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 | ||
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 ☐ No
As of May 9, 2025,
EON Resources, Inc.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2025
TABLE OF CONTENTS
i
Part I. Financial Information
Item 1. Financial Statements
EON RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2025 | December 31, 2024 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Crude Oil and natural gas sales | ||||||||
| Other | ||||||||
| Short-term derivative instrument asset | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Crude oil and natural gas properties, successful efforts method: | ||||||||
| Proved Properties | ||||||||
| Accumulated depreciation, depletion, amortization and impairment | ( | ) | ( | ) | ||||
| Total oil and natural gas properties, net | ||||||||
| Other property, plant and equipment, net | ||||||||
| Long-term derivative instrument asset | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable – related parties | ||||||||
| Accrued liabilities and other | ||||||||
| Revenue and royalties payable | ||||||||
| Revenue and royalties payable - Related Parties | ||||||||
| Deferred underwriting fee payable | ||||||||
| Related party notes payable, net of discount | ||||||||
| Current portion of warrant liability | ||||||||
| Current portion of long term debt | ||||||||
| Forward purchase agreement liability | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, net of current portion and discount | ||||||||
| Convertible note liability | ||||||||
| Deferred tax liability | ||||||||
| Asset retirement obligations | ||||||||
| Other liabilities | ||||||||
| Total for non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock, $ | ||||||||
| Class A Common stock, $ | ||||||||
| Class B Common stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity attributable to EON Resources, Inc. | ||||||||
| Noncontrolling interest | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
EON RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months Ended March 31, 2025 | Three months Ended March 31, 2024 | |||||||
| Revenues | ||||||||
| Crude oil | $ | $ | ||||||
| Natural gas and natural gas liquids | ||||||||
| Gain (loss) on derivative instruments, net | ( | ) | ( | ) | ||||
| Other revenue | ||||||||
| Total revenues | ||||||||
| Expenses | ||||||||
| Production taxes, transportation and processing | ||||||||
| Lease operating | ||||||||
| Depletion, depreciation and amortization | ||||||||
| Accretion of asset retirement obligations | ||||||||
| General and administrative | ||||||||
| Total expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other Income (expenses) | ||||||||
| Change in fair value of warrant liability | ( | ) | ( | ) | ||||
| Change in fair value of convertible note liability | ( | ) | ||||||
| Change in fair value of FPA liability | ( | ) | ||||||
| Gain on extinguishment of liabilities | ||||||||
| Amortization of debt discount | ( | ) | ( | ) | ||||
| Interest expense | ( | ) | ( | ) | ||||
| Interest income | ||||||||
| Other Income (expense) | ||||||||
| Total other expenses | ( | ) | ( | ) | ||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Income tax benefit | ||||||||
| Net loss | ( | ) | ( | ) | ||||
| Net loss attributable to noncontrolling interests | ||||||||
| Net loss attributable to EON Resources, Inc. | $ | ( | ) | $ | ( | ) | ||
| Weighted average share outstanding, common stock - basic and diluted | ||||||||
| Net loss per share of common stock – basic and diluted | $ | ( | ) | $ | ( | ) | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
EON RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Total | ||||||||||||||||||||||||||||||||||||
| Stockholders’ | ||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | (Deficit) Equity Attributable to EON | Total Stockholders’ | ||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Paid-In | Accumulated | Resources | Noncontrolling | (Deficit) | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Inc. | Interest | Equity | ||||||||||||||||||||||||||||
| Balance – December 31, 2024 | $ | $ | $ | $ | ( | ) | $ | ) | $ | $ | ||||||||||||||||||||||||||
| Share-based compensation | - | |||||||||||||||||||||||||||||||||||
| Shares issued under equity line of credit | ||||||||||||||||||||||||||||||||||||
| Shares issued for conversion of note payables | ||||||||||||||||||||||||||||||||||||
| Shares issued to settle accounts payable | ||||||||||||||||||||||||||||||||||||
| Class B exchanged for Class A | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance – March 31, 2025 | $ | - | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||
| Balance – December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
| Share-based compensation | - | |||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance – March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
EON RESOURCES, INC.
(FORMERLY HNR ACQUISITION CORP)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
| Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation, depletion, and amortization expense | ||||||||
| Accretion of asset retirement obligations | ||||||||
| Equity-based compensation | ||||||||
| Deferred income tax benefit | ( | ) | ( | ) | ||||
| Amortization of debt issuance costs | ||||||||
| Gain on extinguishment of liabilities | ( | ) | ||||||
| Change in fair value of unsettled derivatives | ( | ) | ||||||
| Change in fair value of convertible note liability | ||||||||
| Change in fair value of warrant liability | ||||||||
| Change in fair value of forward purchase agreement | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued liabilities and other | ||||||||
| Royalties payable | ||||||||
| Royalties payable, related party | ||||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Investing activities: | ||||||||
| Development of crude oil and gas properties | ( | ) | ( | ) | ||||
| Purchases of other equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Repayments of long-term debt | ( | ) | ( | ) | ||||
| Proceeds from short-term notes payable | ||||||||
| Repayment of short-term notes payable | ( | ) | ||||||
| Proceeds from related party notes payable | ||||||||
| Repayment of related party notes payable | ( | ) | ||||||
| Proceeds from sale of common stock | ||||||||
| Net cash provide by (used in) financing activities | ( | ) | ||||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Cash paid during the period for: | ||||||||
| Interest on debt | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Debt discount related to warrants issued with Private Notes Payable | $ | $ | ||||||
| Accrued purchases of property and equipment at period end | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
EON RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
Organization and General
EON Resources, Inc. (the “Company”) was incorporated in Delaware on December 9, 2020. The Company was 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”). On September 16, 2024, the Company filed a Certificate of Amendment (the “Certificate of Amendment”) to its Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to change the Company’s name from “HNR Acquisition Corp” to “EON Resources Inc.”, effective on September 17, 2024.
Effective November 15, 2023, the Company completed its initial business combination. Through its subsidiary Pogo Resources, LLC, a Texas limited liability Company “(“Pogo” or “Pogo Resources”) and its subsidiary LH Operating, LLC, a Texas limited liability company “(“LHO”), the Company is an independent oil and natural gas company focused on the acquisition, development, exploration, and production of oil and natural gas properties in the Permian Basin. The Permian Basin is located in west Texas and southeastern New Mexico and is characterized by high oil and liquids-rich natural gas content, multiple vertical and horizontal target horizons, extensive production histories, long-lived reserves and historically high drilling success rates. The Company’s properties are in the Grayburg-Jackson Field in Eddy County, New Mexico, which is a sub-area of the Permian Basin. The Company focuses exclusively on vertical development drilling.
Going Concern Considerations
At March 31, 2025, the Company had $
The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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.
5
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 April 16, 2025. The interim results for the three months ended March 31, 2025 are not necessarily indicative of the results to be expected for the year ending December 31, 2025 or for any future periods.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Segments Reporting
Segment information is prepared on the same basis
that our CEO, who is our Chief Operating Decision Maker (“CODM”), manages our segments, evaluates financial results, and makes
key operating decisions. The Company has
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.
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. Significant estimates and assumptions reflected in the financial statements include: i) estimates of proved reserves of oil and natural gas, which affect the calculation of depletion, depreciation, and amortization (“DD&A”) and impairment of proved oil and natural gas properties, ii) impairment of undeveloped properties and other assets, iii) depreciation of property and equipment; and iv) the valuation of commodity derivative instruments. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ materially from management’s estimates using different assumptions or under different conditions. Future production may vary materially from estimated oil and natural gas proved reserves. Actual future prices may vary significantly from price assumptions used for determining proved reserves and for financial reporting.
6
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’s Class B Common Stock does not have economic rights to the undistributed earnings of the Company, and are not considered participating securities under ASC 260. As such, they are excluded from the calculation of net income (loss) per common share.
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
Cash
The Company considers all cash on hand, depository accounts held by banks, money market accounts and investments with an original maturity of three months or less to be cash equivalents. The Company’s cash and cash equivalents are held in financial institutions in amounts that exceed the insurance limits of the Federal Deposit Insurance Corporation. The Company believes its counterparty risks are minimal based on the reputation and history of the institutions selected.
Accounts Receivable
Accounts receivable consist of receivables from crude oil and natural gas purchasers and are generally uncollateralized. Accounts receivables are typically due within 30 to 60 days of the production date and 30 days of the billing date and are stated at amounts due from purchasers and industry partners. Amounts are considered past due if they have been outstanding for 60 days or more. No interest is typically charged on past due amounts.
The Company reviews its need for an allowance for doubtful accounts on a periodic basis and determines the allowance, if any, by considering the length of time past due, previous loss history, future net revenues associated with the debtor’s ownership interest in oil and natural gas properties operated by the Company and the debtor’s ability to pay its obligations, among other things. The Company believes its accounts receivable are fully collectible. Accordingly, no allowance for doubtful accounts has been provided.
As of March 31, 2025
and December 31, 2024, the Company had approximately
Crude Oil and Natural Gas Properties
The Company accounts for its crude oil and natural gas properties under the successful efforts method of accounting. Under this method, costs of proved developed producing properties, successful exploratory wells and developmental dry hole costs are capitalized. Internal costs that are directly related to acquisition and development activities, including salaries and benefits, are capitalized. Internal costs related to production and similar activities are expensed as incurred. Capitalized costs are depleted by the unit-of-production method based on estimated proved developed producing reserves. The Company calculates quarterly depletion expense by using the estimated prior period-end reserves as the denominator. The process of estimating and evaluating crude oil and natural gas reserves is complex, requiring significant decisions in the evaluation of available geological, geophysical, engineering, and economic data. The data for a given property may also change substantially over time because of numerous factors, including additional development activity, evolving production history and a continual reassessment of the viability of production under changing economic conditions. As a result, revisions in existing reserve estimates occur. Capitalized development costs of producing oil and natural gas properties are depleted over proved developed reserves and leasehold costs are depleted over total proved reserves. Upon the sale or retirement of significant portions of or complete fields of depreciable or depletable property, the net book value thereof, less proceeds or salvage value, is recognized as a gain or loss.
7
Exploration costs, including geological and geophysical expenses, seismic costs on unproved leaseholds and delay rentals are expensed as incurred. Exploratory well drilling costs, including the cost of stratigraphic test wells, are initially capitalized, but charged to expense if the well is determined to be economically nonproductive. The status of each in-progress well is reviewed quarterly to determine the proper accounting treatment under the successful efforts method of accounting. Exploratory well costs continue to be capitalized so long as the Company has identified a sufficient quantity of reserves to justify completion as a producing well, is making sufficient progress assessing reserves with economic and operating viability, and the Company remains unable to make a final determination of productivity.
If an in-progress exploratory well is found to be economically unsuccessful prior to the issuance of the financial statements, the costs incurred prior to the end of the reporting period are charged to exploration expense. If the Company is unable to make a final determination about the productive status of a well prior to issuance of the financial statements, the costs associated with the well are classified as suspended well costs until the Company has had sufficient time to conduct additional completion or testing operations to evaluate the pertinent geological and engineering data obtained. At the time the Company can make a final determination of a well’s productive status, the well is removed from suspended well status and the resulting accounting treatment is recorded.
The Company recognized
depreciation, depletion, and amortization expense totaling $
Impairment of Oil and Gas Properties
Proved oil and natural gas properties are reviewed for impairment when events and circumstances indicate a possible decline in the recoverability of the carrying amount of such property. The Company estimates the expected future cash flows of its oil and natural gas properties and compares the undiscounted cash flows to the carrying amount of the oil and natural gas properties, on a field-by-field basis, to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, the Company will write down the carrying amount of the oil and natural gas properties to estimated fair value.
The Company did not recognize any impairment of oil and natural gas properties in the periods presented.
Asset Retirement Obligations
The Company recognizes the fair value of an asset retirement obligation (“ARO”) in the period in which it is incurred if a reasonable estimate of fair value can be made. The asset retirement obligation is recorded as a liability at its estimated present value, with an offsetting increase recognized in oil and natural gas properties on the consolidated balance sheets. Periodic accretion of the discounted value of the estimated liability is recorded as an expense in the consolidated statements of operations.
Other Property and Equipment, net
Other property and equipment are recorded at cost. Other property and equipment are depreciated over its estimated useful life on a straight-line basis. The Company expenses maintenance and repairs in the period incurred. Upon retirements or dispositions of assets, the cost and related accumulated depreciation are removed from the consolidated balance sheet with the resulting gains or losses, if any, reflected in operations.
Materials and supplies are stated at the lower of cost or market and consist of oil and gas drilling or repair items such a tubing, casing, and pumping units. These items are primarily acquired for use in future drilling or repair operations and are carried at lower of cost or market.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered impaired, the impairment to be recorded is measured by the amount by which the carrying amount of the asset exceeds its estimated fair value. The estimated fair value is determined using either a discounted future cash flow model or another appropriate fair value method.
8
Derivative Instruments
The Company uses derivative financial instruments to mitigate its exposure to commodity price risk associated with oil prices. The Company’s derivative financial instruments are recorded on the consolidated balance sheets as either an asset or a liability measured at fair value. The Company has elected not to apply hedge accounting for its existing derivative financial instruments, and as a result, the Company recognizes the change in derivative fair value between reporting periods currently in its consolidated statements of operations. The fair value of the Company’s derivative financial instruments is determined using industry-standard models that consider various inputs including: (i) quoted forward prices for commodities, (ii) time value of money and (iii) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Realized gains and losses from the settlement of derivative financial instruments and unrealized gains and unrealized losses from valuation changes in the remaining unsettled derivative financial instruments are reported in a single line item as a component of revenues in the consolidated statements of operations. Cash flows from derivative contract settlements are reflected in operating activities in the accompanying consolidated statements of cash flows. See Note 4 for additional information about the Company’s derivative instruments.
The Company’s credit risk related to derivatives is a counterparties’ failure to perform under derivative contracts owed to the Company. The Company uses credit and other financial criteria to evaluate the credit standing of, and to select, counterparties to its derivative instruments. Although the Company does not obtain collateral or otherwise secure the fair value of its derivative instruments, associated credit risk is mitigated by the Company’s credit risk policies and procedures.
The Company has entered into International Swap Dealers Association Master Agreements (“ISDA Agreements”) with its derivative counterparty. The terms of the ISDA Agreements provide the Company and the counterparty with rights of set off upon the occurrence of defined acts of default by either the Company or a counterparty to a derivative, whereby the party not in default may set off all derivative liabilities owed to the defaulting party against all derivative asset receivables from the defaulting party.
Product Revenues
The Company accounts for sales in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Revenue is recognized when the Company satisfies a performance obligation in an amount reflecting the consideration to which it expects to be entitled. The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when the performance obligation is satisfied.
The Company enters into contracts with customers to sell its oil and natural gas production. Revenue from these contracts is recognized when the Company’s performance obligations under these contracts are satisfied, which generally occurs with the transfer of control of the oil and natural gas to the purchaser. Control is generally considered transferred when the following criteria are met: (i) transfer of physical custody, (ii) transfer of title, (iii) transfer of risk of loss and (iv) relinquishment of any repurchase rights or other similar rights. Given the nature of the products sold, revenue is recognized at a point in time based on the amount of consideration the Company expects to receive in accordance with the price specified in the contract. Consideration under oil and natural gas marketing contracts is typically received from the purchaser one to two months after production.
Most of the Company’s oil marketing contracts transfer physical custody and title at or near the wellhead or a central delivery point, which is generally when control of the oil has been transferred to the purchaser. The majority of the oil produced is sold under contracts using market-based pricing, which price is then adjusted for differentials based upon delivery location and oil quality. To the extent the differentials are incurred at or after the transfer of control of the oil, the differentials are included in oil revenues on the statements of operations, as they represent part of the transaction price of the contract. If other related costs are incurred prior to the transfer of control of the oil, those costs are included in production taxes, transportation and processing expenses on the Company’s consolidated statements of operations, as they represent payment for services performed outside of the contract with the customer.
9
The Company’s natural gas is sold at the lease location. Most of the Company’s natural gas is sold under gas purchase agreements. Under the gas purchase agreements, the Company receives a percentage of the net production from the sale of the natural gas and residue gas, less associated expenses incurred by the buyer.
The Company does not disclose the value of unsatisfied performance obligations under its contracts with customers as it applies the practical expedient in accordance with ASC 606. The expedient, as described in ASC 606-10-50-14(a), applies to variable consideration that is recognized as control of the product is transferred to the customer. Since each unit of product represents a separate performance obligation, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required.
Customers
The Company sold
Warranty Obligations
The Company provides an assurance-type warranty that guarantees its products comply with agreed-upon specifications. This warranty is not sold separately and does not convey any additional goods or services to the customer; therefore, the warranty is not considered a separate performance obligation. As the Company typically incurs minimal claims under the warranties, no liability is estimated at the time goods are delivered, but rather at the point of a claim.
Other Revenue
Other revenue is generated from the fees the Company charges a single customer for the disposal of water, saltwater, brine, brackish water, and other water (collectively, “Water”) into the Company’s water injection system. Revenue recognized under the agreement is variable in nature and primarily based on the volume of Water accepted during the period.
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 Private Notes Payable 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 Membership Interest Purchase Agreement (“MIPA”) whereby the Company acquired Pogo and LHO, 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. The Public Warrants issued in connection with the Company’s initial public offering are classified as equity instruments.
10
Forward Purchase Agreement Valuation
The Company has determined that the Forward Purchase Agreement Put Option, including the Maturity Consideration, within the Forward Purchase Agreement is (i) a freestanding financial instrument and (ii) a liability (i.e., an in-substance written put option). This liability was recorded as a liability at fair value on the consolidated balance sheet as of the reporting date in accordance with ASC 480. The fair value of the liability was estimated using a Monte-Carlo Simulation in a risk-neutral framework. Specifically, the future stock price is simulated assuming a Geometric Brownian Motion (“GBM”). For each simulated path, the forward purchase value is calculated based on the contractual terms and then discounted back to present. Finally, the value of the forward is calculated as the average present value over all simulated paths. The model also considered the likelihood of a dilutive offering of common stock.
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 $
Income Taxes
The Company follows the asset and liability method
of accounting for income taxes under FASB ASC 740, “Income Taxes.” 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. The Company is subject
to income tax examinations by major taxing authorities since inception. The Company’s effective tax rate was approximately
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 March 31, 2025 and December 31, 2024. 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 March 31, 2025 and December 31, 2024. The Company is currently not aware of any issues under review that could result in significant payments, accruals, or material deviation from its position.
Recent Accounting Pronouncements
In December 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-09, Income Taxes (Topic 740) — Improvements to Income Tax Disclosures. Under this ASU, entities must disclose, on an annual basis, specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. In addition, ASU 2023-09 requires entities to disclose additional information about income taxes paid. ASU 2023-09 is effective for financial statements for annual periods beginning after December 15, 2024. The Company is currently evaluating the potential impact of adopting this guidance on the consolidated financial statements and the notes to consolidated financial statements.
In November of 2024, the FASB issued ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. Under this ASU entities must disclose for interim and annual reporting periods, in the notes to financial statements, additional information about specific expense categories. The amendments in this update are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Entities are permitted to apply either the prospective or retrospective transition methods. The Company is currently evaluating the impact of adopting this guidance on the consolidated financial statements and the notes to consolidated financial statements.
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Other than described above, 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 — DERIVATIVES
Derivative Activities
The Company is exposed to volatility in market prices and basis differentials for natural gas, oil and NGLs, which impacts the predictability of its cash flows related to the sale of those commodities. These risks are managed by the Company’s use of certain derivative financial instruments. The Company has historically used crude diff swaps, fixed price swaps, and costless collars. As of March 31, 2025, the Company’s derivative financial instruments consisted of costless collars and crude diff swaps, which are described below:
Costless Collars
Arrangements that contain a fixed floor price (“purchased put option”) and a fixed ceiling price (“sold call option”) based on an index price which, in aggregate, have no net cost. At the contract settlement date, (1) if the index price is higher than the ceiling price, the Company pays the counterparty the difference between the index price and ceiling price, (2) if the index price is between the floor and ceiling prices, no payments are due from either party, and (3) if the index price is below the floor price, the Company will receive the difference between the floor price and the index price.
Additionally, the Company will occasionally purchase an additional call option at a higher strike price than the aforementioned fixed ceiling price. Often this is accomplished in conjunction with the costless collar at no additional cost. If an additional call option is utilized, at the contract settlement date, (1) if the index price is higher than the sold call strike price but lower than the purchased option strike price, then the Company pays the difference between the index price and the sold call strike price, (2) if the index price is higher than the purchased call price, then the Company pays the difference between the purchased call option and the sold call option, and the Company receives payment of the difference between the index price and the purchased option strike price, (3) if the index price is between the purchased put strike price and the sold call strike price, no payments are due from either party, (4) if the index price is below the floor price, the Company will receive the difference between the floor price and the index price.
The Company had no agreements in place classified as costless collars as of March 31, 2025 or December 31, 2024.
Crude price differential swaps
The Company has entered into commodity swap contracts that are effective over the next 1 to 24 months and are used to hedge against location price risk of the respective commodity resulting from supply and demand volatility and protect cash flows against price fluctuations.
The following table reflects the weighted-average price of open commodity swap contracts as of March 31, 2025:
| Commodity Swaps | ||||||||
| Weighted | ||||||||
| Volume | average | |||||||
| Period | (Bbls/month) | price ($/Bbl) | ||||||
| Q2 2025 | $ | |||||||
| Q3-Q4 2025 | $ | |||||||
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The following table reflects the weighted-average price of open commodity swap contracts as of December 31, 2024:
| Commodity Swaps | ||||||||
| Weighted | ||||||||
| Volume | average | |||||||
| Period | (Bbls/month) | price ($/Bbl) | ||||||
| Q1-Q4 2024 | $ | |||||||
| Q1-Q4 2025 | $ | |||||||
Derivative Assets and Liabilities
As of March 31, 2025
and December 31, 2024, the Company is conducting derivative activities with one counterparty, which is secured by the lender in the Company’s
bank credit facility. The Company believes the counterparty is acceptable credit risk, and the credit worthiness of the counterparty is
subject to periodic review. The assets and liabilities are netted given that all positions are held by a single counterparty and subject
to a master netting arrangement.
| As of March 31, 2025 | ||||||||||||
| Gross fair value | Amounts netted | Net fair value | ||||||||||
| Commodity derivatives: | ||||||||||||
| Short-term derivative asset | $ | $ | ( | ) | $ | |||||||
| Long-term derivative asset | ||||||||||||
| Short-term derivative liability | ( | ) | ||||||||||
| Long-term derivative liability | ||||||||||||
| Total derivative liability | $ | |||||||||||
| As of December 31, 2024 | ||||||||||||
| Gross fair value | Amounts netted | Net fair value | ||||||||||
| Commodity derivatives: | ||||||||||||
| Short-term derivative asset | $ | $ | ( | ) | $ | |||||||
| Long-term derivative asset | ||||||||||||
| Short-term derivative liability | ( | ) | ( | ) | ||||||||
| Long-term derivative liability | ||||||||||||
| Total derivative asset | $ | |||||||||||
The effects of the Company’s derivatives on the consolidated statements of operations are summarized below:
| Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | |||||||
| Total gain (loss) on unsettled derivatives | $ | $ | ( | ) | ||||
| Total gain (loss) on settled derivatives | ( | ) | ( | ) | ||||
| Net gain (loss) on derivatives | $ | ( | ) | $ | ( | ) | ||
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NOTE 5 — LONG-TERM DEBT AND NOTES PAYABLE
The Company’s debt instruments are as follows:
| March 31, 2025 | December 31, 2024 | |||||||
| Senior Secured Term Loan | $ | $ | ||||||
| Seller Promissory Note | ||||||||
| Merchant Cash Advances | ||||||||
| Convertible Notes Payable, including at $ | ||||||||
| Private loans | ||||||||
| Total | ||||||||
| Less: unamortized financing cost | ( | ) | ( | ) | ||||
| Less: current portion including amortization | ( | ) | ( | ) | ||||
| Long-term debt, net of current portion | $ | $ | ||||||
Senior Secured Term Loan Agreement
In connection with the
closing of the Company’s initial business combination (the “Closing”), the Company (for purposes of the Loan Agreement,
the “Borrower”) and First International Bank & Trust (“FIBT” or “Lender”), HNRA Upstream,
LLC, the Company’s subsidiary (“OpCo”), HNRA Partner, Inc., a subsidiary of OpCo (“SPAC Subsidiary”), the
Company, and LH Operating, LLC (for purposes of the Loan Agreement, collectively, the “Guarantors” and together with the Borrower,
the “Loan Parties”), and FIBT entered into a Senior Secured Term Loan Agreement on November 15, 2023 (the “Loan Agreement”),
setting forth the terms of a senior secured term loan facility in an aggregate principal amount of $
Pursuant to the terms
of the Term Loan Agreement, the Term Loan was advanced in one tranche on the date of closing of the Company’s initial business combination
(the “Closing Date”). The proceeds of the Term Loan were used to (a) fund a portion of the purchase price, (b) partially
fund a debt service reserve account funded with $
On the Closing Date,
Borrower deposited $
On
April 18, 2024, the Company and FIBT entered into a Second Amendment to Term Loan Agreement (the “Amendment”) effective as
of March 31, 2024. Pursuant to the Amendment, the Term Loan Agreement was modified to provide that the Company must, on or before December
31, 2024, deposit funds in a Debt Service Reserve Account (as defined in the Loan Agreement) such that the balance of the account equals
$
14
The Term Loan Agreement contains affirmative and restrictive covenants and representations and warranties. The Loan Parties are bound by certain affirmative covenants setting forth actions that are required during the term of the Term Loan Agreement, including, without limitation, certain information delivery requirements, obligations to maintain certain insurance, and certain notice requirements. Additionally, the Loan Parties from time to time will be bound by certain restrictive covenants setting forth actions that are not permitted to be taken during the term of the Term Loan Agreement without prior written consent, including, without limitation, incurring certain additional indebtedness, entering into certain hedging contracts, consummating certain mergers, acquisitions or other business combination transactions, consummating certain dispositions of assets, making certain payments on subordinated debt, making certain investments, entering into certain transactions with affiliates, and incurring any non-permitted lien or other encumbrance on assets. The Term Loan Agreement also contains other customary provisions, such as confidentiality obligations and indemnification rights for the benefit of the Lender. The Company was in compliance with covenants of the Term Loan Agreement as of March 31, 2025.
For three months ended
March 31, 2025 and 2024, the Company amortized $
Pledge and Security Agreement
In connection with the Term Loan, FIBT and the Loan Parties entered into a Pledge and Security Agreement on November 15, 2023 (the “Security Agreement”), whereby the Loan Parties granted a senior security interest to FIBT on all assets of the Loan Parties, except certain excluded assets described therein.
Guaranty Agreement
In connection with the Term Loan, FIBT and the Loan Parties entered into a Guaranty Agreement on November 15, 2023 (the “Guaranty Agreement”), whereby the Guarantors guaranteed payment and performance of all Loan Parties under the Term Loan Agreement.
Subordination Agreement
In connection with the Term Loan and the Seller Promissory Note, the Lenders, the sellers of Pogo and LHO (the “Sellers”) and the Company entered into a Subordination Agreement whereby the Sellers cannot require repayment, nor commence any action or proceeding at law or equity against the Company or the Lenders to recover any or all of the unpaid Seller Promissory Note until the Term Loan is repaid in full.
Seller Promissory Note
In connection with the Closing, OpCo issued the
Seller Promissory Note to Pogo Royalty, LLC (“Pogo Royalty”) in the principal amount of $
Private Notes Payable
Prior to December 31, 2023, the Company entered
into various unsecured promissory notes with existing investors of the Company for total principal of $
15
During the year ended December 31, 2024, the Company
and certain note holders, including White Lion, entered into exchange agreements (the “2024 Exchange Agreements”) whereby
the holders agreed to exchange their outstanding working capital notes totaling $
The Company is amortizing the debt discount through
a period of nine months from the Closing Date. The Company recognized amortization of debt discount of $
Convertible Notes Payable
During the year ended December 31, 2024, the Company
and certain note holders entered into exchange agreements whereby the holders agreed to exchange their outstanding working capital notes
totaling $
During the three months ended March 31, 2025,
the Company and 16 of its Private Note Payable Investors (the “Exchange Investors”) entered into exchange agreements (the
“2025 Exchange Agreements”) whereby the Exchange Investors exchanged their Old Notes and Old Warrants for convertible promissory
notes (the “Convertible Notes”). The principal amounts of the Convertible Notes were determined by adding the original principal
amount of the Old Notes and the number of Old Warrants. In connection with the 2025 Exchange Agreements, the Company issued Convertible
Notes in the aggregate principal amount of $
The Convertible Notes mature on
16
During the three months ended March 31, 2025,
the Company issued
Accrued interest on the convertible promissory
notes was $
Merchant Cash Advances
On December 4, 2024, the Company entered into a merchant cash advance
agreement with a third party. The Company received $
On March 18, 2025, the Company entered into a
master receivables purchase agreement with a third party. The Company received cash proceeds of $
As of March 31, 2025 and December 31, 2024, there
was $
Future Maturities of Long-term debt
The following summarizes the Company’s maturities of debt instruments:
| Principal | ||||
| 12 months ended: | ||||
| March 31, 2026 | $ | |||
| March 31, 2027 | ||||
| March 31, 2028 | ||||
| Total | $ | |||
NOTE 6 — STOCKHOLDERS’ EQUITY
As of March 31, 2025, there were
On November 15, 2023, as contemplated by the MIPA,
the Company filed the Second A&R Charter with the Secretary of State of the State of Delaware, pursuant to which the number of authorized
shares of the Company’s capital stock, par value $
As part of the consideration to effect the Company’s initial
business combination, the Company issued
17
On February 10, 2025, the Company entered into a Purchase, Sale, Termination and Exchange Agreement (the “Termination Agreement”), by and among the Company, OpCo, SPAC Subsidiary, HNRA Royalties, LLC, Pogo Royalty, CIC Pogo LP, DenCo Resources, LLC, Pogo Resources Management, LLC, and 4400 Holdings LLC. The closing of the transactions contemplated by the Termination Agreement is subject to the satisfaction of various conditions, including the Company obtaining financing.
Pursuant to the Termination Agreement, the Company
agreed to purchase an irrevocable and exclusive option to purchase a certain
As consideration for entering into the Termination
Agreement, the Company agreed to release the
The closing of transactions contemplated by the Termination Agreement is contingent upon the occurrence of certain conditions, including (i) the availability of financing to the Company, (ii) the receipt by Pogo Royalty of a consent of FIBT to the Termination Agreement and a written termination agreement, executed by the Company and FIBT, terminating that certain Subordination Agreement, dated as of November 15, 2023, by and among FIBT, the Company and Pogo Royalty, (iii) the receipt by the Company of any required stockholder consents, (iv) the respective representations and warranties of the parties being true and correct, subject to certain materiality exceptions and (v) the performance by the parties in all material respects of their respective obligations under the Agreement.
The Agreement may be terminated at any time by mutual consent of the parties thereto or by any one party if the counterparty is in material breach of the Agreement. If the closing of transactions contemplated by the Termination Agreement does not occur prior to 1:00 p.m. Central Time on June 3, 2025, the Termination Agreement will automatically terminate.
During the three months ended March 31, 2025,
the Company issued
On October 18, 2024, the Company entered into
a consulting agreement with a third party for financing services on a month to month basis. As compensation for services the Company
will pay the consultant a fee of $
On January 13, 2025, the Company entered into
a settlement agreement with its former President, Donald Orr, whereby the Company agreed to pay Mr Orr $
18
On January 14, 2025, the Company entered into
an agreement with a consultant whereby the Company agreed to issue the consultant
The Company recognized total stock-based compensation
expense of $
Common Stock Purchase Agreement
On October 17, 2022, the Company entered into
a common stock purchase agreement (as amended, 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, 2026. 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) $
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
On March 7, 2024, the
Company entered into an Amendment No. 1 to Common Stock Purchase Agreement (the “Amendment”) with White Lion. Pursuant to
the Amendment, the Company and White Lion agreed to a fixed number of Commitment Shares equal to
Finally, pursuant to the Amendment, the Company’s right to sell shares of common stock to White Lion will now extend until December 31, 2026.
19
On June 17, 2024, the
Company entered into an Amendment No. 2 to Common Stock Purchase Agreement (the “2nd Amendment”) with White Lion. Pursuant
to the 2nd Amendment, the Company and White Lion agreed to amend the process of a Rapid Purchase, whereby the parties will close on the
Rapid Purchase on the trading day the notice of the applicable Rapid Purchase is given. The 2nd Amendment, among other things, also removed
the maximum number of shares required to be purchased upon notice of a Rapid Purchase, added a limit of
In addition, the Company
may, from time to time while a purchase notice is active, issue a Rapid Purchase Notice to White Lion for the purchase of shares (not
to exceed
In addition, pursuant
to the Amendment, the Company may, from time to time while a Purchase Notice is active, issue a Rapid Purchase Notice to White Lion which
the parties will close on the Rapid Purchase within
During the three months ended March 31, 2025,
the Company issued
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
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 7 — 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. |
20
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.
Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are as follows:
Derivatives
The Company’s commodity
price derivatives primarily represent crude oil collar contracts (some with long calls), fixed price swap contracts and differential swap
contracts. The asset and liability measurements for the Company’s commodity price derivative contracts are determined using Level
2 inputs. The asset and liability values attributable to the Company’s commodity price derivatives were determined based on inputs
that include, but not limited to, the contractual price of the underlying position, current market prices, crude oil forward curves, discount
rates, and volatility factors. The Company had a net derivative asset of $
Warrant Liability
Based on the redemption right present in the warrants issued in connection with promissory notes, the warrants are accounted for as a liability in accordance with ASC 480 and ASC 815, with the changes in fair value of the warrants recognize in the statement of operations.
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 Closing Date of the MIPA through the 18-month redemption date and an estimated
discount rate of
Nonrecurring Basis
The carrying value of the Company’s financial instruments, consisting of cash, accounts receivable, accounts payable and accrued expenses, approximates their fair value due to the short maturity of such instruments. Financial instruments also consist of debt for which fair value approximates carrying values as the debt bears interest at fixed or variable rates which are reflective of current rates otherwise available to the Company. The Company is not exposed to significant interest, currency or credit risks arising from these financial instruments.
NOTE 8 — RELATED PARTY TRANSACTIONS
On May 5, 2022, the Company entered into a Referral
Fee and Consulting Agreement (the “Consulting Agreement”) with Alexandria VMA Capital, LLC (“Alexandria”), an
entity controlled by Mr. Caravaggio, who became the Company’s CEO on December 17, 2023. Pursuant to the Consulting Agreement, Alexandria
provided information and contacts with suitable investments and acquisition candidates for the Company’s initial business combination.
In addition, Alexandria provided due diligence, purchasing and negotiating strategy advice, organizational and operational advice, and
such other services as requested by the Company. In consideration of the services provided by Alexandria, the Company paid to Alexandria
Capital a referral fee of $
21
On January 20, 2023, January 27, 2023, and February
14, 2023, Mr. Caravaggio entered into Private Notes Payable with the Company. Pursuant to the Private Notes Payable, Mr. Caravaggio paid
an aggregate amount of $
On February 14, 2023, the Company entered into
a consulting agreement with Donald Orr, the Company’s former President, which became 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 $
NOTE 9 — COMMITMENTS AND CONTINGENCIES
Contingencies
The Company is a party to various legal actions arising in the ordinary course of its businesses. In accordance with ASC 450, Contingencies, the Company accrues reserves for outstanding lawsuits, claims and proceedings when a loss contingency is probable and can be reasonably estimated. The Company estimates the amount of loss contingencies using current available information from legal proceedings, advice from legal counsel and available insurance coverage. Due to the inherent subjectivity of the assessments and unpredictability of the outcomes of the legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, the Company’s exposure and ultimate losses may be higher, and possibly significantly more, than the amounts accrued.
Environmental
From time to time, and in the ordinary course of business, the Company may be subject to certain environmental liabilities. Environmental expenditures that relate to an existing condition caused by past operations and have no future economic benefits are expensed. Environmental expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. Liabilities for expenditures that will not qualify for capitalization are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Such liabilities are undiscounted unless the timing of cash payments for the liability is fixed or reliably determinable. Environmental liabilities normally involve estimates that are subject to revision until settlement or remediation occurs.
22
As of March 31, 2025 and December 31, 2024, the
Company had recorded an environmental remediation liability of $
NOTE 10 — SUBSEQUENT EVENTS
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the consolidated financial statements were issued.
Subsequent to March 31, 2025, the Company issued
On March 21, 2025, the Company entered into an agreement with a consultant
to provide marketing and distribution services to the Company through September 30, 2025. Subsequent to March 31, 2025, the Company issued
On March 28, 2025, the Company entered into an agreement with a consultant
to provide transaction advisory services. Subsequent to March 31, 2025, the Company issued
On April 28, 2025, the Company agreed to issue
On May 7, 2025, the Company issued a total of
Subsequent to March 31, 2025, the Company and
14 of the Investors (the “Exchange Investors”) entered into exchange agreements (the “Exchange Agreements”) whereby
the Exchange Investors exchanged their Old Notes and Old Warrants for convertible promissory notes (the “Convertible Notes”).
The principal amounts of the Convertible Notes were determined by adding the original principal amount of the Old Notes and the number
of Old Warrants. In connection with the Exchange Agreements, the Company issued Convertible Notes in the aggregate principal amount of
$
The Convertible Notes mature on
23
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 EON Resources, Inc. (formerly 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. References to the Predecessor refer to the business of Pogo Resources, LLC and its subsidiaries prior to the Closing Date. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the unaudited consolidated 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 an independent oil and natural gas company based in Texas and formed in 2017 that is focused on the acquisition, development, exploration, production and divestiture of oil and natural gas properties in the Permian Basin. The Permian Basin is located in west Texas and southeastern New Mexico and is characterized by high oil and liquids-rich natural gas content, multiple vertical and horizontal target horizons, extensive production histories, long-lived reserves and historically high drilling success rates. Our properties are in the Grayburg-Jackson Field in Eddy County, New Mexico, which is a sub-area of the Permian Basin. Pogo focuses primarily on production through waterflooding recovery methods.
Our assets as mentioned above consist of contiguous leasehold positions of approximately 13,700 gross (13,700 net) acres with an average working interest of 100%. We operate 100% of the net acreage across the Company’s assets, all of which is net operated acreage of vertical wells with average depths of approximately 3,810 feet.
Our average daily production for the three months ended March 31, 2025 was 749 barrel of oil equivalent (“BOE”) per day. Our average daily production for the year ended December 31, 2024, was 798 BOE per day. The decrease in production is due to an increase in well downtime, water injection flowlines that needed repair or replacement, and the conveyance of the 10% Override royalty interest to Pogo Royalty.
Selected Factors That Affect Our Operating Results
Our revenues, cash flows from operations and future growth depend substantially upon:
| ● | the timing and success of production and development activities; |
24
| ● | the prices for oil and natural gas; |
| ● | the quantity of oil and natural gas production from our wells; |
| ● | changes in the fair value of the derivative instruments we use to reduce our exposure to fluctuations in the price of oil and natural gas; |
| ● | our ability to continue to identify and acquire high-quality acreage and development opportunities; and |
| ● | the level of our operating expenses. |
In addition to the factors that affect companies in our industry generally, the location of substantially all of our acreage discussed above subjects our operating results to factors specific to these regions. These factors include the potential adverse impact of weather on drilling, production and transportation activities, particularly during the winter and spring months, as well as infrastructure limitations, transportation capacity, regulatory matters and other factors that may specifically affect one or more of these regions.
The price at which our oil and natural gas production are sold typically reflects either a premium or discount to the New York Mercantile Exchange (“NYMEX”) benchmark price. Thus, our operating results are also affected by changes in the oil price differentials between the applicable benchmark and the sales prices we receive for our oil production. Our oil price differential to the NYMEX benchmark price during the three months ended March 31, 2025 and 2024, was $(1.98) and $(5.51) per barrel, respectively. Our natural gas price differential during the three months ended March 31, 2025 and 2024, was $0.79 and $0.54 per one thousand cubic feet (“Mcf”), respectively. Fluctuations in our price differentials and realizations are due to several factors such as gathering and transportation costs, takeaway capacity relative to production levels, regional storage capacity, gain/loss on derivative contracts and seasonal refinery maintenance temporarily depressing demand.
Market Conditions
The price that we receive for the oil and natural gas we produce is largely a function of market supply and demand. Because our oil and gas revenues are heavily weighted toward oil, we are more significantly impacted by changes in oil prices than by changes in the price of natural gas. World-wide supply in terms of output, especially production from properties within the United States, the production quota set by OPEC, and the strength of the U.S. dollar can adversely impact oil prices.
Historically, commodity prices have been volatile, and we expect the volatility to continue in the future. Factors impacting the future oil supply balance are world-wide demand for oil, as well as the growth in domestic oil production.
Prices for various quantities of natural gas and oil that we produce significantly impact our revenues and cash flows. The following table lists average NYMEX prices for oil and natural gas for the three months ended March 31, 2025 and 2024.
| For the three months ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| Average NYMEX Prices (1) | ||||||||
| Oil (per Bbl) | $ | 71.84 | $ | 77.56 | ||||
| Natural gas (per Mcf) | $ | 4.94 | $ | 2.67 | ||||
| (1) | Based on average NYMEX closing prices. |
For the three months ended March 31, 2025, the average NYMEX oil pricing was $71.84 per barrel of oil or 7% lower than the average NYMEX price per barrel for the three months ended March 31, 2024. Our settled derivatives decreased our realized oil price per barrel by $2.28 and $2.05 in the three months ended March 31, 2025, and 2024, respectively. Our average realized oil price per barrel after reflecting settled derivatives and location differentials was $67.78 and $72.15 for the three months ended March 31, 2025 and 2024, respectively.
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The average NYMEX natural gas pricing for the three months ended March 31, 2025, was $4.94 per Mcf, or 95% higher than the average NYMEX price of $2.13 per Mcf for the three months ended March 31, 2024.
Results of Operations
Three months ended March 31, 2025 Compared to Three months ended March 31, 2024
The following table sets forth selected operating data for the periods indicated. Average sales prices are derived from accrued accounting data for the relevant period indicated.
| Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | |||||||
| Revenues | ||||||||
| Crude oil | $ | 4,392,605 | $ | 4,971,150 | ||||
| Natural gas and natural gas liquids | 139,532 | 178,608 | ||||||
| Gain (loss) on derivative instruments, net | (85,071 | ) | (1,997,247 | ) | ||||
| Other revenue | 117,532 | 130,588 | ||||||
| Total revenues | $ | 4,564,598 | 3,283,099 | |||||
| Average sales prices: | ||||||||
| Oil (per Bbl) | $ | 70.06 | $ | 74.20 | ||||
| Effect on gain (loss) of settled oil derivatives on average price (per Bbl) | (2.28 | ) | (2.05 | ) | ||||
| Oil net of settled oil derivatives (per Bbl) | 67.78 | 72.15 | ||||||
| Natural gas (per Mcf) | $ | 4.94 | $ | 2.67 | ||||
| Realized price on a BOE basis excluding settled commodity derivatives | $ | 67.24 | $ | 67.03 | ||||
| Effect of gain (loss) on settled commodity derivatives on average price (per BOE) | (2.12 | ) | (1.79 | ) | ||||
| Realized price on a BOE basis including settled commodity derivatives | $ | 65.12 | $ | 65.24 | ||||
| Expenses | ||||||||
| Production taxes, transportation and processing | 397,216 | 428,280 | ||||||
| Lease operating | 1,921,321 | 2,299,518 | ||||||
| Depletion, depreciation and amortization | 97,075 | 476,074 | ||||||
| Accretion of asset retirement obligations | 335,771 | 33,005 | ||||||
| General and administrative | 2,084,545 | 2,309,824 | ||||||
| Total expenses | 4,835,928 | 5,546,701 | ||||||
| Costs and expenses (per BOE): | ||||||||
| Production taxes, transportation, and processing | $ | 5.89 | $ | 5.57 | ||||
| Lease operating expenses | 28.50 | 29.93 | ||||||
| Depreciation, depletion, and amortization expense | 1.44 | 6.20 | ||||||
| Accretion of asset retirement obligations | 4.98 | 0.43 | ||||||
| General and administrative | 30.93 | 30.06 | ||||||
| Net producing wells at period-end | 342 | 342 | ||||||
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Oil and Natural Gas Sales
Our revenues vary from year to year primarily as a result of changes in realized commodity prices and production volumes. For the three months ended March 31, 2025, our oil and natural gas sales decreased 12% from the three months ended March 31, 2024, excluding the effect of settled commodity derivatives, and a 12% decrease in production volumes. Production volumes decreased for the three months ended March 31, 2025 from the three months ended March 31, 2024 as a result of increased flaring of natural gas during the current period.
Production for the comparable periods is set forth in the following table:
| For the Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| Production: | ||||||||
| Oil (MBbl) | 63 | 67 | ||||||
| Natural gas (MMcf) | 28 | 59 | ||||||
| Total (MBOE)(1) | 67 | 77 | ||||||
| Average daily production: | ||||||||
| Oil (Bbl) | 697 | 739 | ||||||
| Natural gas (Mcf) | 314 | 653 | ||||||
| Total (BOE)(1) | 749 | 848 | ||||||
| (1) | Natural gas is converted to BOE at the rate of one-barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas, which is not necessarily indicative of the relationship of oil and natural gas prices. |
Derivative Contracts
We enter into commodity derivatives instruments to manage the price risk attributable to future oil production. We recorded a loss on derivative contracts of $85,071 for the three months ended March 31, 2025, compared to a loss of $1,997,247 for the three months ended March 31, 2024. Higher commodity prices in the three months ended March 31, 2025, resulted in realized losses of $142,859 compared to realized losses of $137,154 for the three months ended March 31, 2024. For the three months ended March 31, 2025, unrealized gains were $57,788 compared to unrealized losses of $1,860,093 for the three months ended March 31, 2024.
For the three months ended March 31, 2025, our average realized oil price per barrel after reflecting settled derivatives was $65.12 compared to $62.53 for the three months ended March 31, 2024. For the three months ended March 31, 2025, our settled derivatives decreased our realized oil price per barrel by $2.12 compared to decreasing the price per barrel by $1.79 for the three months ended March 31, 2024. As of March 31, 2025, we ended the period with a $164,185 net derivative asset compared to a net asset of $106,397 as of December 31, 2024.
Other Revenue
Other revenue was $117,532 for the three months ended March 31, 2025, compared to $130,588 for the three months ended March 31, 2024. The revenue is related to providing water services to a third party. The contract is for one year starting on September 1, 2022, and has been renewed by mutual agreement.
Lease Operating Expenses
Lease operating expenses were $1,921,321 for the three months ended March 31, 2025, compared to $2,299,518 for the three months ended March 31, 2024. On a per unit basis, production expenses decreased 0.6% from $29.93 per BOE for the three months ended March 31, 2024, to $28.50 per BOE for the three months ended March 31, 2025.
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Production Taxes, Transportation and Processing
We pay production taxes, transportation and processing costs based on realized oil and natural gas sales. Production taxes, transportation and processing costs were $397,216 for the three months ended March 31, 2025, compared to $428,280 for the three months ended March 31, 2024. As a percentage of oil and natural gas sales, these costs were 9% in the three months ended March 31, 2025 and 2024. Production taxes, transportation, and processing as a percent of total oil and natural gas sales are consistent with historical trends.
Depletion, Depreciation and Amortization
Depletion, depreciation and amortization (“DD&A”) was $97,075 for the three months ended March 31, 2025 compared to $476,074 for the three months ended March 31, 2024. DD&A was $1.44 per BOE for the three months ended March 31, 2025, compared to $6.20 per BOE for the three months ended March 31, 2024. The aggregate decrease in DD&A expense for the three months ended March 31, 2025, compared to the three months ended March 31, 2024, was driven by the decrease in oil and gas production.
Accretion of Asset Retirement Obligations
Accretion expense was $335,771 for the three months ended March 31, 2025, compared to $33,005 for the three months ended March 31, 2024. Accretion expense was $4.98 per BOE for the three months ended March 31, 2025, compared to $0.43 per BOE for the three months ended March 31, 2024. The aggregate increase in accretion expense for the three months ended March 31, 2025, compared to the three months ended March 31, 2024, was driven by changes in certain assumptions, specifically the inflation factor.
General and Administrative
General and administrative expenses were $2,084,545 for the three months ended March 31, 2025, compared to $2,309,824 for the three months ended March 31, 2024. The decrease in general and administrative expenses is primarily due to decreased stock-based compensation in the current period of $368,093 compared to $699,248 in the comparative period.
Interest Expense and amortization of financing costs
Interest expense was $1,744,246 for the three months ended March 31, 2025, compared to $1,860,582 for the three months ended March 31, 2024. The decrease in interest expense is driven by the decreases in the Senior Secured term loan and the Private Notes Payable.
During the three months ended March 31, 2025, the Company recorded $337,370 related to the amortization of financing costs compared to $813,181 for the three months ended March 31, 2024. These costs are attributable to deferred finance costs paid on the Senior Secured Term Loan, and discounts associated with the Private Notes Payable during 2023.
Change in fair value of forward purchase agreement
The change in fair value of forward purchase agreement consisted of a loss of $349,189 for the three months ended March 31, 2024 related to the inputs used in our fair value estimate of the FPA Put Option, primarily the decline in our stock price during the three months ended March 31, 2024. The key inputs to the fair value estimate include our stock price, which declined during the Successor period, and the likelihood, timing and price of a potential dilutive offering. The FPA put option was settled during the year ended December 31, 2024 and therefore no change in fair value was recorded in the three months ended March 31, 2025.
Change in fair value of warrant and convertible note liabilities
The change in fair value of warrant liabilities consisted of a loss of $162,520 for the three months ended March 31, 2025, compared to a loss of $624,055 for the three months ended March 31, 2024, related to fluctuations in the trading price of our warrants, a portion of which are accounted for as liabilities due to the redemption provisions in those issued to Private Note holders.
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The change in fair value of convertible note liabilities consisted of a loss of $129,746 for the three months ended March 31, 2025.
Gain on extinguishment of liabilities
The Company recognized a gain on extinguishment of liabilities of $92,294 during the three months ended March 31, 2025 related to the exchange of certain notes payable and warrant liabilities for convertible note agreements.
Liquidity, Capital Resources and Going Concern
Our main sources of liquidity have been internally generated cash flows from operations and credit facility borrowings. Our primary use of capital has been for the development of oil and gas properties and the return of initial invested capital to our owners. We continually monitor potential capital sources for opportunities to enhance liquidity or otherwise improve our financial position.
As of March 31, 2025, we had outstanding debt of $22,563,093 under our Senior Secured Term Loan, $15,000,000 under the Seller Promissory Note, and $2,900,000 of outstanding private notes payable, $1,548,500 of convertible notes payable and $1,047,028 from merchant cash advances. A total of $8,654,397 of this is due within one year. As of March 31, 2025, we had $3,074,094 of cash and cash equivalents on hand, of which $2,600,000 is in an escrow account pursuant to the requirements of the Senior Secured Term Loan, and had a working capital deficit of $27,937,557. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.
We had negative cash flow from operations of $1,827,355 for the three months ended March 31, 2025 and positive cash flow from operations of $3,700,686 for the year ended December 31, 2024. Additionally, management’s plans to alleviate this substantial doubt include improving profitability through streamlining costs, maintaining active hedge positions for its proven reserve production, and the issuance of additional shares of Class A Common Stock. We have a three-year Common Stock Purchase Agreement with a maximum funding limit of $150,000,000 that can fund our operations and production growth, and be used to reduce liabilities. Through the date of this filing, we have received $6,969,866 in cash proceeds related to the sale of 7,000,000 shares of common stock under this agreement and expect to continue to utilize it to fund operational needs. We cannot assure you, however, that any additional capital will be available to us on favorable terms or at all. Our capital expenditures could be curtailed if our cash flows decline from expected levels.
Cash Flows
Sources and uses of cash for the three months ended March 31, 2025 and 2024, are as follows:
| Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | |||||||
| Net cash (used in) provided by operating activities | $ | (1,827,355 | ) | $ | 1,119,845 | |||
| Net cash used in investing activities | (1,117,540 | ) | (591,003 | ) | ||||
| Net cash (used in) provided by financing activities | 3,047,431 | (670,924 | ) | |||||
| Net change in cash and cash equivalents | $ | 102,536 | $ | (142,082 | ) | |||
Operating Activities
The change in net cash flow used operating activities for the three months ended March 31, 2025, as compared to 2024 is primarily due to decreased production volumes and a reduction in payable balances during the current period.
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Investing Activities
Net cash used in investing activities for the three months ended March 31, 2025 was primarily related to $1,117,540 in development costs for our reserves. Cash flows used in investing activities for the three months ended March 31, 2024 consisted primarily of $571,003 of cash paid for development costs of our reserves.
Financing Activities
Net cash provided by financing activities during the three months ended March 31, 2025 were primarily related to the sale of common stock under the Common Stock Purchase agreement of $4,341,532 and proceeds of $617,500 from short term notes payable offset by repayments of the Senior Secured Term Loan of $1,133,324 and Private Notes Payable of $778,277. Cash flows used in financing activities for the three months ended March 31, 2024 were primarily related to repayments of the Senior Secured Term Loan of $887,174 and Private Notes Payable of $33,750, partially offset by an additional $250,000 in cash proceeds from the Private Notes Payable issued during the three months ended March 31, 2024.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2025.
Contractual obligations
We have contractual commitments under our Senior Secured Term Loan, the Seller Promissory Note and the Private Notes Payable which include periodic interest payments. See Note 5 to our interim condensed consolidated unaudited financial statements. We have contractual commitments that may require us to make payments upon future settlement of our commodity derivative contracts. See Note 4 to our interim condensed consolidated unaudited financial statements.
Our other liabilities represent current and noncurrent other liabilities that are primarily comprised of environmental contingencies, asset retirement obligations and other obligations for which neither the ultimate settlement amounts nor their timings can be precisely determined in advance.
Critical Accounting Estimates
The following is a discussion of our most critical accounting estimates, judgements and uncertainties that are inherent in the Company’s application of GAAP.
Proved Reserve Estimates
Estimates of our proved reserves included in this report are prepared in accordance with GAAP and SEC guidelines. The accuracy of a proved reserve estimate is a function of:
| ● | the quality and quantity of available data; |
| ● | the interpretation of that data; |
| ● | the accuracy of various mandated economic assumptions; and |
| ● | the judgment of the persons preparing the estimate. |
Our proved reserve information included in our Annual Report on its Form 10-K filed with the SEC on April 16, 2025 as of December 31, 2024 and 2023, was prepared by independent petroleum engineers. Because these estimates depend on many assumptions, all of which may substantially differ from future actual results, proved reserve estimates will be different from the quantities of oil and gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate may justify, positively or negatively, material revisions to the estimate of proved reserves.
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It should not be assumed that the standardized measure included as of December 31, 2024, is the current market value of our estimated proved reserves. In accordance with SEC requirements, we based the 2024 standardized measure on a twelve-month average of commodity prices on the first day of each month in 2024 and prevailing costs on the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs utilized in the estimate. See Note 12 of notes to the consolidated annual financial statements for additional information.
Our estimates of proved reserves materially impact depletion expense. If the estimates of proved reserves decline, the rate at which we records depletion expense will increase, reducing future net income. Such a decline may result from lower commodity prices, which may make it uneconomical to drill for and produce higher cost fields. In addition, a decline in proved reserve estimates may impact the outcome of our assessment of our proved properties for impairment.
Impairment of Proved Oil and Gas Properties
We review our proved properties to be held and used whenever management determines that events or circumstances indicate that the recorded carrying value of the properties may not be recoverable. Management assesses whether or not an impairment provision is necessary based upon estimated future recoverable proved reserves, commodity price outlooks, production and capital costs expected to be incurred to recover the reserves, discount rates commensurate with the nature of the properties and net cash flows that may be generated by the properties. Proved oil and gas properties are reviewed for impairment at the level at which depletion of proved properties is calculated. See Note 2 of notes to the consolidated financial statements.
Asset Retirement Obligations
We have significant obligations to remove tangible equipment and facilities and to restore the land at the end of crude oil and natural gas production operations. Our removal and restoration obligations are primarily associated with plugging and abandoning wells. Estimating the future restoration and removal costs is difficult and requires management to make estimates and judgments because most of the removal obligations are many years in the future and contracts and regulations often have vague descriptions of what constitutes removal. Asset removal technologies and costs are constantly changing, as are regulatory, political, environmental, safety and public relations considerations.
Inherent in the present value calculation are numerous assumptions and judgments including the ultimate settlement amounts, credit-adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the present value of the existing asset retirement obligations, a corresponding adjustment is generally made to the crude oil and natural gas property or other property and equipment balance. See Note 5 of notes to the consolidated financial statements.
Litigation and Environmental Contingencies
We make judgments and estimates in recording liabilities for ongoing litigation and environmental remediation. Actual costs can vary from such estimates for a variety of reasons. The costs to settle litigation can vary from estimates based on differing interpretations of laws and opinions and assessments on the amount of damages. Similarly, environmental remediation liabilities are subject to change because of changes in laws and regulations, developing information relating to the extent and nature of site contamination and improvements in technology. A liability is recorded for these types of contingencies if we determine the loss to be both probable and reasonably estimable. See Note 9 of notes to the consolidated financial statements.
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Derivative Instruments
We use derivative financial instruments to mitigate its exposure to commodity price risk associated with oil prices. Our derivative financial instruments are recorded on the consolidated balance sheets as either an asset or a liability measured at fair value. We have elected not to apply hedge accounting for its existing derivative financial instruments, and as a result, we recognize the change in derivative fair value between reporting periods currently in its consolidated statements of operations. The fair value of our derivative financial instruments is determined using industry-standard models that consider various inputs including: (i) quoted forward prices for commodities, (ii) time value of money and (iii) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Realized gains and losses from the settlement of derivative financial instruments and unrealized gains and unrealized losses from valuation changes in the remaining unsettled derivative financial instruments are reported in a single line item as a component of revenues in the consolidated statements of operations. Cash flows from derivative contract settlements are reflected in operating activities in the accompanying consolidated statements of cash flows. See Note 4 for additional information about our derivative instruments.
New Accounting Pronouncements
The effects of new accounting pronouncements are discussed in Note 2 to the consolidated financial statements.
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) and our Chief Financial Officer (Principal Financial 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) and our Chief Executive Officer (Principal Financial Officer) carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2025. Based upon their evaluation, our Chief Executive Officer (Principal Executive Officer) and our Chief Executive Officer (Principal Financial Officer) concluded that, our disclosure controls and procedures were not effective related to the lack of sufficient accounting personnel to manage the Company’s financial accounting process, lack of segregation of duties, proper accounting for complex financial instruments, lack of design and implementation of controls related to oil and gas activities, which combined constituted a material weakness in our internal control over financial reporting. As a result, we performed additional analysis as deemed necessary to ensure that our 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.
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A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management concluded that a deficiency in internal control over financial reporting existed relating to the lack of sufficient accounting personnel to manage the Company’s financial accounting process, lack of segregation of duties, proper accounting for complex financial instruments, lack of design and implementation of controls related to oil and gas activities and lack of capital expenditure 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 March 31, 2025. 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 March 31, 2025 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 timelier 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.
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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 April 16, 2025.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
During the three months ended March 31, 2025,
none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act)
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. |
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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.
| EON Resources, Inc. | ||
| Date: May 15, 2025 | By: | /s/ Dante Caravaggio |
| Name: | Dante Caravaggio | |
| Title: | Chief Executive Officer | |
| Date: May 15, 2025 | By: | /s/ Mitchell B. Trotter |
| Name: | Mitchell B. Trotter | |
| Title: | Chief Financial Officer | |
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