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 September 30, 2022

☐

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 or 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 þ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 þ 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 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 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 November 4, 2022 was 22,096,055.

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EMPIRE PETROLEUM CORPORATION

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	Page No.

Item 1.	Condensed Consolidated Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at September 30, 2022 and December 31, 2021	3

	Condensed Consolidated Statements of Operations – For the Three- and Nine-Months ended September 30, 2022 and 2021	4

	Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) – For the Three- and Nine-Months Ended September 30, 2022 and 2021	5

	Condensed Consolidated Statements of Cash Flows – For the Nine Months Ended September 30, 2022 and 2021	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7-17

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18-23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	24

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 3.	Defaults Upon Senior Securities	25

Item 4.	Mine Safety Disclosures	25

Item 5.	Other Information	25

Item 6.	Exhibits	25

	Signatures	26

-2-

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

EMPIRE PETROLEUM CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,			December 31,
	2022			2021
ASSETS
Current Assets:
Cash	$	15,733,842		$	3,611,871
Accounts Receivable		5,981,533			7,733,905
Derivative Instruments		348,665			55,242
Inventory - Oil in Tanks		1,605,357			1,037,880
Prepaids		724,484			679,122
Total Current Assets		24,393,881			13,118,020

Property and Equipment:
Oil and Natural Gas Properties, Successful Efforts		53,064,338			46,914,326
Less: Accumulated Depreciation, Depletion and Impairment		(18,703,073	)		(17,525,918	)
Net		34,361,265			29,388,408
Other Property and Equipment, Net		1,535,765			1,288,611
Total Property and Equipment, Net		35,897,030			30,677,019

Derivative Instruments - Long Term		51,660			194,018
Sinking Fund		5,450,000			4,810,000
Utility and Other Deposits		449,811			1,290,594

Total Assets	$	66,242,382		$	50,089,651

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable	$	4,226,799		$	4,329,535
Accrued Expenses		7,325,010			5,844,184
Current Portion of Lease Liability		251,117			180,105
Current Portion of Long-Term Notes Payable		1,258,804			1,700,663
Total Current Liabilities		13,061,730			12,054,487

Long-Term Notes Payable		5,174,783			6,117,091
Long-Term Note Payable - PIE (Note 5)		1,399,030			797,010
Long-Term Lease Liability		613,899			646,311
Asset Retirement Obligations		21,722,407			20,640,599
Total Liabilities		41,971,849			40,255,498

Commitments and Contingencies (Note 15)

Stockholders' Equity:
Series A Preferred Stock - $.001 Par Value, 10,000,000 Shares Authorized, 6 and 0 Shares Issued and Outstanding, Respectively		—			—
Common Stock - $.001 Par Value 190,000,000 Shares Authorized, 21,882,565 and 19,840,648 Shares Issued and Outstanding, Respectively		81,550			79,362
Additional Paid-in Capital		74,048,678			68,988,134
Accumulated Deficit		(49,859,695	)		(59,233,343	)
Total Stockholders' Equity		24,270,533			9,834,153

Total Liabilities and Stockholders' Equity	$	66,242,382		$	50,089,651

See accompanying notes to condensed consolidated financial statements

-3-

EMPIRE PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Revenue:
Oil Sales	$	11,501,521		$	7,761,584		$	35,247,309		$	13,882,077
Gas Sales		1,587,542			855,507			4,019,400			1,536,569
Natural Gas Liquids Sales		1,637,808			1,439,799			5,133,872			1,913,191
Other		22,921			71,043			71,877			154,018
Net Realized and Unrealized Gain (Loss) on Derivatives		42,474			(32,271	)		(93,740	)		(572,220	)
Total Revenue		14,792,266			10,095,662			44,378,718			16,913,635

Costs and Expenses:
Operating		8,505,640			3,597,124			19,200,436			7,328,066
Taxes - Production		1,112,246			678,295			3,151,325			1,266,808
Depletion, Depreciation & Amortization		539,543			1,279,534			1,429,788			2,025,407
Accretion of Asset Retirement Obligation		342,619			327,018			1,009,107			881,638
General and Administrative		2,850,059			1,914,326			8,587,891			6,040,475

Total Costs and Expenses		13,350,107			7,796,297			33,378,547			17,542,394

Operating Income (Loss)		1,442,159			2,299,365			11,000,171			(628,759	)

Other Income and (Expense):
Convertible Debt Modification Inducement Expense		—			(2,276,813	)		—			(2,276,813	)
Unrealized Gain on Embedded Conversion Option		—			689,215			—			92,931
Other Income (Expense)		(1,100,888	)		29,687			(1,278,760	)		190,387
Interest Expense		(125,330	)		(4,467,679	)		(347,763	)		(7,373,113	)

Net Income (Loss)	$	215,941		$	(3,726,225	)	$	9,373,648		$	(9,995,367	)

Net Income (Loss) per Common Share:
Basic	$	0.01		$	(0.23	)	$	0.45		$	(0.75	)
Diluted	$	0.01		$	(0.23	)	$	0.41		$	(0.75	)
Weighted Average Number of Common Shares Outstanding,
Basic		21,651,383			16,560,705			20,654,294			13,278,341
Diluted		24,065,485			16,560,705			22,778,836			13,278,341

See accompanying notes to condensed consolidated financial statements

-4-

EMPIRE PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

For the Three- and Nine- Months Ended September 30, 2022 and 2021

(Unaudited)

									Common		Additional
	Common Stock				Preferred Stock				Stock		Paid-In		Accumulated
	Shares		Par Value		Shares		Par Value		Subscribed		Capital		Deficit			Total
Balances, December 31, 2021		19,840,648	$	79,362		—	$	—	$	—	$	68,988,134	$	(59,233,343	)	$	9,834,153

Net Income		—		—		—		—		—		—		3,623,427			3,623,427

Issuance of Preferred Stock		—		—		6		—		—		6		—			6

Warrants Exercised		48,750		195		—		—		—		97,305		—			97,500

Stock Compensation Expense		—		—		—		—		—		376,278		—			376,278

Balances, March 31, 2022		19,889,398		79,557		6		—		—		69,461,723		(55,609,916	)		13,931,364

Net Income		—		—		—		—		—		—		5,534,280			5,534,280

Options and Warrants Exercised		1,553,895		1,554		—		—		—		2,885,629		—			2,887,183

Stock Compensation Expense		—		—		—		—		—		486,904		—			486,904

Balances, June 30, 2022		21,443,293	$	81,111		6	$	—	$	—	$	72,834,256	$	(50,075,636	)	$	22,839,731

Net Income		—		—		—		—		—		—		215,941			215,941

Options and Warrants Exercised		439,272		439		—		—		—		404,781		—			405,220

Stock Compensation Expense		—		—		—		—		—		809,641		—			809,641

Balances, September 30, 2022		21,882,565	$	81,550		6	$	—	$	—	$	74,048,678	$	(49,859,695	)	$	24,270,533

									Common			Additional
	Common Stock				Preferred Stock				Stock			Paid-In		Accumulated
	Shares		Par Value		Shares		Par Value		Subscribed			Capital		Deficit			Total
Balances, December 31, 2020		6,223,069	$	24,892		—	$	—	$	—		$	22,152,451	$	(40,618,381	)	$	(18,441,038	)

Net Loss		—		—		—		—		—			—		(997,180	)		(997,180	)

Warrants Exercised		5,907,046		23,628		—		—		—			3,325,424		—			3,349,052

Issuance of Common Stock and Warrants		2,248,865		8,995		—		—		(13,000	)		3,139,655		—			3,135,650

Balances, March 31, 2021		14,378,980		57,515		—		—		(13,000	)		28,617,530		(41,615,561	)		(12,953,516	)

Net Loss		—		—		—		—		—			—		(5,271,962	)		(5,271,962	)

Stock Compensation Expense		—		—		—		—		—			406,250		—			406,250

Warrants Exercised		1,361,428		5,446		—		—		13,000			3,968,411		—			3,986,857

Warrants Issued with Unsecured Convertible Notes		—		—		—		—		—			544,824		—			544,824

Unsecured Convertible Note Conversion		300,000		1,200		—		—		—			1,498,800		—			1,500,000

Right to Buy Issued with Unsecured Convertible Notes		—		—		—		—		—			989,115		—			989,115

Shares and Warrants Issued for Secured Convertible Note		375,000		1,500		—		—		—			4,593,000		—			4,594,500

Balances, June 30, 2021		16,415,408		65,661		—		—		—			40,617,930		(46,887,523	)		(6,203,932	)

Net Loss		—		—		—		—		—			—		(3,726,225	)		(3,726,225	)

Stock Options Exercised		209,679		839		—		—		(47,388	)		93,936		—			47,387

Warrants Exercised		342,857		1,371		—		—		(50,000	)		584,343		—			535,714

Shares and Warrants Issued with Amended Secured Convertible Notes		1,300,000		5,200		—		—		—			11,412,940		—			11,418,140

Unsecured Convertible Note Conversion		283,600		1,134		—		—		—			1,416,866		—			1,418,000

Shares Issued for Convertible Note Interest		29,397		118		—		—		—			240,936		—			241,054

Balances, September 30, 2021		18,580,941	$	74,323		—	$	—	$	(97,388	)	$	54,366,951	$	(50,613,748	)	$	3,730,138

See accompanying notes to condensed consolidated financial statements

-5-

EMPIRE PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Nine Months Ended September 30,
	2022			2021
Cash Flows From Operating Activities:
Net Income (Loss)	$	9,373,648		$	(9,995,367	)

Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By Operating Activities:
Stock Compensation and Issuances		1,672,823			406,250
Amortization of Right of Use Assets		135,234			54,363
Depreciation, Depletion and Amortization		1,429,788			2,025,407
Accretion of Asset Retirement Obligation		1,009,107			881,638
Settlement of Asset Retirement Obligation		(342,344	)		—
Loss on Settlement of Asset Retirement Obligation		181,386			—
Loss on XTO Final Settlement (See Note 4)		1,448,363			—
PIE-Related Expense (See Note 5)		1,399,030			—
Amortization of Loan Issue Costs		—			14,587
Right to Buy Issuance Costs		—			989,115
Unrealized Gain on Embedded Conversion Option		—			(92,931	)
Amortization of Discount on Convertible Notes		—			6,670,129
Convertible Debt Modification Inducement Expense		—			2,276,813
Stock Issued for Interest Expense Payment		—			241,054
Forgiveness of Payroll Protection Plan Loan		—			(160,700	)
Change in Operating Assets and Liabilities:
Accounts Receivable		304,009			(5,566,084	)
Unrealized Gain on Derivatives		(151,065	)		(113,943	)
Inventory, Oil in Tanks		(567,477	)		(681,208	)
Prepaids, Current		(45,362	)		115,670
Other Assets		43,773			(6,807	)
Accounts Payable		(2,464,573	)		2,326,752
Accrued Expenses		1,480,826			1,245,653
Net Cash Provided By Operating Activities		14,907,166			630,391

Cash Flows from Investing Activities:
Acquisition of Oil and Natural Gas Properties		(2,205,000	)		(17,869,779	)
Additions to Oil and Natural Gas Properties		(1,502,900	)		—
Purchase of Other Fixed Assets		(307,787	)		(508,571	)
Cash Paid for Right of Use Assets		(135,244	)		—
Sinking Fund Deposit		(640,000	)		(4,330,000	)
Net Cash Used In Investing Activities		(4,790,931	)		(22,708,350	)

Cash Flows from Financing Activities:
Proceeds from Debt Issued		—			19,599,850
Principal Payments of Debt		(1,384,167	)		(5,546,738	)
Proceeds from Stock and Warrant Issuance		—			11,054,661
Proceeds from Option and Warrant Exercise		3,389,903			—
Net Cash Provided By Financing Activities		2,005,736			25,107,773

Net Change in Cash		12,121,971			3,029,814

Cash - Beginning of Period		3,611,871			157,695

Cash - End of Period	$	15,733,842		$	3,187,509

Supplemental Cash Flow Information:
Cash Paid for Interest	$	292,022		$	975,944

Non-Cash Investing and Financing Activities:
Non-Cash Additions to Asset Retirement Obligations	$	233,659		$	6,117,709
Note Payable Activity - PIE Agreement (see Note 5)	$	602,020		$	148,296
Right-of-use assets purchased with lease liability	$	173,144		$	—
Purchases of Oil and Natural Gas Properties and Deposits in Accounts Payable, Notes Payable, Royalty Suspense, and Contingent Payable to Seller	$	2,361,837		$	290,325
Equipment Purchased Utilizing Note Payable	$	—		$	259,945
Unsecured Convertible Note Conversion	$	—		$	2,918,000
Shares and Warrants Issued for Secured Convertible Note	$	—		$	16,131,650

See accompanying notes to condensed consolidated financial statements

-6-

EMPIRE PETROLEUM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

Note 1 - Organization and Basis of Presentation

Empire Petroleum Corporation (“Empire” or 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 has eight wholly-owned subsidiaries in four areas of operations:

Empire Rockies Region

Empire North Dakota LLC (“Empire North Dakota”)

Empire North Dakota Acquisition LLC (“Empire NDA”)

Empire New Mexico LLC d/b/a Green Tree New Mexico (“Empire New Mexico”)

Empire Texas (“Empire Texas”), consisting of the following entities:

Empire Texas Operating LLC

Empire Texas LLC

Empire Texas GP LLC

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 include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions, including revenues and expenses, have been eliminated in consolidation.

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. Operating results for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

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, 2021 which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2022.

Note 2 – Summary of Significant Accounting Policies

Significant Accounting Policies

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, 2021.

Fair Value Measurements

The Financial Accounting Standards Board (“FASB”) 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.

-7-

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 September 30, 2022.

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 Consolidated Financial Statements.

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- or nine-months ended September 30, 2022.

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.

Out of Period Adjustments

In the third quarter of 2022, the Company identified and recorded an out-of-period adjustment related to the Joint Development Agreement discussed in Note 5. The impact of recording this adjustment reduced Utility and Other Deposits and increased Lease Operating Expense by approximately $1.3 million. The amount attributable to the prior year was approximately $797,000 and is immaterial to the prior year financial statements and thus adjusted in the current period.

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.

-8-

Recently Issued Accounting Pronouncements

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 Accounting Standards Update (“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 is analyzing the effect that adoption will have but does not expect a material impact as a result of adopting these standards.

Note 3 – Property

The Company follows the successful efforts method of accounting for its oil and natural gas properties. Under this method, costs to acquire oil and natural gas properties and costs incurred to drill and equip development and exploratory wells are capitalized. Exploration costs are charged to operations as incurred. 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 Properties and Impairments

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 in any period disclosed in these financial statements.

In May 2021, the Company purchased oil and natural gas properties in New Mexico (see Note 4).

In April 2022, the Company purchased working interests of oil and natural gas properties primarily located in the Landa field in North Dakota through its wholly owned subsidiary Empire NDA and assumed the role of operator. The Company paid approximately $1.4 million for eight producing properties, two properties with behind-pipe reserves, and related lease and well equipment. The Company allocated 80% of the acquisition cost to leasehold costs and the remaining 20% to related lease and well equipment. Non-cash asset retirement obligations were assumed of $233,659. The acquisition was accounted for as an asset acquisition.

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

	September 30, 2022			December 31, 2021
Proved producing wells	$	23,294,453		$	20,689,548
Proved undeveloped		2,865,584			2,724,966
Lease and well equipment		6,707,792			5,311,779
Asset retirement obligation		18,268,308			18,188,033
Wells in progress		1,928,201			—
Gross capitalized costs		53,064,338			46,914,326
Accumulated depreciation, depletion, amortization
and impairment		(18,703,073	)		(17,525,918	)
Net capitalized costs	$	34,361,265		$	29,388,408

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Wells in progress consist of recompletions and sidetrack wells being drilled in the Starbuck field in North Dakota at September 30, 2022.

Depletion and amortization expense for the nine months ended September 30, 2022 and 2021 was approximately $1.3 million and $2.0 million, respectively.

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

	September 30, 2022			December 31, 2021
Other property and equipment, at cost	$	2,030,593		$	1,547,325
Less: accumulated depreciation		(494,828	)		(258,714	)
Other property and equipment, net	$	1,535,765		$	1,288,611

Depreciation expense for the nine months ended September 30, 2022 and 2021 was approximately $99,000 and $50,000, respectively.

Note 4 – Acquisition of XTO Properties

On March 12, 2021, the Company, through its wholly owned subsidiary Empire New Mexico, entered into a purchase and sale agreement (“PSA”) with XTO Holdings, LLC (a subsidiary of ExxonMobil) (the “Seller”, “XTO”) to acquire, among other things, certain oil and natural gas properties in New Mexico. The purchase price was $17.8 million subject to customary adjustments. The transaction closed on May 14, 2021 with an effective date of January 1, 2021.

The XTO acquisition has been assessed under the screen test for business combinations under FASB ASC 805, Business Combinations (“ASC 805”). The XTO acquisition met the screen test and has been accounted for as an asset acquisition. Under the accounting for asset acquisitions, the acquisition is recorded using a cost accumulation and allocation model under which the cost of the acquisition is allocated on a relative fair value basis to the assets acquired and liabilities assumed. Acquisition-related transaction costs are capitalized as a component of the cost of the assets acquired.

As a condition of the sale, the Company purchased a $5,000,000 performance bond for the benefit of the Seller for proper plugging, abandonment, and restoration of the purchased properties. The performance bond is collateralized with a letter of credit in the amount of $3,750,000. To effect the letter of credit, the Company entered into a Promissory Note Agreement with Bank of Oklahoma, NA in the amount of $3,750,000 which is due on demand with an interest rate established by the Bank, currently at 4%. The Promissory Note, and associated letter of credit, is collateralized with a bank certificate of deposit in a corresponding amount. In addition, the Company was required to deposit $100,000 per month, up to $1,250,000, into a sinking fund to be held by the surety. Subsequent amendments increased the monthly payment amounts to $160,000 in response to additional bonding requested by the State of New Mexico that increased the letter of credit requirement to $5.45 million. Payments on the sinking fund were made through April 2022 and no additional collateral deposits were required as of June 2022.

The following table sets forth the Company’s purchase price allocation:

Fair Value of Assets Acquired
Oil and natural gas properties	$	17,662,402
Inventory - Oil in tanks		318,546
Vehicles		179,156
Asset retirement obligations		6,117,709
Total assets acquired		24,277,813

Fair Value of Liabilities Assumed
Royalty suspense		290,325
Asset retirement obligations		6,117,709
Total liabilities assumed		6,408,034

Purchase Price		17,869,779

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The value of oil and gas properties was based on an allocation of the purchase price which included assignment of values to the other identifiable assets acquired and liabilities assumed. The value of inventory, vehicles, and royalty suspense was based on their relative fair values as described above.

The fair value of asset retirement obligations are included in proved oil and natural gas properties with a corresponding liability in the table above. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate and timing associated with the incurrence of these costs.

On October 7, 2022, the Company entered into a final settlement agreement with XTO. The provisions of this settlement allowed the Company to substitute the performance bond and letter of credit that were put into place with the transaction for a new performance bond that does not require the Company to have collateral invested in the performance bond. Due to the nature and timing of the settlement occurring prior to the issuance of this Form 10-Q, the result of the final settlement was a non-cash expense of approximately $1.4 million to Other Income (Expense) on the Consolidated Statements of Operations in the current period.

Note 5 – Joint Development Agreement

On August 6, 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. To fund the work, PIE entered into a term loan agreement with Empire Texas 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. Proceeds of the loan will be used for recompletion or workover of the Workover Wells. Refer to Note 8 for the amount advanced on the loan as of the current period-end. As part of the JDA, Empire Texas will assign to PIE a combined 85% working and revenue interest in the Workover Wells. Of the assigned interest, 70% working and revenue interest will be used to repay the obligations under the term loan agreement. Once the term loan is repaid, PIE will reassign a 35% working and revenue interest to Empire Texas in each of the Workover Wells and retain a 50% working and revenue interest. To the extent the cash flows from the revenue interest are insufficient to repay the obligations under the term loan, the Company remains required to repay the obligation. In the third quarter of 2022, the activity under the JDA was evaluated to determine if there were sufficient cash flows to support the long-term asset recorded as an offset to the note payable. As there is not sufficient revenue to support the reduction of the asset, the asset was written off to Lease Operating Expense on the Consolidated Statements of Operations.

In addition, PIE and Empire entered into a Securities Purchase Agreement ( the “Securities Agreement”) whereby PIE purchased for $525,000 (a) 875,000 shares of Empire common stock, (b) warrants to purchase 656,250 shares of Empire common stock at an exercise price of $0.80 per share, (c) warrants to purchase 450,000 shares of Empire common stock at an exercise price of $1.00 per share, (d) warrants to purchase 2,034,129 shares of Empire common stock at an exercise price of $0.40 per share, and (e) warrants to purchase up to 2,766,666 shares of Empire common stock at an exercise price of $0.564 per share, pursuant to various vesting provisions as detailed in the Securities Agreement. On March 11, 2021 the Company amended the Securities Agreement to remove the vesting provisions for the warrants and PIE exercised all related warrants for an aggregate exercise price of $3,349,052.

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Note 6 - 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:

	September 30, 2022			December 31, 2021
Asset retirement obligations, beginning of period	$	20,640,599		$	15,364,217
Additions		233,659			6,117,709
Liabilities settled		(160,958	)		(2,055,806	)
Accretion expense		1,009,107			1,214,479
Asset retirement obligation, end of period	$	21,722,407		$	20,640,599

Note 7 – 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 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 gains (losses) reported in earnings related to the commodity derivative instruments for the three- and nine-months ended September 30, 2022 and 2021:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2022		2021			2022			2021
Gain (Loss) on Derivatives:
Oil derivatives	$	42,474	$	112,183		$	(93,740	)	$	(427,766	)
Natural gas derivatives		—		(144,454	)		—			(144,454	)
	$	42,474	$	(32,271	)	$	(93,740	)	$	(572,220	)

The following represents the Company’s net cash payments on derivatives for the three- and nine-months ended September 30, 2022 and 2021:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021

Oil derivatives	$	(83,832	)	$	(177,736	)	$	(244,723	)	$	(541,709	)
Natural gas derivatives		—			(144,454	)		—			(144,454	)
	$	(83,832	)	$	(322,190	)	$	(244,723	)	$	(686,163	)

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The following table sets forth the Company’s outstanding derivative contracts at September 30, 2022:

				4^th Quarter
2022
WTI Index Put Options:
Quarterly volume (MBbls)				24.72
Floor price (Bbl)				$40.00-$70.00

	1^st Quarter	2^nd Quarter	3^rd Quarter	4^th Quarter
2023
WTI Index Put Options:
Quarterly volume (MBbls)	55.40	15.34	16.86	9.00
Floor price (Bbl)	$40.00-$70.00	$55.00	$55.00-$60.00	$50.00

Note 8 - Debt

The following table represents the Company’s outstanding debt as of September 30, 2022:

Senior Revolver Loan Agreement	$	6,169,500

Term Loan – PIE, a related party		1,399,030

Equipment and vehicle notes, 0% to 6.99% interest rates, maturing		264,087
2025 to 2027 with monthly principal and interest payments
of $400 to $1,400 per month

Total Notes Payable		7,832,617
Less: Current Maturities		1,258,804
Total Long-Term Notes Payable	$	6,573,813

On July 7, 2021, the Company entered into the Fourth Amendment to its Senior Revolver Loan Agreement (the “Amended Agreement”) with CrossFirst Bank (“CrossFirst”). The maximum amount that can be advanced under the Agreement is $20,000,000 and the existing commitment amount at the current period-end is $6,480,000 which is reduced by $300,000 per calendar quarter and includes interest at Wall Street Journal Prime plus 150 basis points (7.75% as of September 30, 2022). The Amended Agreement matures on March 27, 2024. Collateral for the loan is a lien on all of the assets of Empire Louisiana and Empire North Dakota, both of which are wholly owned subsidiaries of the Company, and a first priority mortgage lien, pledge of and security interest in not less than 80% of Empire Louisiana’s and Empire North Dakota’s producing oil, gas and other leasehold and mineral interests. The Amended Agreement requires that the Company maintain commodity derivatives at certain thresholds based on projected production and to maintain certain covenants including an EBITDAX to interest expense of at least 4.5:1 and funded debt to EBITDAX of less than 4:1 on a trailing twelve-month basis. Current maturities of debt related to the Amended Agreement is $1,200,000. The Company was in compliance with its loan covenants at September 30, 2022. The Company paid $900,000 in principal payments during the nine months ended September 30, 2022.

In August 2020, concurrent with the JDA with PIE, a related party, 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 will be used for recompletion or workover of certain designated wells. Refer to Note 5 for additional information regarding this arrangement.

Note 9 - Leases

The Company leases its corporate office headquarters in Tulsa, Oklahoma and three field offices whose terms expire between 2024 and 2027. The corporate office has an option to renew for an additional five-year term; however, 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.

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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 $191,000 for the nine months ended September 30, 2022.

Supplemental balance sheet information related to the right of use leases is as follows as of September 30, 2022:


Net operating lease asset (included in Other Property and Equipment)	$	1,140,037

Current portion of lease liability	$	251,117
Long-term lease liability		613,899
Total right of use lease liabilities	$	865,016

The weighted average remaining term for the Company’s right-of-use leases is 3.3 years.

Maturities of lease liabilities are as follows as of September 30, 2022:


2023	$	308,358
2024		311,351
2025		258,889
2026		76,315
2027		21,700
Total lease payments		976,613
Less imputed interest		(111,597	)
Total lease obligation	$	865,016

Note 10 – Accrued Expenses

Accrued expenses consisted of the following:

		September 30, 2022		December 31, 2021
Accrued and suspended third-party revenue		$	5,104,590	$	4,454,776
Accrued salaries and expenses			187,873		114,954
Accrued taxes			1,164,956		692,742
Accrued expenses			867,591		581,712
Total	Total	$	7,325,010	$	5,844,184

Note 11 – Common and Preferred Stock

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 (Master Fund), Ltd. (the “Fund”) 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 the Fund. For so long as the Series

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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 the Fund, as the Fund’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

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.

Note 12 - Equity

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. All share amounts have retrospectively been stated at post-reverse split amounts and pricing.

During February and March 2021, the Company issued to a group of accredited investors 2,248,464 shares of its common stock and warrants to purchase 2,248,464 shares of its common stock for $2.00 per share with an original expiration date of December 31, 2022 that would be accelerated should certain performance criteria be met. Proceeds from the sale were $3,147,850. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 180%, risk free interest rate of 0.14% and a term of 21 months. The fair value of the warrants of $2,350,407 was allocated to Additional Paid-in Capital. The performance criteria triggering early maturity occurred in April 2022, accelerating the warrant maturity date to July 2022. During the nine months ended September 30, 2022, 1,782,347 shares of common stock were issued as a result of warrant exercises. As of July 10, 2022, all such warrants were fully exercised.

In September 2022, a former director of the Company exercised warrants granted in November 2017 to purchase 250,000 shares of common stock for $1.00 per share.

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Earnings Per Share

The computation of diluted shares outstanding for the three months ended September 30, 2022, excluded 2,379,700 stock options, 1,000,000 warrants, and 124,477 outstanding RSUs, as their effect would have been anti-dilutive, while the computation of diluted shares outstanding for the nine months ended September 30, 2022, excluded 2,706,887 stock options and 73,476 outstanding RSUs, as their effect would have been anti-dilutive. There were no such anti-dilutive shares outstanding for the three- and nine-months ended September 30, 2021.

Note 13 – Stock-Based Compensation

Stock Options

On April 3, 2019, the Board of Directors of the Company adopted the Empire Petroleum Corporation 2019 Stock Option Plan (the “Stock Option Plan”). The total number of shares of common stock that may be issued pursuant to stock options under the Stock Option Plan is 2,500,000. Further, on April 3, 2019, the Company granted Mr. Pritchard and Mr. Morrisett each, options to purchase 625,000 shares of common stock of the Company at an exercise price of $1.32 per share. Each option vested in three installments with 312,500 vesting immediately and 156,250 vesting each in April 2020 and April 2021. All of the options expire in April 2029. The value allocated to the vested options was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 213%, risk free interest rate of 2.32% and a term of 5.375 years. As a result of the adoption of a 2021 plan, the Board of Directors and management have determined that there would be no further issuances from the Stock Option Plan. In April 2022, Mr. Pritchard exercised options to purchase 235,000 shares of common stock and as of September 30, 2022, there were 1,943,200 unexercised options under the Stock Option Plan.

On August 27, 2021, the Board of Directors of the Company adopted the Empire Petroleum Corporation 2021 Stock and Incentive Compensation Plan (the “Incentive Plan”). The total number of shares of common stock that may be issued pursuant to the Incentive Plan is 750,000. Four grants were made in 2021 that amounted to 187,500 options. Two of the grants were for a cumulative amount of 62,500 options and vested immediately upon grant in November 2021. Valuation was calculated using the Black-Scholes option valuation model with the following assumptions: no dividend yield, expected annual volatility of 229%, risk free interest rate of 0.81%, and term of 3 years. The third grant was for 62,500 options and the valuation used the following inputs: no dividend yield, expected annual volatility of 277%, risk free interest rate of 0.99%, and term of 4 years. The fourth grant was for 62,500 options and inputs used to value the grant included no dividend yield, expected annual volatility of 335%, risk free interest rate of 1.16%, and a term of 5 years.

On February 28, 2022, management issued a combination of stock options and restricted stock units under the Incentive Plan. 249,000 stock options were granted to employees and members of management with three-year vesting terms and expirations of August 2025 and 2026. Stock option values were calculated using a Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 56% as calculated by utilizing the stock price from the date of the XTO acquisition through grant date, risk free interest rate of 1.62% and 1.67% for the 2025 and 2026 options, respectively, and expected useful lives of 2.75 and 3.75 years for the 2025 and 2026 options, respectively. Total fair value of the stock option grants was approximately $1.2 million. The value of these options are being recognized to expense in a straight-line method from date of grant through expiration date.

In July 2022, a former director of the Company exercised 75,000 of his stock options granted under the Stock Option Plan.

Restricted Stock Units

The Incentive Plan allows for the grant of restricted stock units (“RSUs”). Any grants of RSUs are made in accordance with the terms of the Incentive Plan that allows a maximum of 750,000 shares of common stock to be issued.

Each RSU represents the contingent right to receive one share of common stock. The holders of outstanding RSUs do not receive dividends or have voting rights prior to vesting and settlement. The Company determines the fair value of granted RSUs based on the market price of the common stock on the date of the grant. Compensation expense for granted RSUs is recognized on a straight-line basis over the vesting and is net of forfeitures, as incurred. Stock-based compensation is included in General and Administrative expense in the Condensed Consolidated Statements of Operations and is recorded with a corresponding increase in Additional Paid-in Capital within the Condensed Consolidated Balance Sheets.

RSUs were granted on February 28, 2022 with 12- and 13-month service periods. Total value assigned to the RSUs based on grant date approximated $585,000. For the nine months ended September 30, 2022, approximately $339,000 of compensation expense related to RSUs was recognized, leaving approximately $244,000 of unrecognized compensation expense which will be recognized on a straight-line basis depending on the service period of each grant.

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On May 22, 2022, RSUs were granted to Board members with 13-month service periods. Total value assigned to the RSUs based on grant date was $1,545,000. Compensation expense of approximately $491,000 was recognized for the nine months ended September 30, 2022, related to these grants and unrecognized compensation expense to be recognized on a straight-line basis over the remaining service period approximated $1,054,000 at September 30, 2022.

On August 26, 2022, the stockholders of the Company approved the Company’s 2022 Stock and Incentive Compensation Plan which reserves 750,000 shares of the Company’s common stock for issuance thereunder. As a result of such approval, no further awards will be made under the Incentive Plan.

Note 14 – Related Party Transactions

The Fund is a related party of the Company as it beneficially owns approximately 25% of the Company’s outstanding shares of common stock as of September 30, 2022. Additionally, a board member of the Fund was appointed to the Company’s Board of Directors in October 2021 as the Board co-chairman and now serves as chairman. This Board member separately beneficially owns approximately 16% of the Company’s outstanding shares of common stock and held all outstanding shares of preferred stock at September 30, 2022. The Board member also is a majority owner of PIE. In October 2021 another board member of the Fund was appointed to the Company’s Board of Directors and has an ownership percentage of approximately 3%.

The Company has a JDA with PIE to perform recompletion or workover on specified mutually agreed upon wells (See Note 5). This JDA has a note payable whose balance increases as work is performed until payout terms have been reached per the agreement (See Note 8).

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 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 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.

The Company has undergone a sales tax audit related to its Texas entity and received the initial assessment notice in April 2022. The maximum exposure of this sales tax assessment is approximately $1.3 million though the Company is confident that the final assessment will be less than the maximum as previously stated. The Company has accrued $650,000 for this contingency as of September 30, 2022.

Note 16 – Subsequent Events

In October 2022, a former director of the Company exercised warrants to purchase 225,000 shares of common stock for $1.00 per share under a grant made in November 2017.

On October 7, 2022, the Company executed a final settlement agreement with XTO. See Note 4 for additional information related to the final settlement.

On October 11, 2022, a total of 50,000 RSUs were granted to directors with a 13-month service period. Total assigned value at the grant date was $718,000.

On October 19, 2022, the Company appointed J. Kevin Vann as an executive officer in the newly created position of Vice President, Finance and Strategic Planning.

On November 1, 2022, the Company purchased a well in Texas from XTO with a preliminary purchase amount of approximately $500,000.

The Equity Distribution Agreement, dated June 23, 2022, by and between Empire Petroleum Corporation and Raymond James & Associates, Inc. was terminated on November 2, 2022.

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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, 2021. 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

The Company’s primary business is the exploration and development of oil and natural gas interests. The Company has incurred significant losses from operations in previous years, and there is no assurance that it will achieve sustained profitability or obtain the funds necessary to finance its operations. For all periods presented, the Company’s effective tax rate is 0%. 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.

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 nine months ended September 30, 2022.

Liquidity

As of September 30, 2022, the Company had approximately $15.7 million of cash on hand and approximately $300,000 available on its Credit Facility. The Company expects to incur costs related to future oil and natural gas acquisitions into the future. It is expected that management will use a combination of cash flows from operations as well as seeking additional debt and equity funding for these acquisitions and to fund ongoing operations.

Working Capital

Working capital (presented below) increased by approximately $10.3 million between December 31, 2021 and September 30, 2022. This change is primarily a result of a consistently strong pricing environment in the first nine months of 2022 that increased the Company’s cash balance by approximately $12.1 million, serving as the primary driver of the increase in working capital between period ends.

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	September 30,		December 31,
	2022		2021
Current Assets	$	24,393,881	$	13,118,020
Current Liabilities		13,061,730		12,054,487
Working Capital	$	11,332,151	$	1,063,533

Cash Flows

	Nine Months Ended September 30,
Cash Flows Provided By (Used In):	2022			2021			Variance
Operating Activities	$	14,907,166		$	630,391		$14,276,775
Investing Activities		(4,790,931	)		(22,708,350	)	17,917,419
Financing Activities		2,005,736			25,107,773		(23,102,037)

Cash Flows from Operating Activities

The Company closed on its New Mexico properties in May 2021 (See Note 4). These properties significantly increased the volume produced by the Company and the Company benefited from higher pricing in the nine months of 2022 compared to the same period in the prior year. The Company had net income in the first nine months of 2022 compared to a net loss in the same period in 2021, further increasing cash provided by operating activities compared to the cash provided by operating activities for the same period last year.

Cash Flows from Investing Activities

For the nine months ended September 30, 2021, the Company paid for the XTO acquisition with approximately $17.9 million in cash (See Note 4) and paid approximately $4.3 million to the sinking fund and promissory note related to the XTO acquisition. These cash outflows were the primary driver for the net cash used in investing activities in the prior year. In the current period, acquisition expenditures were approximately $3.7 million, a significant reduction in comparison to the prior year XTO expenditure. The Company has begun recompletion and other capitalizable efforts in multiple states as it attempts to bring production back online from existing wells and bring on new production from sidetrack drilling, leading to an increase in additions to oil and natural gas properties in the current year.

Cash Flows from Financing Activities

For the nine months ended September 30, 2022, the Company made principal payments on debt of approximately $1.4 million that were offset by approximately $3.4 million of cash received for warrant exercises. During the same period in the prior year, the Company received cash totaling approximately $11.1 million related to stock and warrant issuances. In 2021, proceeds from debt issued primarily related to the XTO acquisition were approximately $19.6 million.

Capital Resources

Capital Expenditures

For the nine months ended September 30, 2022, the Company spent approximately $500,000 on additions to oil and natural gas properties as a result of non-operated drilling, and an additional $1 million on capitalized additions to oil and natural gas properties. The Company anticipates additional capital expenditures in the coming quarters that will be funded with cash flows from operations, debt, and/or equity issuances.

Production and Operating Data

The following table sets forth a summary of the Company’s production and operating data for the three- and nine-month periods ended September 30, 2022 and 2021. Because of normal production declines, increased or decreased production due to future acquisitions, divestitures, and development, fluctuations in commodity prices and the effects of acquisitions or divestitures, the historical information presented below should not be interpreted as being indicative of future results.

-19-

	Three Months Ended September 30,					Nine Months Ended September 30,
	2022		2021			2022		2021
Production and Operating Data:
Net Production Volumes:
Oil (Bbl)		123,804		114,495			361,226		220,780
Natural gas (Mcf)		231,522		224,118			653,829		379,600
Natural gas liquids (Gal)		1,805,523		1,699,112			5,109,649		2,598,655
Total (Boe)		205,380		192,303			591,856		345,919
Average Price per Unit:
Oil (Bbl), (a)	$	92.22	$	64.98		$	96.90	$	59.80
Natural gas (Mcf), (a)	$	6.86	$	3.82		$	6.15	$	4.05
Natural gas liquids (Gal)	$	0.91	$	0.85		$	1.00	$	0.74
Total (Boe)	$	71.30	$	50.11	(b)	$	74.45	$	50.10	(b)
Operating Costs and Expenses per Boe:
Oil and natural gas production	$	41.41	$	18.75		$	32.44	$	21.18
Production and ad valorem taxes	$	5.42	$	3.53		$	5.32	$	3.66
Depreciation, depletion, amortization and	$	4.30	$	8.35		$	4.12	$	8.41
accretion
General & administrative	$	13.88	$	9.95		$	14.51	$	17.46

(a)

Includes the effect of net cash receipts (payments on) derivatives, as applicable contracts are in place.

(b)

Prior to the acquisition of the New Mexico properties in May 2021, natural gas liquids production was minimal and included as a component of natural gas on the consolidated financial statements.

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

Gal – One gallon of natural gas liquid

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.

-20-

Three Months Ended September 30, 2022 and 2021

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 September 30,
	2022		2021			Variance			Variance %

Oil Revenues	$	11,501,521	$	7,761,584		$	3,739,937			48%
Natural Gas Revenues		1,587,542		855,507			732,035			86%
NGL Revenues		1,637,808		1,439,799			198,009			14%
Total Revenues from Product Sales		14,726,871		10,056,890

Cash-Based Lease Operating Expense		7,106,610		3,597,124			3,509,486			98%
Non-Cash Lease Operating Expense (See Note 5)		1,399,030		—			1,399,030			100%
Production and Ad Valorem Taxes		1,112,246		678,295			433,951			64%
Depreciation, Depletion, Amortization and Accretion		882,162		1,606,552			(724,390	)		-45%
Cash-Based General and Administrative Expenses		1,390,418		925,211			88,929			10%
Non-Cash General and Administrative Expenses:
Non-Cash Loss Contingency		650,000		—			650,000			100%
Non-Cash Right to Buy Issuance Cost		—		989,115			(989,115	)		-100%
Stock-based Compensation		809,641		—			1,185,919			100%
Interest Expense		125,330		4,467,679			(4,342,349	)		-97%

Operating Income (Loss)		1,442,159		2,299,365			(857,206	)		37%
Net Income (Loss)		215,941		(3,726,225	)		3,942,166			106%

Revenues

Revenues for the three-month period increased over the same period as the prior year primarily due to increased realized oil and natural gas pricing.

Realized oil pricing for the three months ended September 30, 2022 was approximately $92 per barrel, while realized pricing for the same period in the prior year was approximately $65, an increase in price of approximately 40%.

Realized natural gas pricing for the three months ended September 30, 2022 was approximately $7 per mcf, while realized pricing for the same period in the prior year was approximately $4, an increase in price of approximately 75%.

Net oil production volumes were approximately 124,000 Bbls for the three months ended September 30, 2022, an increase of approximately 9% over the same period in the prior year.

Net natural gas production volumes increased by approximately 7,400 Mcf between the three-month periods ended September 30, 2021 and September 30, 2022, an increase of approximately 4%.

Lease Operating Expense and Taxes

Lease operating expense rose with the XTO acquisition and in response to the Company’s execution of its mission to increase production in its legacy assets. The Company has worked to cost-effectively increase production throughout its asset base utilizing experienced personnel and third-party service providers. Lease operating expenses for New Mexico were approximately $1.9 million more for the three months ended September 30, 2022 than for the same period in 2021 due to additional field work and maintenance. Lease operating expenses for North Dakota increased by approximately $2 million as the Company continued to work over wells in the state to enhance production alongside capital recompletions and sidetrack drilling.

Production and ad valorem taxes have increased as a direct result of the XTO acquisition’s properties and increased volumes produced and sold, paired with the Company’s efforts to return wells to production.

Depreciation, Depletion, Amortization and Accretion

The addition of PDP reserves and producing volumes in New Mexico served as the primary driver of the change in this expense period over period.

-21-

General and Administrative Expense

General and administrative expenses increased primarily due to an increase in salaries, benefits, and bonuses period over period.

The Company accrued $650,000 for a loss contingency related to a Texas sales tax audit for which the initial assessment was received in April 2022 based on management’s estimate of the final settlement amount. The Company intends to seek redetermination of this assessment. The final payment related to this sales tax audit may be more or less than the accrued amount.

Stock-based Compensation

The Company utilizes stock-based compensation to compensate members of management and retain talented personnel. The Company anticipates stock-based compensation to continue to be utilized in 2022 and beyond to attract and retain talented personnel and compensate Board members and consultants.

Interest Expense

Cash-based interest expense declined with a corresponding decrease in the Company’s Credit Facility. In the third quarter of 2021, there was a non-cash charge to interest expense of approximately $4.3 million related to interest and amortization of debt issuance costs for convertible notes issued in 2021 that were fully converted prior to December 31, 2021.

Nine Months Ended September 30, 2022 and 2021

	Nine Months Ended September 30,
	2022		2021			Variance			Variance %

Oil Revenues	$	35,247,309	$	13,882,077		$	21,365,232			154%
Natural Gas Revenues		4,019,400		1,536,569			2,482,831			162%
NGL Revenues		5,133,872		1,913,191			3,220,681			168%
Total Revenues from Product Sales		44,400,581		17,331,837

Lease Operating Expense		17,801,406		7,328,066			10,473,340			143%
Non-Cash Lease Operating Expense (See Note 5)		1,399,030		—			1,399,030			100%
Production and Ad Valorem Taxes		3,151,325		1,266,808			1,884,517			149%
Depreciation, Depletion, Amortization and Accretion		2,438,895		2,907,045			(468,150	)		-16%
Cash-Based General and Administrative Expenses		6,265,068		4,645,110			1,619,958			35%
Non-Cash General and Administrative Expenses:
Non-Cash Loss Contingency		650,000		—			650,000			100%
Non-Cash Right to Buy Issuance Cost		—		989,115			(989,115	)		-100%
Stock-based Compensation		1,672,823		406,250			1,266,573			312%
Interest Expense		347,763		7,373,113			(7,025,350	)		-95%

Operating Income (Loss)		11,000,171		(628,759	)		11,628,930			1850%
Net Income (Loss)		9,373,648		(9,995,367	)		19,369,015			194%

Revenues

Realized oil pricing for the nine months ended September 30, 2022 was approximately $97 per barrel, while realized pricing for the same period in the prior year was approximately $60, an increase in price of approximately 62%.

Realized natural gas pricing for the nine months ended September 30, 2022 was approximately $6 per mcf, while realized pricing for the same period in the prior year was approximately $4, an increase in price of approximately 50%.

-22-

Net oil production volumes were approximately 361,000 Bbls for the nine months ended September 30, 2022, an increase of 63% over the same period in the prior year.

Net natural gas production volumes increased by approximately 274,000 Mcf between the nine-month periods ended September 30, 2021 and September 30, 2022, an increase of approximately 72%.

Lease Operating Expense and Taxes

Lease operating expense rose with the XTO acquisition and in response to the Company’s execution of its mission to increase production in its legacy assets. The Company has worked to cost-effectively increase production throughout its asset base utilizing experienced personnel and third-party service providers. Lease operating expenses for New Mexico were approximately $9.6 million more for the nine months ended September 30, 2022 than for the same period in 2021. Production and ad valorem taxes have increased as a direct result of the XTO acquisition’s properties and increased volumes produced and sold, paired with the Company’s efforts to return wells to production. In addition to recompletions and sidetrack well drilling activity in North Dakota, the Company also undertook workover and other lease operating activities in 2022; North Dakota’s lease operating expenses increased by approximately $3.2 million period-over-period as a result of increased field activity.

Depreciation, Depletion, Amortization and Accretion

The addition of PDP reserves and producing volumes for the entire nine months in New Mexico in 2022 served as the primary driver of the change in these expenses period over period. Depletion for New Mexico properties was approximately $950,000 for the nine months ended September 30, 2022 compared to approximately $1.4 million for the same period in the prior year.

General and Administrative Expense

The Company’s headcount increased as a result of the New Mexico acquisition, including administrative personnel. Cash-based board compensation for the nine months ended September 30, 2022, was approximately $850,000, approximately $730,000 higher than the $116,000 paid in the first nine months of 2021. The Company accrued $650,000 for a loss contingency related to a Texas sales tax audit for which the initial assessment was received in April 2022 based on management’s estimate of the final settlement amount. The Company intends to seek redetermination of this assessment. The final payment related to this sales tax audit may be more or less than the accrued amount.

Stock-based Compensation

Interest Expense

Cash-based interest expense declined with a corresponding decrease in the Company’s Credit Facility. In the third quarter of 2021, there was a non-cash charge to interest expense of approximately $7.0 million related to interest and amortization of debt issuance costs for convertible notes issued in 2021 that were fully converted prior to December 31, 2021.

-23-

SEC Form 10-Q filed by Empire Petroleum Corporation