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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, 2023 |

or

☐ | 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 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 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 November 9, 2023 was 22,892,280.

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 September 30, 2023 and December 31, 2022 | 2
| Condensed Consolidated Statements of Operations – For the Three and Nine Months Ended September 30, 2023 and 2022 | 3
| Condensed Consolidated Statements of Changes in Stockholders' Equity – For the Three and Nine Months Ended September 30, 2023 and 2022 | 4
| Condensed Consolidated Statements of Cash Flows – For the Nine Months Ended September 30, 2023 and 2022 | 5
| Notes to Unaudited Condensed Consolidated Financial Statements | 6-16
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 17-22
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 23
Item 4. | Controls and Procedures | 23
PART II. | OTHER INFORMATION |
Item 1. | Legal Proceedings | 24
Item 1A. | Risk Factors | 24
Item 2. | Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities | 24
Item 3. | Defaults Upon Senior Securities | 24
Item 4. | Mine Safety Disclosures | 24
Item 5. | Other Information | 24
Item 6. | Exhibits | 24-25
| Signatures | 26

1

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

EMPIRE PETROLEUM CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

|  | September 30, |  |  | December 31, |
|  | 2023 |  |  | 2022 |
ASSETS |  |  |  |  |  |  |  |
Current Assets: |  |  |  |  |  |  |  |
Cash |  | $ | 11,034,834 |  |  | $ | 11,944,442 |
Accounts Receivable |  |  | 7,226,146 |  |  |  | 7,780,239 |
Derivative Instruments |  |  | — |  |  |  | 121,584 |
Inventory |  |  | 1,564,684 |  |  |  | 1,840,274 |
Prepaids |  |  | 591,732 |  |  |  | 1,048,434 |
Total Current Assets |  |  | 20,417,396 |  |  |  | 22,734,973 |
Property and Equipment: |  |  |  |  |  |  |  |
Oil and Natural Gas Properties, Successful Efforts |  |  | 74,620,878 |  |  |  | 63,986,339 |
Less: Accumulated Depreciation, Depletion and Impairment |  |  | (22,014,050 | ) |  |  | (20,116,696 | )
Total Oil and Gas properties, Net |  |  | 52,606,828 |  |  |  | 43,869,643 |
Other Property and Equipment, Net |  |  | 1,867,911 |  |  |  | 1,441,529 |
Total Property and Equipment, Net |  |  | 54,474,739 |  |  |  | 45,311,172 |
Sinking Fund |  |  | — |  |  |  | 2,779,000 |
Utility and Other Deposits |  |  | 1,374,771 |  |  |  | 719,930 |
Total Assets |  | $ | 76,266,906 |  |  | $ | 71,545,075 |
LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |  |  |  |
Current Liabilities: |  |  |  |  |  |  |  |
Accounts Payable |  | $ | 6,051,027 |  |  | $ | 5,843,366 |
Accrued Expenses |  |  | 5,726,117 |  |  |  | 9,461,010 |
Derivative Instruments |  |  | 1,053,606 |  |  |  | — |
Current Portion of Lease Liability |  |  | 424,819 |  |  |  | 256,975 |
Term Note Payable - Related Party (Note 8) |  |  | 1,060,004 |  |  |  | — |
Curresnt Portion of Long-Term Debt |  |  | 4,549,585 |  |  |  | 2,059,309 |
Total Current Liabilities |  |  | 18,865,158 |  |  |  | 17,620,660 |
Long-Term Debt |  |  | 116,507 |  |  |  | 4,063,115 |
Bridge Loans - Related Parties (Note 8) |  |  | 10,000,000 |  |  |  | — |
Term Note Payable - Related Party (Note 8) |  |  | — |  |  |  | 1,076,987 |
Lease Liability |  |  | 654,524 |  |  |  | 547,692 |
Derivative Instruments |  |  | 59,949 |  |  |  | — |
Asset Retirement Obligations |  |  | 27,742,852 |  |  |  | 25,000,740 |
Total Liabilities |  |  | 57,438,990 |  |  |  | 48,309,194 |
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, 22,892,280 and 22,093,503 Shares Issued and Outstanding, Respectively |  |  | 82,414 |  |  |  | 81,615 |
Additional Paid-in Capital |  |  | 78,566,843 |  |  |  | 75,303,479 |
Accumulated Deficit |  |  | (59,821,341 | ) |  |  | (52,149,213 | )
Total Stockholders' Equity |  |  | 18,827,916 |  |  |  | 23,235,881 |
Total Liabilities and Stockholders' Equity |  | $ | 76,266,906 |  |  | $ | 71,545,075 |

See accompanying notes to condensed consolidated financial statements.

2

EMPIRE PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Revenue: |  |  |  |  |  |  |  |  |  |  |  |
Oil Sales |  | $ | 9,492,127 |  |  | $ | 11,501,521 |  |  | $ | 27,578,453 |  |  | $ | 35,247,309 |
Gas Sales |  |  | 411,217 |  |  |  | 1,526,148 |  |  |  | 1,315,938 |  |  |  | 3,731,946 |
Natural Gas Liquids Sales |  |  | 411,624 |  |  |  | 945,317 |  |  |  | 1,278,759 |  |  |  | 3,201,947 |
Total Product Revenues |  |  | 10,314,968 |  |  |  | 13,972,986 |  |  |  | 30,173,150 |  |  |  | 42,181,202 |
Other |  |  | 17,050 |  |  |  | 22,921 |  |  |  | 54,775 |  |  |  | 71,877 |
Net Gain (Loss) on Derivatives |  |  | (1,185,921 | ) |  |  | 42,474 |  |  |  | (1,319,401 | ) |  |  | (93,740 | )
Total Revenue |  |  | 9,146,097 |  |  |  | 14,038,381 |  |  |  | 28,908,524 |  |  |  | 42,159,339 |
Costs and Expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Lease Operating Expense (Including Workovers) |  |  | 7,050,054 |  |  |  | 7,751,755 |  |  |  | 20,669,217 |  |  |  | 16,981,057 |
Production and Ad Valorem Taxes |  |  | 792,241 |  |  |  | 1,112,246 |  |  |  | 2,271,630 |  |  |  | 3,151,325 |
Depletion, Depreciation & Amortization |  |  | 727,943 |  |  |  | 539,543 |  |  |  | 2,061,474 |  |  |  | 1,429,788 |
Accretion of Asset Retirement Obligation |  |  | 470,505 |  |  |  | 342,619 |  |  |  | 1,277,141 |  |  |  | 1,009,107 |
General and Administrative Expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
General and Administrative Expense |  |  | 2,580,464 |  |  |  | 2,040,418 |  |  |  | 7,497,947 |  |  |  | 6,915,068 |
Stock-Based Compensation |  |  | 158,792 |  |  |  | 809,641 |  |  |  | 2,289,237 |  |  |  | 1,672,823 |
Total General and Administrative Expense |  |  | 2,739,256 |  |  |  | 2,850,059 |  |  |  | 9,787,184 |  |  |  | 8,587,891 |
Total Costs and Expenses |  |  | 11,779,999 |  |  |  | 12,596,222 |  |  |  | 36,066,646 |  |  |  | 31,159,168 |
Operating Income (Loss) |  |  | (2,633,902 | ) |  |  | 1,442,159 |  |  |  | (7,158,122 | ) |  |  | 11,000,171 |
Other Income and (Expense): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest Expense |  |  | (249,796 | ) |  |  | (125,330 | ) |  |  | (671,982 | ) |  |  | (347,763 | )
Other Income (Expense) |  |  | 1,350 |  |  |  | (1,100,888 | ) |  |  | 23,256 |  |  |  | (1,278,760 | )
Income (Loss) Before Income Taxes |  |  | (2,882,348 | ) |  |  | 215,941 |  |  |  | (7,806,848 | ) |  |  | 9,373,648 |
Income Tax (Provision) Benefit |  |  | 134,720 |  |  |  | — |  |  |  | 134,720 |  |  |  | — |
Net Income (Loss) |  | $ | (2,747,628 | ) |  | $ | 215,941 |  |  | $ | (7,672,128 | ) |  | $ | 9,373,648 |
Net Income (Loss) per Common Share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | (0.12 | ) |  | $ | 0.01 |  |  | $ | (0.34 | ) |  | $ | 0.45 |
Diluted |  | $ | (0.12 | ) |  | $ | 0.01 |  |  | $ | (0.34 | ) |  | $ | 0.41 |
Weighted Average Number of Common Shares Outstanding: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 22,727,639 |  |  |  | 21,651,383 |  |  |  | 22,320,207 |  |  |  | 20,654,294 |
Dilsuted |  |  | 22,727,639 |  |  |  | 24,065,485 |  |  |  | 22,320,207 |  |  |  | 22,778,836 |

See accompanying notes to condensed consolidated financial statements.

3

EMPIRE PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Three and Nine Months Ended September 30, 2023 and 2022

(Unaudited)

|  |  |  |  |  |  |  |  |  |  |  |  |  | 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 |
Net Loss |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (2,464,909 | ) |  |  | (2,464,909 | )
Options and Warrants Exercised |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Stock-Based Compensation |  |  | 20,000 |  |  |  | 20 |  |  |  | — |  |  |  | — |  |  |  | 1,180,786 |  |  |  | — |  |  |  | 1,180,806 |
Balances, June 30, 2023 |  |  | 22,124,592 |  |  |  | 81,646 |  |  |  | 6 |  |  |  | — |  |  | $ | 75,307,762 |  |  |  | (57,073,713 | ) |  |  | 18,315,695 |
Net Loss |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (2,747,628 | ) |  |  | (2,747,628 | )
Warrants Exercised |  |  | 500,000 |  |  |  | 500 |  |  |  | — |  |  |  | — |  |  |  | 2,499,500 |  |  |  | — |  |  |  | 2,500,000 |
Stock Issued for Purchase Option (See Note 3) |  |  | 67,000 |  |  |  | 67 |  |  |  | — |  |  |  | — |  |  |  | 600,990 |  |  |  | — |  |  |  | 601,057 |
Stock-Based Compensation |  |  | 200,688 |  |  |  | 201 |  |  |  | — |  |  |  | — |  |  |  | 158,591 |  |  |  | — |  |  |  | 158,792 |
Balances, September 30, 2023 |  |  | 22,892,280 |  |  | $ | 82,414 |  |  |  | 6 |  |  | $ | — |  |  | $ | 78,566,843 |  |  | $ | (59,821,341 | ) |  | $ | 18,827,916 |

|  |  |  |  |  |  |  |  |  |  |  |  |  | Additional |  |  |  |  |  |  |
|  | Common Stock |  |  | Preferred Stock |  |  | Paid-In |  |  | Accumulated |  |  |  |
|  | Shares |  |  | Par Value |  |  | Shares |  |  | Par Value |  |  | 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-Based Compensation |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 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-Based Compensation |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 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-Based Compensation |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 809,641 |  |  |  | — |  |  |  | 809,641 |
Balances, September 30, 2022 |  |  | 21,882,565 |  |  | $ | 81,550 |  |  |  | 6 |  |  | $ | — |  |  | $ | 74,048,678 |  |  | $ | (49,859,695 | ) |  | $ | 24,270,533 |

See accompanying notes to condensed consolidated financial statements.

4

EMPIRE PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

|  | For the Nine Months Ended September 30, |
|  | 2023 |  |  | 2022 |
Cash Flows From Operating Activities: |  |  |  |  |  |  |  |
Net Income (Loss) |  | $ | (7,672,128 | ) |  | $ | 9,373,648 |
Adjustments to Reconcile Net Income (Loss) to Net Cash |  |  |  |  |  |  |  |
Provided By Operating Activities: |  |  |  |  |  |  |  |
Stock-Based Compensation |  |  | 2,289,237 |  |  |  | 1,672,823 |
Amortization of Right of Use Assets |  |  | 287,956 |  |  |  | 135,234 |
Depreciation, Depletion and Amortization |  |  | 2,061,474 |  |  |  | 1,429,788 |
Accretion of Asset Retirement Obligation |  |  | 1,277,141 |  |  |  | 1,009,107 |
Loss on Dersivatives |  |  | 1,319,401 |  |  |  | 93,740 |
Settlement on or Purchases of Derivative Instruments |  |  | (87,042 | ) |  |  | (244,805 | )
Loss on XTO Final Settlement |  |  | — |  |  |  | 1,448,363 |
PIE-Related Expense |  |  | — |  |  |  | 1,399,030 |
Change in Operating Assets and Liabilities: |  |  |  |  |  |  |  |
Accounts Receivable |  |  | (1,572,038 | ) |  |  | 304,009 |
Inventory, Oil in Tanks |  |  | (292,057 | ) |  |  | (567,477 | )
Prepaids, Current |  |  | 911,416 |  |  |  | (45,362 | )
Accounts Payable |  |  | 194,438 |  |  |  | (2,464,573 | )
Accrued Expenses |  |  | (3,732,113 | ) |  |  | 1,480,826 |
Other Long-Term Assets and Liabilities |  |  | (942,916 | ) |  |  | (117,185 | )
Net Cash Provided By (Used In) Operating Activities |  |  | (5,957,231 | ) |  |  | 14,907,166 |
Cash Flows From Investing Activities: |  |  |  |  |  |  |  |
Acquisition of Oil and Natural Gas Properties |  |  | (2,094,419 | ) |  |  | (2,205,000 | )
Additions to Oil and Natural Gas Properties |  |  | (5,596,535 | ) |  |  | (1,502,900 | )
Purchase of Other Fixed Assets |  |  | (179,514 | ) |  |  | (307,787 | )
Cash Paid for Right of Use Assets |  |  | (427,711 | ) |  |  | (135,244 | )
Sinking Fund Deposit |  |  | 2,779,000 |  |  |  | (640,000 | )
Net Cash Provided By (Used In) Investing Activities |  |  | (5,519,179 | ) |  |  | (4,790,931 | )
Cash Flows From Financing Activities: |  |  |  |  |  |  |  |
Principal Payments of Debt |  |  | (1,933,198 | ) |  |  | (1,384,167 | )
Proceeds from Bridge Loans from Related Parties |  |  | 10,000,000 |  |  |  | — |
Proceeds from Warrant Exercises |  |  | 2,500,000 |  |  |  | 3,389,903 |
Net Cash Provided By (Used In) Financing Activities |  |  | 10,566,802 |  |  |  | 2,005,736 |
Net Change in Cash |  |  | (909,608 | ) |  |  | 12,121,971 |
Cash - Beginning of Period |  |  | 11,944,442 |  |  |  | 3,611,871 |
Cash - End of Period |  | $ | 11,034,834 |  |  | $ | 15,733,842 |
Supplemental Cash Flow Information: |  |  |  |  |  |  |  |
Cash Paid for Interest |  | $ | 398,033 |  |  | $ | 292,022 |

See accompanying notes to condensed consolidated financial statements.

5

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, 2023.

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, 2022 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, 2023.

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, 2022.

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.

6

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 September 30, 2023.

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.

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 nine months ended September 30, 2023.

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.

7

Recently Issued Accounting Pronouncements

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 June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses. This ASU, as further amended, affects trade receivables, financial assets and certain other instruments that are not measured through net income. This ASU will replace the currently required incurred loss approach with an expected loss model for instruments measured at amortized cost and is effective for financial statements issued for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of this ASU on January 1, 2023 by the Company did not have a material impact on the Company’s consolidated financial statements since the Company does not have a history of material credit losses.

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 is analyzing the effect that adoption will have but does not currently 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 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.

On August 9, 2023, the Company and a subsidiary of Energy Evolution Master Fund, Ltd., a related party, collectively acquired additional working interests in certain of the Company’s New Mexico properties. The Company paid $2.1 million in cash and acquired 10% of the total acquired working interests in the transaction. The subsidiary of Energy Evolution Master Fund, Ltd. acquired the other 90% of the acquired working interest (“EEF Interest”). The Company has a one-year option to acquire the EEF Interest for $5 million, subject to adjustments (“Purchase Option”). In exchange for the Purchase Option, the Company issued 67,000 shares of common stock valued at approximately $601,000 and reflected in Utility and Other Deposits. The Company has the right to extend the initial one-year Purchase Option period for two successive one-year periods by agreeing to issue an additional 42,000 shares of common stock prior to the end of the one-year period then in effect. The Purchase Option may be exercised by the Company at any time during the one-year period then in effect by sending written notice to Energy Evolution Master Fund, Ltd. prior to the expiration of such one-year period.

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 nine months ended September 30, 2023.

8

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

Schedule of aggregate capitalized costs oil and natural gas properties

|  | September 30, 2023 |  |  | December 31, 2022 |
Proved properties |  | $ | 69,756,380 |  |  | $ | 52,831,131 |
Unproved properties |  |  | 3,158,299 |  |  |  | 2,865,556 |
Work in process |  |  | 1,706,199 |  |  |  | 8,289,652 |
Gross capitalized costs |  |  | 74,620,878 |  |  |  | 63,986,339 |
Depreciation, depletion, amortization and impairment |  |  | (22,014,050 | ) |  |  | (20,116,696 | )
Total oil and gas properties, net |  | $ | 52,606,828 |  |  | $ | /43,869,643 |

Depletion and amortization expense for the three months ended September 30, 2023 and 2022 was approximately $677,000 and $500,000, respectively. Depletion and amortization expense for the nine months ended September 30, 2023 and 2022 was approximately $1,897,000 and $1,331,000, respectively.

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

Schedule of other property plant and equipment

|  | September 30, 2023 |  |  | December 31, 2022 |
Other property and equipment, at cost |  | $ | 2,795,308 |  |  | $ | 1,878,325 |
Less: Accumulated depreciation |  |  | (927,397 | ) |  |  | (436,796 | )
Other property and equipment, net |  | $ | 1,867,911 |  |  | $ | 1,441,529 |

Depreciation expense for the three months ended September 30, 2023 and 2022 was approximately $51,000 and $39,000, respectively. Depreciation expense for the nine months ended September 30, 2023 and 2022 was approximately $164,000 and $99,000, respectively.

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:

Schedule of asset retirement activity |  | For the Nine Months Ended September 30, |
|  | 2023 |  |  | 2022 |
Asset retirement obligations, beginning of period |  | $ | 25,000,740 |  |  | $ | 20,640,599 |
Additions |  |  | 72,000 |  |  |  | 233,659 |
Liabilities settled |  |  | (910,967 | ) |  |  | (160,958 | )
Revisions |  |  | 2,303,939 |  |  |  | — |
Accretion expense |  |  | 1,277,140 |  |  |  | 1,009,107 |
Asset retirement obligation, end of period |  | $ | 27,742,852 |  |  | $ | 21,722,407 |

The revisions in 2023 primarily reflect cost revision estimates to wells in New Mexico based on 2023 plugging activity.

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.

9

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 and nine months ended September 30, 2023 and 2022:

Schedule of commodity derivative instruments

|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Losses on Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Oil derivatives |  | $ | (1,185,921 | ) |  | $ | 42,474 |  |  | $ | (1,319,401 | ) |  | $ | (93,740 | )

The following represents the Company’s net cash payments related to derivatives for the three and nine months ended September 30, 2023 and 2022:

Schedule of net cash payment related derivatives

|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Oil derivatives |  | $ | (45,855 | ) |  | $ | (83,832 | ) |  | $ | (87,042 | ) |  | $ | (244,723 | )

The following table sets forth the Company’s outstanding derivative contracts at September 30, 2023:

Schedule of outstanding derivative contracts

|  | 4th Quarter 2023 |  |  | 1st Quarter 2024 |  |  | 2nd Quarter 2024 |  |  | 3rd Quarter 2024 |  |  | 4th Quarter 2024 |
WTI Fixed-Price Swaps: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Quarterly volume (MBbls) |  |  | 38.50 |  |  |  | 38.00 |  |  |  | 30.00 |  |  |  | 30.00 |  |  |  | 30.00 |
Weighted-average fixed price (Bbl) |  |  | $78.60 |  |  |  | $74.01 |  |  |  | $72.15 |  |  |  | $77.02 |  |  |  | $75.57 |
WTI Index Put Options: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Quarterly volume (MBbls) |  |  | 41.00 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Floor price (Bbl) |  |  | $40.00-$50.00 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

Note 6 – Accounts Receivable

The following table represents the Company’s accounts receivable as of September 30, 2023 and December 31, 2022:

Schedule of accounts receivable

|  | September 30, 2023 |  |  | December 31, 2022 |
Oil and gas receivables |  | $ | 3,182,548 |  |  | $ | 3,060,341 |
Joint interest billings |  |  | 3,856,691 |  |  |  | 2,057,719 |
Receivable from former CEO (See Note 12) |  |  | — |  |  |  | 2,130,614 |
Other |  |  | 186,906 |  |  |  | 531,565 |
Total accounts receivable |  | $ | 7,226,146 |  |  | $ | 7,780,239 |

Note 7 – Accrued Expenses

The following table represents the Company’s accrued expenses as of September 30, 2023 and December 31, 2022:

Schedule of accrued expenses

|  | September 30, 2023 |  |  | December 31, 2022 |
Accrued and suspended third-party revenue |  | $ | 4,135,488 |  |  | $ | 4,415,311 |
Accrued salaries and payroll taxes |  |  | 400,890 |  |  |  | 3,299,785 |
Accrued production taxes |  |  | 828,226 |  |  |  | 500,481 |
Income taxes payable |  |  | — |  |  |  | 208,898 |
Other |  |  | 361,513 |  |  |  | 1,036,535 |
|  | $ | 5,726,117 |  |  | $ | 9,461,010 |

10

Note 8 – Debt Including Debt with Related Parties

The following table represents the Company’s outstanding debt as of September 30, 2023 and December 31, 2022:

Schedule of outstanding debts

|  | As of September 30, 2023 |  |  | As of December 31, 2022 |
Senior Revolver Loan Agreement |  | $ | 4,369,500 |  |  | $ | 5,869,500 |
Term Note Payable – Related Party |  |  | 1,060,004 |  |  |  | 1,076,987 |
Bridge Loans – Related Parties |  |  | 10,000,000 |  |  |  | — |
Equipment and vehicle notes, 0% to 9.0% interest rates, due in 2025 to 2027 with monthly payments ranging from $400 to $1,400 per month |  |  | 160,178 |  |  |  | 252,924 |
Note Payable to insurance provider, bears 5.78% interest, matures January 2024, monthly payments |  |  | 136,414 |  |  |  | — |
Total debt |  |  | 15,726,096 |  |  |  | 7,199,411 |
Less: Current maturities (Excluding Related Parties) |  |  | (4,549,585 | ) |  |  | (2,059,309 | )
Less: Related Parties |  |  | (10,000,000 | ) |  |  | (1,076,987 | )
Less: Related Parties – Current Maturities |  |  | (1,060,004 | ) |  |  | — |
Long-Term debt |  | $ | 116,507 |  |  | $ | 4,063,115 |

Senior Revolver Loan Agreement

On July 7, 2021, the Company entered into the Fourth Amendment to its Senior Revolver Loan Agreement with CrossFirst Bank (“CrossFirst”) as further amended by Letter Agreements in conjunction with redetermination dates (“the Amended Agreement” or “Credit Facility”). The maximum amount that can be advanced under the Amended Agreement is $20,000,000 and the existing commitment amount following an August 9, 2023 amendment agreement is $5,180,000 which is reduced by $500,000 per calendar quarter and includes interest at Wall Street Journal Prime plus 150 basis points (10.00% as of September 30, 2023). The Amended Agreement, which originally matured on May 26, 2024, has been extended to August 23, 2024 through the August 9, 2023 amendment. Collateral for the loan is a lien on all of the assets of Empire Louisiana and Empire North Dakota, 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 the Company maintain commodity derivatives at certain thresholds based on projected production and, beginning March 31, 2021, to maintain certain covenants including an EBITDAX to interest expense of at least 3:1 and funded debt to EBITDAX of 4:1 on a trailing twelve-month basis. Beginning with the quarter ended September 30, 2023, the funded debt to EBITDAX is a maximum of 3:1 on a trailing twelve-month basis and an additional covenant of a 1:1 current ratio. As a result of the August 23, 2024 maturity date, the total outstanding balance is reflected as current. The Company was in compliance with the loan covenants at September 30, 2023.

Term Note – 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, 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 were used for recompletion or workover of certain designated wells. 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.

Bridge Loans - Related Parties

On September 19, 2023, each of Phil Mulacek, an individual and board member, and Energy Evolution Master Fund, Ltd., a Cayman Islands exempted company (each, an “Investor” and collectively, the “Investors”), made a bridge loan to Empire North Dakota in the amount of $5.0 million (collectively, the “Bridge Loans”). The Investors are each a related party of the Company. See Note 14 for a description of material transactions between the Company and the Investors.

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The proceeds of the Bridge Loans in the aggregate amount of $10.0 million will be primarily used by Empire North Dakota for the development of oil and gas properties leased and operated by Empire North Dakota (the “North Dakota Properties”). The Company has issued to each Investor its unconditional guarantee of the obligations of Empire North Dakota under the Bridge Loans (collectively, the “Company Guarantees”).

The Bridge Loans, as amended subsequent to September 30, 2023, mature December 31, 2024 (the “Maturity Date”) and accrue interest at the rate of 7% per annum. After the Maturity Date, any principal balance of the Bridge Loans remaining unpaid accrue interest at the rate of 9% per annum. Interest will be paid quarterly, beginning November 16, 2023 in common shares of the Company based on the average VWAP for the five trading days preceding the interest date. Empire North Dakota paid to each Investor an origination fee in cash of $50,000 or 1.0 percent of the principal amount of its Bridge Loan. The Bridge Loans may be prepaid at any time or from time to time.

The Bridge Loans rank pari passu with all other notes similar to the Bridge Loans now or hereafter issued, but are junior to all existing or hereafter created secured debt (as defined in the Bridge Loans) of Empire North Dakota established pursuant to the Credit Facility. The Bridge Loans are senior in all respects to all hereafter created unsecured debt of Empire North Dakota. The Bridge Loans provide that Empire North Dakota will not, directly or indirectly, enter into, create, incur, assume or suffer to exist any unsecured Debt of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom, that is senior in any respect to Empire North Dakota’s obligations under the Bridge Loans.

On September 19, 2023, Empire Louisiana, Empire North Dakota and CrossFirst entered into that certain Letter Agreement amending the Credit Facility to, among other things: (1) exclude the Bridge Loans from the definition of Funded Debt (as defined in the Credit Facility); (2) allow the indebtedness evidenced by the Bridge Loans; (3) provide for CrossFirst’s consent to the Bridge Loans; and (4) require that the proceeds of the Bridge Loans be deposited into a segregated account with CrossFirst (the “Segregated Account”) and that such proceeds only be used primarily in connection with the development of the North Dakota Properties. In connection with entering into the Letter Agreement, the Company ratified, confirmed and continued its Amended and Restated Guaranty Agreement dated as of March 27, 2019 in favor of CrossFirst, pursuant to which the Company unconditionally guaranteed the obligations of Empire Louisiana and Empire North Dakota under the Credit Facility.

On September 19, 2023, the Investors and Empire North Dakota entered into a Subordination Agreement in favor of CrossFirst (the “Subordination Agreement”), pursuant to which the Investors subordinated (a) the repayment of the Bridge Loans to the payment of the indebtedness of Empire Louisiana and Empire North Dakota to CrossFirst under the Credit Facility (the “Lender Obligations”) and (b) any lien and security interests securing the Bridge Loans to the lien and security interests of CrossFirst securing the Lender Obligations. Notwithstanding the foregoing, the Investors have the right, so long as there is no default or event of default under the Credit Facility, to receive regularly scheduled interest payments at the non-default rate and repayments of principal under the Bridge Loans. Under the Subordination Agreement, (a) the Company Guarantees are also subordinated to the Lender Obligations and (b) the Investors and Empire North Dakota agreed to the Segregated Account and that the proceeds of the Bridge Loans will primarily be used in connection with the development of the North Dakota Properties.

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 2027. 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 $288,000 and $191,000 for the nine months ended September 30, 2023 and 2022, respectively. Cash paid for right-of-use leases was approximately $279,000 and $192,000 for the same periods.

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

Schedule of right of use leases

|  | September 30, 2023 |  |  | December 31, 2022 |
Operating lease asset - net (included in Other Property and Equipment) |  | $ | 1,213,403 |  |  | $ | 776,219 |
Current portion of lease liability |  | $ | 424,819 |  |  | $ | 256,975 |
Long-term lease liability |  |  | 654,524 |  |  |  | 547,692 |
Total right-of-use lease liabilities |  | $ | 1,079,343 |  |  | $ | 804,667 |

The weighted average remaining term for the Company’s right-of-use leases is 2.5 years.

Maturities of lease liabilities are as follows as of September 30, 2023:

Schedule of maturities lease liabilities

Year 1 |  |  | $ | 500,197 |
Year 2 |  |  |  | 454,117 |
Year 3 |  |  |  | 226,702 |
Year 4 |  |  |  | 21,700 |
Year 5 |  |  |  | — |
Total lease payments |  |  |  | 1,202,716 |
Less imputed interest |  |  |  | (123,373 | )
Total lease obligation |  |  | $ | 1,079,343 |

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 Master Fund, Ltd. (“Energy Evolution” or 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 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.

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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.

Earnings Per Share

The computation of diluted shares outstanding for the three and nine months ended September 30, 2023, respectively, excluded 1,409,686 and 1,586,960 stock options, warrants, and 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, 2022.

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 nine months ended September 30, 2023.

Schedule of non vested restricted stock unit activity

|  |  |  |  | Weighted Average |
|  | RSUs |  |  | Fair Value (a) |
Outstanding, December 31, 2022 |  |  | 224,288 |  |  | $ | 15.42 |
Granted |  |  | 179,195 |  |  |  | 10.47 |
Vested |  |  | (103,185 | ) |  |  | 17.11 |
Forfeited |  |  | (57,966 | ) |  |  | 14.43 |
Outstanding, September 30, 2023 |  |  | 242,332 |  |  | $ | 11.31 |
(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, 2022 |  |  | 2,379,700 |  |  | $ | 3.31 |
Granted |  |  | 533,000 |  |  |  | 10.07 |
Exercised |  |  | (235,000 | ) |  |  | 1.36 |
Cancelled |  |  | (447,734 | ) |  |  | 4.45 |
Outstanding, September 30, 2023 |  |  | 2,229,966 |  |  | $ | 4.83 |

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The following table summarizes information about stock options outstanding as of September 30, 2023.

Schedule of summarizes information about stock options outstanding

Range of |  | Options |  | Weighted Average |  | Weighted |  | Options |  | Weighted
Exercise |  | Outstanding |  | Remaining |  | Average |  | Exercisable |  | Average
Prices |  | at 9/30/23 |  | Contractual Life |  | Exercise Price |  | at 9/30/23 |  | Exercise Price
$1.32 to $12.36 |  | 2,229,966 |  | 5.14 years |  | $4.83 |  | 1,683,960 |  | $2.75

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.

In July 2023, the Company’s Chief Operating Officer separated from the Company and will receive severance of $145,000 over six months. Additionally, certain vested options were forfeited resulting in the reversal of $576,000 of previously recorded stock-based compensation.

Note 13 – Income Taxes

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 and nine months ended September 30, 2023.

Schedule of reconciliation of effective income tax rate | For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
| $ | % |  | $ | % |  | $ | % |  | $ | %
Provision (benefit) at statutory rate | (605,293) | 21.0% |  | 45,348 | 21.0% |  | (1,639,438) | 21.0% |  | 1,968,466 | 21.0%
State Taxes (net of federal impact) | (138,056) | 4.8% |  | 10,473 | 4.9% |  | (374,979) | 4.8% |  | 454,622 | 4.9%
Nondeductible Expenses | (5,469) | 0.2% |  | — | 0.0% |  | (1,529) | 0.0% |  | — | 0.0%
Return to Provision | (5,355) | 0.2% |  | — | 0.0% |  | (5,355) | 0.1% |  | — | 0.0%
Valuation Allowance | 619,453 | -21.5% |  | (55,821) | -25.9% |  | 1,886,581 | -24.2% |  | (2,423,088) | -25.9%
Income tax provision (benefit) | (134,720) | 4.7% |  | — | 0% |  | (134,720) | 1.7% |  | — | 0%

Note 14 – Related Party Transactions

Energy Evolution is a related party of the Company as it beneficially owns approximately 24% of the Company’s outstanding shares of common stock as of September 30, 2023. Additionally, a board member of Energy Evolution was appointed to the Company’s board in October 2021. This board member separately beneficially owns approximately 16% of the Company’s outstanding shares of common stock as of September 30, 2023. 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.

In March 2021, the majority owner of PIE, through the exercise of warrants, became a significant shareholder of the Company’s outstanding shares of stock. The Company has a joint development agreement with PIE to perform recompletion or workover on specified mutually agreed upon wells in Texas. As of September 30, 2023, the Company has outstanding obligations of approximately $1.1 million as a part of the joint development agreement (See Note 8). In the third quarter of 2022, a $1.4 million long-term asset that had previously been recorded as an offset to the note payable was expensed to workovers within Lease Operating Expense on the Consolidated Statement of Operations.

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The Company has also entered into a Shared Services Agreement with PIE effective August 1, 2023 that includes access to administrative, engineering and support services as well as building and insurance services. The agreement provides that the Company will reimburse PIE for the out-of-pocket or actual costs incurred by PIE in providing such services to the Company.

In July 2023, Energy Evolution exercised its remaining warrants for 500,000 shares of common stock for $5.00 per share. The Company received $2.5 million related to this transaction.

On September 19, 2023, each of Phil Mulacek and Energy Evolution made a bridge loan to Empire North Dakota each in the amount of $5.0 million. The Investors are each a related party of the Company. See Note 8 for a description of the Bridge Loans.

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.

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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, 2022. 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 of developed production of oil and gas interests. We have incurred significant losses from operations in years prior to 2022, and there is no assurance that we will maintain profitability 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.

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 nine months ended September 30, 2023.

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 September 30, 2023, the Company had approximately $11 million of cash on hand and approximately $300,000 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.

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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. In October 2023, the Company commenced a drilling program in the Starbuck field of North Dakota in which we expect to drill 10 to 14 wells at an estimated total cost of $20 million to $22 million. 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.

Phil Mulacek and Energy Evolution have committed to funding at least an additional $10 million through equity or other mutually agreed instrument.

Working Capital

Working capital (presented below) decreased by approximately $3.6 million between December 31, 2022 and September 30, 2023. This change is primarily a result of the total outstanding amount under the Credit Facility becoming current due to its maturity on August 24, 2024, coupled with capital expenditures in 2023, higher workover and plug and abandonment costs, and a weaker price environment in the first nine months of 2023.

|  | September, 30 |  |  | December 31, |
|  | 2023 |  |  | 2022 |
Current Assets |  | $ | 20,417,396 |  |  | $ | 22,734,973 |
Current Liabilities |  |  | 18,865,158 |  |  |  | 17,620,660 |
Working Capital |  | $ | 1,552,238 |  |  | $ | 5,114,313 |

Cash Flows

|  | Nine Months Ended September 30, |  |  |  |
Cash Flows Provided By (Used In): |  | 2023 |  |  | 2022 |  |  | Variance |
Operating Activities |  | $ | (5,957,231 | ) |  | $ | 14,907,166 |  |  | $ | (20,864,397 | )
Investing Activities |  |  | (5,519,179 | ) |  |  | (4,790,931 | ) |  |  | (728,248 | )
Financing Activities |  |  | 10,566,802 |  |  |  | 2,005,736 |  |  |  | 8,561,066 |

Cash Flows from Operating Activities

The impact of lower commodity prices in 2023 contributed to the decrease in cash flows as well as a higher level of workovers and plugging activity in 2023 and a $2.1 million payment for withholding obligations on an option exercise (see Note 12). The Company had net income in the first nine months of 2022 primarily driven by higher commodity pricing and increasing cash provided by operating activities.

Cash Flows from Investing Activities

In 2022, we began recompletions and other capitalizable efforts in multiple states as we sought to bring production online from existing wells and bring on new production from sidetrack drilling in North Dakota. This activity continued into 2023 and contributed to $5.6 million of capital expenditures in 2023 coupled with activities related to the Company’s current development activities in North Dakota. In addition, the Company purchased interest in producing properties in New Mexico for approximately $2.1 million in August 2023.

As part of the XTO acquisition in 2021, we entered into an agreement to create a sinking fund for future plugging liabilities, paying approximately $4.8 million into that fund in 2021 and 2022. In 2022, we were able to negotiate for the release of the sinking fund requirement and received $2.0 million in late 2022. The remaining $2.8 million of the sinking fund balance was returned to us in 2023.

Cash Flows from Financing Activities

For the nine months ended September 30, 2023, the Company made principal payments on its Credit Facility totaling approximately $1.5 million pursuant to required quarterly payments. In September 2023, we received proceeds from bridge loans from related parties totaling $10 million (See Note 8).

In 2022, we received approximately $3 million of cash related to warrant exercises.

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Capital Resources

Capital Expenditures

For the nine months ended September 30, 2023, the Company spent approximately $5.6 million on additions to oil and natural gas properties and primarily reflects the completion of the 2022 well enhancement project in North Dakota, new drilling in North Dakota, and non-operated drilling. 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 and nine months ended September 30, 2023 and 2022. 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 September 30, |  |  | Nine Months Ended September 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Production and Operating Data: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net Production Volumes: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Oil (Bbl) |  |  | 120,177 |  |  |  | 123,804 |  |  |  | 368,847 |  |  |  | 361,226 |
Natural Gas (Mcf) |  |  | 195,908 |  |  |  | 231,522 |  |  |  | 638,419 |  |  |  | 653,829 |
Natural Gas Liquids (Bbl) |  |  | 35,568 |  |  |  | 42,989 |  |  |  | 106,002 |  |  |  | 121,658 |
Total (Boe) |  |  | 188,396 |  |  |  | 205,380 |  |  |  | 581,252 |  |  |  | 591,856 |
Average Price per Unit: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Oil (Bbl) |  | $ | 78.98 |  |  | $ | 92.90 |  |  | $ | 74.77 |  |  | $ | 97.58 |
Natural Gas (Mcf) |  | $ | 2.10 |  |  | $ | 6.59 |  |  | $ | 2.06 |  |  | $ | 5.71 |
Natural Gas Liquids (Bbl) |  | $ | 11.57 |  |  | $ | 21.99 |  |  | $ | 12.06 |  |  | $ | 26.32 |
Total (Boe) |  | $ | 54.75 |  |  | $ | 68.03 |  |  | $ | 51.91 |  |  | $ | 71.27 |
Operating Costs and Expenses per Boe: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Lease Operating Expense |  | $ | 37.42 |  |  | $ | 37.74 |  |  | $ | 35.56 |  |  | $ | 28.69 |
Production and Ad Valorem Taxes |  | $ | 4.21 |  |  | $ | 5.42 |  |  | $ | 3.91 |  |  | $ | 5.32 |
Depreciation, Depletion, Amortization and Accretion |  | $ | 6.36 |  |  | $ | 4.30 |  |  | $ | 5.74 |  |  | $ | 4.12 |
General and Administrative Expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
General and Administrative Expense |  | $ | 13.70 |  |  | $ | 9.93 |  |  | $ | 12.90 |  |  | $ | 11.68 |
Stock-Based Compensation |  | $ | 0.84 |  |  | $ | 3.94 |  |  | $ | 3.94 |  |  | $ | 2.83 |
Total General and Administrative Expense |  | $ | 14.54 |  |  | $ | 13.88 |  |  | $ | 16.84 |  |  | $ | 14.51 |

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.

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Three Months Ended September 30, 2023 and 2022

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, |  |  |  |  |  |  |
|  | 2023 |  |  | 2022 |  |  | Variance |  |  | Variance % |
Oil Revenues |  | $ | 9,492,127 |  |  | $ | 11,501,521 |  |  | $ | (2,009,394 | ) |  |  | -17% |
Natural Gas Revenues |  |  | 411,217 |  |  |  | 1,526,148 |  |  |  | (1,114,931 | ) |  |  | -73% |
NGL Revenues |  |  | 411,624 |  |  |  | 945,317 |  |  |  | (533,693 | ) |  |  | -56% |
Total Product Revenues |  |  | 10,314,968 |  |  |  | 13,972,986 |  |  |  |  |  |  |  |  |
Lease Operating Expense (Including Workovers) |  |  | 7,050,054 |  |  |  | 7,751,755 |  |  |  | (701,701 | ) |  |  | -9% |
Production and Ad Valorem Taxes |  |  | 792,241 |  |  |  | 1,112,246 |  |  |  | (320,005 | ) |  |  | -29% |
Depreciation, Depletion, Amortization and Accretion |  |  | 1,198,448 |  |  |  | 882,162 |  |  |  | 316,286 |  |  |  | 36% |
General and Administrative Expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
General and Administrative Expense |  |  | 2,580,464 |  |  |  | 2,040,418 |  |  |  | 540,046 |  |  |  | 26% |
Stock-based Compensation |  |  | 158,792 |  |  |  | 809,641 |  |  |  | (650,849 | ) |  |  | -80% |
Total General and Administrative Expense |  |  | 2,739,256 |  |  |  | 2,850,059 |  |  |  | (110,803 | ) |  |  | -4% |
Interest Expense |  |  | 249,796 |  |  |  | 125,330 |  |  |  | 124,466 |  |  |  | 99% |
Operating Income (Loss) |  |  | (2,633,902 | ) |  |  | 1,442,159 |  |  |  | (4,076,061 | ) |  |  | NM |
Net Income (Loss) |  |  | (2,747,628 | ) |  |  | 215,941 |  |  |  | (2,963,569 | ) |  |  | 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 September 30, 2023 decreased over the same period as the prior year primarily due to lower realized oil, natural gas and NGL prices and lower oil volumes. Oil volumes in third-quarter 2023 were impacted by facility maintenance in New Mexico.

Realized oil prices for the three months ended September 30, 2023, were approximately $78.98 per barrel, while realized prices for the same period in the prior year were approximately $92.90 per barrel, a decrease in price of approximately 15%.

Realized natural gas prices for the three months ended September 30, 2023, were approximately $2.10 per mcf, while realized prices for the same period in the prior year were approximately $6.59 per mcf, a decrease in price of approximately 71%.

Realized NGL prices for the three months ended September 30, 2023, were approximately $11.57 per barrel, while realized prices for the same period in the prior year were approximately $21.99 per barrel, a decrease in price of approximately 45%.

Net oil sales volumes were approximately 120,000 Bbls for the three months ended September 30, 2023, a decrease of approximately 3% over the same period in the prior year. Oil volumes in third-quarter 2023 were impacted by facility maintenance in New Mexico.

Lease Operating Expense and Production Taxes

Lease operating expense was lower in 2023 due in part to lower contract labor in the third quarter of 2023. Lease operating expense includes approximately $3.2 million workover expense for the three months ended September 30, 2023 as compared to $2.9 million for the same period in 2022. The 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 lower for the third quarter of 2023 compared to 2022 as a result of the lower product revenues discussed above.

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General and Administrative Expense

General and administrative expense, excluding stock-based compensation, increased in 2023 compared to 2022 primarily due to higher employee costs.

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 2023 and beyond to attract and retain talented personnel and compensate Board members and consultants. The decrease year over year is primarily due to forfeited stock options resulting in the reversal of $576,000 of previously recorded stock-based compensation (See Note 12).

Interest Expense

Cash-based interest expense increased despite a decrease in the outstanding amount under the Company’s Credit Facility due to an increase in the interest rate from 5.0% at September 30, 2022 to 10.0% at September 30, 2023.

Nine Months Ended September 30, 2023 and 2022

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.

|  | Nine Months Ended September 30, |  |  |  |  |  |  |
|  | 2023 |  |  | 2022 |  |  | Variance |  |  | Variance % |
Oil Revenues |  | $ | 27,578,453 |  |  | $ | 35,247,309 |  |  | $ | (7,668,856 | ) |  |  | -22% |
Natural Gas Revenues |  |  | 1,315,938 |  |  |  | 3,731,946 |  |  |  | (2,416,008 | ) |  |  | -65% |
NGL Revenues |  |  | 1,278,759 |  |  |  | 3,201,947 |  |  |  | (1,923,188 | ) |  |  | -60% |
Total Product Revenues |  |  | 30,173,150 |  |  |  | 42,181,202 |  |  |  |  |  |  |  |  |
Lease Operating Expense (Including Workovers) |  |  | 20,669,217 |  |  |  | 16,981,057 |  |  |  | 3,688,160 |  |  |  | 22% |
Production and Ad Valorem Taxes |  |  | 2,271,630 |  |  |  | 3,151,325 |  |  |  | (879,695 | ) |  |  | -28% |
Depreciation, Depletion, Amortization and Accretion |  |  | 3,338,615 |  |  |  | 2,438,895 |  |  |  | 899,720 |  |  |  | 37% |
General and Administrative Expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
General and Administrative Expense |  |  | 7,497,947 |  |  |  | 6,915,068 |  |  |  | 582,879 |  |  |  | 8% |
Stock-based Compensation |  |  | 2,289,237 |  |  |  | 1,672,823 |  |  |  | 616,414 |  |  |  | 37% |
Total General and Administrative Expense |  |  | 9,787,184 |  |  |  | 8,587,891 |  |  |  | 1,199,293 |  |  |  | 14% |
Interest Expense |  |  | 671,982 |  |  |  | 347,763 |  |  |  | 324,219 |  |  |  | 93% |
Operating Income (Loss) |  |  | (7,158,122 | ) |  |  | 11,000,171 |  |  |  | (18,158,293 | ) |  |  | NM |
Net Income (Loss) |  |  | (7,672,128 | ) |  |  | 9,373,648 |  |  |  | (17,045,776 | ) |  |  | 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 nine months ended September 30, 2023 decreased over the same period as the prior year primarily due to lower realized oil, natural gas and NGL prices, partially offset by higher oil sales volumes.

Realized oil prices for the nine months ended September 30, 2023, were approximately $74.77 per barrel, while realized prices for the same period in the prior year were approximately $97.58 per barrel, a decrease in price of approximately 23%.

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Realized natural gas prices for the nine months ended September 30, 2023, were approximately $2.06 per mcf, while realized prices for the same period in the prior year were approximately $5.71 per mcf, a decrease in price of approximately 67%.

Realized NGL prices for the nine months ended September 30, 2023, were approximately $12.06 per barrel, while realized prices for the same period in the prior year were approximately $26.32 per barrel, a decrease in price of approximately 54%.

Net oil sales volumes were approximately 369,000 Bbls for the nine months ended September 30, 2023, an increase of approximately 2% over the same period in the prior year.

Lease Operating Expense and Production Taxes

Lease operating expense was higher in 2023 due in part to higher workover activity in the first nine months of 2023 coupled with higher production. Lease operating expense includes approximately $8.9 million of workover expense for the nine months ended September 30, 2023 as compared to $5.3 million for the same period in 2022. Part of the higher workover expense was in North Dakota as the Company continued to work over wells in the state to enhance production alongside capital recompletions and sidetrack drilling started in 2022.

Production taxes were lower for the first nine months of 2023 compared to 2022 as a result of the lower product revenues discussed above.

Depreciation, Depletion, Amortization and Accretion

The higher DD&A in 2023 is due in part to the increase in production as well as the impact of the capitalized costs associated with the capital development activity in North Dakota.

General and Administrative Expense

General and administrative expense, excluding stock-based compensation, in 2023 includes $360,000 of severance expense for the former CEO and $145,000 of severance expense for the former COO (see Note 12) along with higher employee salaries and wages, partially offset by lower employee bonus expense period over period. The nine months ended September 30, 2022 includes a $650,000 expense accrual related to a sales tax audit.

Stock-based Compensation

The Company utilizes stock-based compensation to compensate members of the Board, management, and retain talented personnel. The Company anticipates stock-based compensation to continue to be utilized in 2023 and beyond to attract and retain talented personnel and compensate Board members and consultants. The increase year over year is primarily due to Board awards in 2023 partially offset by forfeited stock options resulting in the reversal of $576,000 of previously recorded stock-based compensation (See Note 12).

Interest Expense

Cash-based interest expense increased despite a decrease in the outstanding amount under the Company’s Credit Facility due to an increase in the interest rate from 5.0% at September 30, 2022 to 10.0% at September 30, 2023.

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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 conducted an evaluation under the supervision and participation of the Company's Chief Executive Officer and Chief Financial Officer, along with the Company’s 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 Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures as of the end of the period covered by this report were not effective due to an existing material weakness discussed below. As described in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2023, the Company’s Chief Executive Officer and Principal Financial Officer concluded that, as of December 31, 2022, the Company’s internal control over financial reporting was not effective at a reasonable assurance level due to a material weakness as the Company did not have sufficient resources and processes in its accounting function, which restricts the Company’s ability to gather, analyze and properly review information related to financial reporting in a timely manner.

Management has evaluated the material weakness described above and is in the process of updating its design and implementation of internal control over financial reporting to remediate the aforementioned material weakness and enhance the Company’s internal control environment which to date has included the hiring of a Chief Accounting Officer in October 2021. In the first quarter of 2022, the Chief Accounting Officer engaged an outside company to undertake an internal controls review. This review concluded in the third quarter of 2022. Controls that would strengthen the Company’s internal control structure that were identified during the course of the review continue to be designed and will be implemented on an ongoing basis. Additionally, in December 2022, we had a change in the Chief Accounting Officer although the former Chief Accounting Officer continued to assist the Company on a part-time basis in the first half of 2023. In addition to continuing to enhance and refine control design, management plans to add the appropriate resources and focus efforts during 2023 to test the operational effectiveness of the controls that will be established. In May 2023, we hired an additional accounting resource who will serve as Controller. We are committed to continuing to improve our internal control processes and will continue to diligently and vigorously review our financial reporting controls and procedures.

Changes in Internal Control Over Financial Reporting

While we continue to implement design enhancements to our internal control procedures, we believe that other than the changes described above regarding the ongoing remediation efforts, there were no changes to our internal control over financial reporting during the three months ended September 30, 2023, 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 2023 with additional controls implemented as they are identified by the outside consultants. Management will continue to diligently and rigorously review the financial reporting controls and procedures on an ongoing basis.

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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

On August 9, 2023 the Company issued 67,000 shares of common stock to Energy Evolution in exchange for the Purchase Option. For a description of the Purchase Option, see Note 3 of Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

The issuance of such shares of common stock was not registered under the Securities Act of 1933, as amended, in reliance upon the exemption from the registration requirements of that Act provided by Section 4(a)(2) thereof. Energy Evolution is a sophisticated accredited investor with the experience and expertise to evaluate the merits and risks of an investment in the Company and the financial means to bear the risks of such an investment.

Item 3. | Defaults Upon Senior Securities

None.

Item 4. | Mine Safety Disclosures

Not applicable.

Item 5. | Other Information

None.

Item 6. | Exhibits

10.1 |  | Empire North Dakota LLC Promissory Note Due October 31, 2023 in the original aggregate principal amount of $5.0 million in favor of Phil Mulacek (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated September 19, 2023, which was filed on September 25, 2023).
10.2 |  | Empire North Dakota LLC Promissory Note Due October 31, 2023 in the original principal amount of $5.0 million in favor of Energy Evolution Master Fund, Ltd. (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated September 19, 2023, which was filed on September 25, 2023).
10.3 |  | Commercial Guaranty Agreement, dated as of September 19, 2023, issued by Empire Petroleum Corporation in favor of Phil Mulacek (incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K dated September 19, 2023, which was filed on September 25, 2023).
10.4 |  | Commercial Guaranty Agreement, dated as of September 19, 2023, issued by Empire Petroleum Corporation in favor of Energy Evolution Master Fund, Ltd. (incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K dated September 19, 2023, which was filed on September 25, 2023).
10.5 |  | Letter Agreement amending Senior Revolver Loan Agreement, dated as of September 19, 2023, by and among Empire Louisiana LLC and Empire North Dakota LLC, as borrowers, Empire Petroleum Corporation, as guarantor, and CrossFirst Bank, as lender (incorporated herein by reference to Exhibit 10.5 to the Company’s Form 8-K dated September 19, 2023, which was filed on September 25, 2023).

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10.6 |  | Subordination Agreement, dated as of September 19, 2023, by and among Phil Mulacek, Energy Evolution Master Fund, Ltd. and Empire North Dakota LLC in favor of CrossFirst Bank (incorporated herein by reference to Exhibit 10.6 to the Company’s Form 8-K dated September 19, 2023, which was filed on September 25, 2023).
10.7 |  | Letter Amendment amending the Bridge Loans, dated as of October 31, 2023, by and among Phil Mulacek and Energy Evolution Master Fund, Ltd., as investors, Empire North Dakota LLC, as borrower, and Empire Petroleum Corporation, as guarantor (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated October 31, 2023, which was filed on November 1, 2023).
10.8 |  | Shared Services Agreement, dated as of August 1, 2023, by and between PIE Operating, LLC and Empire Petroleum Corporation (submitted herewith).
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 Stephen L. Faulkner, Jr., Chief Financial Officer (submitted herewith).
32.1 |  | Section 1350 Certification of Michael R. Morrisett, Chief Executive Officer (submitted herewith).
32.2 |  | Section 1350 Certification of Stephen L. Faulkner, Jr., Chief Financial Officer (submitted herewith).
101 |  | Financial Statements for Inline XBRL format (submitted herewith).
104 |  | Cover Page Interactive Data File (embedded within Inline XBRL document).

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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: November 13, 2023 | By: | /s/ Michael R. Morrisett |
|  | Michael R. Morrisett |
|  | Chief Executive Officer and President |
|  | (Principal Executive Officer) |

Date: November 13, 2023 | By: | /s/ Stephen L. Faulkner, Jr. |
|  | Stephen L. Faulkner, Jr. |
|  | Chief Financial Officer and Chief Accounting Officer |
|  | (Principal Financial Officer) |

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