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ACQUISITION OF ENERGYQUEST II ASSETS

3 Months Ended

Mar. 31, 2019

Notes to Financial Statements

4. ACQUISITION OF ENERGYQUEST II ASSETS

On March 28, 2019, the Company purchased oil producing properties from EnergyQuest II, LLC ("EnergyQuest") for a purchase price of $5,418,653. The effective date of the transaction is January 1, 2019. After certain adjustments related to the effective date, the total proceeds paid to EnergyQuest were $5,187,882. Such proceeds were paid from borrowing on notes payable and sales of unregistered securities of the Company.

The oil and gas properties purchased from EnergyQuest include 184 wells in Montana and North Dakota currently producing approximately 375 barrels of oil equivalent (BOE) per day, and Empire will operate 139 wells. Engineering reports for the properties estimate proved developed reserves 2,874Mbbls of oil and 13.8 MMcf of natural gas.

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


Fair Value of Assets Acquired
Accounts receivable		$	1,256,094
Inventory of oil in tanks			438,320
Oil properties			8,071,365

Total Assets Acquired		$	9,765,779

Fair Value of Liabilities Assumed
Accounts payable		$	1,310,517
Asset retirement obligations			3,267,380

Total liabilities assumed		$	4,577,897

Total consideration paid		$	5,187,882

The fair values of assets acquired and liabilities assumed were based on the following key inputs:

Oil and natural gas properties

The fair value of proved oil and natural gas properties was measured using valuation techniques that convert the future cash flows to a single discounted amount. Significant inputs to the valuation of proved oil and natural gas properties include estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average costs of capital. The Company utilized a combination of the New York Mercantile Exchange ("NYMEX") strip pricing and consensus pricing to value the reserves, then applied various discount rates depending on the classification of reserves and other risk characteristics. Management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired.

The fair value of asset retirement obligations totaled $3,267,380 and is 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.

The inputs used to value oil and natural gas properties and asset retirement obligations require significant judgment and estimates made by management and represent Level 3 inputs.

Financial instruments and other

The fair values determined for accounts receivable and accounts payable were equivalent to the carrying value due to their short-term nature.

Accounts payable includes approximately $1,300,000 of liabilities primarily related to well activity prior to close.