 30, 2023 relates to the Company’s formation and the initial public offering (“Initial Public Offering” or “IPO”) described below, and, after our Initial Public Offering, identifying a target company for a Business Combination. The Company will not generate any operating revenues until after completion of the Business Combination, at the earliest. The Company will generate non-operating income in the form of interest income from the proceeds derived from the Initial Public Offering. The Company has selected December 31 as its year end.
Sponsor and Financing:
The registration statement for the Company’s
IPO was declared effective on February 10, 2022 (the “Effective Date”). On February 15, 2022, the Company consummated the
IPO of
Transaction costs amounted to $
The Trust Account:
Funds from the Initial Public Offering were placed in a trust account (the “Trust Account”). The Trust Account shall invest only in U.S. government treasury bills with a maturity of one hundred eighty (180) days or less or in money market funds meeting certain conditions under Rule 2a-7 under the Investment Company Act of 1940 which invest only in direct U.S. government obligations. Funds will remain in the Trust Account until the earlier of (i) the consummation of the Business Combination or (ii) the distribution of the Trust Account as described below. The remaining proceeds outside the Trust Account may be used to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses.
The Company’s amended and restated certificate
of incorporation, as amended, provides that, other than the withdrawal of interest to pay taxes, none of the funds held in the Trust Account
will be released until the earlier of: (i) the completion of the Business Combination; (ii) the redemption of any public shares
properly tendered in connection with a stockholder vote to amend the Company’s amended and restated certificate of incorporation
(A) to modify the substance or timing of the Company’s obligation to redeem
5
Business Combination:
The Company’s management has broad discretion
with respect to the specific application of the net proceeds of the Initial Public Offering, although substantially all of the net proceeds
of the Initial Public Offering are intended to be generally applied toward consummating a Business Combination with (or acquisition of)
a Target Business. As used herein, “Target Business” means one or more target businesses that together have an aggregate fair
market value equal to at least
The Company, after signing a definitive agreement for a Business Combination, will either (i) seek stockholder approval of the Business Combination at a meeting called for such purpose in connection with which stockholders holding common stock may seek to redeem their shares, regardless of whether they vote for or against the Business Combination, for cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account as of two business days prior to the consummation of the initial Business Combination, including interest but less taxes payable, or (ii) provide stockholders holding common stock with the opportunity to sell their shares to the Company by means of a tender offer (and thereby avoid the need for a stockholder vote) for an amount in cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account as of two business days prior to commencement of the tender offer, including interest but less taxes payable. As a result, shares of common stock will be recorded at their redemption amount and classified as temporary equity upon the completion of the Initial Public Offering, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, “Distinguishing Liabilities from Equity.”
The decision as to whether the Company will seek stockholder
approval of the Business Combination or will allow stockholders to sell their shares in a tender offer will be made by the Company, solely
in its discretion, and will be based on a variety of factors such as the timing of the transaction and whether the terms of the transaction
would otherwise require the Company to seek stockholder approval unless a vote is required by law or under the NYSE American rules. If
the Company seeks stockholder approval, it will complete its Business Combination only if a majority of the outstanding shares of common
stock voted are voted in favor of the Business Combination. However, in no event will the Company redeem its public shares of common stock
in an amount that would cause its net tangible assets to be less than $
On February 5, 2023, the Company received notice from the Sponsor
of its intention to extend the Combination period by three months until May 15, 2023. On February 8, 2023, in accordance with the Company’s
then-effective amended and restated certificate of incorporation, the Sponsor’s designee deposited $
On May 11, 2023, the stockholders
of the Company approved, and the Company filed with the Secretary of State of Delaware, an amendment to the Company’s certificate
of incorporation to extend the date by which the Company must consummate its initial Business Combination from May 15, 2023 by up to six
(6) one-month extensions to November 15, 2023, provided that the Sponsor deposits into the Trust Account the lesser of (x) $
6
On May 11, 2023, the Sponsor’s designee deposited
$
In the event of such distribution, it is possible that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the Initial Public Offering price per Unit in the Initial Public Offering.
In order to protect the amounts held in the trust
account, the Sponsor has agreed that it will be liable to the Company if and to the extent any claims by a vendor for services rendered
or products sold to the Company, or a prospective target business with which the Company has discussed entering into a transaction agreement,
reduce the amount of funds in the trust account to below (i) $
Risks and Uncertainties
Management is currently evaluating the impact of the COVID-19 pandemic on the industry and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position, results of its operations, and/or search for a target company, the specific impact is not readily determinable as of the date of these financial statements. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Inflation Reduction Act of 2022
On August 16, 2022, the Inflation Reduction Act of
2022 (the “IR Act”) was signed into federal law. The IR Act provides for, among other things, a new U.S. federal
7
Any redemption or other repurchase that occurs after December 31, 2022, in connection with a Business Combination, extension vote or otherwise, may be subject to the excise tax. Whether and to what extent the Company would be subject to the excise tax in connection with a Business Combination, extension vote or otherwise would depend on a number of factors, including (i) the fair market value of the redemptions and repurchases in connection with the Business Combination, extension or otherwise, (ii) the structure of a Business Combination, (iii) the nature and amount of any “PIPE” or other equity issuances in connection with a Business Combination (or otherwise issued not in connection with a Business Combination but issued within the same taxable year of a Business Combination) and (iv) the content of regulations and other guidance from the Treasury. In addition, because the excise tax would be payable by the Company and not by the redeeming holder, the mechanics of any required payment of the excise tax have not been determined. The foregoing could cause a reduction in the cash available on hand to complete a Business Combination and in the Company’s ability to complete a Business Combination.
Excise Tax Liability
On May 11, 2023, in connection with the stockholder
vote for the amendment to the Company’s certificate of incorporation, a total of
Going Concern Considerations
At September 30, 2023, the Company had $
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Condensed Form 10-Q and Article 8 of Regulation S-X of the SEC. Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a complete presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the period presented.
8
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K as filed with the SEC on March 31, 2023. The interim results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023 or for any future periods.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Emerging Growth Company:
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 (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s consolidated financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Net Income (Loss) Per Share:
Net income (loss) per share of common stock is computed
by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during
the period, excluding shares of common stock subject to forfeiture. The Company has not considered the effect of the warrants sold in
the Initial Public Offering and private placement warrants to purchase an aggregate of
The Company’s statements of operations include
a presentation of net income (loss) per share for common stock shares subject to possible redemption in a manner similar to the two-class
method of income per share. Net income (loss) per common share, basic and diluted, for redeemable common stock is calculated by dividing
the net income allocable to redeemable common stock, by the weighted average number of redeemable common shares outstanding since original
issuance. Net income (loss) per common stock, basic and diluted, for non-redeemable common stock is calculated by dividing net income
allocable to non-redeemable common stock, by the weighted average number of shares of non-redeemable common stock outstanding for the
periods.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2023 | September 30, 2022 | September
30, 2023 | September 30, 2022 | |||||||||||||
| Redeemable common shares | ||||||||||||||||
| Numerator: net income (loss) allocable to redeemable common stock | $ | $ | $ | $ | ( | ) | ||||||||||
| Denominator: weighted average number of redeemable common shares | ||||||||||||||||
| $ | $ | $ | $ | ( | ) | |||||||||||
| Non-redeemable common shares | ||||||||||||||||
| Numerator: net loss allocable to non-redeemable common shares | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator: weighted average number of non-redeemable common shares | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
9
Fair Value of Financial Instruments:
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under FASB ASC 820, “Fair Value Measurement”, approximates the carrying amounts represented on the balance sheet.
The Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
| ● | Level 1, defined as observable inputs such as quoted prices (unadjusted) for identical instruments in active markets; |
| ● | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and |
| ● | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
Use of Estimates:
The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash:
Cash includes cash on deposit at banking institutions
as well as all highly liquid short-term investments with original maturities of 90 days or less. The balance of the Company’s
cash as of September 30, 2023 and December 31, 2022 was $
Marketable Securities Held in Trust Account:
At September 30, 2023, the assets held in the Trust Account were held in mutual funds. All of the Company’s investments held in the Trust Account are classified as trading securities. Trading securities are presented on the balance sheet at fair value at the end of each reporting period. Gains and losses resulting from the change in fair value of investments held in the Trust Account are included in Interest Income on marketable securities held in Trust Account in the accompanying statement of operations. The estimated fair values of investments held in Trust Account are determined using available market information.
10
Warrant Liabilities
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock, among other conditions for equity classification. This assessment is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
In accordance with Accounting Standards Codification ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, the warrants issued in connection with the working capital loans do not meet the criteria for equity classification due to the redemption right whereby the holder may require the Company to settle the warrant in cash 18 months after the closing of the MIPA, and must be recorded as liabilities. The warrants are measured at fair value at inception and at each reporting date in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in the statements of operations in the period of change.
Concentration of Credit Risk:
Financial instruments that potentially subject the
Company to concentrations of credit risk consist of a cash account in a financial institution, which, at times, may exceed the Federal
Depository Insurance Coverage (“FDIC”) of $
Common Stock Subject to Possible Redemption:
The Company accounts for its common stock subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity”. Common stock subject to mandatory redemption (if any) are classified as a liability instrument and are measured at fair value. Conditionally redeemable common stock (including common stock that feature redemption rights that are either within the control of the holder or subject to the redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. The Company’s common stock issued in the Initial Public Offering feature certain redemption rights that are considered to be outside of the Company’s control and subject to the occurrence of uncertain future events. Accordingly, the shares of common stock subject to possible redemption will be presented at redemption value as temporary equity, outside of the stockholders’ equity section of the Company’s balance sheet upon closing of the Initial Public Offering.
| Gross Proceeds | $ | |||
| Less: fair value of public warrants | ( | ) | ||
| Less: common stock issuance costs | ( | ) | ||
| Accretion to redemption value | ||||
| Redeemable common stock as of December 31, 2022 | $ | |||
| Redemptions of common stock | ( | ) | ||
| Accretion to redemption value | ||||
| Redeemable common stock as of September 30, 2023 | $ |
11
Offering Costs:
Offering costs consist of legal and accounting costs
incurred through the balance sheet date that are directly related to the Initial Public Offering. These costs, together with the underwriter
discount, were charged to additional paid in capital upon the completion of the Initial Public Offering. During the nine months ended September 30, 2023, the Company paid $
Income Taxes:
The Company follows the asset and liability method of accounting for income taxes under FASB ASC 740, “Income Taxes” (“ASC 740”) Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the 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.
FASB 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. There were no unrecognized tax benefits as of September 30, 2023 and December 31, 2022. The Company recognizes accrued interest
and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties
at September 30, 2023 and December 31, 2022. 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. The Company’s effective tax rate was approximately
Recent Accounting Pronouncements:
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. The Company adopted this guidance early on January 1, 2023 with no impact to the Company’s consolidated financial statements.
Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s consolidated financial statements.
NOTE 3 — INITIAL PUBLIC OFFERING
Pursuant to the Initial Public Offering, the Company
sold
12
The Company granted the underwriter a 45-day option
to purchase up to fifteen percent (
The Warrants issued in connection with the Units that were issued upon exercise of the underwriters’ over-allotment option are identical to the public Warrants and have no net cash settlement provisions. The Company accounts for its Public and Private warrants as equity-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
The Company paid an underwriting discount of five
percent (
In addition, for a period of 18 months from the closing of the Business Combination offering, EF Hutton has an irrevocable right of first refusal to act as a sole investment banker, sole book-runner, and/or sole placement agent, at EF Hutton’s sole discretion, for each and every future public and private equity and debt offering, including all equity linked financings on terms and conditions customary to EF Hutton for such transactions.
NOTE 4 — RELATED PARTY TRANSACTIONS
Founder Shares
On December 24, 2020, the Company issued an aggregate
of
13
The Founder Shares are identical to the common stock previously included in the Units sold in the Initial Public Offering except that the Founder Shares are convertible under the circumstances described below and subject to certain transfer restrictions, as described in more detail below.
The Company’s initial stockholders have agreed
not to transfer, assign or sell any of their Founder Shares until the earlier of (A) 180 days after the completion of the Company’s
initial Business Combination, or earlier if, subsequent to the Company’s initial Business Combination, the last sale price of the
Company’s common stock equals or exceeds $
Private Placement Units
The Sponsor, together with such other members, if
any, of the Company’s executive management, directors, advisors or third party investors as determined by the Sponsors in its sole
discretion, purchased, in the aggregate,
If the Company does not complete a Business Combination, then the proceeds will be part of the liquidating distributions to the public stockholders and the Warrants issued to the Sponsor will expire worthless.
Related Party Loans and Costs
In addition, in order to finance transaction costs
in connection with an intended initial business combination, the Sponsor or an affiliate of the Sponsor, or certain of the Company’s
officers and directors may, but are not obligated to, loan the Company funds as may be required (“Working Capital Loans”).
The Working Capital Loans may be repaid upon completion of a Business Combination, without interest, or, at the lender’s discretion,
up to $
In December 2022, the Company received $
14
In addition, the Sponsor or an affiliate of the Sponsor or certain of the Company’s or Sponsor’s officers and directors may provide the Company with uncompensated advisory services.
In February 2022, the Company repaid the $
Following the IPO, effective April 14, 2022, the Company
entered into an agreement with Rhone Merchant Resources Inc. (formerly known as Houston Natural Resources Inc.), a Company controlled
by our Chairman and CEO, for services related to identifying potential business combination targets. The Company paid $
Administrative Service Agreement
The Company has agreed to pay $
Other
On December 8, 2021, the Board of Directors of
the Company agreed to compensate the directors of the Company through the issuance of shares of the Company equal in value to $
On May 1, 2022, and effective April 6, 2022, the Company
entered into a consulting agreement in the ordinary course of business with a stockholder who owns
During the year ended December
31, 2022, the Company incurred and paid $
On February 14, 2023, the Company entered into a consulting agreement
with Donald Orr, the Company’s President, which will become effective upon
the closing of the MIPA for a term of three years. Under the agreement, the Company will pay Mr. Orr an initial cash amount of $
15
On February 15, 2023, the Company entered into a consulting agreement
with Rhône Merchant House, Ltd. (“RMH Ltd”), a company control
by the Company’s Chairman and CEO Donald H. Goree, which will become effective upon the closing of the MIPA for a term of three
years. Under the agreement, the Company will pay to RMH Ltd an initial cash amount of $
NOTE 5 — STOCKHOLDERS’ EQUITY
Common Stock
At September 30, 2023, the authorized common stock
of the Company was
At December 31, 2021, there were
As of September 30, 2023, there were
On October 17, 2022, the Company entered into a common
stock purchase agreement (the “Common Stock Purchase Agreement”) and a related registration rights agreement (the “White
Lion RRA”) with White Lion Capital, LLC, a Nevada limited liability company (“White Lion”). Pursuant to the Common Stock
Purchase Agreement, the Company has the right, but not the obligation to require White Lion to purchase, from time to time, up to $
Subject to the satisfaction of certain customary conditions
including, without limitation, the effectiveness of a registration statement registering the shares issuable pursuant to the Common Stock
Purchase Agreement, the Company’s right to sell shares to White Lion will commence on the effective date of the registration statement
and extend until December 31, 2025. During such term, subject to the terms and conditions of the Common Stock Purchase Agreement, the
Company may notify White Lion when the Company exercises its right to sell shares (the effective date of such notice, a “Notice
Date”). The number of shares sold pursuant to any such notice may not exceed (i) the lower of (a) $
16
The purchase price to be paid by White Lion for any
such shares will equal
The Company will have the right to terminate the Common Stock Purchase Agreement at any time after Commencement, at no cost or penalty, upon three trading days’ prior written notice. Additionally, White Lion will have the right to terminate the Common Stock Purchase Agreement upon three days’ prior written notice to the Company if (i) there is a Fundamental Transaction, (ii) the Company is in breach or default in any material respect of the White Lion RRA, (iii) there is a lapse of the effectiveness, or unavailability of, the Registration Statement for a period of 45 consecutive trading days or for more than an aggregate of 90 trading days in any 365-day period, (iv) the suspension of trading of the common stock for a period of five consecutive trading days, (v) the material breach of the Common Stock Purchase Agreement by the Company, which breach is not cured within the applicable cure period or (vi) a Material Adverse Effect has occurred and is continuing. No termination of the Common Stock Purchase Agreement will affect the registration rights provisions contained in the White Lion RRA.
In consideration for the commitments of White Lion,
as described above, the Company has agreed that it will issue to White Lion shares of common stock having a value of $
Registration Rights Agreement (White Lion)
Concurrently with the execution of the Common Stock Purchase Agreement, the Company entered into the White Lion RRA with the White Lion in which the Company has agreed to register the shares of common stock purchased by White Lion with the SEC for resale within 30 days of the consummation of a business combination. The White Lion RRA also contains usual and customary damages provisions for failure to file and failure to have the registration statement declared effective by the SEC within the time periods specified.
The Common Stock Purchase Agreement and the White Lion RRA contain customary representations, warranties, conditions and indemnification obligations of the parties. The representations, warranties and covenants contained in such agreements were made only for purposes of such agreements and as of specific dates, were solely for the benefit of the parties to such agreements and may be subject to limitations agreed upon by the contracting parties.
NOTE 6 — COMMITMENTS AND CONTINGENCIES
Underwriting Agreement
The underwriters were entitled to a cash underwriting
discount of $
Registration Rights Agreement (Founder Shares)
The holders of the Founder Shares and the Private Placement Units and warrants that may be issued upon conversion of working capital loans (and any shares of common stock issuable upon the exercise of the Private Placement Units or warrants issued upon conversion of the working capital loans) will be entitled to registration rights pursuant to a registration rights agreement to be signed on or before the date of the prospectus for the Initial Public Offering. The holders of these securities are entitled to make up to three demands in the case of the founder shares, excluding short form registration demands, and one demand in the case of the private placement warrants, the working capital loan warrants and, in each case, the underlying shares that the Company register such securities for sale under the Securities Act. In addition, these holders will have “piggy-back” registration rights to include their securities in other registration statements filed by the Company. In the case of the private placement warrants, representative shares issued to EF Hutton, the demand registration rights provided will not be exercisable for longer than five years from the effective date of the registration statement in compliance with FINRA Rule 5110(f)(2)(G)(iv) and the piggyback registration right provided will not be exercisable for longer than seven years from the effective date of the registration statement in compliance with FINRA Rule 5110(f)(2)(G)(v). The Company will bear the expenses incurred in connection with the filing of any such registration statements.
17
Other agreements
On August 28, 2023, the Company entered into a transaction
and strategic advisory agreement with a consultant. Under the agreement, the consultant will assist the Company in potential private placements
of securities of the Company in order to fund the Company’s proposed business combination. The consultant will receive a cash fee
of up to
On September 30, 2022, the Company entered into an agreement with a consultant for services related to securing additional financing for potential future acquisitions for a period of one year. In connection with this agreement, the consultant may receive a finder’s fee from any financing that is secured by the Company from a referral by the consultant.
NOTE 7 — PROPOSED BUSINESS COMBINATION
On December 27, 2022, the Company, entered into a membership interest purchase agreement (the “Original MIPA”) with CIC Pogo LP, a Delaware limited partnership (“CIC”), DenCo Resources, LLC, a Texas limited liability company (“DenCo”), Pogo Resources Management, LLC, a Texas limited liability company (“Pogo Management”), 4400 Holdings, LLC, a Texas limited liability company (“4400” and, together with CIC, DenCo and Pogo Management, collectively, “Seller” and each a “Seller”), and, solely with respect to Section 7.20 of the MIPA, HNRAC Sponsors LLC, a Delaware limited liability company (“Sponsor”).
On August 28, 2023, the Company, HNRA Upstream, LLC, a newly formed Delaware limited liability company which is managed by, and is a subsidiary of, the Company (“OpCo”), and HNRA Partner, Inc., a newly formed Delaware corporation and wholly owned subsidiary of OpCo (“SPAC Subsidiary”, and together with the Company and OpCo, “Buyer” and each a “Buyer”), entered into an Amended and Restated Membership Interest Purchase Agreement (the “A&R MIPA”) with Seller, and, solely with respect to Section 6.20 of the A&R MIPA, the Sponsor, which amended and restated the Original MIPA in its entirety (as amended and restated, the “MIPA”). The post-purchase Company will be organized in an “Up-C” structure.
Pursuant to the MIPA, and subject to the terms, provisions, and conditions
set forth therein, at the closing of the transactions contemplated by the MIPA (the “Closing”),
18
The “Aggregate Consideration” for the
Immediately following the Closing, the Company will be the sole manager
of and control OpCo, and will own
The current shares of common stock of the Company will be reclassified as Class A Common Stock. Each share of Class B Common Stock has no economic rights but entitles its holder to one vote on all matters to be voted on by stockholders generally. Holders of shares of Class A Common Stock and shares of Class B Common Stock will vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law or by our Proposed Second A&R Charter (as defined below). We do not intend to list any shares of Class B Common Stock on any exchange.
Following this Closing, under the amended and restated limited liability company agreement of OpCo (the “OpCo A&R LLC Agreement”), each holder of OpCo Class B Units will, subject to certain timing procedures and other conditions set forth therein, have the right (the “OpCo Exchange Right”) to exchange all or a portion of its OpCo Class B OpCo Units for, at OpCo’s election, (i) shares of our Class A Common Stock at an exchange ratio of one share of Class A Common Stock for each OpCo Class B Unit exchanged, subject to conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions, or (ii) an equivalent amount of cash. OpCo will determine whether to pay cash in lieu of the issuance of shares of Class A Common Stock based on facts in existence at the time of the decision, which we expect would include the relative value of the Class A Common Stock (including trading prices for the Class A Common Stock at the time), the cash purchase price, the availability of other sources of liquidity (such as an issuance of stock) to acquire the OpCo Class B Units and alternative uses for such cash. Additionally, the holders of OpCo Class B Units will be required to exchange all of their OpCo Class B Units (a “Mandatory Exchange”) upon the occurrence of the following: (i) upon the direction of the Company with the consent of at least fifty percent (50%) of the holders of OpCo Class B Units; or (ii) upon the one-year anniversary of the Mandatory Conversion Trigger Date.
In connection with any exchange of OpCo Class B Units pursuant to the OpCo Exchange Right or acquisition of OpCo Class B Units pursuant to a Mandatory Exchange, a corresponding number of shares of Class B Common Stock held by the relevant OpCo unitholder will be cancelled.
19
Promissory Note”) to the extent the amount available for payment
of the Cash Consideration at Closing (the “Minimum Cash Amount”) is less than $
Immediately following the Closing, the Company will be the sole manager
of and control OpCo, and will own
The current shares of common stock of the Company will be reclassified as Class A Common Stock. Each share of Class B Common Stock has no economic rights but entitles its holder to one vote on all matters to be voted on by stockholders generally. Holders of shares of Class A Common Stock and shares of Class B Common Stock will vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law or by our Proposed Second A&R Charter (as defined below). We do not intend to list any shares of Class B Common Stock on any exchange.
Following this Closing, under the amended and restated limited liability company agreement of OpCo (the “OpCo A&R LLC Agreement”), each holder of OpCo Class B Units will, subject to certain timing procedures and other conditions set forth therein, have the right (the “OpCo Exchange Right”) to exchange all or a portion of its OpCo Class B OpCo Units for, at OpCo’s election, (i) shares of our Class A Common Stock at an exchange ratio of one share of Class A Common Stock for each OpCo Class B Unit exchanged, subject to conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions, or (ii) an equivalent amount of cash. OpCo will determine whether to pay cash in lieu of the issuance of shares of Class A Common Stock based on facts in existence at the time of the decision, which we expect would include the relative value of the Class A Common Stock (including trading prices for the Class A Common Stock at the time), the cash purchase price, the availability of other sources of liquidity (such as an issuance of stock) to acquire the OpCo Class B Units and alternative uses for such cash. Additionally, the holders of OpCo Class B Units will be required to exchange all of their OpCo Class B Units (a “Mandatory Exchange”) upon the occurrence of the following: (i) upon the direction of the Company with the consent of at least fifty percent (50%) of the holders of OpCo Class B Units; or (ii) upon the one-year anniversary of the Mandatory Conversion Trigger Date.
In connection with any exchange of OpCo Class B Units pursuant to the OpCo Exchange Right or acquisition of OpCo Class B Units pursuant to a Mandatory Exchange, a corresponding number of shares of Class B Common Stock held by the relevant OpCo unitholder will be cancelled.
At Closing, the Company and the Seller will enter into a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which the Company has agreed to provide Seller with certain registration rights with respect to the shares of Class A Common Stock issuable upon exercise of the OpCo Exchange Right, including filing with the SEC an initial Registration Statement on Form S-1 covering the resale by the Seller of the Share Consideration so as to permit their resale under Rule 415 under the Securities Act, no later than thirty (30) days following the Closing, use its commercially reasonable efforts to have the initial Registration Statement declared effective by the SEC as soon as reasonably practicable following the filing thereof with the SEC and use commercially reasonable efforts to convert the Form S-1 (and any subsequent Registration Statement) to a shelf registration statement on Form S-3 as promptly as practicable after the Company is eligible to use a Form S-3 Shelf.
In certain circumstances, the Seller can demand the Company’s assistance with underwritten offerings, and the Seller will be entitled to certain piggyback registration rights.
In connection with the MIPA, OpCo and Seller agreed to cause the execution of an Option Agreement (the “Option Agreement”) by and between the Company (or a newly created special purpose entity of the Company) and Pogo Royalty, LLC, a Texas limited liability company (“Pogo Royalty”), an affiliate of Seller. Pogo Royalty owns certain overriding royalty interests in certain oil and gas assets owned by Pogo Resources, LLC (the “ORR Interest”). Pursuant to the Option Agreement, Pogo Royalty will grant an irrevocable and exclusive option to the Company to purchase the ORR Interest for the Option Price (defined below) at any time prior to the date that is twelve (12) months following the effective date of the Option Agreement. The option will not be exercisable while the Seller Promissory Note is outstanding.
20
The purchase price for the ORR Interest upon exercise of the option
shall be (i) (1) $
The Option Agreement and the option will immediately terminate upon the earlier of (a) Pogo Royalty’s transfer or assignment of all of the ORR Interest in accordance with the Option Agreement and (b) the date that is twelve (12) months following the effective date of the Option Agreement.
In connection with the MIPA, at the Closing, the Company will enter into director nomination and board observer agreement (the “Board Designation Agreement”) with CIC. Pursuant to the Board Designation Agreement, CIC will have the right, at any time CIC beneficially owns capital stock of the Company, to appoint two board observers to attend all meetings of the board of directors of the Company. In addition, after the time of the conversion of the OpCo Preferred Units owned by Seller, CIC will have the right to nominate a certain number of members of the board of directors depending on its ownership percentage of Class A Common Stock as further provided in the Board Designation Agreement.
The Company has agreed to, at Closing, enter into and cause certain
of its founders (the “Founders”) to enter into a backstop agreement (the “Backstop Agreement”) with Seller whereby
the Seller will have the right (“Put Right”) to cause the Founders to purchase Seller’s OpCo Preferred Units at
a purchase price per unit equal to $
As security that the Founders will be able to purchase the OpCo Preferred
Units upon exercise of the Put Right, the Founders will agree to place
On October 17, 2023,
the Sponsor’s designee deposited $
NOTE 8 — NOTES PAYABLE
During the nine months ended September 30, 2023,
the Company entered into various unsecured promissory notes with existing investors of the Company for total principal of $
The promissory notes bear interest at the greater
of
21
The Company valued the warrants using the trading
prices of the Public Warrants, which mirror the terms of the note payable warrants. The Company also estimated the fair value of the redemption
put using a present value calculation for the time from the estimated closing date of the MIPA through the 18 month redemption date, an
estimated discount rate of
The Company is amortizing the debt discount through
a period of six months from the estimated closing date of the MIPA. The Company recognized amortization of debt discount of $
On August 28, 2023, the Company entered
into a commitment letter (the “Debt Commitment Letter”) with First International Bank & Trust
(“FIBT” or “Lender”), pursuant to which FIBT has agreed to provide the Company with a senior secured term
loan in the amount of $
The obligations of FIBT to provide the Credit Facility were initially set to terminate on October 30, 2023 if the Closing Date has not occurred by such date. On October 24, 2023, the Company and FIBT entered into a First Amendment to the Debt Commitment Letter whereby the termination date was extended to November 15, 2023.
NOTE 9 — SUBSEQUENT EVENTS
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the unaudited condensed consolidated financial statements were issued.
Subsequent to September
30, 2023, the Company received an additional $
On October 17, 2023,
the Sponsor’s designee deposited $
On October 30, 2023, the Company, convened and
adjourned, without conducting any other business, its special meeting of its stockholders (the “Special Meeting”) held in
connection with: (i) a proposal to approve and adopt the A&R MIPA, and the transactions contemplated thereby (the “Purchase”
and such proposal, the “Purchase Proposal”), (ii) a proposal to approve and adopt the HNR Acquisition Corp 2023 Omnibus Incentive
Plan, a copy of which is attached to the Proxy Statement (as defined below) as Annex B (the “Incentive Plan Proposal”), (iii)
a proposal to approve, for purposes of complying with NYSE American Rule 713(a), the potential and likely issuance of more than
22
Forward Purchase Agreement
On November 2, 2023, the Company entered into an agreement with (i) Meteora Capital Partners, LP (“MCP”), (ii) Meteora Select Trading Opportunities Master, LP (“MSTO”), and (iii) Meteora Strategic Capital, LLC (“MSC” and, collectively with MCP and MSTO, “FPA Seller”) (the “Forward Purchase Agreement”) for OTC Equity Prepaid Forward Transactions. For purposes of the Forward Purchase Agreement, the Company is referred to as the “Counterparty”. Capitalized terms used herein but not otherwise defined shall have the meanings ascribed to such terms in the Forward Purchase Agreement.
Pursuant to the terms
of the Forward Purchase Agreement, the FPA Seller intends, but is not obligated, to purchase up to
The Forward Purchase
Agreement provides for a prepayment shortfall in an amount in U.S. dollars equal to
The Forward Purchase Agreement provides that the FPA Seller will be paid directly an aggregate cash amount (the “Prepayment Amount”) equal to (x) the product of (i) the number of HNRA Shares as set forth in a Pricing Date Notice and (ii) Per-Share Redemption Price as defined in the Company’s certificate of incorporation, effective as of February 10, 2022, as amended from time to time (the “Initial Price”), less (y) the Prepayment Shortfall.
Counterparty will pay to the FPA Seller the Prepayment Amount required under the Forward Purchase Agreement directly from the Counterparty’s Trust Account maintained by Continental Stock Transfer and Trust Company holding the net proceeds of the sale of the units in Counterparty’s initial public offering and the sale of private placement warrants (the “Trust Account”), no later than the earlier of (a) one Local Business Day after the Closing Date and (b) the date any assets from the Trust Account are disbursed in connection with the Purchase & Sale; except that to the extent that the Prepayment Amount is to be paid from the purchase of Additional Shares by FPA Seller, such amount will be netted against such proceeds, with FPA Seller being able to reduce the purchase price for the Additional Shares by the Prepayment Amount. For the avoidance of doubt, any Additional Shares purchased by the FPA Seller will be included in the Number Purchased Amount under the Forward Purchase Agreement for all purposes, including for determining the Prepayment Amount.
Following the Closing,
the reset price (the “Reset Price”) will be $
23
From time to time and on any date following the Trade Date (any such date, an “OET Date”) and subject to the terms and conditions in the Forward Purchase Agreement, FPA Seller may, in its absolute discretion, terminate the Transaction in whole or in part by providing written notice to Counterparty (the “OET Notice”), by the later of (a) the fifth Local Business Day following the OET Date and (b) no later than the next Payment Date following the OET Date, (which shall specify the quantity by which the Number of Shares shall be reduced (such quantity, the “Terminated Shares”)). The effect of an OET Notice shall be to reduce the Number of Shares by the number of Terminated Shares specified in such OET Notice with effect as of the related OET Date. As of each OET Date, Counterparty shall be entitled to an amount from FPA Seller, and the FPA Seller shall pay to Counterparty an amount, equal to the product of (x) the number of Terminated Shares and (y) the Reset Price in respect of such OET Date. The payment date may be changed within a quarter at the mutual agreement of the parties.
The “Valuation Date” will be the earlier to occur of (a) the date that is three (3) years after the date of the closing of the Purchase & Sale (the date of the closing of the Purchase & Sale, the “Closing Date”) pursuant to the A&R MIPA, (b) the date specified by FPA Seller in a written notice to be delivered to Counterparty at FPA Seller’s discretion (which Valuation Date shall not be earlier than the day such notice is effective) after the occurrence of any of (w) a VWAP Trigger Event, (x) a Delisting Event, (y) a Registration Failure or (z) unless otherwise specified therein, upon any Additional Termination Event, and (c) the date specified by FPA Seller in a written notice to be delivered to Counterparty at FPA Seller’s sole discretion (which Valuation Date shall not be earlier than the day such notice is effective). The Valuation Date notice will become effective immediately upon its delivery from FPA Seller to Counterparty in accordance with the Forward Share Purchase Agreement.
On the “Cash Settlement Payment Date,” which is the tenth Local Business Day immediately following the last day of the Valuation Period, the FPA Seller will remit to the Counterparty an amount equal to the Settlement Amount and will not otherwise be required to return to the Counterparty any of the Prepayment Amount and the Counterparty shall remit to the FPA Seller the Settlement Amount Adjustment; provided, that if the Settlement Amount less the Settlement Amount Adjustment is a negative number and either clause (x) of Settlement Amount Adjustment applies or the Counterparty has elected pursuant to clause (y) of Settlement Amount Adjustment to pay the Settlement Amount Adjustment in cash, then neither the FPA Seller nor the Counterparty shall be liable to the other party for any payment under the Cash Settlement Payment Date section of the Forward Purchase Agreement.
The FPA Seller has agreed to waive any redemption rights with respect to any Recycled Shares in connection with the Purchase & Sale, as well as any redemption rights under the Company’s certificate of incorporation that would require redemption by the Company. Such waiver may reduce the number of HNRA Shares redeemed in connection with the Purchase & Sale, and such reduction could alter the perception of the potential strength of the Purchase & Sale. The Forward Purchase Agreement has been structured, and all activity in connection with such agreement has been undertaken, to comply with the requirements of all tender offer regulations applicable to the Purchase & Sale, including Rule 14e-5 under the Securities Exchange Act of 1934.
FPA Funding Amount PIPE Subscription Agreements
On November 2, 2023, the Company entered into a subscription agreement (the “FPA Funding Amount PIPE Subscription Agreement”) with FPA Seller.
Pursuant to the FPA Funding
PIPE Subscription Agreement, FPA Seller agreed to subscribe for and purchase, and the Company agreed to issue and sell to FPA Seller,
on the Closing Date, an aggregate of up to
A copy of the form of FPA Funding Amount PIPE Subscription Agreement is filed herewith as Exhibit 10.2, and the foregoing description of the FPA Funding Amount PIPE Subscription Agreement is qualified in its entirety by reference thereto.
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
References in this report (the “Quarterly Report”) to “we,” “us” or the “Company” refer to HNR Acquisition Corp. References to our “management” or our “management team” refer to our officers and directors, and references to the “Sponsor” refer to HNRAC Sponsors, LLC. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Quarterly Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
Special Note Regarding Forward-Looking Statements
This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act that are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of the Company’s Annual Report on Form 10-K filed with the SEC. The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Overview
We are a newly organized blank check company incorporated on December 9, 2020 as a Delaware corporation and formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. We closed our Initial Public Offering on February 15, 2022. Our efforts to identify a prospective target business will not be limited to a particular industry or geographic region. While we may pursue an acquisition opportunity in any industry or sector, we intend to focus on assets used in exploring, developing, producing, transporting, storing, gathering, processing, fractionating, refining, distributing or marketing of natural gas, natural gas liquids, crude oil or refined products in North America.
We intend to identify and acquire a business that could benefit from a hands-on owner with extensive operational experience in the energy sector in North America and that presents potential for an attractive risk-adjusted return profile under our stewardship. The largest oil and gas companies, including ExxonMobil, Royal Dutch Shell, Chevron and BP, are projected to sell a combined $100 billion in oil and gas assets around the world as they focus on top-performing regions according to a new analysis from consulting firm Rystad (October 2020). Our management team has extensive experience in identifying and executing such potential acquisitions across the upstream and midstream energy sectors. In addition, our team has significant hands-on experience working with private companies in preparing for and executing an initial public offering and serving as active owners and directors by working closely with these companies to continue their transformations and to create value in the public markets.
We believe that our management team is well positioned to identify attractive risk-adjusted returns in the marketplace and that their contacts and transaction sources, ranging from industry executives, private owners, private equity funds, and investment bankers, will enable us to pursue a broad range of opportunities.
25
We will seek to capitalize on the extensive experience of each of the members of our management team who have, on average, more than 40 years of experience in the energy industry. Mr. Donald H. Goree, our Chairman and Chief Executive Officer has over 40 years’ experience in the oil and gas industry involving exploration and production, oil and gas pipeline construction and operations, natural gas gathering, processing and gas liquification. Mr. Goree was the Founder and President of Goree Petroleum Inc., a corporation engaged in oil and gas exploration and production in premiere basins throughout the United States for 35 years. Currently, Mr. Goree is the Founder, Chairman and Chief Executive officer of Houston Natural Resources, Inc., a global natural resource corporation located in Houston, Texas and the controlling member of our sponsor. Mr. Goree also previously served as Founder, Chairman and Chief Executive officer of Global Xchange Solutions AG., a publicly reporting corporation, private equity, investment bank and market-making firm, based in Zurich, Switzerland, with offices in Frankfurt, Germany and London, United Kingdom. Global Xchange Solutions sponsored listings of private companies to the London Stock Exchange, AIM, the Frankfurt Stock Exchange, the Berlin Stock Exchange and the Börse Stuttgart, and provided public company development and market development advice. Mr. Goree also previously served as Chairman and Chief Executive officer of Azur Holdings, Inc., a Fort Lauderdale, Florida-based, OTC-listed luxury real estate developer of mid-rise waterfront condominiums. Mr. Donald W. Orr, our President, is a degreed geologist with over 42 years of experience in petroleum geology and production operations. Mr. Orr began his career as a junior geologist with Texas Oil and Gas Corporation in 1976, and was elevated within two years to a supervisory role overseeing over five geologists on his team, most of whom had more experience than Mr. Orr. In 1979, Mr. Orr helped form American Shoreline, Inc., an independent oil and gas company. Mr. Orr formerly held a position with Seven Energy LLC, a wholly owned subsidiary of Weatherford International plc in 2005, where he pioneered numerous innovations in underbalanced drilling, or UBD, including drilling with unconventional materials and devising the methodology for unlocking the productive capacity of the Buda Lime through the use of UBD. In June 2009, Mr. Orr founded XNP Resources, LLC, an independent oil and gas company engaged in the exploration, development, production, and acquisition of oil and natural gas resources. Shortly thereafter, XNP Resources teamed up with Tahoe Energy Partners, LLC to acquire oil and gas leases for drilling in the Rocky Mountain region. At Mr. Orr’s direction, XNP Resources began acquiring a strategic leasehold position in the Sand Wash Basin in Colorado. XNP Resources was able to secure a major leasehold position in the heart of what has become the highly competitive Niobrara Shale formation in western Colorado. Since 2014, Mr. Orr has been developing an unconventional resource play in Alaska that contains over 600 billion cubic feet of gas in stacked coal reservoirs. More recently, Mr. Orr assembled a team of oil and gas professionals in order to study certain oil provinces in Colombia, South America.
The past performance of the members of our management team is not a guarantee that we will be able to identify a suitable candidate for our initial business combination or of success with respect to any business combination we may consummate. You should not rely on the historical record of the performance of our management team as indicative of our future performance. Additionally, in the course of their respective careers, members of our management team have been involved in businesses and deals that were unsuccessful. None of our officers and directors has experience with SPACs.
We intend to effectuate a business combination using cash from the proceeds of our Initial Public Offering and the sale of our capital stock, debt or a combination of cash, stock and debt.
The issuance of additional shares of our stock in a business combination:
| ● | may significantly dilute the equity interest of investors in our Initial Public Offering; |
| ● | may subordinate the rights of holders of common stock if preferred stock is issued with rights senior to those afforded our common stock; |
| ● | could cause a change of control if a substantial number of shares of our common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and could result in the resignation or removal of our present officers and directors; and |
| ● | may adversely affect prevailing market prices for our common stock and/or warrants. |
26
Similarly, if we issue debt securities, it could result in:
| ● | default and foreclosure on our assets if our operating revenues after an initial business combination are insufficient to repay our debt obligations; |
| ● | acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach certain covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant; |
| ● | our immediate payment of all principal and accrued interest, if any, if the debt security is payable on demand; |
| ● | our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding; |
| ● | our inability to pay dividends on our common stock; |
| ● | using a substantial portion of our cash flow to pay principal and interest on our debt, which will reduce the funds available for dividends on our common stock if declared, our ability to pay expenses, make capital expenditures and acquisitions, and fund other general corporate purposes; |
| ● | limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate; |
| ● | increased vulnerability to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation; |
| ● | limitations on our ability to borrow additional amounts for expenses, capital expenditures, acquisitions, debt service requirements, and execution of our strategy; and |
| ● | other disadvantages compared to our competitors who have less debt. |
As indicated in the accompanying unaudited condensed consolidated financial statements, at September 30, 2023, we had $638,736 in cash and working capital of $4,606,920, which excludes franchise and income taxes payable as the net amounts can be paid from the interest earned in the Trust Account. We expect to continue to incur significant costs in the pursuit of our acquisition plans. We cannot assure you that our plans to complete our initial business combination will be successful.
Results of Operations
We have neither engaged in any operations nor generated any revenues to date. Our only activities from inception (December 9, 2020) through September 30, 2023 were organizational activities, those necessary to prepare for our Initial Public Offering, described below, and, after our Initial Public Offering, identifying a target company for a business combination. We do not expect to generate any operating revenues until after the completion of a business combination. We generate non-operating income in the form of interest income on marketable securities held in the Trust Account. We incur expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses.
For the three months ended September 30, 2023, we had a net loss of $5,358 which consisted of $658,742 of operating costs, franchise tax expense of $50,000, amortization of debt discount of $574,280, interest expense of $89,769 and a loss on the change in fair value of warrant liabilities of $264,169. These were partially offset by $627,932 of interest income on marketable securities held in our Trust Account and a gain from the settlement of liabilities of $787,500. The Company also recognized $205,775 of income tax benefit during the three months ended September 30, 2023. For the three months ended September 30, 2022, we had a net loss of $61,629, which consisted of $409,308 of operating costs, franchise tax expense of $50,000, partially offset by $397,081 of interest income on marketable securities held in our Trust Account, respectively.
27
For the nine months ended September 30, 2023, we had a net loss of $415,775, which consisted of $1,927,221 of operating costs, $150,000 of franchise tax, amortization of debt discount of $1,073,338, interest expense on promissory notes of $182,925, a change in fair value of warrant liabilities of $171,456. These were partially offset by $2,417,604 of interest income on marketable securities held in our Trust Account and $787,500 from a gain on settlement of liabilities, respectively. The Company also recognized $130,335 of income tax expense during the months ended September 30, 2023. For the nine months ended September 30, 2022, we had operating costs of $1,215,349 and interest income on marketable securities held in our Trust Account of $524,169.
Liquidity, Capital Resources and Going Concern
On February 15, 2022, we consummated our Initial Public Offering of 8,625,000 Units at a price of $10.00 per Unit (including 1,125,000 Units from the full exercise of the underwriters’ over-allotment option), generating gross proceeds of $86,250,000. Simultaneously with the closing of the Initial Public Offering, we consummated the sale of 505,000 private placement Units to the Sponsor at a price of $10.00 per Unit, generating gross proceeds of $5,050,000. Following the Initial Public Offering, the exercise of the over-allotment option and the sale of the private placement Units, a total of $87,975,000 was placed in the Trust Account.
The Company recorded $4,793,698 of offering costs as a reduction of equity in connection with the shares of common stock previously included in the Units prior to their separation, including $1,725,000 of underwriting discount, $2,587,500 of deferred underwriting fee, and $481,198 of other offering costs.
As of September 30, 2023, we had cash of $638,736 and marketable securities held in the Trust Account of $48,974,196 consisting of U.S. Treasury Bills with a maturity of 180 days or less. Interest income on the balance in the Trust Account may be used by us to pay taxes. On May 11, 2023, in connection with the stockholder vote for the amendment to the Company’s certificate of incorporation, a total of 4,115,597 Public Shares for an aggregate redemption amount of $43,318,207 were redeemed from the Trust Account by the stockholders of the Company. The Company also withdrew a total of $711,204 from the Trust Account to pay franchise and federal income taxes. During the three months ended September 30, 2023, the Company withdrew an additional $120,000 from the Trust Account to pay franchise and income taxes.
For the nine months ended September 30, 2023, net cash used in operating activities was $1,235,439. Net loss of $415,775 was affected by interest income on marketable securities held in Trust of $2,417,604, change in fair value of warrant liabilities of $171,456, amortization of debt discount of $1,073,338, a gain of $787,500 from the settlement of liabilities and a change in working capital accounts of $1,140,646. For the nine months ended September 30, 2022, net cash used in operating activities was $1,240,547. Net loss of $840,452 was affected by interest income on marketable securities held in Trust of $524,169, and a change in working capital accounts of $124,074.
The Company had cash flows provided by investing activities of $42,686,770 during the nine months ended September 30, 2023, consisting of $43,318,207 in cash withdrawn from the Trust Account for redemptions of common stock, $831,204 of interest withdrawn for payment of taxes, partially offset by $1,462,641 related to the deposit of the SPAC extension payments into the Trust. During the nine months ended September 30, 2022 net cash used in investing activities was $87,975,000 related to the initial Trust deposit from the Company’s IPO.
The Company had cash flows used in financing activities of $40,888,207 during the nine months ended September 30, 2023 including payment of $43,318,207 for redemptions of common stock, payment of $150,000 in deferred finance costs and proceeds of $2,580,000 related to the sale of unsecured promissory notes, coupled with the issuance of warrants, to investors. During the nine months ended September 30, 2022, the Company has cash provided by financing activities of $89,229,351, primarily related to the net proceeds from the IPO of $84,319,667 and the Private Placement of $5,023,284.
We intend to use substantially all of the funds held in the Trust Account, including any amounts representing interest earned on the Trust Account (less deferred underwriting commissions and income taxes payable), to complete our business combination. To the extent that our capital stock or debt is used, in whole or in part, as consideration to complete our business combination, the remaining proceeds held in the Trust Account will be used as working capital to finance the operations of the target business or businesses, make other acquisitions and pursue our growth strategies.
28
In order to fund working capital deficiencies or finance transaction costs in connection with a business combination, our sponsor and our initial stockholders or their affiliates may, but are not obligated to, loan us funds as may be required. If we complete a business combination, we would repay such loaned amounts. In the event that a business combination does not close, we may use a portion of the working capital held outside the Trust Account to repay such loaned amounts but no proceeds from our Trust Account would be used for such repayment. Up to $1,000,000 of such loans may be convertible into warrants identical to the private placement warrants, at a price of $1.00 per warrant at the option of the lender. The warrants would be identical to the private placement warrants, including as to exercise price, exercisability and exercise period. The terms of such loans by our officers and directors, if any, have not been determined and no written agreements exist with respect to such loans. We do not expect to seek loans from parties other than our sponsor or an affiliate of our sponsor as we do not believe third parties will be willing to loan such funds and provide a waiver against any and all rights to seek access to funds in our Trust Account.
At September 30, 2023, the Company had $638,736 in cash and a working capital deficit of $4,606,920, which excludes franchise and income taxes payable as the net amounts can be paid from the interest earned in the Trust Account. The Company has incurred and expects to continue to incur significant costs in pursuit of its financing and acquisition plans. On February 5, 2023, the Company received notice from the Sponsor of its intention to extend the Combination period by three months until May 15, 2023. On February 8, 2023 in accordance with the Company’s then-effective amended and restated certificate of incorporation, the Sponsor’s designee deposited $862,500 into the Company’s Trust Account in connection with the extension. On May 11, 2023, the stockholders of the Company approved, and the Company filed with the Secretary of State of Delaware, an amendment to the Company’s certificate of incorporation to extend the date by which the Company must consummate its initial Business Combination from May 15, 2023 by up to six (6) one-month extensions to November 15, 2023, provided that the Sponsor deposits into the Trust Account the lesser of (x) $120,000, or (y) $0.04 per share for each public share of common stock outstanding as of the applicable deadline for each such one-month extension until November 15, 2023, unless the closing of the Company’s initial Business Combination shall have occurred, in exchange for a non-interest bearing, unsecured promissory note payable upon consummation of the initial Business Combination. On May 11, 2023, the Sponsor’s designee deposited $120,000 into the Trust Account, extending the date by which the Company must consummate its initial Business Combination to June 15, 2023. On June 9, 2023, the Sponsor’s designee deposited $120,000 into the Trust Account, extending the date by which the Company must consummate its initial Business Combination to July 15, 2023. On July 11, 2023, the Sponsor’s designee deposited $120,000 into the Trust Account, extending the date by which the Company must consummate its initial Business Combination to August 15, 2023. On August 7, 2023, the Sponsor’s designee deposited $120,000 into the Trust Account, extending the date by which the Company must consummate its initial Business Combination to September 15, 2023. On September 11, 2023, the Sponsor’s designee deposited $120,000 into the Trust Account, extending the date by which the Company must consummate its initial Business Combination to October 15, 2023. On October 17, 2023, the Sponsor’s designee deposited $120,000 into the Trust Account, extending the date by which the Company must consummate its initial Business Combination to November 15, 2023.
In the event the Company does not complete a Business Combination by November 15, 2023 or amend its certificate of incorporation, the Company is required to redeem the public shares sold in the Initial Public Offering. Additionally, the Company’s officers, directors and Sponsor may, but are not obligated to, loan the Company funds, from time to time or at any time, in whatever amount they deem reasonable in their sole discretion, to meet the Company’s working capital needs. Accordingly, the Company may not be able to obtain additional financing. If the Company is unable to raise additional capital, it may be required to take additional measures to conserve liquidity, which could include, but not necessarily be limited to, curtailing operations, suspending the pursuit of a potential transaction, and reducing overhead expenses. The Company cannot provide any assurance that new financing will be available to it on commercially acceptable terms, if at all. There is no assurance that the Company’s plans to consummate a Business Combination will be successful within the Combination Period. These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
29
We believe we will need to raise additional funds in order to meet the expenditures required for operating our business. If our estimate of the costs of identifying a target business, undertaking in-depth due diligence and negotiating a business combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior to our business combination. Moreover, we may need to obtain additional financing either to complete our business combination or because we become obligated to redeem a significant number of our public shares upon consummation of our business combination, in which case we may issue additional securities or incur debt in connection with such business combination. Subject to compliance with applicable securities laws, we would only complete such financing simultaneously with the completion of our business combination. If we are unable to complete our business combination because we do not have sufficient funds available to us, we will be forced to cease operations and liquidate the trust account. In addition, following our business combination, if cash on hand is insufficient, we may need to obtain additional financing in order to meet our obligations.
On October 17, 2022, the Company entered into a common stock purchase agreement (the “Common Stock Purchase Agreement”) and a related registration rights agreement (the “White Lion RRA”) with White Lion Capital, LLC, a Nevada limited liability company (“White Lion”). Pursuant to the Common Stock Purchase Agreement, the Company has the right, but not the obligation to require White Lion to purchase, from time to time, up to $150,000,000 in aggregate gross purchase price of newly issued shares of the Company’s common stock, par value $0.0001 per share, subject to certain limitations and conditions set forth in the Common Stock Purchase Agreement. Capitalized terms used but not otherwise defined herein shall have the meaning given to such terms by the Common Stock Purchase Agreement.
The Company is obligated under the Common Stock Purchase Agreement and the White Lion RRA to file a registration statement with the U.S. Securities and Exchange Commission (the “SEC”) to register the common stock under the Securities Act of 1933, as amended, for the resale by White Lion of shares of common stock that the Company may issue to White Lion under the Common Stock Purchase Agreement.
Subject to the satisfaction of certain customary conditions including, without limitation, the effectiveness of a registration statement registering the shares issuable pursuant to the Common Stock Purchase Agreement, the Company’s right to sell shares to White Lion will commence on the effective date of the registration statement and extend until December 31, 2025. During such term, subject to the terms and conditions of the Common Stock Purchase Agreement, the Company may notify White Lion when the Company exercises its right to sell shares (the effective date of such notice, a “Notice Date”). The number of shares sold pursuant to any such notice may not exceed (i) the lower of (a) $2,000,000 and (b) the dollar amount equal to the product of (1) the Effective Daily Trading Volume (2) the closing price of common stock on the Effective Date (3) 400% and (4) 30%, divided by the closing price of common stock on NYSE American preceding the Notice Date and (ii) a number of shares of common stock equal to the Average Daily Trading Volume multiplied by the Percentage Limit.
The purchase price to be paid by White Lion for any such shares will equal 96% of the lowest daily volume-weighted average price of common stock during a period of two consecutive trading days following the applicable Notice Date.
The Company will have the right to terminate the Common Stock Purchase Agreement at any time after Commencement, at no cost or penalty, upon three trading days’ prior written notice. Additionally, White Lion will have the right to terminate the Common Stock Purchase Agreement upon three days’ prior written notice to the Company if (i) there is a Fundamental Transaction, (ii) the Company is in breach or default in any material respect of the White Lion RRA, (iii) there is a lapse of the effectiveness, or unavailability of, the Registration Statement for a period of 45 consecutive trading days or for more than an aggregate of 90 trading days in any 365-day period, (iv) the suspension of trading of the common stock for a period of five consecutive trading days, (v) the material breach of the Common Stock Purchase Agreement by the Company, which breach is not cured within the applicable cure period or (vi) a Material Adverse Effect has occurred and is continuing. No termination of the Common Stock Purchase Agreement will affect the registration rights provisions contained in the White Lion RRA.
In consideration for the commitments of White Lion, as described above, the Company has agreed that it will issue to White Lion shares of common stock having a value of $1,500,000 based on the volume-weighted average price of the common stock on a date which is the earlier to occur of (i) two Trading Days prior to the filing of the registration statement it will file pursuant to the White Lion RRA and (ii) after the closing of any business combination agreement, the Trading Day prior to the Investor sending a written request to the Company for such commitment shares, and to include such shares in the registration statement it will file pursuant to the White Lion RRA.
30
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of September 30, 2023.
Contractual obligations
We currently pay our Sponsor $5,000 per month for providing us with office space, utilities, secretarial and administrative services. We also agreed to pay Sponsor an additional $5,000 per month for such services, but have agreed with Sponsor to defer payment to Sponsor of such additional accrued amounts until the closing of the MIPA. The Company has paid $169,250 to the Sponsor through September 30, 2023 for administrative support services and owes the Sponsor $50,000 as of September 30, 2023.
The Company has entered into various working capital unsecured promissory notes with existing investors of the Company, totaling $3,584,000 to date. These notes will mature at the five year anniversary of the MIPA. The investor may demand repayment beginning six months from the closing date of the MIPA.
Critical Accounting Policies
The preparation of condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following critical accounting policies:
Warrant Liabilities
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock, among other conditions for equity classification. This assessment is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
In accordance with Accounting Standards Codification ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, the warrants issued in connection with the working capital loans do not meet the criteria for equity classification due to the redemption right whereby the holder may require the Company to settle the warrant in cash 18 months after the closing of the MIPA, and must be recorded as liabilities. The warrants are measured at fair value at inception and at each reporting date in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in the statements of operations in the period of change.
Common Stock Subject to Possible Redemption:
The Company accounts for its common stock subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity”. Common stock subject to mandatory redemption (if any) are classified as a liability instrument and are measured at fair value. Conditionally redeemable common stock (including common stock that feature redemption rights that are either within the control of the holder or subject to the redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. The Company’s common stock issued in the Initial Public Offering feature certain redemption rights that are considered to be outside of the Company’s control and subject to the occurrence of uncertain future events. Accordingly, the shares of common stock subject to possible redemption will be presented at redemption value as temporary equity, outside of the stockholders’ equity section of the Company’s balance sheet upon closing of the Initial Public Offering.
31
Net Loss Per Share of Common Stock:
Net loss per share of common stock is computed by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period, excluding shares of common stock subject to forfeiture. The Company has not considered the effect of the warrants sold in the Initial Public Offering and private placement warrants to purchase an aggregate of 6,847,500 shares and warrants to purchase 2,734,000 issued in connection with working capital loans in the calculation of diluted income per share, since the exercise of the warrants is contingent upon the occurrence of future events. As a result, diluted loss per share of common stock is the same as basic loss per share of common stock for the period presented.
The Company’s statements of operations include a presentation of net loss per share for common stock shares subject to possible redemption in a manner similar to the two-class method of income per share. Net loss per common share, basic and diluted, for redeemable common stock is calculated by dividing the net income allocable to redeemable common stock, by the weighted average number of redeemable common shares outstanding since original issuance. Net loss per common stock, basic and diluted, for non-redeemable common stock is calculated by dividing net income allocable to non-redeemable common stock, by the weighted average number of shares of non-redeemable common stock outstanding for the periods. Shares of non-redeemable common stock include the founder shares as these common shares do not have any redemption features and do not participate in the income earned on the Trust Account.
Use of Estimates:
The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Item 3. 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 4. 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, Principal Financial and Accounting Officer), as appropriate to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer (Principal Executive Officer, Principal Financial and Accounting Officer) carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2023. Based upon his evaluation, our Chief Executive Officer (Principal Executive Officer, Principal Financial and 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, the redeemable common stock not being remeasured to redemption value accurately, accounting of complex financial instruments and certain accruals not initially being recorded in a timely manner 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 consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our financial position, results of operations and cash flows for the period presented.
32
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 consolidated 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 and certain accruals not being recorded in a timely manner constituted a material weakness as defined in the SEC regulations.
Changes in Internal Control 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 consolidated 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 September 30, 2023. In making these assessments, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission 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 September 30, 2023 due to the material weakness in our internal control over financial reporting described above. We plan to enhance our processes to identify and appropriately recognize accounting transactions in a more timely manner, and understand the nuances of the complex accounting standards that apply to our consolidated financial statements.
Our plans at this time include hiring additional accounting staff and 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.
33
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors disclosed in our annual report as amended on Form 10-K filed with the SEC on March 31, 2023, as amended on Form 10-K/A filed with the SEC on May 24, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In July 2023, the Company issued 150,000 warrants to a third-party having terms substantially similar to the Private Placement Warrants in connection with the receipt of $150,000 in cash and the issuance of a promissory note.
In July 2023, the Company issued 150,000 warrants to a third-party having terms substantially similar to the Private Placement Warrants in connection with the receipt of $150,000 in cash and the issuance of a promissory note.
In July 2023, the Company issued 50,000 warrants to a third-party having terms substantially similar to the Private Placement Warrants in connection with the receipt of $50,000 in cash and the issuance of a promissory note.
In July 2023, the Company issued 25,000 warrants to a stockholder having terms substantially similar to the Private Placement Warrants in connection with the receipt of $25,000 in cash and the issuance of a promissory note.
In July 2023, the Company issued 10,000 warrants to a third-party having terms substantially similar to the Private Placement Warrants in connection with the receipt of $10,000 in cash and the issuance of a promissory note.
In August 2023, the Company issued 50,000 warrants to a third-party having terms substantially similar to the Private Placement Warrants in connection with the receipt of $50,000 in cash and the issuance of a promissory note.
In August 2023, the Company issued 150,000 warrants to a third-party having terms substantially similar to the Private Placement Warrants in connection with the receipt of $150,000 in cash and the issuance of a promissory note.
In August 2023, the Company issued 100,000 warrants to a third-party having terms substantially similar to the Private Placement Warrants in connection with the receipt of $100,000 in cash and the issuance of a promissory note.
In September 2023, the Company issued 50,000 warrants to a third-party having terms substantially similar to the Private Placement Warrants in connection with the receipt of $50,000 in cash and the issuance of a promissory note.
In September 2023, the Company issued 20,000 warrants to a third-party having terms substantially similar to the Private Placement Warrants in connection with the receipt of $20,000 in cash and the issuance of a promissory note.
All issuances of warrants described above were not registered under the Securities Act in reliance upon the exemption provided in Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
34
Item 6. Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
| * | Filed herewith. |
| ** | Furnished herewith. |
35
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| HNR ACQUISITION CORP | ||
| Date: November 9, 2023 | By: | /s/ Donald Goree |
| Name: | Donald Goree | |
| Title: | Chief Executive Officer and | |
| Chief Financial Officer | ||
| (Principal Executive Officer, | ||
| Principal Financial and Accounting Officer) | ||
36