Prairie Operating Co
For the period ended Dec 31, 2024. Filed Mar 6, 2025.
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FY2024 · Filed Mar 6, 2025
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Item 8. Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Prairie Operating, Co.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Prairie Operating, Co. and its subsidiaries (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of operations, stockholders’ equity/members’ deficit and cash flows for each of the two years in the period ended December 31, 2024, 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, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2024 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.
Fair Value – Financial Instruments (Standby Equity Purchase Agreement, Senior Convertible Note and Subordinated Note Warrants) - Refer to Note 1, Note 2, Note 4, Note 6 and Note 10 to the financial statements.
Critical Audit Matter Description
As described in Note 1, Note 2, Note 4, Note 6 and Note 10 to the financial statements, the Company entered into a Standby Equity Purchase Agreement to fund working capital needs. The Company determined that the Standby Equity Purchase Agreement represents a derivative instrument. The Company utilized unobservable market data to determine the fair value of the Standby Equity Purchase Agreement. As described in Note 1, Note 2, Note 4, Note 6 and Note 10 to the financial statements, the Company issued a $15.0 million Senior Convertible Note to provide a portion of the proceeds for the NRO Acquisition. The Company determined that the Senior Convertible Note contained certain features that required bifurcation and separate accounting as embedded derivatives and elected to account for the note at fair value. The Company utilized unobservable market data to determine the fair value of the Senior Convertible Note. As described in Note 2, Note 6 and Note 10 to the financial statements, the Company issued Subordinated Note Warrants to purchase up to 1,141,552 shares of common stock. The Company determined that the Subordinated Note Warrants should be accounted for as a liability at fair value. The Company utilized unobservable market data to determine the fair value of the Subordinated Note Warrants.
The principal consideration for our determination that the valuation of the Standby Equity Purchase Agreement, Senior Convertible Note and Subordinated Note Warrants is a critical audit matter are the significant judgment by management necessary in the selection of valuation techniques and assumptions with significant unobservable market data 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 Standby Equity Purchase Agreement, Senior Convertible Note and Subordinated Note Warrants included the following, among others:
| ● | We obtained an understanding of the design of the Company’s controls over the valuation of the Standby Equity Purchase Agreement, Senior Convertible Note and Subordinated Note Warrants, 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 equity volatility and asset volatility, valuation methodology, and key assumptions used in determining the fair value of the Standby Equity Purchase Agreement, Senior Convertible Note and Subordinated Note Warrants 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. |
Fair Value – Share-Based Compensation (Performance Share Awards (PSU)) - Refer to Note 2 and Note 16 to the financial statements
Critical Audit Matter Description
As described in Note 2 and Note 16 to the financial statements, the Company granted PSUs to certain of its employees. The Company utilized unobservable market data to determine the grant date fair value of PSUs.
The principal consideration for our determination that the valuation of the PSU grant date fair value is a critical audit matter are the significant judgment by management necessary in the selection of valuation techniques and assumptions with significant unobservable market data 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 PSU grant date fair value included the following, among others:
| ● | We obtained an understanding of the design of the Company’s controls over the valuation of the PSU grant date fair value, 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 equity volatility, valuation methodology, and key assumptions used in determining the fair value of the PSU grant date fair value 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 6, 2025
The text of this filing, as the company filed it with the SEC, without its images or exhibits. This is not investment advice.