EMPIRE PETROLEUM CORP

Previous wording

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 Empire 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 Empire’s failure to secure short and long-term financing necessary to sustain and grow its operations, increased competition, changes in the markets in which Empire participates and the technology utilized by Empire and new legislation regarding environmental matters. These risks and other risks that could affect Empire's business are more fully described in reports Empire files with the SEC, including its Annual Report on Form 10-K for the year ended December 31, 2023. Actual results may vary materially from the forward-looking statements. Empire undertakes no duty to update any of the forward-looking statements in this Form 10-Q.

Current wording

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 Empire 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 Empire’s failure to secure short and long-term financing necessary to sustain and grow its operations, increased competition, changes in the markets in which Empire participates, the technology utilized by Empire, new legislation regarding environmental matters and general economic conditions including inflation, tariffs and interest rates. These risks and other risks that could affect Empire's business are more fully described in reports Empire files with the SEC, including its Annual Report on Form 10-K for the year ended December 31, 2024. Actual results may vary materially from the forward-looking statements. Empire undertakes no duty to update any of the forward-looking statements in this Form 10-Q.** **

Previous wording

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

Current wording

Our primary business is the optimization and development of oil and gas interests. We have incurred losses from operations in 2025 and 2024. There is no assurance that we will be profitable or obtain the funds necessary to finance our future operations.

Previous wording

The preparation of financial statements in conformity with 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 Empire’s critical accounting policies during the nine months ended September 30, 2024.

Current wording

The preparation of financial statements in conformity with US GAAP requires management to use judgment to make estimates and assumptions that affect certain amounts reported in the unaudited interim consolidated financial statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts reported in the future. Because estimates and assumptions require significant judgment, future actual results could differ from those estimates and could have a significant impact on our results of operations, financial position and cash flows. We re-evaluate our estimates and assumptions at least on a quarterly basis and periodically update 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 Empire’s critical accounting estimates during the three months ended March 31, 2025.

Previous wording

Empire’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. Empire’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 Empire’s sources of liquidity. Although Empire 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 Empire’s future needs.

Current wording

Empire’s primary sources of short-term liquidity are cash and cash equivalents, net cash provided by operating activities, our Credit Facility and issuance of debt or equity securities. Empire’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 Empire’s sources of liquidity. Although Empire 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 Empire’s future needs.

Previous wording

As noted below, our working capital is negative as of September 30, 2024, which is primarily the result of a higher level of payables related to capital spending as part of our Starbuck Drilling Program in North Dakota. In addition, Empire was not in compliance with the current ratio covenant under the Revolver as of September 30, 2024; however, Empire obtained a compliance waiver from the lender for September 30, 2024. As of September 30, 2024, we had approximately $3.1 million in cash on hand and approximately $0.2 million available on the Revolver. Empire will require additional funds to be in compliance with debt covenants and satisfy the payables discussed above which are greater than estimated cash flows from operations over the next 12 months. Phil Mulacek and Energy Evolution Master Fund, Ltd, both related parties of Empire and our largest two shareholders, owning 20.3% and 31.4%, respectively, of the common shares outstanding as of September 30, 2024, have indicated that they will, and have the ability to, provide sufficient support to sustain the operating, investing, and financing activities of Empire, as necessary. In addition to the November Rights Offering, discussed elsewhere in this document, management continues to seek additional sources of capital via the debt or equity markets to improve liquidity going forward. See the liquidity and going concern discussion included in notes to unaudited interim condensed consolidated financial statements, presented elsewhere in this document, for further discussion of management’s plans.

Current wording

As noted below, our working capital is negative as of March 31, 2025, which is primarily the result of a lower cash balance due to capital spending as part of our Starbuck Drilling Program, return-to-production efforts in Texas and a reduction-to-production due to five wells being down in North Dakota during the first quarter of 2025. As of March 31, 2025, we had approximately $1.1 million in cash on hand and approximately $7.8 million available under our Credit Facility; however, the Company’s available borrowing capacity under the Credit Facility continues to decrease due to a subsequent borrowing of $3.0 million in April 2024 and monthly reductions to the borrowing capacity under the Credit Facility (See Note 8). Empire will require additional funds to satisfy the payables discussed above which are greater than estimated cash flow from operations over the next 12 months. Phil Mulacek and Energy Evolution, both related parties of Empire and our largest two stockholders, owning 21.1% and 31.8%, respectively, of the common shares outstanding as of March 31, 2025, have indicated that they will, and have the ability to, provide sufficient support to sustain the operating, investing, and financing activities of Empire, as necessary. Management continues to seek additional sources of capital via the debt or equity markets to improve liquidity going forward. See Liquidity and Going Concern in Note 1 of Notes to Unaudited Interim Condensed Consolidated Financial Statements for further discussion of management’s plans.

Previous wording

Empire expects to continue to incur costs related to drilling activities in core areas as well as future oil and natural gas acquisitions in core areas. As of September 30, 2024, Empire has incurred approximately $38.3 million of additions to oil and natural gas properties, primarily related to the drilling program in the Starbuck field of North Dakota. It is expected that Empire 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.

Current wording

Empire expects to continue to incur costs related to drilling activities in core areas as well as future oil and natural gas acquisitions in core areas. During the first quarter of 2025, Empire incurred approximately $2.7 million of additions to oil and natural gas properties, primarily related to the drilling program in the Starbuck field of North Dakota. It is expected that Empire 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.

Previous wording

Working capital, presented below, decreased by approximately $9.0 million between December 31, 2023, and September 30, 2024. This change was primarily driven by payables related to the Starbuck Drilling Program in North Dakota and a lower cash balance at September 30, 2024.

Current wording

Working capital is presented in the table below. This change of approximately $3.5 million was primarily driven by payables related to the Starbuck Drilling Program in North Dakota and a lower cash balance at March 31, 2025.

Previous wording

Cash flow from financing activities in 2024 includes net proceeds from the April Rights Offering of approximately $20.5 million (see Note 10). In addition, cash flows from financing activities in 2024 includes $5.0 million from a promissory note issued to Empire by a related party and approximately $4.0 million borrowed on Empire’s Revolver (see Note 8).

Current wording

Cash flows from financing activities in 2024 includes $5.0 million from a promissory note issued to Empire by a related party (see Note 8) and approximately $4.0 million borrowed on Empire’s Credit Facility.

Previous wording

For the nine months ended September 30, 2024, Empire incurred approximately $38.3 million of additions to oil and natural gas properties which primarily reflects continued drilling and completions activity related to our Starbuck Drilling Program in North Dakota.

Current wording

For the three months ended March 31, 2025, Empire incurred approximately $2.7 million of total additions to oil and natural gas properties which is primarily from continued drilling and completions activity related to our Starbuck Drilling Program in North Dakota.

Previous wording

The following table sets forth a summary of Empire’s production and operating data for the three and nine months ended September 30, 2024 and 2023. Because of normal production declines, increased or decreased production due to future acquisitions, divestitures, and development, and fluctuations in commodity prices, the historical information presented below should not be interpreted as being indicative of future results.

Current wording

The following table sets forth a summary of Empire’s production and operating data for the three months ended March 31, 2025 and 2024. Because of normal production declines, increased or decreased production due to future acquisitions, divestitures, development, and fluctuations in commodity prices, the historical information presented below should not be interpreted as being indicative of future results.

Previous wording

Revenues for the three months ended September 30, 2024, increased slightly compared to the prior year primarily due to higher oil, natural gas and NGL sales volumes, substantially offset by lower realized oil and natural gas prices.

Current wording

Revenues for the three months ended March 31, 2025, decreased compared to the prior year primarily due to lower oil and NGLs sales volumes and lower realized oil prices.

Previous wording

Net oil sales volumes were approximately 145,000 Bbls for the three months ended September 30, 2024, an increase of approximately 20% over the same period in the prior year. Oil volumes in third-quarter 2024 increased primarily due to new wells completed in North Dakota during the period as well as the acquisition of additional working interest in New Mexico.

Current wording

Net oil sales volumes were approximately 120,000 Bbls for the three months ended March 31, 2025, a decrease of approximately 9% over the same period in the prior year primarily due to five wells being down to redrill in North Dakota during first quarter 2025.

Previous wording

Realized oil prices for the three months ended September 30, 2024, were $71.48 per barrel, while realized prices for the same period in the prior year were $78.98 per barrel, a decrease in price of approximately 9%.

Current wording

Realized oil prices for the three months ended March 31, 2025, were $67.28 per barrel, while realized prices for the same period in the prior year were $72.21 per barrel, a decrease in price of approximately 7% due to a general decline in overall market price.

Previous wording

Realized natural gas prices for the three months ended September 30, 2024, were $0.03 per mcf, while realized prices for the same period in the prior year were $2.10 per mcf. This is primarily due to the depressed natural gas prices in the third quarter of 2024 in New Mexico.

Current wording

Realized natural gas prices for the three months ended March 31, 2025, were $2.74 per Mcf, while realized prices for the same period in the prior year were $1.78 per Mcf. The increase is due to an increase in market price during the same period.

Previous wording

Realized NGL prices for the three months ended September 30, 2024, were $13.84 per barrel, while realized prices for the same period in the prior year were $11.57 per barrel, an increase in price of approximately 20%.

Current wording

Realized NGLs prices for the three months ended March 31, 2025, were $12.56 per barrel, while realized prices for the same period in the prior year were $11.97 per barrel, an increase in price of approximately 5%.

Previous wording

Lease operating expense was lower for the three months ended September 30, 2024, compared to the same period in 2023 primarily due to lower workover costs. Lease operating expense includes approximately $1.4 million of workover expense for the three months ended September 30, 2024, as compared to $3.2 million for the same period in 2023. The higher workover expense in 2023 was primarily in New Mexico as Empire continued to work over wells in the region to enhance and maintain production.

Current wording

Lease operating expense was lower for the three months ended March 31, 2025, compared to the same period in 2024 primarily due to lower workover costs. Lease operating expense includes approximately $0.4 million of workover expense for the three months ended March 31, 2025, compared to $2.0 million for the same period in 2024. The higher workover expense in 2024 was primarily in New Mexico as Empire continued work in the region to enhance and maintain production.

Previous wording

Production taxes were higher for the three months ended September 30, 2024, compared to the same period in 2023 as a result of the higher product revenues discussed above.

Current wording

Production taxes were lower for the three months ended March 31, 2025, compared to the same period in 2024 as a result of the lower product revenues discussed above.

Previous wording

The higher DD&A for the three months ended September 30, 2024, compared to the same period in 2023 is due in part to the increase in production, the acquisition of additional working interest as well as the impact of the capitalized costs associated with the new drilling activity as part of our Starbuck Drilling Program in North Dakota.

Current wording

The higher DD&A for the three months ended March 31, 2025, compared to the same period in 2024 is primarily due to the acquisition of additional working interest and the impact of the capitalized costs associated with the new drilling activity as part of our Starbuck Drilling Program in North Dakota. Accretion also increased slightly from prior period due to the new drilling activity.

Previous wording

Empire utilizes stock-based compensation to compensate members of the Board, management, and retain talented personnel. Empire anticipates stock-based compensation to continue to be utilized in 2024 and beyond to attract and retain talented personnel and compensate Board members and consultants. The decrease year over year is primarily due to Board of Directors awards in 2023.

Current wording

Stock-based compensation decreased period over period due to a lower number of awards in first quarter 2025. Empire utilizes stock-based compensation to compensate the Board, members of management, and retain talented personnel. Empire anticipates stock-based compensation to continue to be utilized in 2025 and beyond to attract and retain talented personnel and compensate Board members and consultants.

Previous wording

Interest expense decreased for the three months ended September 30, 2024, compared to the same period in 2023 primarily due to lower cash interest expense from lower average debt balances in the third quarter of 2024 compared to third-quarter 2023.

Current wording

Interest expense decreased for the three months ended March 31, 2025 compared to the same period in 2024 primarily due to certain non-cash interest expense in first quarter 2024 from the convertible promissory note further described in Note 8 partially offset by a higher average outstanding balance on the Company’s Credit Facility.