Debt

9 Months Ended

Sep. 30, 2024

Debt Disclosure [Abstract]

Debt

Note 8 – Debt

The Company’s debt balances consisted of the following for the periods indicated:

	September 30, 2024			December 31, 2023
Senior convertible note	$	15,000,000		$	—
Less: unamortized issuance discount		(750,000	)		—
Senior convertible note, net	$	14,250,000		$	—
Subordinated promissory note – related party	$	5,000,000		$	—
Fair value adjustment		281,414			—
Subordinated promissory note – related party, at fair value	$	5,281,414		$	—

Senior Convertible Note

On September 30, 2024, Yorkville advanced the Pre-Paid Advance of $15.0 million to the Company and the Company issued the Senior Convertible Note, with an interest rate of 8.00% and a maturity date of September 30, 2025. The Company’s obligations with respect to the Pre-Paid Advance and under the Senior Convertible Note are guaranteed by Prairie LLC, a subsidiary of the Company, and Prairie Operating Holding Co., LLC (“Prairie Holdco”), a subsidiary of the Company, pursuant to a global guaranty agreement entered into by Prairie LLC and Prairie Holdco in favor of Yorkville on September 30, 2024. Yorkville may convert the Pre-Paid Advance into shares of Common Stock at any time at the Conversion Price (as defined in the SEPA). The Company may, at any time, redeem all or a portion or the amounts outstanding under the Senior Convertible Note at 105% of the principal amount thereof, plus accrued and unpaid interest.

The Company did not receive the proceeds from the Senior Convertible Note until October 1, 2024; therefore, it has recorded a $14.3 million short-term financing receivable related to the Senior Convertible Note as of September 30, 2024.

The Company has determined that certain features of the Senior Convertible Note require bifurcation and separate accounting as embedded derivatives. As such, the Company has elected the fair value option to account for the Senior Convertible Note; therefore, in accordance with ASC 815, the Company recorded the Senior Convertible Note at fair value and will remeasure the fair value each reporting period with changes in fair value recognized in earnings. Due to the short-term nature of the Senior Convertible Note, the Company has determined that its fair value as of September 30, 2024 is $14.3 million, which is equal to the face value of $15.0 million less the 5% original issuance discount. Refer to Note 5 – Fair Value Measurements for a further discussion of the fair value of the Senior Convertible Note.

Subordinated Promissory Note

On September 30, 2024 (the “Subordinated Note Effective Date”), the Company entered into the Subordinated Note with the Noteholders, as defined above, in a principal amount of $5.0 million, with a maturity of September 30, 2025. Refer to Note 15 – Related Party Transactions for a further discussion about the Subordinated Note and the Noteholders. The Subordinated Note has an interest rate of 10.00% and the Noteholders are entitled to a minimum return on capital of up to 2.0x upon the repayment, prepayment or acceleration of the obligations, or the occurrence of certain other triggering events under the Subordinated Note. The Subordinated Note is guaranteed by Prairie LLC pursuant to a global guaranty agreement entered into by Prairie LLC in favor of the Noteholders on the Subordinated Note Effective Date. The Subordinated Note is subordinated to the prior payment in full in cash to the Senior Convertible Note and any future senior secured revolving credit facility of the Company entered into after the Subordinated Note Effective Date.

The Company did not receive a portion of the proceeds from the Subordinated Note until October 1, 2024; therefore, it has recorded a $2.0 million short-term financing receivable related to the Subordinated Note as of September 30, 2024.

Pursuant to the terms of the Subordinated Note, the Company issued the Subordinated Note Warrants to purchase up to 1,141,552 shares of Common Stock to the Noteholders, vesting in tranches based on the date of repayment of the Subordinated Note. Refer to Note 13 – Common Stock Options and Warrants below for a further discussion of the Subordinated Note Warrants.

Pursuant to the Subordinated Note, the Company entered into a registration rights agreement (the “SPA Registration Rights Agreement”) with the Noteholders pursuant to which the Company agreed to file a registration statement registering the resale of the Common Stock underlying the Subordinated Note Warrants.

The Company has determined that certain features of the Subordinated Note require bifurcation and separate accounting as embedded derivatives. As such, the Company has elected the fair value option to account for the Subordinated Note; therefore, in accordance with ASC 815, the Company has recorded the Subordinated Note at fair value and will remeasure the fair value each reporting period with changes in fair value recognized in earnings. As of September 30, 2024, the fair value of the Subordinated Note is $5.3 million. Additionally, the Company has determined that the Subordinated Note Warrants should be accounted for as a liability pursuant to ASC 480. In accordance with ASC 815, the Company has recorded the Subordinated Note Warrants at fair value and will remeasure the fair value each reporting period with changes in fair value recognized in earnings. As of September 30, 2024, the fair value of the Subordinated Note Warrants is $2.8 million and was determined using a Monte Carlo simulation model. Refer to Note 5 – Fair Value Measurements for a further discussion of the fair value of the Subordinated Note and the Subordinated Note Warrants. The total fair value of the Subordinated Note and the Subordinated Note Warrants exceeded the proceeds of $5.0 million, as a result, the Company has recognized a loss on debt issuance of $3.0 million on its condensed consolidated statements of operations for the three and nine months ended September 30, 2024. 

Amended and Restated Senior Secured Convertible Debentures

In connection with the Merger, the Company entered into 12% amended and restated senior secured convertible debentures due December 31, 2023 with each of Bristol Investment Fund, Ltd. (“Bristol Investment”) and Barlock 2019 Fund, LP (“Barlock”), in the principal amount of $1.0 million each. Refer to Note 15 – Related Party Transactions for a further discussion about Bristol Investment and Barlock.

The Company determined that the AR Debentures contained certain features which required bifurcation and separate accounting as embedded derivatives. As such, the Company elected to initially and subsequently measure the AR Debentures in their entirety at fair value with changes in fair value recognized in earnings in accordance with ASC 815. As of September 30, 2023, the fair value of the AR Debentures increased to $4.9 million compared to $2.9 million at the date of the Merger. The Company recognized the $2.1 million and $2.9 million changes in fair value as Loss on adjustment to fair value – AR Debentures on the condensed consolidated statements of operations for the three and nine months ended September 30, 2023, respectively, and the condensed consolidated statement of cash flows for the nine months ended September 30, 2023. Refer to Note 5 – Fair Value Measurements for a further discussion of the fair value of the AR Debentures.

The AR Debentures were fully converted in October 2023.

Small Business Administration Loan

Upon the Merger, the Company assumed a loan agreement with the Small Business Administration (“SBA”). The loan accrued interest at a rate of 3.75% and was scheduled to mature in September 2050. The Company elected to fully repay the SBA loan and the accrued interest in September 2023, which is presented as part of financing cash outflows on the condensed consolidated statement of cash flows for the nine months ended September 30, 2023.