Prairie Operating Co
For the period ended Dec 31, 2023. Filed Mar 19, 2024.
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FY2023 · Filed Mar 19, 2024
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Reports of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Prairie Operating Co.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Prairie Operating, Co. (formerly known as Prairie Operating Co., LLC) and its subsidiaries (the Company), as of December 31, 2023 and 2022, the related consolidated statements of operations, members’ deficit/stockholders’ equity and cash flows for year ended December 31, 2023, and for the period from June 7, 2022 (date of inception) to December 31, 2022 and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the year ended December 31, 2023, and for the period from June 7, 2022 (date of inception) to December 31, 2022 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Determine the Merger as an Asset Acquisition and Evaluate the Acquired Assets Value – Asset Acquisition of Creek Road Miners, Inc. – Refer to Note 1 and Note 3 to the financial statements
Critical Audit Matter Description
The Company’s merger with Creek Road Miners, Inc. was determined to be a reverse asset acquisition and resulted in Prairie Operating Co., LLC being the accounting acquirer. The Company used the cost accumulation method to determine the cost of the acquisition as well as determining the cost of the acquisition to be recorded as the acquired asset value.
Auditing the Company’s determination of the transaction as a reverse asset acquisition and evaluating the acquired assets value required auditor judgment in assessing and concluding the appropriateness of management determinations that the transaction is not a business combination but rather a reverse asset acquisition as well as determining the cost of the acquisition to be recorded as the acquired asset value.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the determination that the Creek Road Miners, Inc. merger transaction is a reverse asset acquisition and evaluating the acquired assets value included the following, among others:
| ● | We read the Amended and Restated Agreement and Plan of Merger to identify and assess the relevant terms and conditions to evaluate the appropriateness of management’s accounting treatment. |
| ● | We evaluated the appropriateness of management’s determination that the transaction is a reverse asset acquisition by assessing the reasonableness of the qualitative and quantitative considerations utilized in determining that the assets acquired and liabilities assumed do not constitute a business (does not have inputs, processes and outputs) and that Prairie Operating Co., LLC is considered the accounting acquirer. |
| ● | We evaluated management’s determination of the acquired assets value by assessing the appropriateness of the cost accumulation method used by management and by evaluating the appropriateness of management’s conclusion that the fair value of the consideration paid will be based on the fair value of the common stock retained by Creek Road Miners, Inc. stockholders, Series D Preferred Stock issued and transaction costs. |
Fair Value – Financial Instruments (AR Debentures and Series D Preferred Stock)-Refer to Note 2, Note 3, Note 8 and Note 10 to the financial statements
Critical Audit Matter Description
As described in Note 3 to the financial statements, the Company issued 4,432 shares of Series D Preferred Stock as consideration in the merger transaction with Creek Road Miners, Inc. The Company utilized a complex valuation technique with unobservable inputs to determine the fair value of the Series D Preferred Stock. As described in Note 3, Note 8 and Note 10 to the financial statements, in connection with the merger transaction with Creek Road Miners, Inc., the Company assumed AR Debentures in an aggregate principal amount of $2.0 million. The Company determined that the AR Debentures contained certain features that required bifurcation and separate accounting as embedded derivatives. The Company elected to measure the AR Debentures in their entirety at fair value.
The principal consideration for our determination that the valuation of the AR Debentures and Series D Preferred Stock is a critical audit matter are the significant judgments by management necessary in the selection of valuation techniques and assumptions with significant unobservable inputs to estimate the fair value. This required a high degree of auditor judgment and extensive audit effort, including the need to involve fair value specialists who possess significant quantitative and modeling expertise, to audit and evaluate the appropriateness of these models and inputs.
How We Addressed the Matter in Our Audit
Our audit procedures related to the valuation of the AR Debentures and Series D Preferred Stock included the following, among others:
| ● | We obtained an understanding of the design of the Company’s controls over the valuation of the AR Debentures and Series D Preferred Stock, including controls over management’s review of the valuation model and the significant assumptions used in determining their fair values. |
| ● | With the assistance of a third-party valuation specialist, we audited the fair value of the embedded conversion option and warrant liability, valuation methodology, and key assumptions used in determining the fair value of the AR Debentures and Series D Preferred Stock by: |
| ○ | Evaluating the appropriateness of the valuation model and techniques used in determining fair value; |
| ○ | Assessing that the significant valuation assumption inputs of implied volatility and yield are consistent with those that would be used by market participants through the testing of source information, checking the mathematical accuracy of the calculation, and developing independent estimates and comparing to those selected by management, where applicable; and |
| ○ | Recalculation of the fair value determined by management to verify its reasonableness. |
| ● | We audited the completeness and accuracy of the underlying data supporting the significant valuation assumption inputs. |
/s/ Ham, Langston and Brezina, L.L.P.
We have served as the Company’s auditor since 2023.
Houston, Texas
March 18, 2024
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