UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________

FORM 10-Q

_________________

(Mark One)

☑

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: ____________to ____________

_____________________

EMPIRE PETROLEUM CORPORATION

(Exact name of registrant as specified in its charter)

_____________________

delaware

001-16653

73-1238709

(State or Other Jurisdiction of

Incorporation or Organization)

(Commission

File Number)

(I.R.S. Employer

Identification No.)

2200 S. Utica Place, Suite 150, Tulsa, OK 74114
(Address of principal executive offices)(Zip Code)

(539) 444-8002

(Registrant’s telephone number, including area code)

(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
Common Stock $.001 par value	EP	NYSE American

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. Yes ☒ No ☐

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). Yes ☒ No ☐

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 ☐
Non-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 ☒

The number of shares of the registrant's common stock, $0.001 par value, outstanding as of the latest practicable date of May 9, 2024 was 30,380,906.

EMPIRE PETROLEUM CORPORATION

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	Page No.

Item 1.	Condensed Consolidated Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023	2

	Condensed Consolidated Statements of Operations – For the Three Months Ended March 31, 2024 and 2023	3

	Condensed Consolidated Statements of Changes in Stockholders' Equity – For the Three Months Ended March 31, 2024 and 2023	4

	Condensed Consolidated Statements of Cash Flows – For the Three Months Ended March 31, 2024 and 2023	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6-16

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17-21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	22


PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	23

Item 1A.	Risk Factors	23

Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	23

Item 3.	Defaults Upon Senior Securities	23

Item 4.	Mine Safety Disclosures	23

Item 5.	Other Information	23

Item 6.	Exhibits	23

	Signatures	24

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

EMPIRE PETROLEUM CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	March 31,			December 31,
	2024			2023
ASSETS
Current Assets:
Cash	$	3,491,465		$	7,792,508
Accounts Receivable		7,290,007			8,354,636
Derivative Instruments		—			406,806
Inventory		1,797,342			1,433,454
Prepaids		1,250,672			757,500
Total Current Assets		13,829,486			18,744,904

Property and Equipment:
Oil and Natural Gas Properties, Successful Efforts		107,020,654			93,509,803
Less: Accumulated Depreciation, Depletion and Impairment		(24,427,923	)		(22,996,805	)
Total Oil and Gas Properties, Net		82,592,731			70,512,998
Other Property and Equipment, Net		1,729,316			1,883,211
Total Property and Equipment, Net		84,322,047			72,396,209

Other Noncurrent Assets		1,931,161			1,474,503

Total Assets	$	100,082,694		$	92,615,616

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable	$	17,194,236		$	16,437,219
Accrued Expenses		7,436,586			7,075,302
Derivative Instruments		440,644			—
Current Portion of Lease Liability		430,273			432,822
Current Portion of Note Payable - Related Party (Note 8)		1,060,004			1,060,004
Current Portion of Long-Term Debt		486,483			44,225
Total Current Liabilities		27,048,226			25,049,572

Long-Term Debt		8,533,693			4,596,775
Long-Term Note Payable - Related Party (Note 8)		2,970,000			—
Long Term Lease Liability		441,748			544,382
Derivative Instruments (Note 8)		1,292,000			—
Asset Retirement Obligations		28,105,761			27,468,427
Total Liabilities		68,391,428			57,659,156

Commitments and Contingencies (Note 15)

Stockholders' Equity:
Series A Preferred Stock - $.001 Par Value, 10,000,000 Shares Authorized, 6 and 6 Shares Issued and Outstanding, Respectively		—			—
Common Stock - $.001 Par Value, 190,000,000 Shares Authorized, 25,623,674 and 25,503,530 Shares Issued and Outstanding, Respectively		85,145			85,025
Additional Paid-in Capital		100,200,135			99,490,253
Accumulated Deficit		(68,594,014	)		(64,618,818	)
Total Stockholders' Equity		31,691,266			34,956,460

Total Liabilities and Stockholders' Equity	$	100,082,694		$	92,615,616

See accompanying notes to condensed consolidated financial statements.

EMPIRE PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended March 31,
	2024			2023
Revenue:
Oil Sales	$	9,441,964		$	8,938,715
Gas Sales		377,130			656,035
NGL Sales		416,211			504,954
Total Product Revenues		10,235,305			10,099,704
Other		10,086			19,364
Loss on Derivatives		(858,150	)		(66,823	)
Total Revenue		9,387,241			10,052,245

Costs and Expenses:
Lease Operating Expense		7,387,423			6,520,163
Production and Ad Valorem Taxes		833,447			758,114
Depletion, Depreciation & Amortization		1,490,130			622,489
Accretion of Asset Retirement Obligation		485,349			401,275
General and Administrative Expense:
General and Administrative Expense		2,879,037			3,023,279
Stock-Based Compensation		710,002			949,639
Total General and Administrative Expense		3,589,039			3,972,918

Total Costs and Expenses		13,785,388			12,274,959

Operating Income (Loss)		(4,398,147	)		(2,222,714	)

Other Income and (Expense):
Interest Expense		(315,049	)		(237,299	)
Other Income (Expense) (Note 8)		738,000			422
Income (Loss) Before Income Taxes		(3,975,196	)		(2,459,591	)

Income Tax (Provision) Benefit		—			—

Net Income (Loss)	$	(3,975,196	)	$	(2,459,591	)

Net Income (Loss) per Common Share:
Basic	$	(0.15	)	$	(0.11	)
Diluted	$	(0.15	)	$	(0.11	)
Weighted Average Number of Common Shares Outstanding:
Basic		25,688,427			22,096,796
Diluted		25,688,427			22,096,796

See accompanying notes to condensed consolidated financial statements.

EMPIRE PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Three Months Ended March 31, 2024 and 2023

(Unaudited)


									Additional
	Common Stock				Preferred Stock				Paid-In		Accumulated
	Shares		Par Value		Shares		Par Value		Capital		Deficit			Total
Balances, December 31, 2023		25,503,530	$	85,025		6	$	—	$	99,490,253	$	(64,618,818	)	$	34,956,460

Net Loss		—		—		—		—		—		(3,975,196	)		(3,975,196	)

Stock-Based Compensation		120,144		120		—		—		709,882		—			710,002

Balances, March 31, 2024		25,623,674	$	85,145		6	$	—	$	100,200,135	$	(68,594,014	)	$	31,691,266

									Additional
	Common Stock				Preferred Stock				Paid-In			Accumulated
	Shares		Par Value		Shares		Par Value		Capital			Deficit			Total
Balances, December 31, 2022		22,093,503	$	81,615		6	$	—	$	75,303,479		$	(52,149,213	)	$	23,235,881

Net Loss		—		—		—		—		—			(2,459,591	)		(2,459,591	)

Impact of Former CEO settlement		—		—		—		—		(2,126,131	)		—			(2,126,131	)

Stock-Based Compensation		11,089		11		—		—		949,628			—			949,639

Balances, March 31, 2023		22,104,592	$	81,626		6	$	—	$	74,126,976		$	(54,608,804	)	$	19,599,798

See accompanying notes to condensed consolidated financial statements.

EMPIRE PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Three Months Ended March 31,
	2024			2023
Cash Flows From Operating Activities:
Net Income (Loss)	$	(3,975,196	)	$	(2,459,591	)

Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By Operating Activities:
Stock-Based Compensation		710,002			949,639
Amortization of Right of Use Assets		135,733			76,225
Depreciation, Depletion and Amortization		1,490,130			622,489
Accretion of Asset Retirement Obligation		485,349			401,275
Loss on Commodity Derivatives		858,150			66,823
Settlement on or Purchases of Commodity Derivative Instruments		(10,700	)		(41,187	)
Gain on Financial Derivatives		(738,000	)		—
Change in Operating Assets and Liabilities:
Accounts Receivable		1,064,629			(849,909	)
Inventory, Oil in Tanks		(363,888	)		(420,859	)
Prepaids, Current		(2,398	)		89,812
Accounts Payable		4,339,024			(213,611	)
Accrued Expenses		361,284			(110,053	)
Other Long-Term Assets and Liabilities		(446,430	)		(3,177,767	)
Net Cash Provided By (Used In) Operating Activities		3,907,689			(5,066,714	)

Cash Flows From Investing Activities:
Additions to Oil and Natural Gas Properties ^(a)		(16,940,873	)		(2,210,004	)
Purchase of Other Fixed Assets		(31,023	)		(27,170	)
Cash Paid for Right of Use Assets		(125,238	)		(86,545	)
Sinking Fund Deposit		—			2,779,000
Net Cash Provided By (Used In) Investing Activities		(17,097,134	)		455,281

Cash Flows From Financing Activities:
Borrowings on Credit Facility		3,950,000			—
Proceeds from Promissory Note - Related Party (Note 8)		5,000,000
Principal Payments of Debt		(61,598	)		(569,136	)
Net Cash Provided By (Used In) Financing Activities		8,888,402			(569,136	)

Net Change in Cash		(4,301,043	)		(5,180,569	)

Cash - Beginning of Period		7,792,508			11,944,442

Cash - End of Period	$	3,491,465		$	6,763,873

Supplemental Cash Flow Information:
Cash Paid for Interest	$	179,893		$	136,761

________

(a)

Incurred capital expenditures were $13,358,866 and $2,210,004 for the respective periods. The differences between incurred and cash capital expenditures is due to changes in related accounts payable.

See accompanying notes to condensed consolidated financial statements.

EMPIRE PETROLEUM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization and Basis of Presentation

Empire Petroleum Corporation (the “Company”, collectively with its subsidiaries) is an independent energy company operator engaged in optimizing developed production by employing field management methods to maximize reserve recovery while minimizing costs. Empire operates the following wholly-owned subsidiaries in its areas of operations:

●	Empire New Mexico, LLC (“Empire New Mexico”)
		o	Empire New Mexico LLC d/b/a Green Tree New Mexico
		o	Empire EMSU LLC
		o	Empire EMSU-B LLC
		o	Empire AGU LLC
		o	Empire NM Assets LLC
●	Empire Rockies Region
		o	Empire North Dakota LLC (“Empire North Dakota”)
		o	Empire North Dakota Acquisition LLC (“Empire NDA”)
●	Empire Texas (“Empire Texas”), consisting of the following entities:
		o	Empire Texas LLC
		o	Empire Texas Operating LLC
		o	Empire Texas GP LLC
		o	Pardus Oil & Gas Operating, LP (owned 1% by Empire Texas GP LLC and 99% by Empire Texas LLC)
●	Empire Louisiana LLC (“Empire Louisiana”)

Empire was incorporated in the State of Delaware in 1985. The consolidated financial statements of Empire Petroleum Corporation and subsidiaries include the accounts of the Company and its wholly-owned subsidiaries.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company's financial position, the results of operations, and the cash flows for the interim period are included. All adjustments are of a normal, recurring nature. Certain amounts in prior periods have been reclassified to conform to current presentation. Operating results for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.

The information contained in this Form 10-Q should be read in conjunction with the audited financial statements and related notes for the year ended December 31, 2023 which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2024.

Note 2 – Summary of Significant Accounting Policies

Significant Accounting Policies

During the three months ended March 31, 2024, the Company added one significant accounting policy and estimate relating to convertible debt and derivative liability. Besides this, there have been no material changes to significant accounting policies and estimates from the information provided in the Form 10-K for the year ended December 31, 2023.

Convertible Debt and Derivative Liability

In connection with the Company’s issuance of a Promissory Note (the “Note”) in the first quarter of 2024, the Company bifurcated the embedded conversion option, and recorded the embedded conversion option as a long-term derivative liability in accordance with FASB ASC 815, Derivatives and Hedging. The convertible debt and the derivative liability associated with the Note are presented on the Condensed Consolidated Balance Sheets as the Long-Term Note Payable – Related Party and long-term Derivative Instruments. The convertible debt is carried at amortized cost. The derivative liability will be remeasured at each reporting period using a binomial lattice model with changes in fair value recorded in the Condensed Consolidated Statements of Operations in Other Income (Expense). See Note 8 for further details.

Fair Value Measurements

The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (ASC Topic 820), defines fair value, establishes a consistent framework for measuring fair value and establishes a fair value hierarchy based on the observability of inputs used to measure fair value.

The three-level fair value hierarchy for disclosure of fair value measurements defined by ASC Topic 820 is as follows:

Level 1 – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Inputs, other than quoted prices within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 – Prices or valuations that require unobservable inputs that are both significant to the fair value measurement and unobservable. Valuation under Level 3 generally involves a significant degree of judgment from management.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve a degree of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instrument’s complexity. The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level. There were no transfers between fair value hierarchy levels for the period ended March 31, 2024.

Financial instruments and other – The fair values determined for accounts receivable, accrued expenses and other current liabilities were equivalent to the carrying value due to their short-term nature.

Derivatives – Derivative financial instruments are carried at fair value and measured on a recurring basis. The Company’s commodity price hedges are valued based on discounted future cash flow models that are primarily based on published forward commodity price curves; thus, these inputs are designated as Level 2 within the valuation hierarchy.

The fair values of derivative instruments in asset positions include measures of counterparty nonperformance risk, and the fair values of derivative instruments in liability positions include measures of the Company’s nonperformance risk. These measurements were not material to the Condensed Consolidated Financial Statements.

Assets and Liabilities Measured at Fair Value on a Recurring Basis - The Company uses a binomial lattice valuation model to value the Level 3 derivative liabilities at inception and on subsequent valuation dates. This model incorporates transaction details such as the Company’s stock price, contractual terms of the Note and unobservable inputs classified as Level 3 including risk-free rate and expected volatility. As of March 31, 2024, these unobservable inputs were 4.6% and 50%, respectively. The fair value of the embedded derivative liability will be reassessed quarterly using the same binomial lattice valuation model.

Fair Value on a Nonrecurring Basis

The Company applies the provisions of fair value measurement on a non-recurring basis to its non-financial assets and liabilities, including oil and gas properties and asset retirement obligations. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments if events or changes in certain circumstances indicate that adjustments may be necessary. No triggering events that require assessment of such items were observed during the three months ended March 31, 2024.

Related Party Transactions

Transactions between related parties are considered to be related party transactions even though they may not be given accounting recognition. FASB ASC 850, Related Party Disclosures requires that transactions with related parties that would have influence in decision making shall be disclosed so that users of the financial statements can evaluate their significance. Related party transactions typically occur within the context of the following relationships: affiliates of the entity; entities for which investments in their equity securities is typically accounted for under the equity method by the investing entity; trusts for the benefit of employees; principal owners of the entity and members of their immediate families; management of the entity and members of their immediate families; and other parties that can significantly influence the management or operating policies of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

Concentrations of Credit Risk

The Company’s accounts receivable are primarily receivables from oil and natural gas purchasers and joint interest owners. The purchasers of the Company’s oil and natural gas production consist primarily of independent marketers, major oil and natural gas companies and gas pipeline companies. Historically, the Company has not experienced any significant losses from uncollectible accounts from its oil and natural gas purchasers. The Company operates a substantial portion of its oil and natural gas properties. As the operator of a property, the Company makes full payments for costs associated with the property and seeks reimbursement from the other working interest owners in the property for their share of those costs. Joint operating agreements govern the operations of an oil or natural gas well and, in most instances, provide for offsetting of amounts payable or receivable between the Company and its joint interest owners. The Company’s joint interest partners consist primarily of independent oil and natural gas producers. If the oil and natural gas exploration and production industry in general was adversely affected, the ability of the Company’s joint interest partners to reimburse the Company could be adversely affected.

Recently Adopted Accounting Standards

The FASB periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. The Company has reviewed the recently issued pronouncements and concluded that the following new accounting standards are applicable:

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in this ASU affect entities that issue convertible instruments and/or contracts in an entity’s own equity. The amendments in this ASU primarily affect convertible instruments issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed. However, all entities that issue convertible instruments are affected by the amendments to the disclosure requirements of this ASU. For contracts in an entity’s own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted for as derivatives under the current guidance because of failure to meet the settlement conditions of the derivatives scope exception related to certain requirements of the settlement assessment. Also affected is the assessment of whether an embedded conversion feature in a convertible instrument qualifies for the derivatives scope exception. Additionally, the amendments in this ASU affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. The amendments in this ASU are effective for public business entities, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Board specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The Board decided to allow entities to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Company has adopted this standard for the current year and does not expect it to have a material impact on our consolidated financial statements.

Note 3 – Property

The Company follows the successful efforts method of accounting for its oil and natural gas activities. Under this method, costs to acquire oil and natural gas properties and costs incurred to drill and equip development and exploratory wells are deferred until exploration and completion results are evaluated. Exploration drilling costs are expensed if recoverable reserves are not found. Upon sale or retirement of oil and natural gas properties, the costs and related accumulated depreciation, depletion and amortization are eliminated from the accounts and the resulting gain or loss is recognized.

Costs incurred to maintain wells and related equipment and lease and well operating costs are charged to expense as incurred.

Depletion is calculated on a units-of-production basis at the field level based on total proved developed reserves.

Proved oil and natural gas properties are reviewed for impairment at least annually, or as indicators of impairment arise. There have been no indicators of impairment during the three months ended March 31, 2024.

Aggregate capitalized costs of oil and natural gas properties are as follows:

	March 31, 2024			December 31, 2023

Proved properties	$	92,634,087		$	75,346,623
Unproved properties		3,708,264			3,245,431
Work in process		10,678,303			14,917,749
Gross capitalized costs		107,020,654			93,509,803

Depreciation, depletion, amortization and impairment		(24,427,923	)		(22,996,805	)
Total oil and gas properties, net	$	82,592,731		$	70,512,998

Depletion and amortization expense related to oil and gas properties for the three months ended March 31, 2024 and 2023 was approximately $1,431,000 and $563,000, respectively.

The Company completed four wells in North Dakota related to our Starbuck Drilling program during the first quarter of 2024.

Other property and equipment consists of operating lease assets, vehicles, office furniture, and equipment with lives ranging from three to five years.

	March 31, 2024			December 31, 2023

Other property and equipment, at cost	$	3,029,041		$	2,998,018
Less: Accumulated depreciation		(1,299,725	)		(1,114,807	)
Other property and equipment, net	$	1,729,316		$	1,883,211

Depreciation expense related to other property and equipment for the three months ended March 31, 2024 and 2023 was approximately $59,000.

Note 4 - Asset Retirement Obligations

The Company’s asset retirement obligations represent the estimated present value of the estimated cash flows the Company will incur to plug, abandon, and remediate its producing properties at the end of their productive lives, in accordance with applicable state laws. Market risk premiums associated with asset retirement obligations are estimated to represent a component of the Company’s credit-adjusted risk-free rate that is utilized in the calculations of asset retirement obligations.

The Company’s asset retirement obligation activity is as follows:


	For the Three Months Ended March 31,
	2024		2023

Asset retirement obligations, beginning of period	$	28,168,427	$	25,000,740
Additions		151,985		—
Liabilities settled		—		(190,375	)
Revisions		—		(68,809	)
Accretion expense		485,349		401,275
Asset retirement obligation, end of period	$	28,805,761	$	25,142,831
Less current portion included in Accrued Expenses		700,000		—
Asset retirement obligation, long-term	$	28,105,761	$	25,142,831

The additions in 2024 primarily relate to the completion of four wells in our North Dakota Starbuck Drilling Program during the quarter.

Note 5 – Commodity Derivative Financial Instruments

The Company uses derivative financial instruments to manage its exposure to commodity price fluctuations. Commodity derivative instruments are used to reduce the effect of volatility of price changes on the oil and natural gas the Company produces and sells. The Company does not enter into derivative financial instruments for speculative or trading purposes. The Company’s derivative financial instruments consist of swaps and put options.

The Company does not designate its derivative instruments in such a way that would qualify for hedge accounting. Accordingly, the Company reflects changes in the fair value of its derivative instruments in its consolidated statements of operations as they occur. Unrealized gains and losses related to the contracts are recognized and recorded as changes to the derivative asset or liability on the Company’s consolidated balance sheets.

The following table summarizes the net realized and unrealized losses reported in earnings related to the commodity derivative instruments for the three months ended March 31, 2024 and 2023:

	Three Months Ended March 31,
	2024			2023
Loss on Derivatives:
Oil derivatives (a)	$	(858,150	)	$	(66,823	)

________

(a)

Includes $847,450 and $25,636 of unrealized derivative losses for the respective periods.

The following represents the Company’s net settlements related to derivatives for the three months ended March 31, 2024 and 2023:

	Three Months Ended March 31,
	2024			2023

Oil derivatives	$	(10,700	)	$	(41,187	)

The following table sets forth the Company’s outstanding derivative contracts at March 31, 2024:

	2nd Quarter 2024		3rd Quarter 2024		4th Quarter 2024

WTI Fixed-Price Swaps:
Quarterly volume (MBbls)		30.00		30.00		30.00
Weighted-average fixed price (Bbl)	$	72.15	$	77.02	$	75.57

Note 6 – Accounts Receivable

The following table represents the Company’s accounts receivable as of March 31, 2024 and December 31, 2023:

	March 31, 2024		December 31, 2023

Oil, Gas and NGL Receivables	$	3,227,706	$	2,784,745
Joint Interest Billings		4,026,259		5,444,331
Other		36,042		125,560
Total Accounts Receivable	$	7,290,007	$	8,354,636

Note 7 – Accrued Expenses

The following table represents the Company’s accrued expenses as of March 31, 2024 and December 31, 2023:

	March 31, 2024		December 31, 2023

Accrued and suspended third-party revenue	$	4,459,055	$	4,049,984
Accrued salaries and payroll taxes		1,032,523		1,059,295
Accrued production taxes		774,359		829,226
Other		1,170,649		1,136,797
	$	7,436,586	$	7,075,302

Note 8 – Debt Including Debt with Related Parties

The following table represents the Company’s outstanding debt as of March 31, 2024 and December 31, 2023:

	As of March 31, 2024			As of December 31, 2023

Equity Bank Credit Facility	$	8,442,484		$	4,492,484

Promissory Note – Related Party		2,970,000			—

Note Payable – Related Party		1,060,004			1,060,004

Equipment and vehicle notes, 0.00% to 9.00% interest rates, due in 2025 to 2028 with monthly payments ranging from $900 to $1,400 per month		135,995			148,516

Note Payable to insurance provider, bears 7.29% interest, matures January 2025, monthly payments of principal and interest of $51,067		441,697			—

Total Debt		13,050,180			5,701,004
Less: Current Maturities		(486,483	)		(44,225	)
Less: Promissory Note – Related Party		(2,970,000	)		—
Less: Note Payable – Related Party		(1,060,004	)		(1,060,004	)
Long-Term debt	$	8,533,693		$	4,596,775

On December 29, 2023, Empire North Dakota and Empire NDA ("Borrowers”), entered into a Revolver Loan Agreement with Equity Bank (the "Credit Facility”). Pursuant to the Credit Facility (a) the initial revolver commitment amount is $10,000,000; (b) the maximum revolver commitment amount is $15,000,000; (c) commencing on January 31, 2024, and occurring on the last day of each calendar month thereafter, the revolver commitment amount is reduced by $150,000; (d) commencing on March 31, 2024, there are scheduled semiannual collateral borrowing base redeterminations each year on March 31 and September 30; (e) the final maturity date is December 29, 2026; (f) outstanding borrowings bear interest at a rate equal to the prime rate of interest plus 1.50%, and in no event lower than 8.50%; (g) a quarterly commitment fee is based on the unused portion of the commitments; and (h) Borrowers have the right to prepay loans under the Credit Facility at any time without a prepayment penalty.

The Credit Facility is guaranteed by the Company. Borrowers entered into a security agreement, pursuant to which the obligations under the Credit Facility are secured by liens on substantially all of the assets of Borrowers. Furthermore, the obligations under the Credit Facility are secured by a continuing, first priority mortgage lien, pledge of and security interest in not less than 80% of Borrowers’ producing oil, gas and other leasehold and mineral interests, including without limitation, those situated in the States of North Dakota and Montana.

The Credit Facility requires Borrowers to, commencing as of the fiscal quarter ended December 31, 2023, maintain (a) a current ratio of 1.0 to 1.0 or more and (b) a ratio of funded debt to EBITDAX, calculated quarterly and annually based on a trailing twelve-month basis, of no more than 3.50 to 1.00. At March 31, 2024, the Borrowers were technically not in compliance with the current ratio covenant, however, the noncompliance was resolved within the applicable cure period in accordance with the Credit Facility agreement following the completion of a subscription rights offering on April 10, 2024 in which the Company received approximately $20.66 million in cash (see Note 10). The Company is in compliance with the other covenants as of March 31, 2024.

Promissory Note – Related Party

On February 16, 2024, the Company issued a Promissory Note in the aggregate principal amount of $5,000,000 (the "Note”) to Energy Evolution Master Fund, Ltd. (“Energy Evolution”). Energy Evolution has advanced the Company $5,000,000 under the Note. The proceeds of the Note will be used by the Company to fund, in part, its ongoing oil and gas drilling program and for working capital purposes.

The Note matures on February 15, 2026 (the "Maturity Date”) and accrues interest at the rate of 7% per annum. After the Maturity Date, any principal balance of the Note remaining unpaid accrues interest at the rate of 9% per annum. At the option of Energy Evolution, interest payments will be paid either in cash or in shares of common stock of the Company on each of the following dates (or if any such

date is not a business day, the next following business day) (each an "Interest Payment Date”), except upon the occurrence of an Event of Default, in which case interest will accrue and be paid in cash on demand: (i) March 31, 2024; (ii) June 30, 2024; (iii) September 30, 2024; (iv) December 31, 2024; (v) March 31, 2025; (vi) June 30, 2025; (vii) September 30, 2025; (viii) December 31, 2025; and (ix) the Maturity Date. All or any portion of the outstanding principal amount of the Note may be converted into shares of common stock of the Company at a conversion price of $6.25 per share (the "Conversion Price”), at the option of Energy Evolution, at any time and from time to time. If the full principal amount of the Note is drawn and converted into shares of common stock of the Company, 800,000 shares would be issued (without giving effect to any interest that may be converted). Accrued interest on the principal amount converted will be due on the applicable date of conversion in cash or, at the option of Energy Evolution, by issuance of shares of common stock of the Company in the manner set forth in the Note (where the date of conversion is the relevant Interest Payment Date”). The Conversion Price is subject to customary adjustments. The Note may be prepaid at any time or from time to time without the consent of Energy Evolution and without penalty or premium, provided that the Company provides Energy Evolution with at least five business days prior written notice, each principal payment is made in cash and all accrued interest is paid in cash, or at the option of Energy Evolution, the accrued interest may be paid by issuance of shares of common stock of the Company in the manner set forth in the Note (where the Interest Payment Date is the date of prepayment).

The Company determined that an embedded conversion feature included in the Promissory Note required bifurcation from the host contract that is recognized as a separate derivative liability carried at fair value. The estimated fair value of the derivative liability, which represents a Level 3 valuation, was $1,292,000 as of March 31, 2024 and was determined using a binomial lattice model using certain assumptions and inputs discussed in Note 2. Accordingly, the Company has recognized a gain on the fair value adjustment of the derivative liability in the amount of approximately $738,000 in Other Income (Expense) in the Condensed Consolidated Statements of Operations for the quarter ended March 31, 2024. All of the other embedded features of the Note were clearly and closely related to the debt host and did not require bifurcation as a derivative liability.

Note Payable – Related Party

In August 2020, the Company, through its wholly owned subsidiary, Empire Texas, entered into a joint development agreement (the "JDA”) with Petroleum & Independent Exploration, LLC and related entities ("PIE”), a related party (see Note 14), dated August 1, 2020. Under the terms of the JDA, PIE will perform recompletion or workover on specified mutually agreed upon wells ("Workover Wells”) owned by Empire Texas. Concurrent with the JDA with PIE, the Company entered into a term loan agreement dated August 1, 2020, whereby PIE will loan up to $2,000,000, at an interest rate of 6% per annum, maturing August 7, 2024 unless terminated earlier by PIE. The loan proceeds were used for recompletion or workover of certain designated wells. In addition, the Company assigned 85% working and revenue interest to PIE in the designated wells which will be applied to repayment of the loan. As of March 31, 2024, $1,060,004 has been advanced from the PIE loan.

Note 9 - Leases

As a lessee, the Company leases its corporate office headquarters in Tulsa, Oklahoma and one field office. The leases expire between 2024 and 2028. The corporate office has an option to renew for an additional five-year term. The option to renew the lease is generally not considered reasonably certain to be exercised. Therefore, the period covered by such optional period is not included in the determination of the term of the lease and the lease payments during these periods are similarly excluded from the calculation of right-of-use lease asset and lease liability balances.

The Company also leases vehicles primarily used in our field operations. These vehicle leases typically have a three-year life.

The Company recognizes right-of use lease expense on a straight-line basis, except for certain variable expenses that are recognized when the variability is resolved, typically during the period in which they are paid. Variable right-of-use lease payments typically include charges for property taxes, insurance, and variable payments related to non-lease components, including common area maintenance.

Right-of-use lease expense was approximately $136,000 and $77,600 for the three months ended March 31, 2024 and 2023, respectively. Cash paid for right-of-use leases was approximately $125,000 and $78,400 for the same periods.

Supplemental balance sheet information related to the right-of-use leases is as follows:

Schedule of right of use leases


	March 31, 2024		December 31, 2023

Net operating lease asset (included in Other Property and Equipment)	$	958,648	$	1,077,031

Current portion of lease liability	$	430,273	$	432,822
Long-term lease liability		441,748		544,382
Total right-of-use lease liabilities	$	872,021	$	977,204

The weighted-average remaining term for the Company’s right-of-use leases is 2.1 years. The weighted-average discount rate was 8.51% for the first quarter of 2024.

Maturities of lease liabilities are as follows as of March 31, 2024:


Year 1	$	486,584
Year 2		376,628
Year 3		86,680
Year 4		3,100
Year 5		—
Total lease payments		952,992
Less imputed interest		(80,971	)
Total lease obligation	$	872,021

Note 10 – Equity

Pursuant to the Company’s Amended and Restated Certificate of Incorporation (“Charter”), effective as of March 4, 2022, the total number of shares of all classes of stock that the Company has the authority to issue is 200,000,000, consisting of 190,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share.

Preferred Stock

Preferred stock may be issued from time to time in one or more series at the direction of the Board of Directors and the directors also have the ability to fix dividend rates and rights, liquidation preferences, voting rights, conversion rights, rights and terms of redemption and other rights, preferences, privileges and restrictions as determined by the Board of Directors, subject to certain limitations set forth in the Charter.

Series A Voting Preferred Stock

On March 8, 2022, the Company formalized the issuance of preferred stock as was required under the terms of the Company's May 2021 financing agreements with Energy Evolution and issued six shares of Series A Voting Preferred Stock. The Series A Voting Preferred Stock was issued in connection with the strategic investment in the Company by Energy Evolution. For so long as the Series A Voting Preferred Stock is outstanding, the Company’s Board of Directors will consist of six directors. Three of the directors are designated as the Series A Directors and the three other directors (each, a “common director”) are elected by the holders of common stock and/or any preferred stock (other than the Series A Voting Preferred Stock) granted the right to vote on the common directors. Any Series A Director may be removed with or without cause but only by the affirmative vote of the holders of a majority of the Series A Voting Preferred Stock voting separately and as a single class. The holders of the Series A Voting Preferred Stock have the exclusive right, voting separately and as a single class, to vote on the election, removal and/or replacement of the Series A Directors. Holders of common stock or other preferred stock do not have the right to vote on the Series A Directors. The approval of the holders of the Series A Voting Preferred Stock, voting separately and as a single class, is required to authorize any resolution or other action to issue or modify the number, voting rights or any other rights, privileges, benefits, or characteristics of the Series A Voting Preferred Stock, including without limitation, any action to modify the number, structure and/or composition of the Company’s current Board of Directors.

The Series A Voting Preferred Stock is held by Phil Mulacek, chairman of the Board of Directors and one of the principals of Energy Evolution, as Energy Evolution’s designee (the “Initial Holder”). The Series A Voting Preferred Stock may be transferred only to certain controlled affiliates of the Initial Holder (“Permitted Transferees”), and the voting rights of the Series A Voting Preferred Stock are contingent upon the Initial Holder and Permitted Transferees (collectively, the “Series A Holders”) holding together at least 3,000,000 shares of the Company’s outstanding common stock.

The Series A Voting Preferred Stock is not entitled to receive any dividends or distributions of cash or other property except in the event of any liquidation, dissolution or winding up of the Company’s affairs. In such event, before any amount is paid to the holders of the Company’s common stock but after any amount is paid to the holders of the Company’s senior securities, the holders of the Series A Voting Preferred Stock will be entitled to receive an amount per share equal to $1.00.

Except as discussed above or as otherwise set forth in the certificate of designation of the Series A Voting Preferred Stock, the holders of the Series A Voting Preferred Stock have no voting rights.

The Series A Voting Preferred Stock is not redeemable at the Company’s election or the election of any holder, except the Company may elect to redeem the Series A Voting Preferred Stock for $1.00 per share following satisfaction of its notice and cure requirements in the event that:

	•	any or all shares of Series A Voting Preferred Stock are held by anyone other than the Initial Holder or a Permitted Transferee; or
	•	the Series A Holders together hold less than 3,000,000 shares of the Company’s outstanding common stock.

The Series A Voting Preferred Stock is not convertible into common stock or any other security.

Common Stock

On August 27, 2021, the Company’s Board of Directors approved a one-for-four reverse stock split such that every holder of the Company’s common stock would receive one share of common stock for every four shares owned. The reverse stock split was effective as of 6:00 p.m. Eastern Time on March 7, 2022, immediately prior to the Company’s listing of its common stock on the NYSE American.

The holders of shares of common stock are entitled to one vote per share for all matters on which common stockholders are authorized to vote on. Examples of matters that common stockholders are entitled to vote on include, but are not limited to, election of three of the six directors and other common voting situations afforded to common stockholders.

In April 2024, the Company completed a subscription rights offering (“Rights Offering”) which raised gross proceeds of $20.66 million. The Company distributed at no charge to holders of its common stock, as of the close of business on March 7, 2024 (the record date for the Rights Offering), one subscription right for each share of Common Stock held. Each subscription right entitled the holder to purchase 0.161 shares of Common Stock at a subscription price of $5.00 per share per one whole share of Common Stock. The subscription rights were non-transferable and not listed for trading on any stock exchange or market.

Earnings Per Share

The computation of diluted shares outstanding for the three months ended March 31, 2024 excluded 1,460,589 shares related to stock options, warrants, outstanding RSUs, and convertible debt as their effect would have been anti-dilutive. The computation of diluted shares outstanding for the three months ended March 31, 2023 excluded 2,348,009 shares related to stock options, warrants, and outstanding RSUs, as their effect would have been anti-dilutive.

Note 11 – Stock-Based Compensation

The Company recognizes stock-based compensation expense associated with granted stock options and restricted stock units (RSUs). The Company accounts for forfeitures of equity-based incentive awards as they occur. Stock-based compensation expense related to time-based restricted stock units is based on the price of the common stock on the grant date and recognized as vesting occurs. For options, the fair value is determined using the Black-Scholes option valuation assumptions on dividend yield, expected annual volatility, risk-free interest rate and an expected useful life. Stock-based compensation is recorded with a corresponding increase in Additional Paid-in Capital within the Condensed Consolidated Balance Sheets.

The following summary reflects nonvested restricted stock unit activity and related information for the three months ended March 31, 2024.

				Weighted Average
	RSUs			Fair Value ^(a)

Outstanding, December 31, 2023		204,817		$	10.61
Granted		—			—
Vested		(45,515	)		11.75
Forfeited		(22,500	)		11.05
Outstanding, March 31, 2024		136,802		$	10.16


(a) Shares are valued at the grant-date market price.

The following summary reflects stock option activity and related information:

				Weighted Average
	Options			Exercise Price

Outstanding, December 31, 2023		2,065,381		$	4.89
Granted		—			—
Exercised		(119,100	)		1.32
Cancelled		—			—
Outstanding, March 31, 2024		1,946,281		$	5.10

The following table summarizes information about stock options outstanding as of March 31, 2024.

Range of	Options	Weighted Average	Weighted	Options	Weighted
Exercise	Outstanding	Remaining	Average	Exercisable	Average
Prices	at 3/31/24	Contractual Life	Exercise Price	at 3/31/24	Exercise Price

$1.32 to $12.36	1,946,281	4.67 years	$5.10	1,486,110	$3.23

Note 12 – Executive Separations

On March 16, 2023, Thomas W. Pritchard resigned as Chief Executive Officer and a director of the Company to pursue other opportunities. Although not required under Mr. Pritchard’s Employment Agreement with the Company, in recognition of Mr. Pritchard’s past service to the Company, the Company will pay Mr. Pritchard severance benefits in the amount of approximately $360,000, as set forth in Section 4.2 of his Employment Agreement, in one lump sum payment within 30 days after March 23, 2023, rather than in monthly installments. This was accrued as of March 31, 2023, and payment was made in April 2023. The Company also extended the period under which Mr. Pritchard has the right to exercise his outstanding vested non-qualified stock options from three months after the date of his termination of employment to September 16, 2024.  In addition, Mr. Pritchard has surrendered to the Company 340,234 RSUs and options as satisfaction for the $2.1 million receivable that primarily resulted from incorrect withholdings associated with an April 2022 option exercise by Mr. Pritchard. The Company also had a $2.1 million liability recorded at December 31, 2022, related to withholding payables that were remitted in 2023. 

On March 17, 2023, the Board of Directors appointed Michael R. Morrisett to the position of Chief Executive Officer. Mr. Morrisett did not receive any additional compensation for assuming the role of Chief Executive Officer.

Note 13 – Income Taxes

For all periods presented, the Company’s effective tax rate is 0%. Other than the full year of 2022, the Company has generated net operating losses since inception, which would normally reflect a tax benefit in the Condensed Consolidated Statement of Operations and a deferred asset on the Condensed Consolidated Balance Sheet. However, because of the current uncertainty as to the Company’s ability to achieve sustained profitability, a valuation reserve has been established that offsets the amount of any tax benefit available for each period presented in the Condensed Consolidated Statements of Operations. The following table presents a reconciliation of its effective income tax rate to the U.S. statutory income tax rate for the three months ended March 31, 2024 and 2023.

	For the Three Months Ended March 31,
	2024		2023
	$	%	$	%

Provision (benefit) at statutory rate	(834,791)	21.0%	(516,514)	21.0%
State Taxes (net of federal impact)	(190,937)	4.8%	(118,333)	4.8%
Nondeductible Expenses	6,401	-0.2%	(2,460)	0.1%
Stock Options Exercised	(103,796)	2.6%	—	0.0%
Valuation Allowance	1,123,123	-28.3%	637,307	-25.9%
Income tax provision (benefit)	—	0.0%	—	0%

Note 14 – Related Party Transactions

Energy Evolution is a related party of the Company as it beneficially owns approximately 26.6% of the Company’s outstanding shares of common stock as of March 31, 2024. Subsequent to the Rights Offering (see Note 10) Energy Evolution beneficially owns

approximately 30.1% of the Company’s outstanding shares. Additionally, a board member of Energy Evolution was appointed to the Company’s board in October 2021. This board member separately beneficially owns approximately 19.3% of the Company’s outstanding shares of common stock as of March 31, 2024. Subsequent to the Rights Offering this board member beneficially owns approximately 20.6% of the Company’s outstanding shares. The board member also is a majority owner of PIE. In October 2021 another Energy Evolution member was appointed to the Company’s board of directors.

The Company has a JDA with PIE to perform completions or workovers on specified mutually agreed upon wells (see Note 8). As of March 31, 2024, the Company has incurred obligations of approximately $1.1 million as a part of the JDA.

On February 16, 2024, the Company issued a Promissory Note in the aggregate principal amount of $5,000,000 (the "Note”) to Energy Evolution (see Note 8). As of March 31, 2024, Energy Evolution has advanced the Company $5,000,000 under the Note.

Accounts receivable on the Condensed Consolidated Balance Sheet includes approximately $1,030,000 receivable from Energy Evolution. Accrued Expenses includes approximately $213,000 of revenue payable to Energy Evolution.

Note 15 – Commitments and Contingencies

From time to time, the Company is subject to various legal proceedings arising in the ordinary course of business, including proceedings for which the Company may not have insurance coverage. While many of these matters involve inherent uncertainty, as of the date hereof, the Company does not currently believe that any such legal proceedings will have a material adverse effect on the Company’s business, financial position, results of operations or liquidity.

The Company is subject to extensive federal, state, and local environmental laws and regulations. These laws, among other things, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Management believes no materially significant liabilities of this nature existed as of the balance sheet date.

Agreed Compliance Order

In January 2024, the Company deposited $1 million into an escrow account in accordance with an Agreed Compliance Order (“ACO”) with the New Mexico Oil Conservation Division (“OCD”) for compliance work on certain inactive wells in New Mexico. Under the terms of the ACO, the escrow funds will be returned to the Company at a rate of $10,000 for each well as the compliance work is completed. In February 2024, $550,000 of the escrow funds were returned to the Company following the completion of work on 55 wells. As of March 31, 2024, the remaining escrow balance of $450,000 is included in other noncurrent assets in the Condensed Consolidated Balance Sheet. In April 2024, we completed work on an additional 25 wells and expect to receive $250,000 from the escrow account in the second quarter of 2024.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q, including this section, includes certain statements that may be deemed “forward-looking statements” within the meaning of federal securities laws. All statements, other than statements of historical facts, which address activities, events, or developments that the Company expects, believes, or anticipates will or may occur in the future, including future sources of financing and other possible business developments, are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties and could be affected by a number of distinct factors, including the Company’s failure to secure short and long-term financing necessary to sustain and grow its operations, increased competition, changes in the markets in which the Company participates and the technology utilized by the Company and new legislation regarding environmental matters. These risks and other risks that could affect the Company's business are more fully described in reports the Company files with the SEC, including its Annual Report on Form 10-K for the year ended December 31, 2023. Actual results may vary materially from the forward-looking statements. The Company undertakes no duty to update any of the forward-looking statements in this Form 10-Q.

Overview

Our primary business is the optimization and development of oil and gas interests. In 2022 we had net income from operations but have incurred losses from operations in 2023 and 2024 and in years prior to 2022. There is no assurance that we will be profitable or obtain funds necessary to finance our future operations.

We seek to increase shareholder value by growing reserves, production, revenues, and cash flow from operating activities by executing our mission to use highly-skilled personnel to thoughtfully and expertly spend capital to realize reserves on producing properties as well as further develop fields.

Management places emphasis on operating cash flow in managing our business, as operating cash flow considers the cash expenses incurred during the period and excludes non-cash expenditures not related directly to our operations.

Business Strategy

Our business strategy is to obtain long-term growth in reserves and cash flow on a cost-effective basis. Management regularly evaluates potential acquisitions of properties that would enhance current core areas of operation.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to use judgment to make estimates and assumptions that affect certain amounts reported in the consolidated financial statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts reported in the future. Critical accounting policies are those accounting policies that involve judgment and uncertainties affecting the application of those policies and the likelihood that materially different amounts would be reported under different conditions or using differing assumptions. Management periodically updates the estimates used in the preparation of the financial statements based on management’s latest assessment of the current and projected business and general economic environment. There have been no significant changes to the Company’s critical accounting policies during the three months ended March 31, 2024.

LIQUIDITY AND CAPITAL RESOURCES

General

The Company’s primary sources of short-term liquidity are cash and cash equivalents, net cash provided by operating activities, and issuance of debt or equity securities. The Company’s short- and long-term liquidity requirements consist primarily of capital expenditures, acquisitions of oil and natural gas properties, payments of contractual obligations, and working capital obligations. Funding for these requirements may be provided by any combination of the Company’s sources of liquidity. Although the Company expects that its sources of funding will be adequate to fund its liquidity requirements, no assurance can be given that such funding sources will be adequate to meet the Company’s future needs.

Liquidity

As of March 31, 2024, the Company had approximately $3.5 million of cash on hand and approximately $1.1 million available on its Credit Facility. For additional information regarding the Credit Facility, see Note 8 to the Condensed Consolidated Financial Statements included in this report.

The Company expects to incur costs related to drilling activities in core areas as well as future oil and natural gas acquisitions in core areas. As of March 31, 2024, the Company has incurred approximately $25 million of cumulative costs related to the drilling program in the Starbuck field of North Dakota. It is expected that the Company will use a combination of debt or equity issuances, cash on hand, and cash flows from operations to fund capital programs, ongoing operations, and any potential acquisitions.

Working Capital

Working capital (presented below) decreased by approximately $6.9 million between December 31, 2023 and March 31, 2024. This change was primarily driven by payables related to the Starbuck Drilling Program and a lower cash balance at March 31, 2024.

	March 31,			December 31,
	2024			2023

Current Assets	$	13,829,486		$	18,744,904
Current Liabilities		27,048,226			25,049,572
Working Capital	$	(13,218,740	)	$	(6,304,668	)

Cash Flows

	Three Months Ended March 31,
Cash Flows Provided By (Used In):	2024			2023			Variance

Operating Activities	$	3,907,689		$	(5,066,714	)	$	8,974,403
Investing Activities		(17,097,134	)		455,281			(17,552,415	)
Financing Activities		8,888,402			(569,136	)		9,457,538

Cash Flows from Operating Activities

The impact of higher commodity prices and lower general and administrative expenses during the first quarter of 2024 contributed to the increase in cash flows from operating activities. General and administrative expense in 2023 included $360,000 of severance paid to the Company’s former CEO.

Cash Flows from Investing Activities

Cash flows from investing activities in the first quarter of 2024 includes approximately $17 million of additions to oil and gas properties primarily due to the development of our operations in North Dakota.

Cash Flows from Financing Activities

Cash flows from financing activities for the first quarter of 2024 includes $5 million from a promissory note issued to the Company by a related party and approximately $4 million borrowed on the Company’s Credit Facility (see Note 8).

Capital Resources

Capital Expenditures

For the three months ended March 31, 2024, the Company incurred approximately $13.4 million of additions to oil and natural gas properties which primarily reflects continued drilling and completions activity in North Dakota. As previously discussed, the Company began a capital program in the third quarter of 2023 in North Dakota.

Production and Operating Data

The following table sets forth a summary of the Company’s production and operating data for the three months ended March 31, 2024 and 2023. Because of normal production declines, increased or decreased production due to future acquisitions, divestitures, and development, and fluctuations in commodity prices, the historical information presented below should not be interpreted as being indicative of future results.

	Three Months Ended March 31,
	2024		2023
Production and Operating Data:

Net Production Volumes:
Oil (Bbl)		130,760		120,257
Natural Gas (Mcf)		211,820		231,218
Natural Gas Liquids (Bbl)		34,785		39,756
Total (Boe)		200,848		198,549

Average Price per Unit:
Oil (Bbl)	$	72.21	$	74.33
Natural Gas (Mcf)	$	1.78	$	2.84
Natural Gas Liquids (Bbl)	$	11.97	$	12.70
Total (Boe)	$	50.96	$	50.87

Operating Costs and Expenses per Boe:
Lease Operating Expense	$	36.78	$	32.84
Production and Ad Valorem Taxes	$	4.15	$	3.82
Depreciation, Depletion, Amortization and Accretion	$	9.84	$	5.16
General and Administrative Expense:
General and Administrative Expense	$	14.33	$	15.23
Stock-Based Compensation	$	3.54	$	4.78
Total General and Administrative Expense	$	17.87	$	20.01

Bbl – One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in reference to oil, condensate, or natural gas liquids.

Mcf – One thousand cubic feet of natural gas.

Boe – One barrel of oil equivalent, a standard convention used to express oil and natural gas volumes on a comparable oil equivalent basis. Natural gas equivalents are determined under the relative energy content method by using the ratio of 6.0 Mcf of natural gas to 1.0 Bbl of oil or condensate.

Three Months Ended March 31, 2024 and 2023

Results of Operations

The following table reflects the Company’s summary operating information. Because of normal production declines, increased or decreased drilling activity and the effects of acquisitions, the historical information presented below should not be interpreted as indicative of future results.

	Three Months Ended March 31,
	2024			2023			Variance			Variance %

Oil Revenues	$	9,441,964		$	8,938,715		$	503,249			6%
Natural Gas Revenues		377,130			656,035			(278,905	)		-43%
NGL Revenues		416,211			504,954			(88,743	)		-18%
Total Product Revenues		10,235,305			10,099,704

Lease Operating Expense (Including Workovers)		7,387,423			6,520,163			867,260			13%
Production and Ad Valorem Taxes		833,447			758,114			75,333			10%
Depreciation, Depletion, Amortization and Accretion		1,975,479			1,023,764			951,715			93%
General and Administrative Expense:
General and Administrative Expense		2,879,037			3,023,279			(144,242	)		-5%
Stock-based Compensation		710,002			949,639			(239,637	)		-25%
Total General and Administrative Expense		3,589,039			3,972,918			(383,879	)		-10%

Interest Expense		315,049			237,299			77,750			33%

Operating Income (Loss)		(4,398,147	)		(2,222,714	)		(2,175,433	)		NM
Net Income (Loss)		(3,975,196	)		(2,459,591	)		(1,515,605	)		NM

NM: A percentage calculation is not meaningful due to change in signs, a zero-value denominator or a percentage change that is greater than 200.

Revenues

Revenues for the three months ended March 31, 2024 increased over the same period as the prior year primarily due to higher oil sales volumes despite a decrease in realized prices.

Net oil sales volumes were approximately 131,000 Bbls for the three months ended March 31, 2024, an increase of approximately 9% over the same period in the prior year. Oil volumes in first-quarter 2024 increased primarily due to new wells completed in North Dakota during the period.

Realized oil prices for the three months ended March 31, 2024 were approximately $72.21 per barrel, while realized prices for the same period in the prior year were approximately $74.33 per barrel, a decrease in price of approximately 3%.

Realized natural gas prices for the three months ended March 31, 2024 were approximately $1.78 per mcf, while realized prices for the same period in the prior year were approximately $2.84 per mcf, a decrease in price of approximately 37%.

Realized NGL prices for the three months ended March 31, 2024 were approximately $11.97 per barrel, while realized prices for the same period in the prior year were approximately $12.70 per barrel, a decrease in price of approximately 6%.

Lease Operating Expense and Production Taxes

Lease operating expense was higher in 2024 due in part to higher power and fuel costs, higher contract labor and an increase in employee headcount in first-quarter 2024 compared to first-quarter 2023. Lease operating expense includes approximately $2.0 million workover expense for the three months ended March 31, 2024 as compared to $2.7 million for the same period in 2023. The higher workover expense in 2023 was primarily in New Mexico as the Company continued to work over wells in the region to enhance production.

Production taxes were higher for the first quarter of 2024 compared to the same period in 2023 as a result of the higher product revenues discussed above.

Depreciation, Depletion, Amortization and Accretion

DD&A was higher in the first quarter of 2024 compared to the same period in 2023 due in part to the increase in production and the impact of higher capitalized costs associated with the new drilling activity in North Dakota.

General and Administrative Expense

General and administrative expense, excluding stock-based compensation, decreased in 2024 compared to 2023 primarily due to the $360,000 of severance expense for the former CEO in first quarter of 2023 (see Note 12) despite an increase in salaries and benefits period over period associated with an increase in employee headcount.

Stock-based Compensation

The Company utilizes stock-based compensation to compensate the Board, members of management, and retain talented personnel. The Company anticipates stock-based compensation to continue to be utilized in 2024 and beyond to attract and retain talented personnel and compensate Board members and consultants.

Interest Expense

Cash-based interest expense was higher for the first quarter of 2024 compared to the same period in 2023 primarily due to the increase in the outstanding amount under the Company’s Credit Facility.

Item 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Item 4.         CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and participation of the Company’s Principal Executive Officer and Principal Financial Officer, along with our management, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Securities Exchange Act Rule 13a-15(e). Based on this evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that the disclosure controls and procedures were effective, as of the end of the period covered by this report, in ensuring the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer (principal executive officer and principal financial officer) to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

While we continue to implement design enhancements to our internal control procedures, there were no changes to our internal control over financial reporting during the three months ended March 31, 2024, which were identified in connection with the evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. It is management’s expectation that the Company will implement enhanced controls throughout 2024 with additional controls implemented as they are identified by management. Management will continue to diligently and rigorously review the financial reporting controls and procedures on an ongoing basis.

Inherent Limitations on Effectiveness of Controls

The Company’s disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their desired objectives. Management recognizes that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of their inherent limitations, disclosure controls and procedures and internal control over financial reporting may not prevent or detect all errors or misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

For information regarding legal proceedings, see Note 15 of the Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Item 1A.

Risk Factors

Not applicable.

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

The Company was not informed by any of its directors or Section 16 officers of the adoption or termination of a "Rule 10b5-1 trading arrangement” or "non-Rule 10b5-1 trading arrangement,” as those terms are defined in Item 408 of Regulation S-K, during the first quarter of 2024.

As previously reported, on March 12, 2024, Stephen L. Faulkner, Jr. (Larry) informed the Company that he was resigning as Chief Financial Officer and Chief Accounting Officer of the Company effective on March 28, 2024. The Company has engaged outside consultants to assist the Company’s Controller while the Company remains in a search process to identify Mr. Faulkner’s successor. Also as previously reported, on May 10, 2024, the Board of Directors of the Company appointed Michael R. Morrisett, the Company’s President and Chief Executive Officer, to temporarily serve as the Company’s principal financial officer until the Company hires a replacement principal financial officer.

Item 6.

Exhibits

10.1		Empire Petroleum Corporation Promissory Note Due February 15, 2026 in the aggregate principal amount of $5.0 million in favor of Energy Evolution Master Fund, Ltd. (incorporated herein by reference to Exhibit 10 to the Company’s Form 8-K dated February 16, 2024, which was filed on February 21, 2024).
31.1		Rule 13a - 14 (a)/15(d) - 14(a) Certification of Michael R. Morrisett, Chief Executive Officer (submitted herewith).
31.2		Rule 13a - 14 (a)/15(d) - 14(a) Certification of Michael R. Morrisett, Chief Executive Officer (principal financial officer) (submitted herewith).

32.1		Section 1350 Certification of Michael R. Morrisett, Chief Executive Officer (submitted herewith).
32.2		Section 1350 Certification of Michael R. Morrisett, Chief Executive Officer (principal financial officer) (submitted herewith).
101		Financial Statements for Inline XBRL format (submitted herewith).

104		Cover Page Interactive Data File (embedded within Inline XBRL document).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Empire Petroleum Corporation

Date: May 15, 2024	By:	/s/ Michael R. Morrisett
		Michael R. Morrisett
		Chief Executive Officer and President
		(Principal Executive Officer and Principal Financial Officer)

SEC Form 10-Q filed by Empire Petroleum Corporation