EP 10-Q
Empire Petroleum Corp (EP)
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM
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| (Mark One) | ||
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended |
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: ____________to ____________ |
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(Exact name of registrant as specified in its charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
(Commission File Number) |
(I.R.S. Employer Identification No.)
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| (Address of principal executive offices)(Zip Code) | ||
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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Securities registered pursuant to Section 12(b) of the Act:
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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
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has been subject to such filing requirements for the past 90 days.
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
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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 ☐ | |
| Smaller reporting company |
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| Emerging growth company |
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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. ☐
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The number of shares of the registrant's common stock, $0.001 par value, outstanding as of May 9, 2025 was .
EMPIRE PETROLEUM CORPORATION
TABLE OF CONTENTS
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EMPIRE PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
| March 31, | December 31, | |||||||
| 2025 | 2024 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts Receivable | ||||||||
| Inventory | ||||||||
| Prepaids | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment: | ||||||||
| Oil and Natural Gas Properties, Successful Efforts | ||||||||
| Less: Accumulated Depletion, Amortization and Impairment | ( | ) | ( | ) | ||||
| Total Oil and Gas Properties, Net | ||||||||
| Other Property and Equipment, Net | ||||||||
| Total Property and Equipment, Net | ||||||||
| Other Noncurrent Assets | ||||||||
| Total Assets | $ | $ | ||||||
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| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable | $ | $ | ||||||
| Accrued Expenses | ||||||||
| Current Portion of Lease Liability | ||||||||
| Current Portion of Long-Term Debt | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Debt | ||||||||
| Long-Term Lease Liability | ||||||||
| Asset Retirement Obligations | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 14) | ||||||||
| Stockholders' Equity: | ||||||||
| Series A Preferred Stock - $ Par Value, Shares Authorized, and Shares Issued and Outstanding, Respectively |
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| Common Stock - $ Par Value Shares Authorized, and Shares Issued and Outstanding, Respectively |
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| Additional Paid-in-Capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Total Stockholders' Equity | ||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | ||||||
See accompanying notes to unaudited interim condensed consolidated financial statements.
2
EMPIRE PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| Revenue: | ||||||||
| Oil Sales | $ | $ | ||||||
| Gas Sales | ||||||||
| NGL Sales | ||||||||
| Total Product Revenues | ||||||||
| Other | ||||||||
| Loss on Derivatives | ( | ) | ||||||
| Total Revenue | ||||||||
| Costs and Expenses: | ||||||||
| Lease Operating Expense | ||||||||
| Production and Ad Valorem Taxes | ||||||||
| Depreciation, Depletion & Amortization | ||||||||
| Accretion of Asset Retirement Obligation | ||||||||
| General and Administrative: | ||||||||
| General and Administrative | ||||||||
| Stock-Based Compensation | ||||||||
| Total General and Administrative | ||||||||
| Total Cost and Expenses | ||||||||
| Operating Loss | ( | ) | ( | ) | ||||
| Other Income and (Expense): | ||||||||
| Interest Expense | ( | ) | ( | ) | ||||
| Other Income (Expense) | ||||||||
| Loss Before Taxes | ( | ) | ( | ) | ||||
| Income Tax Benefit (Provision) | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Net Loss per Common Share: | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted Average Number of Common Shares Outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See accompanying notes to unaudited interim condensed consolidated financial statements.
3
EMPIRE PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
| Common Stock | Preferred Stock | |||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Additional Paid-in-Capital | Accumulated Deficit | Total | ||||||||||||||||||||||
| Balances, December 31, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net Loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock-Based Compensation | — | |||||||||||||||||||||||||||
| Balances, March 31, 2025 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Common Stock | Preferred Stock | |||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Additional Paid-in-Capital | Accumulated Deficit | Total | ||||||||||||||||||||||
| Balances, December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net Loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock-Based Compensation | — | |||||||||||||||||||||||||||
| Balances, March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
See accompanying notes to unaudited interim condensed consolidated financial statements.
4
EMPIRE PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to Reconcile Net Loss to Net Cash | ||||||||
| Provided By Operating Activities: | ||||||||
| Stock-Based Compensation | ||||||||
| Amortization of Right of Use Assets | ||||||||
| Depletion, Depreciation & Amortization | ||||||||
| Accretion of Asset Retirement Obligation | ||||||||
| Loss on Commodity Derivatives | ||||||||
| Settlement on or Purchases of Derivative Instruments | ( | ) | ||||||
| Gain on Financial Derivatives (Note 8) | ( | ) | ||||||
| Gain on Sale of Other Fixed Assets | ( | ) | ||||||
| Change in Operating Assets and Liabilities: | ||||||||
| Accounts Receivable | ||||||||
| Inventory, Oil in Tanks | ( | ) | ( | ) | ||||
| Prepaids, Current | ( | ) | ||||||
| Accounts Payable | ||||||||
| Accrued Expenses | ||||||||
| Other Long-Term Assets and Liabilities | ( | ) | ||||||
| Net Cash Provided By Operating Activities | ||||||||
| Cash Flows From Investing Activities: | ||||||||
| Capital Expenditures - Oil and Natural Gas Properties (1) | ( | ) | ( | ) | ||||
| Disposal of Other Fixed Assets | ||||||||
| Purchase of Other Fixed Assets | ( | ) | ( | ) | ||||
| Cash Paid for Right-of-Use Assets | ( | ) | ( | ) | ||||
| Net Cash Used In Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Borrowings on Credit Facility | ||||||||
| Proceeds from Promissory Note - Related Party (Note 8) | ||||||||
| Principal Payments of Debt | ( | ) | ( | ) | ||||
| Net Cash (Used In) Provided By Financing Activities | ( | ) | ||||||
| Net Change in Cash | ( | ) | ( | ) | ||||
| Cash - Beginning of Period | ||||||||
| Cash - End of Period | $ | $ | ||||||
| Supplemental Cash Flow Information: | ||||||||
| Cash Paid for Interest | $ | $ | ||||||
_____________________
| (1) |
See accompanying notes to unaudited interim condensed consolidated financial statements.
5
EMPIRE PETROLEUM CORPORATION
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Basis of Presentation
Empire Petroleum Corporation (“Empire,” 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”), consisting of the following entities: | |||
| 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 North Dakota (“Empire North Dakota”), consisting of the following entities: | |||
| o | Empire North Dakota LLC | |||
| 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 unaudited interim condensed consolidated financial statements include the accounts of Empire and its wholly-owned subsidiaries. The terms “Company,” “we,” “us,” “our,” and similar terms refer to Empire Petroleum Corporation and its subsidiaries.
The accompanying unaudited interim condensed consolidated financial statements of Empire have been prepared in accordance with accounting principles generally accepted in the United States (“US 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 US GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of Empire's financial position, the results of operations, and the cash flows for the interim period are included. All intercompany accounts and transactions have been eliminated in consolidation. All adjustments are of a normal, recurring nature. Operating results for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2025.
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, 2024, which are contained in Empire's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2025.
Liquidity and Going Concern
The Company has a revolving line of credit agreement (Note 8) with Equity Bank which requires the Company to maintain compliance with certain financial covenants computed on a quarterly and annual basis. As of March 31, 2025, the Company was in compliance with all required covenants and projected to be in compliance with all debt covenants over the next 12 months. However, the Company carried a negative working capital of approximately $12.4 million as of March 31, 2025, an overall decline of approximately $3.5 million from the end of 2024. Cash on hand also declined approximately $1.2 million during the same period. The overall decline in working capital and cash is primarily driven by the Starbuck Drilling Program in North Dakota which continues to incur working capital costs along with continued unforeseen operational costs from the Company’s return-to-production program in Texas started in the fourth quarter of 2024. Additionally, the Company had five wells down in North Dakota due to redrilling which caused production to be down during the first quarter of 2025 further reducing cash flows. This along with the additional costs contributed to the overall negative financial trend. To meet its obligations, the Company increased its revolver commitment to $20.0 million in November 2024 which had approximately $7.8 million remaining unused commitment as of March 31, 2025, which can be used for future obligations; however, subsequent to March 31, 2025, the Company borrowed an additional $3.0 million under the revolver. Additionally, the revolver commitment is reduced monthly by $0.25 million commencing on December 31, 2024 (See Note 8), limiting future access to capital. While the revolver provides additional funding towards the Company’s obligations, the Company still carried approximately $12.4 million of negative working capital at period end and future expected operating cash flows do not sufficiently meet the Company’s obligations for the next 12 months. Given the negative working capital and insufficient expected operating cash flow there is substantial doubt about the Company’s ability to continue as a going concern.
6
Empire has committed financial support from Phil Mulacek who owns approximately 21.1% of our common stock outstanding as of March 31, 2025, and Energy Evolution Master Fund, Ltd. (“Energy Evolution”), our largest stockholder who owns approximately 31.8% of our common stock outstanding as of March 31, 2025. Both are related parties of the Company (see Note 13). Mr. Mulacek and Energy Evolution are willing and able to provide these additional funds, if required, for Empire to continue to meet its obligations over the next 12 months. These additional funds may be raised through related party warrants, or a related party note payable that may or may not have conversion rights into shares of common stock of Empire.
Management has considered these plans, including if they are within the control of Empire, in evaluating Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 205-40, Presentation of Financial Statements - Going Concern. Management believes the above actions are sufficient to allow Empire to meet its obligations as they become due for a period of at least 12 months from the issuance of these financial statements. Management believes that its plans, and support from the existing related-party stockholders discussed above, is probable and has alleviated the substantial doubt regarding Empire’s ability to continue as a going concern.
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, 2024.
Principles of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts and balances of the Company and have been prepared in accordance with US GAAP. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Estimated quantities of crude oil, natural gas and natural gas liquids (“NGLs”) reserves are the most significant of the Company’s estimates. All reserve data used in the preparation of the unaudited interim condensed consolidated financial statements, including depletion, are based on estimates. Reservoir engineering is a subjective process of estimating underground accumulations of crude oil, natural gas and NGLs. There are numerous uncertainties inherent in estimating quantities of proved crude oil, natural gas and NGLs reserves. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, reserve estimates may be different from the quantities of crude oil, natural gas and NGLs that are ultimately recovered.
Other items subject to estimates and assumptions include, but are not limited to, the carrying amounts of property, plant and equipment, asset retirement obligations, valuation allowances for deferred income tax assets, and valuation of derivative instruments. Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic and commodity price environment. The volatility of commodity prices results in increased uncertainty inherent in such estimates and assumptions.
Although management believes these estimates are reasonable, actual results may differ from estimates and assumptions of future events and these revisions could be material. Future production may vary materially from estimated oil and natural gas proved reserves. Actual future prices may vary significantly from price assumptions used for determining proved reserves and for financial reporting.
Accounts Receivable
Accounts receivable include estimated amounts due from crude oil, natural gas, and NGLs purchasers and from non-operating working interest owners. Accrued revenue related to product sales from purchasers and operators are due under normal trade terms, generally requiring payment within 60 days of production. For receivables from joint interest owners, the Company generally has the ability to withhold future revenue disbursements to recover any non-payment of joint interest billings.
7
Receivables are stated at amounts due, net of an allowance for credit losses, if necessary, and are considered past due if full payment is not received by the contractual due date. The Company estimates uncollectible amounts based on the length of time that the accounts receivable has been outstanding, historical collection experience and current and future economic and market conditions, if failure to collect is expected to occur. Past due accounts are generally written off against the allowance for credit losses account only after all collection attempts have been exhausted. The Company did not have an allowance for credit losses as of March 31, 2025.
Inventory
Inventory primarily consists of oil in tanks which has not been delivered and is valued at the lower of cost or net realizable value.
Concentrations of Credit Risk
Empire’s accounts receivable are primarily receivables from oil and natural gas purchasers and joint interest owners. The oil and natural gas purchasers 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 we make full payments for costs associated with the property and seek 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 the offsetting of amounts payable or receivable between the Company and its joint interest owners. Our joint interest partners consist primarily of independent oil and natural gas producers. If the oil and natural gas exploration and production industry in general were adversely affected, the ability of the joint interest partners to reimburse Empire could be adversely affected.
Convertible Debt and Derivative Liability
In connection with Empire’s issuance of a promissory note (Note 8) in the first quarter of 2024, Empire bifurcated the embedded conversion option and recorded the embedded conversion option as a long-term derivative liability in Empire’s unaudited interim condensed consolidated balance sheets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. The convertible debt and the derivative liability associated with the promissory note were separately presented as long-term note payable – related party and long-term derivative instruments on the consolidated financial statements for the applicable periods. The convertible debt was carried at amortized cost. The derivative liability was remeasured at each reporting period using a binomial lattice model with changes in fair value recorded in other income (expense) of the applicable period’s consolidated statements of operations. The conversion option related to the promissory note was exercised in the second quarter of 2024. See Note 8 for further details.
The Company enters into hedge agreements to manage its exposure to oil and natural gas price fluctuations. The fair value of derivative contracts is recognized as an asset or liability on the Company’s consolidated balance sheets. Realized gain or loss is recognized as a component of revenue when the derivative contracts mature. For contracts which have not matured, an unrealized gain or loss is recorded based on the change in the fair value of the outstanding contracts.
Oil and Natural Gas and Other Properties
The Company uses the successful efforts method of accounting for its oil and gas activities. Costs incurred are deferred until exploration and completion results are evaluated. At such time, costs of activities with economically recoverable reserves are capitalized as proven properties, and costs of unsuccessful or uneconomical activities are expensed. Exploration drilling costs are expensed if recoverable reserves are not found. Costs incurred to maintain wells and related equipment and lease and well operating costs are charged to expense as incurred. Upon sale or retirement of oil and natural gas properties, the costs and related accumulated depletion and amortization are eliminated from the accounts and the resulting gain or loss is recognized.
Capitalized drilling costs are reviewed periodically for impairment. Costs related to impaired prospects or unsuccessful exploratory drilling are charged to expense. Management's assessment of the results of exploration activities, commodity price outlooks, planned future sales or expiration of all or a portion of such leaseholds impact the amount and timing of impairment provisions. An impairment expense could result if oil and gas prices decline in the future as it may not be economical to develop some of these unproved properties.
Lease options are capitalized as unproved property acquisition costs and are reviewed for impairment if indicators exist that the carrying value of the lease option may not be recoverable. If the lease options become impaired, expire or are abandoned, the options will be expensed. If proved reserves are discovered after the options are exercised, these costs will be reclassified as proved property.
Depletion and amortization of producing properties is computed on the units-of-production method on a property-by-property basis. The units-of-production method is based primarily on estimates of proved reserve quantities. Due to uncertainties inherent in this estimation process, it is at least reasonably possible that reserve quantities will be revised in the near term. Changes in estimated reserve quantities are applied to depletion and amortization computations prospectively.
Other property and equipment is depreciated on the straight-line method.
8
Revenue Recognition
The Company’s revenues are comprised solely of revenues from customers and include the sale of oil, natural gas and NGLs. The Company believes that the disaggregation of revenue into these three major product types, as presented in the consolidated statements of operations, appropriately depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors based on its single geographic region, the continental United States. Revenues are recognized at a point in time when production is sold to a purchaser at a determinable price, delivery has occurred, control has transferred and it is probable substantially all of the consideration will be collected. The Company fulfills its performance obligations under its customer contracts through delivery of oil, natural gas and NGLs and revenues are recorded on a monthly basis. The Company receives payment from one to three months after delivery. Generally, each unit of product represents a separate performance obligation. The prices received for oil, natural gas and NGLs sales under the Company’s contracts are generally derived from stated market prices which are then adjusted to reflect deductions including transportation, fractionation and processing. As a result, revenues from the sale of oil, natural gas and NGLs will decrease if market prices decline. The sales of oil, natural gas and NGLs, as presented on the unaudited interim condensed consolidated statements of operations, represent the Company’s share of revenues net of royalties and excluding revenue interests owned by others. When selling oil, natural gas and NGLs on behalf of royalty or working interest owners, the Company is acting as an agent and thus reports the revenue on a net basis. To the extent actual volumes and prices of oil and natural gas sales are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volumes and prices for those properties are estimated and recorded. Variances between the Company’s estimated revenue and actual payment are recorded in the month the payment is received. Historically, these differences have been insignificant.
At the end of each month when the performance obligation is satisfied, the variable consideration can be reasonably estimated and amounts due from customers are recorded in accounts receivable on the consolidated balance sheets. Taxes assessed by governmental authorities on oil, natural gas and NGLs sales are presented separately from such revenues in the unaudited interim condensed consolidated statements of operations.
Oil Sales
Oil production is transported from the wellhead to tank batteries or delivery points through flow-lines or gathering systems. Purchasers of the oil take delivery at the tank batteries and transport the oil by truck or at a pipeline delivery point and the Company collects a market price, net of pricing differentials. Revenue is recognized when control transfers to the purchaser at the net price received by the Company.
Natural Gas and NGLs Sales
Under the Company’s natural gas sales arrangements, the purchaser takes control of wet gas at a delivery point near the wellhead or at the inlet of the purchaser’s processing facility. The purchaser gathers and processes the wet gas and remits proceeds to the Company for the resulting natural gas and NGLs sales. Based on the nature of these arrangements, the purchaser is the Company’s processor, thus, the Company recognizes natural gas and NGLs sales based on the net amount of proceeds received from the purchaser.
Transaction Price Allocated to Remaining Performance Obligations
Substantially all of the Company’s product sales are short-term in nature with a contract term of one year or less. For these contracts, the Company has utilized the practical expedient in Accounting Standards Update (“ASU”) 2024, Revenue from Contracts with Customers ("Topic 606”) which exempts the Company from the requirements to disclose the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
For the Company’s product sales that have a contract term greater than one year, the Company has utilized the practical expedient in Topic 606 which states the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required.
9
Prior-Period Performance Obligations
The Company records revenue in the month that product is delivered to the purchaser. Settlement statements for certain natural gas and NGLs sales, however, may not be received for 30 to 90 days after the date the product is delivered, and as a result the Company is required to estimate the amount of product delivered to the purchaser and the price that will be received for the sale of the product. In these situations, the Company records the differences between its estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. Any identified differences between the Company’s revenue estimates and actual revenue received have historically been insignificant. For the three months ended March 31, 2025 and 2024, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material.
Segment Reporting
The Company operates as one operating segment and one reportable segment which is engaged in the exploration, development, and production of oil, gas, and NGLs in New Mexico, North Dakota, Montana, Texas, and Louisiana, from which all of its revenues are derived and expenses incurred. All financial results are reviewed by the Chief Executive Officer ("CEO”), the Company’s Chief Operating Decision Maker ("CODM”), on a consolidated basis to evaluate performance of the Company. The single segment constitutes all of the consolidated entity and the accompanying unaudited interim condensed consolidated financial statements and the notes to the accompanying unaudited interim condensed consolidated financial statements are representative of such amounts.
Fair Value Measurements
The FASB ASC 820, Fair Value Measurement (“Topic 820”) standards define fair value, establish a consistent framework for measuring fair value and establish 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 Topic 820 is as follows:
Level 1 – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Inputs, other than quoted prices within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 – Prices or valuations that require unobservable inputs that are both significant to the fair value measurement and unobservable. Valuation under Level 3 generally involves a significant degree of judgment from management.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve a degree of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instrument’s complexity. Empire 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 three months ended March 31, 2025. See Note 15.
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 (“Topic 850”) 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.
10
Recently Issued Accounting Standards
The FASB periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. Empire has reviewed the recently issued pronouncements and concluded that the following new accounting standards updates (“ASU”) are applicable:
In December 2023, FASB, issued ASU 2023-09, Income Taxes: Improvements to Income Tax Disclosures (“Topic 740”). The guidance in Topic 740 improves the transparency of income tax disclosures by greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. The standard is effective for public companies for fiscal years beginning after December 15, 2024, with early adoption permitted and should be applied prospectively but can be adopted retrospectively. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
In November 2024, FASB issued ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (“Subtopic 220-40”), which expands disclosures around a public entity’s costs and expenses of specific items (i.e. employee compensation and depreciation, depletion and amortization (“DD&A”)), requires the inclusion of amounts that are required to be disclosed under US GAAP in the same disclosure as other disaggregation requirements, requires qualitative descriptions of amounts remaining in expense captions that are not separately disaggregated quantitatively, and requires disclosure of total selling expenses, and in annual periods, the definition of selling expenses. The amendment does not change or remove existing disclosure requirements. The amendment is effective for fiscal years beginning after December 15, 2026, and interim periods with fiscal years beginning after December 15, 2027. Early adoption is permitted, and the amendment can be adopted prospectively or retrospectively to any or all periods presented in the financial statements. Empire is currently assessing the impact of adopting this standard which is expected to only affect financial statement disclosures.
In November 2024, FASB issued ASU 2024-04, Debt—Debt with Conversion and Other Option: Induced Conversions of Convertible Debt Instruments, to improve the relevance and consistency in application of the induced conversion guidance in Subtopic 470-20. ASU 2024-04 is effective for all entities for annual reporting periods beginning after December 15, 2025, and interim reporting periods within those annual reporting periods. Early adoption is permitted as of the beginning of the annual reporting period for all entities that have adopted ASU 2020-06 and may be adopted either on a prospective or retrospective basis. The Company early adopted this ASU on January 1, 2025, on a prospective basis and determined it did not have a material impact on the period’s consolidated financial statements.
Note 3 – Property
The aggregate capitalized costs of oil and natural gas properties are as follows:
| March 31, | December 31, | |||||||
| 2025 | 2024 | |||||||
| (in thousands) | ||||||||
| Proved properties | $ | $ | ||||||
| Unproved properties | ||||||||
| Work in process | ||||||||
| Gross capitalized costs | ||||||||
| Accumulated depletion, amortization and impairment | ( | ) | ( | ) | ||||
| Total Oil and gas properties, net | $ | $ | ||||||
Depletion and amortization expense related to
oil and gas properties for the three months ended March 31, 2025 and 2024, was approximately $
Proved oil and natural gas properties are reviewed for impairment at least annually, or as indicators of impairment arise. There have been no indicators of impairment during the three months ended March 31, 2025.
11
Other property and equipment consists of operating lease assets, vehicles, office furniture, and equipment with lives ranging from three to five years. The capitalized costs of other property and equipment are as follows:
| March 31, | December 31, | |||||||
| 2025 | 2024 | |||||||
| (in thousands) | ||||||||
| Other property and equipment, at cost | $ | $ | ||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Oher property and equipment, net | $ | $ | ||||||
Depreciation expense related to other property
and equipment for the three months ended March 31, 2025 and 2024, was approximately $
Note 4 - Asset Retirement Obligations
The Company’s asset retirement obligations (“ARO”) 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 AROs.
The Company’s ARO activities are summarized in the following table:
| For the Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| (in thousands) | ||||||||
| Asset retirement obligations, beginning of period | $ | $ | ||||||
| Liabilities incurred from dilling activity | ||||||||
| Revisions | ||||||||
| Liabilities settled | ||||||||
| Accretion expense | ||||||||
| Asset retirement obligation, end of period | $ | $ | ||||||
| Less: current portion included in Accrued expenses | ||||||||
| Asset retirement obligation, long-term | $ | $ | ||||||
The liabilities incurred from drilling activity in the first quarter of 2024 primarily relate to the completion of four wells as part of Empire’s North Dakota Starbuck Drilling Program.
Note 5 – Commodity Derivative Financial Instruments
The Company has used derivative financial instruments to manage its exposure to commodity price fluctuations in the past. Commodity derivative instruments have been 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 instrument activity has consisted of swaps and put options.
The Company does not designate its derivative instruments to qualify for hedge accounting. Accordingly, the Company reflects changes in the fair value of its derivative instruments in its unaudited interim condensed consolidated statements of operations as they occur. These contracts are recognized and recorded at fair value as an asset or liability on the Company’s unaudited interim condensed consolidated balance sheets. Cash receipts or payments upon settlement of swaps and put options are reflected in the operating activities section of its unaudited interim condensed consolidated statement of cash flows.
12
The following table summarizes the net realized and unrealized amounts reported in earnings related to the oil derivative instruments:
| For the Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| (in thousands) | ||||||||
| Loss on derivatives, realized | $ | $ | ( | ) | ||||
| Loss on derivatives, unrealized | ( | ) | ||||||
| Loss on derivatives, net | $ | $ | ( | ) | ||||
The following table represents the Company’s net cash payments on derivatives:
| For the Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| (in thousands) | ||||||||
| Cash payments on oil derivatives, net | $ | $ | ( | ) | ||||
The Company did not have any open positions as of March 31, 2025.
Note 6 – Accounts Receivable
The following table represents Empire’s accounts receivable as of the dates presented:
| March 31, | December 31, | |||||||
| 2025 | 2024 | |||||||
| (in thousands) | ||||||||
| Oil, Gas and NGLs receivables | $ | $ | ||||||
| Joint interest billings | ||||||||
| Joint interest billings - related party | ||||||||
| Other | ||||||||
| Total Accounts receivable | $ | $ | ||||||
Note 7 – Accrued Expenses
The following table represents Empire’s accrued expenses as of the dates presented:
| March 31, | December 31, | |||||||
| 2025 | 2024 | |||||||
| (in thousands) | ||||||||
| Accrued and suspended third-party revenue | $ | $ | ||||||
| Accrued salaries and payroll taxes | ||||||||
| Accrued production taxes | ||||||||
| Asset retirement obligation - current | ||||||||
| Other | ||||||||
| $ | $ | |||||||
13
Note 8 – Debt Including Debt with Related Parties
The following table represents Empire’s outstanding debt as of the dates presented:
| March 31, | December 31, | |||||||
| 2025 | 2024 | |||||||
| (in thousands) | ||||||||
| Equity Bank Credit Facility | $ | $ | ||||||
| Note Payable to insurance provider, bears 8.25% interest, matures January 2026, monthly payments of principal and interest of $58,103 | ||||||||
| Equipment and vehicle notes, 0.00% to 9.59% interest rates, due in 2025 to 2030 with monthly payments ranging from $900 to $1,400 per month (1) | ||||||||
| Total Debt | ||||||||
| Less: Current Maturities | ( | ) | ( | ) | ||||
| Long-Term Debt | $ | $ | ||||||
| (1) Weighted-average interest rate of 9.15% | ||||||||
On December 29, 2023, Empire North Dakota and Empire
NDA ("Borrowers”),
The Credit Facility is guaranteed by the Company. Borrowers entered into a security agreement, pursuant to which the obligations under the Credit Facility are secured by liens on substantially all of the assets of Borrowers. Furthermore, the obligations under the Credit Facility are secured by a continuing, first priority mortgage lien, pledge of and security interest in not less than 80% of Borrowers’ producing oil, gas and other leasehold and mineral interests, including without limitation, those situated in the States of North Dakota and Montana.
The Credit Facility requires Borrowers to, commencing as of the fiscal quarter ended December 31, 2023, maintain (a) a current ratio of 1.0 to 1.0 or more and (b) a ratio of funded debt to EBITDAX (as defined in the revolver loan agreement), calculated quarterly and annually based on a trailing twelve-month basis, of no more than 3.50 to 1.00. At March 31, 2025, the Borrowers were in compliance with all required covenants under the Credit Facility.
On November 18, 2024, the Company entered into the
First Amendment to the Credit Facility (the “First Amendment”). Pursuant to the First Amendment
Subsequent to March 31, 2025, we borrowed an additional
$
Promissory Note – Related Party
On February 16, 2024, Empire
issued a promissory note (the "Note”) in the aggregate principal amount of $
Empire determined that an
embedded conversion feature included in the Note required bifurcation from the host contract that is recognized as a separate
derivative liability carried at fair value.
14
Note Payable – Related Party
In August 2020, Empire,
through its wholly-owned subsidiary, Empire Texas, entered into a joint development agreement (“JDA”) with Petroleum &
Independent Exploration, LLC and related entities ("PIE”), a related party (see Note 13), dated August 1, 2020. Under the
terms of the JDA, PIE performed recompletion or workover on specified mutually agreed upon wells owned by Empire Texas. Concurrent with
the JDA with PIE, Empire entered into a term loan agreement dated August 1, 2020, whereby PIE will loan up to $
On July 31, 2024, PIE,
Empire Texas, and Empire entered into a note repayment and loan termination agreement providing for the payment in full of the remaining
outstanding amount of the approximate $
Note 9 - Leases
As a lessee, the Company leases its corporate office
headquarters in Tulsa, Oklahoma, and one field office.
The Company also leases vehicles primarily used in our field operations. These vehicle leases typically have a -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 $
Supplemental balance sheet information related to the right-of-use leases is as follows:
| March 31, | December 31, | |||||||
| 2025 | 2024 | |||||||
| (in thousands) | ||||||||
| Net operating lease asset (included in Other property and equipment) | $ | $ | ||||||
| Current portion of lease liability | $ | $ | ||||||
| Long-term lease liability | ||||||||
| Total right-of-use lease liabilities | $ | $ | ||||||
The weighted-average remaining term for Empire’s
right-of-use leases is
15
| March 31, | |||||
| (in thousands) | 2025 | ||||
| Year 1 | $ | ||||
| Year 2 | |||||
| Year 3 | |||||
| Year 4 | |||||
| Year 5 | |||||
| Total lease payments | |||||
| Less: imputed interest | ( | ) | |||
| Total lease obligation | $ | ||||
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 , consisting of shares of common stock, par value $ per share, and shares of preferred stock, par value $ per share.
Preferred Stock
Preferred stock may be issued from time to time in one or more series at the direction of the Company’s 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 Company’s Board of Directors, subject to certain limitations set forth in the Charter.
Series A Voting Preferred Stock
On March 8, 2022, the Company formalized the issuance of preferred stock as was required under the terms of the Company's May 2021 financing agreements with Energy Evolution and issued six shares of Series A Voting Preferred Stock. The Series A Voting Preferred Stock was issued in connection with the strategic investment in the Company by Energy Evolution. For so long as the Series A Voting Preferred Stock is outstanding, the Company’s Board of Directors will consist of six directors. Three of the directors are designated as the Series A Directors and the three other directors (each, a “common director”) are elected by the holders of common stock and/or any preferred stock (other than the Series A Voting Preferred Stock) granted the right to vote on the common directors. Any Series A Director may be removed with or without cause but only by the affirmative vote of the holders of a majority of the Series A Voting Preferred Stock voting separately and as a single class. The holders of the Series A Voting Preferred Stock have the exclusive right, voting separately and as a single class, to vote on the election, removal and/or replacement of the Series A Directors. Holders of common stock or other preferred stock do not have the right to vote on the Series A Directors. The approval of the holders of the Series A Voting Preferred Stock, voting separately and as a single class, is required to authorize any resolution or other action to issue or modify the number, voting rights or any other rights, privileges, benefits, or characteristics of the Series A Voting Preferred Stock, including without limitation, any action to modify the number, structure and/or composition of the Company’s current Board of Directors.
The Series
A Voting Preferred Stock is held by Phil Mulacek, Chairman of the Board of Directors of the Company and one of the principals of Energy
Evolution, as Energy Evolution’s designee (the “Initial Holder”). The Series A Voting Preferred Stock may be transferred
only to certain controlled affiliates of the Initial Holder (“Permitted Transferees”), and
The Series A Voting Preferred Stock is not entitled to receive any dividends or distributions of cash or other property except in the event of any liquidation, dissolution or winding up of the Company’s affairs. In such event, before any amount is paid to the holders of the Company’s common stock but after any amount is paid to the holders of the Company’s senior securities, the holders of the Series A Voting Preferred Stock will be entitled to receive an amount per share equal to $1.00.
Except as discussed above or as otherwise set forth in the certificate of designation of the Series A Voting Preferred Stock, the holders of the Series A Voting Preferred Stock have no voting rights.
16
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
| · | 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 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. All share amounts have retrospectively been stated at post-reverse split amounts and pricing.
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, the election of three of the six directors and other common voting situations afforded to common stockholders.
In April 2024, Empire completed a subscription rights offering (the "April Rights Offering”) which raised gross proceeds of $20.7 million. Empire distributed at no charge to holders of its common stock, as of the close of business on March 7, 2024 (the record date for the April Rights Offering), one subscription right for each share of common stock held. Each subscription right entitled the holder to purchase 0.161 shares of common stock at a subscription price of $5.00 per share per one whole share of common stock. The subscription rights were non-transferable and not listed for trading on any stock exchange or market.
On May 31, 2024,
In November 2024, Empire completed a subscription rights offering (the "November Rights Offering”) which raised gross proceeds of $10.0 million. Empire distributed at no charge to holders of its common stock, as of the close of business on September 30, 2024 (the record date for the November Rights Offering), one subscription right for each share of common stock held. Each subscription right entitled the holder to purchase 0.063 shares of common stock at a subscription price of $5.05 per share per one whole share of common stock. The subscription rights were non-transferable and not listed for trading on any stock exchange or market.
Loss per Share
| For the Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| (in thousands, except per share data) | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Basic Weighted-Average Shares | ||||||||
| Dilutive effect of potential common shares issuable (1) | ||||||||
| Diluted Weighted-Average Shares | $ | $ | ||||||
| Loss per Common Share | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
| (1) |
17
Empire recognizes stock-based compensation expense associated with granted stock options and restricted stock units (“RSUs”). Empire 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 unaudited interim condensed consolidated balance sheets.
The following summary reflects nonvested restricted stock unit activity and related information:
Weighted Average | ||||||||
| RSUs | Fair Value (1) | |||||||
| Outstanding, December 31, 2024 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Outstanding, March 31, 2025 | $ | |||||||
| (1) |
| Weighted Average | ||||||||
| Options (2) | Exercise Price | |||||||
| Outstanding, December 31, 2024 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Cancelled | ( | ) | ||||||
| Outstanding, March 31, 2025 (1) | $ | |||||||
| Exercisable, March 31, 2025 (1) | $ | |||||||
| (1) |
| (2) |
Note 12 – Income Taxes
For all periods presented in the unaudited interim
condensed consolidated statements of operations, Empire’s effective tax rate is
Note 13 – Related Party Transactions
Energy Evolution is a related party of the Company
as it beneficially owns approximately
The Company had a JDA with PIE to perform recompletion
or workover on specified mutually agreed upon wells. In the third quarter of 2024, Empire issued PIE 205,427 shares of common stock of
Empire as payment in full for this outstanding note balance of $
On February 16, 2024, Empire issued the Note to Energy
Evolution. Energy Evolution advanced Empire $
18
On April 9, 2024, Empire acquired
On June 28, 2024, Energy Evolution exercised its
warrants of Empire and received shares in exchange for approximately $
Accounts receivable on the unaudited interim condensed
consolidated balance sheet include approximately $
Note 14 – Commitments and Contingencies
From time to time, Empire is subject to various legal proceedings arising in the ordinary course of business, including proceedings for which Empire may not have insurance coverage. While many of these matters involve inherent uncertainty, as of the date hereof, Empire does not currently believe that any such legal proceedings will have a material adverse effect on Empire’s business, financial position, results of operations or liquidity.
Empire 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 Empire to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Management believes no materially significant liabilities of this nature existed as of the balance sheet date.
Agreed Compliance Order
In January 2024, the Company
deposited $
New Mexico Trespass
In December 2023, the Company initiated a legal action in the Fifth Judicial District Court, Lea County, New Mexico, against a saltwater company for trespassing within one of the New Mexico water flood units. This suit is currently being pursued by Empire; however, the ultimate outcome of the litigation cannot be determined at this time, and no amount has been recognized due to the uncertainty of any conclusions that may arise as a result of such action.
Note 15 – Fair Value Measurements
The following table provides the carrying value and fair value measurement information for certain financial assets and liabilities. The carrying values of cash, accounts receivable, inventory, accounts payable, accrued expenses, lease liabilities, notes payables and equipment and vehicle notes included in the accompanying unaudited interim consolidated balance sheets approximated fair value at March 31, 2025, and December 31, 2024, as applicable, and generally represent Level 2 fair values due to their short-term nature. Therefore, such financial assets and liabilities are not presented in the following table:
| Fair Value Measurements Using: | ||||||||||||||||||||
| Carrying | Total Fair | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| (in thousands) | Amount | Value | Inputs | Inputs | Inputs | |||||||||||||||
| March 31, 2025 liabilities | ||||||||||||||||||||
| Debt - Credit Facility | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||
| December 31, 2024 liabilities | ||||||||||||||||||||
| Debt - Credit Facility | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||
19
The following methods and assumptions were used to estimate the fair values in the table above and other fair value measurements.
Level 2
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.
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.
Debt - The fair value of our Credit Facility variable rate debt approximates the carrying value as the underlying prime rate changes based on prevailing market rates.
Level 3
Impairment of oil and natural gas properties – The fair value of proved and unproved oil and natural gas properties was measured using valuation techniques that convert the future cash flows to a single discounted amount. Significant inputs to the valuation of proved and unproved oil and natural gas properties include estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted-average costs of capital. The Company utilized a combination of the New York Mercantile Exchange ("NYMEX") strip pricing and consensus pricing to value the reserves, then applied various discount rates depending on the classification of reserves and other risk characteristics. For significant acquisitions, management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired.
Asset Retirement Obligation – The fair value of AROs is included in proved oil and natural gas properties with a corresponding liability. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate and timing associated with the incurrence of these costs.
The inputs used to value oil and natural gas properties for impairments and asset retirement obligations require significant judgment and estimates made by management and represent Level 3 inputs.
Empire applies the provisions of fair value measurement on a non-recurring basis to its non-financial assets and liabilities, including oil and gas properties and asset retirement obligations. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments if events or changes in certain circumstances indicate that adjustments may be necessary. No triggering events that require assessment of such items were observed during the three months ended March 31, 2025 and 2024.
Assets and Liabilities Measured at Fair Value on a Recurring Basis – In the determination of the fair value of the Note including the embedded conversion feature, Empire uses a binomial lattice valuation model to value Level 3 derivative liabilities at inception and on subsequent valuation dates. This model incorporates transaction details such as Empire’s stock price, contractual terms of the Note, and unobservable inputs classified as Level 3 including risk-free rate and expected volatility. Due to the subjective nature of these inputs, the fair value measurement could differ materially under alternative assumptions. As of the conversion option exercise date of May 24, 2024, these unobservable inputs were 5.0% and 46.9%, respectively.
Note 16 – Segment Reporting
The Company’s operations are managed and reported to its CEO, the Company’s CODM, on a consolidated basis. The CEO uses consolidated net loss in assessing performance of capital spend projects to allocate the appropriate resources to drive efficiencies and develop growth strategies. Under the organizational and reporting structure, the Company has one operating segment and one reportable segment.
20
The CODM is provided with the following significant segment expenses within lease operating expense on the unaudited interim condensed consolidated statements of operations:
| For the Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| (in thousands) | ||||||||
| Production costs | $ | $ | ||||||
| Workover activity | ||||||||
| Plugging and abandonment activity | ||||||||
| Lease operating expense | $ | $ | ||||||
Other segment items within consolidated net loss are all separately disclosed on the unaudited interim condensed consolidated statements of operations. Segment asset information is not presented to and used by the CODM to allocate resources, assess performance or make strategic decisions.
21
| 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 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.
Overview
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.
We seek to increase shareholder value by growing reserves, production, revenues, and cash flow from operating activities by executing our mission to use highly skilled personnel to thoughtfully and expertly spend capital to realize reserves on producing properties as well as further develop fields.
Management places emphasis on operating cash flow in managing our business, as operating cash flow considers the cash expenses incurred during the period and excludes non-cash expenditures not related directly to our operations.
Concentration
The Company’s producing properties and oil and natural gas reserves are all located in Louisiana, New Mexico, North Dakota, Montana, and Texas. Because of the concentration, the Company is exposed to the impact of regional supply and demand factors, processing or transportation capacity constraints, severe weather events, water shortages, and government regulations specific to the geographic area. The Company also sells a large portion of its oil and natural gas production to a few customers, which increases the risk of temporary sales interruption or a lower price for production if one of these purchasers were lost.
Inflation
The effect of inflation on the Company has generally been to increase its cost of operations, general and administrative costs and direct costs associated with oil and natural gas production.
Properties
We are an independent operator in four geographic areas in the United States. For our operated properties, we manage and influence production using a combination of experienced field personnel and third-party service providers to execute our mission. Our producing properties have reasonably predictable production profiles and cash flows, subject to commodity price and cost fluctuations. As is common in the industry in which we operate, we selectively participate in drilling and developmental activities in non-operated properties. Decisions to participate in non-operated properties are made after technical and economic analysis of the projects which also considers the operating expertise and historical track record of the operators.
Seasonality of Business
Weather conditions often affect the demand for, and prices of, natural gas and can also delay oil and natural gas production. Demand for natural gas is traditionally higher in the winter, resulting in higher natural gas prices during the first and fourth quarters. Due to these seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of the results realized on an annual basis.
22
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 Estimates
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.
LIQUIDITY AND CAPITAL RESOURCES
General
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.
Liquidity
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.
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.
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Working Capital
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.
| March 31, | December 31, | |||||||
| 2025 | 2024 | |||||||
| (in thousands) | ||||||||
| Current Assets | $ | 11,567 | $ | 12,351 | ||||
| Current Liabilities | 24,014 | 21,270 | ||||||
| Working Capital | $ | (12,447 | ) | $ | (8,919 | ) | ||
Cash Flows
| For the Three Months Ended March 31, | ||||||||||||
| 2025 | 2024 | Change | ||||||||||
| Cash flows provided by (used in): | (in thousands) | |||||||||||
| Operating activities | $ | 1,613 | $ | 3,909 | $ | (2,296 | ) | |||||
| Investing activities | (2,762 | ) | (17,097 | ) | 14,335 | |||||||
| Financing activities | (21 | ) | 8,888 | (8,909 | ) | |||||||
Cash Flows from Operating Activities
Cash flows from operating activities decreased period over period primarily due to lower production volumes primarily in North Dakota and lower oil prices consistent with general market pricing trends.
Cash Flows from Investing Activities
Cash flows from investing activities are primarily from approximately $2.6 million of cash additions to oil and natural gas properties during the first quarter of 2025 compared to approximately $17.0 million of cash additions to oil and natural gas properties during first quarter 2024 associated with the Starbuck Drilling Program in North Dakota with the decline period over period due to the Company nearing completion of this project.
Cash Flows from Financing Activities
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.
Capital Resources
Capital Expenditures
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.
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Production and Operating Data
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.
| For the Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
Production and Operating Data:
| ||||||||
| Net Production Volumes: | ||||||||
| Oil (Bbl) | 119,635 | 130,760 | ||||||
| Natural Gas (Mcf) | 199,868 | 211,820 | ||||||
| Natural Gas Liquids (Bbl) | 31,453 | 34,785 | ||||||
| Total (Boe) | 184,400 | 200,848 | ||||||
| Average Price per Unit: | ||||||||
| Oil (1) | $ | 67.28 | $ | 72.21 | ||||
| Natural gas | $ | 2.74 | $ | 1.78 | ||||
| Natural gas liquids | $ | 12.56 | $ | 11.97 | ||||
| Total (Boe) | $ | 48.76 | $ | 50.96 | ||||
| Operating Costs and Expenses per Boe: | ||||||||
| Lease operating expense (excluding workovers) | $ | 29.18 | $ | 26.79 | ||||
| Workovers | $ | 2.09 | $ | 9.99 | ||||
| Total Lease operating expense | $ | 31.27 | $ | 36.78 | ||||
| Production and ad valorem taxes | $ | 3.86 | $ | 4.15 | ||||
| Depreciation, depletion, amortization and accretion | $ | 14.92 | $ | 9.84 | ||||
| General & administrative (excluding stock-based compensation) | $ | 17.34 | $ | 14.33 | ||||
| Stock-based compensation | $ | 2.88 | $ | 3.54 | ||||
| Total General & administrative | $ | 20.22 | $ | 17.87 | ||||
(1) Excludes the effect of net cash receipts from (payments on) derivatives.
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 March 31, 2025 and 2024
Results of Operations
The following table reflects Empire’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.
| For the Three Months Ended March 31, | Percent | |||||||||||
| 2025 | 2024 | Change | ||||||||||
| (in thousands) | ||||||||||||
| Oil revenues | $ | 8,049 | $ | 9,442 | -15% | |||||||
| Natural gas revenues | 548 | 377 | 45% | |||||||||
| NGL revenues | 395 | 416 | -5% | |||||||||
| Total product revenues | 8,992 | 10,235 | ||||||||||
| Lease operating expense | 5,766 | 7,387 | -22% | |||||||||
| Production and ad valorem taxes | 712 | 833 | -15% | |||||||||
| Depreciation, depletion, amortization and accretion | 2,752 | 1,975 | 39% | |||||||||
| General and administrative expense (excluding stock-based compensation) | 3,197 | 2,879 | 11% | |||||||||
| Stock-based compensation | 531 | 710 | -25% | |||||||||
| Cash-based interest expense | 268 | 180 | 49% | |||||||||
| Non-cash interest expense | 28 | 135 | -79% | |||||||||
| Operating Loss | (3,956 | ) | (4,397 | ) | 0% | |||||||
| Net Loss | (4,221 | ) | (3,974 | ) | 6% | |||||||
Revenues
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.
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.
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.
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.
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%.
Lease Operating Expense and Production Taxes
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.
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.
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Depreciation, Depletion, Amortization and Accretion
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.
General and Administrative Expense (excluding stock-based compensation)
General and administrative expense, excluding stock-based compensation, increased for the three months ended March 31, 2025, compared to the same period in 2024 primarily due to an increase in salaries and benefits period over period associated with an increase in employee headcount.
Stock-based Compensation
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.
Interest Expense
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.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 (the “Exchange Act”) and are not required to provide this information.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and participation of the Company’s Principal Executive Officer/Principal Financial Officer, along with our management, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on this evaluation, the Company’s Principal Executive Officer/Principal Financial Officer concluded that the disclosure controls and procedures were effective, as of the end of the period covered by this report, in ensuring the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer (Principal Executive Officer/Principal Financial Officer), to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
While we continue to implement design enhancements to our internal control procedures, we believe there were no changes to our internal control over financial reporting during the three months ended March 31, 2025, 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.
Inherent Limitations on Effectiveness of Controls
The Company’s disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their desired objectives. Management recognizes that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of their inherent limitations, disclosure controls and procedures and internal control over financial reporting may not prevent or detect all errors or misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
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PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings |
For information regarding legal proceedings, see Note 14 of the unaudited interim 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 and Use of Proceeds |
None.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Mine Safety Disclosures |
Not applicable.
| Item 5. | Other Information |
| Item 6. | Exhibits |
| 31.1 | Rule 13a - 14 (a)/15(d) - 14(a) Certification of Michael R. Morrisett, Chief Executive Officer (submitted herewith). |
| 31.2 | Rule 13a - 14 (a)/15(d) - 14(a) Certification of Michael R. Morrisett, Principal Financial Officer (submitted herewith). |
| 32.1 | Section 1350 Certification of Michael R. Morrisett, Chief Executive Officer (submitted herewith). |
| 32.2 | Section 1350 Certification of Michael R. Morrisett, Principal Financial Officer (submitted herewith). |
| 101 | Financial Statements for Inline XBRL format (submitted herewith). |
| 104 | Cover Page Interactive Data File (embedded within Inline XBRL document). |
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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: May 14, 2025 | By: | /s/ Michael R. Morrisett | |
| Michael R. Morrisett | |||
| Chief Executive Officer and President | |||
| (Principal Executive Officer and Principal Financial Officer) | |||
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