Empire Petroleum Corp 8-K/A, filed Jul 30, 2021
Empire Petroleum Corp (EP)
About this 8-K/A
Empire Petroleum Corp filed this 8-K/A on July 30, 2021, reporting on events of May 14, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 8-K/A
(Amendment No. 1)
_________________
Current Report
Pursuant To Section 13 or 15 (d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported):
MAY 14, 2021
_______________________________
EMPIRE PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
_______________________________
| Delaware | 001-16653 | 73-1238709 |
| (State or Other Jurisdiction | (Commission | (I.R.S. Employer |
| of Incorporation) | File Number) | Identification No.) |
2200 S. Utica Place, Suite 150, Tulsa Oklahoma 74114
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (539) 444-8002
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
None |
EMPR |
None |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
EXPLANATORY NOTE
On May 17, 2021, Empire Petroleum Corporation (the “Company”) filed with the Securities and Exchange Commission a Current Report on Form 8-K, dated May 14, 2021 (the “Initial Form 8-K”), to report that Empire New Mexico LLC, a Delaware limited liability company, which is a wholly owned subsidiary of the Company and doing business as Green Tree New Mexico, acquired certain oil and gas properties in New Mexico comprising of 702 gross wells and approximately 47,200 gross acres (40,580 net acres) in Lea County (the “XTO Properties”), from XTO Holdings, LLC, a subsidiary of ExxonMobil (the “XTO Acquisition”).
This Current Report on Form 8-K/A amends Item 9.01 of the Initial Form 8-K to present certain financial statements of the XTO Properties and to present certain unaudited pro forma financial statements of the Company in connection with the XTO Acquisition.
| Item 9.01 | Financial Statements and Exhibits. |
| (a) | Financial Statements of Business Acquired. |
Filed as Exhibit 99.1 to this Current Report on Form 8-K/A, and incorporated herein by reference, are audited Statements of Revenues and Direct Operating Expenses of the XTO Properties for the years ended December 31, 2020 and 2019, and unaudited Statements of Revenues and Direct Operating Expenses of the XTO Properties for the three months ended March 31, 2021 and 2020.
| (b) | Pro Forma Financial Information. |
Filed as Exhibit 99.2 to this Current Report on Form 8-K/A, and incorporated herein by reference, are unaudited pro forma condensed combined financial statements of the Company as of and for the three months ended March 31, 2021, and for the year ended December 31, 2020, which have been prepared to give effect to the XTO Acquisition. These unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and do not purport to represent what the Company’s actual results of operations or financial position would have been if the XTO Acquisition had occurred on the dates indicated, nor are they necessarily indicative of the Company’s future operating results or financial position.
| (c) | Exhibits. |
The following exhibits are filed herewith.
____________________________
* Previously filed with the Initial Form 8-K.
** Filed
with this Current Report on Form 8-K/A.
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SIGNATURE
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, hereunto duly authorized.
EMPIRE PETROLEUM CORPORATION
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| Date: July 30, 2021 | By: | /s/ Michael R. Morrisett | |
Michael R. Morrisett President |
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EXHIBIT 99.1
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
OF THE OIL AND NATURAL GAS PROPERTIES ACQUIRED BY EMPIRE PETROLEUM
CORPORATION ON MAY 14, 2021 FROM XTO HOLDINGS, LLC
Table of Contents
| Page | |
| Independent Auditors’ Report | 2 |
| Financial Statements | |
| Statements of Revenues and Direct Operating Expenses | 3 |
| Notes to the Statement of Revenues and Direct Operating Expenses | 4-7 |
| Supplemental Oil and Gas Information | 8 |
| 1 |
Report of Independent Auditors
The Board of Directors and Stockholders
Empire Petroleum Corporation
Report on the Financial Statements
We have audited the accompanying statements of revenues and direct operating expenses of certain oil and gas properties (the “Properties”) of XTO Holdings, LLC acquired by Empire New Mexico LLC, a wholly owned subsidiary of Empire Petroleum Corporation (the “Company”), for each of the years ended December 31, 2020 and 2019 and the related notes to the financial statements (the “financial statements”).
Management’s Responsibility for the Financial Statements
Empire Petroleum Corporation’s management is responsible for the preparation and fair presentation of the financial statements in accordance with the basis of accounting described in Note 1; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that is free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal controls of the Properties. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the revenues and direct operating expenses of the Properties of XTO Holdings, LLC acquired by the Company for each of the years ended December 31, 2020 and 2019 in accordance with the basis of accounting described in Note 1.
Emphasis of Matter
As described in Note 1, the accompanying financial statements were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and are not intended to be a complete presentation of the financial position, results of operations, or cash flows of the Properties. Our opinion is not modified with respect to this matter.
Dallas, Texas
July 30, 2021
| 2 |
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
OF THE OIL AND NATURAL GAS PROPERTIES ACQUIRED BY EMPIRE PETROLEUM
CORPORATION ON MAY 14, 2021 FROM XTO HOLDINGS, LLC
| (Unaudited) | ||||||||||||||||
| Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| Oil and condensate | $ | 9,791,212 | $ | 15,291,544 | $ | 2,114,141 | $ | 3,286,902 | ||||||||
| Natural gas | 1,182,739 | 902,715 | 825,734 | 297,753 | ||||||||||||
| Natural gas liquids (NGLs) | 1,908,803 | 2,961,724 | 704,708 | 496,369 | ||||||||||||
| Total revenues | $ | 12,882,754 | $ | 19,155,983 | $ | 3,644,583 | $ | 4,081,024 | ||||||||
| Direct operating expenses: | ||||||||||||||||
| Lease operating expenses | 10,621,135 | 15,300,699 | 1,890,866 | 3,608,947 | ||||||||||||
| Production and ad valorem taxes | 1,132,547 | 1,694,692 | 307,908 | 344,484 | ||||||||||||
| Gathering, compression, and transportation costs | 771,261 | 513,792 | 165,551 | 202,465 | ||||||||||||
| Total direct operating expenses | 12,524,943 | 17,509,183 | 2,364,325 | 4,155,896 | ||||||||||||
| Excess of revenues over direct operating expenses | $ | 357,811 | $ | 1,646,800 | $ | 1,280,258 | $ | (74,872 | ) | |||||||
See accompanying Notes to the Statement of Revenues and Direct Operating Expenses.
| 3 |
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES OF THE OIL AND
NATURAL GAS PROPERTIES ACQUIRED BY EMPIRE PETROLEUM CORPORATION ON
MAY 14, 2021 FROM XTO HOLDINGS, LLC
Notes to the Financial Statements
NOTE 1 – BASIS OF PRESENTATION
On March 12, 2021, Empire New Mexico LLC (“Empire New Mexico”), a Delaware limited liability company and wholly owned subsidiary of Empire Petroleum Corporation (“Empire Petroleum” or the “Company”), entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with XTO Holdings, LLC (“Seller” or “XTO”), a subsidiary of ExxonMobil, to acquire their operated interests in, certain oil and gas producing properties in Lea County, New Mexico (the “Properties” or “New Mexico Properties”) for consideration of $17,800,000 (subject to customary adjustments) with an effective date of January 1, 2021. The oil and gas assets produce from the Eunice Monument field. Under the Purchase Agreement, Empire New Mexico wired a deposit of $1,780,000 to Seller on March 12, 2021, using cash on hand.
On May 14, 2021, Empire New Mexico closed on the purchase and paid a closing payment of $16,089,000 to the Seller, net of preliminary purchase price adjustments and subject to final purchase price adjustments. The Purchase Agreement also contains various representations and warranties, covenants, indemnities, limitations of liability and other terms and conditions that are customary for transactions similar to the transactions contemplated by the Purchase Agreement. The foregoing description of the Purchase Agreement is only a summary, does not purport to be complete, and is subject to, and qualified in its entirety by reference to, the Purchase Agreement, a copy of which is filed as Exhibit 2.1 hereto.
The accompanying Statements of Revenues and Direct Operating Expenses have been prepared on the accrual basis of accounting and have been derived from the historical financial records of Seller, which represent their interests in revenues and expenses associated with the Properties and were not accounted for or operated as a separate subsidiary or division during the years presented. Accordingly, complete financial statements under U.S. generally accepted accounting principles (GAAP) are not available or practicable to obtain for the Properties. The Statements of Revenues and Direct Operating Expenses are not intended to be a complete presentation of the results of operations of the Properties as they do not include certain expenses incurred in connection with owning and operating the Properties, including but not limited to general and administrative expenses, interest expense, depreciation, depletion, amortization and accretion, income taxes, and certain other income and expense items not directly associated with the revenues and direct operating expenses related to the Properties. Any allocation of such historical costs would not be relevant to the future operations of the Properties and accordingly, these Statements of Revenues and Direct Operating Expenses are not representative of the results of operations on a go-forward basis. Furthermore, no balance sheet has been presented for the Properties because they were not accounted for as a separate subsidiary or division of the Seller and complete financial statements are not available, nor has information about the Properties operating, investing, and financing cash flows been provided for similar reasons. The Statement of Revenues and Direct Operating Expenses of the Properties is presented in lieu of the full financial statements required under Rule 3-05 of Regulation S-X of the Securities and Exchange Commission (“SEC”).
| 4 |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of operating revenues and direct operating expenses during the reporting period. Actual amounts could differ from those estimates.
Revenue from Contracts with Customers
Revenue from the sale of crude oil and condensate, natural gas liquids (“NGLs”), and natural gas is recognized at the point control of the product transfers to the customer and collectability is reasonably assured, which is when performance obligations under contracts with customers are satisfied. Virtually all the contracts’ pricing provisions are tied to a market index.
Oil Sales
Oil sales contracts are generally structured in one of the following ways:
| i. | Oil production is sold at the wellhead and an agreed-upon index price is collected, net of pricing differentials. In this scenario, revenue is recognized when control transfers to the purchaser at the wellhead at the net price received. |
| ii. | Oil is delivered to the purchaser at a contractually agreed-upon delivery point at which the purchaser takes custody, title, and risk of loss of the product. Under this arrangement, a third party is paid to transport the product and receive a specified index price from the purchaser with no deduction. In this scenario, revenue is recognized when control transfers to the purchaser at the delivery point based on the price received from the purchaser. Oil revenues are recorded net of these third-party transportation fees in the Statements of Revenues and Direct Operating Expenses. |
Natural Gas and NGLs Sales
Under the Company’s gas purchase, gathering and processing contracts, the Company delivers natural gas to a midstream processing entity at a contractually specified delivery point. The midstream processing entity gathers and processes the natural gas. In certain contracts, the midstream processing entity redelivers certain, or all, of the resulting residue gas and natural gas liquids to the operator of the Properties markets the redelivered hydrocarbons downstream. Through the marketing process, the operator, or its agent, delivers the specified commodities to third-party purchasers at contractually agreed-upon delivery points and receives a specified index price, net of pricing differentials from the purchaser. In this scenario, revenue is recognized when control transfers to the purchaser at the delivery point based on the index-based price received from the purchaser. Any gathering and processing expenses attributable to the products to the third-party purchasers, are presented as operating expenses in the Statements of Revenues and Direct Operating Expenses.
In these arrangements, the operator of the Properties evaluates whether it is the principal or the agent in the ultimate sale to the end customer, and the point at which control of the hydrocarbons transfer to the customer. The operator has concluded that all of its contracts are handled the same and the control of natural gas and NGLs is retained through the gathering, processing, and redelivery services.
| 5 |
Transaction Price Allocated to Remaining Performance Obligations
A significant number of product sales are short-term in nature with a contract term of one year or less. For those contracts, the practical expedient in ASC 606-10-50-14 has been utilized providing an exemption from disclosure of 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.
Direct Operating Expenses
Direct operating expenses are recognized when incurred and consist of direct expenses associated with the operating interests in the Properties. Direct operating expenses include lease operating expenses, production taxes, compression expenses, and gathering and transportation expenses. Lease operating expenses include lifting costs, well repair expenses, facility maintenance expenses, well workover costs, and other field related expenses. Lease operating expenses also include expenses directly associated with support personnel; support services; equipment; and facilities directly related to oil and gas production activities.
NOTE 3 – MAJOR CUSTOMERS
During the year ended December 31, 2020, two customers accounted for approximately 54% and 24%, respectively, of total sales attributable to the Properties. During the year ended December 31, 2019, two customers accounted for approximately 55% and 27%, respectively, of total sales attributable to the Properties.
During the three months ended March 31, 2021, three customers accounted for approximately 54%, 19%, and 10%, respectively, of total sales attributable to the Properties. During the three months ended March 31, 2020, two customers accounted for approximately 55% and 25%, respectively, of total sales attributable to the Properties.
Management does not believe that the loss of these customers would have a material adverse effect as it believes alternative customers are readily available within a competitive pricing environment.
NOTE 4 – CONTINGENCIES
The activities of the Properties may become subject to potential claims and litigation in the ordinary course of business. Management is not aware of any claims or threatened litigation that management believes will have a material adverse effect on the operations or financial results of the Properties.
NOTE 5 – SUBSEQUENT EVENTS
Management has evaluated subsequent events through July 30, 2021, the date the Statement of Revenues and Direct Operating Expenses was available to be issued and has concluded there are no material subsequent events that would require disclosure.
| 6 |
NOTE 6 – SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION – UNAUDITED
The unaudited supplemental information on oil and gas exploration and production activities related to the Properties for the years ended December 31, 2020 and 2019, has been presented in accordance with FASB ASC Topic 932, Extractive Activities – Oil and Gas and the SEC’s final rule, Modernization of Oil and Gas Reporting. All the proved reserves attributable to the Properties are located within Lea County, New Mexico. Prior year reserve studies were not made for the Properties, as such, independent engineers prepared a reserve study as of December 31, 2020, and computed reserves for prior periods using historical production amounts.
Proved reserves of crude oil and natural gas are estimated by independent engineers in accordance with guidelines established by the Securities and Exchange Commission. Many assumptions and judgmental decisions are required to estimate reserves. Reported quantities are subject to future revisions, some of which may be substantial, as additional information becomes available from reservoir performance, new geological and geophysical data, additional drilling, technological advancements, price changes and other economic factors.
The estimations for proved reserves were generated through the integration of available geoscience, engineering, and economic data and commercially available technologies, to establish ‘reasonable certainty’ of economic producibility. As defined by the SEC, reasonable certainty of proved reserves describes a high degree of confidence that the quantities will be recovered. In estimating proved reserves, common industry-accepted methods for subsurface evaluations, including performance, volumetric and analogue-based studies, have been used.
| 7 |
Summary of Proved Crude Oil and Natural Gas Reserves
The following table sets forth certain data pertaining to the Properties’ proved reserves for the years ended December 31, 2020, and 2019:
| Crude | Natural | |||||||||||||
| Total | Oil | Gas | ||||||||||||
| (MMBOE) (2) | (MBBLs) | (MMCF) | ||||||||||||
| Proved reserves as of January 1, 2019(1) | 3,975.1 | 3,096.3 | 5,273.0 | |||||||||||
| Production | 555.0 | 420.3 | 808.4 | |||||||||||
| Proved reserves as of December 31, 2019(1) | 3,420.1 | 2,676.0 | 4,464.6 | |||||||||||
| Production | 501.6 | 381.5 | 720.4 | |||||||||||
| Proved reserves as of December 31, 2020(1) | 2,918.5 | 2,294.5 | 3,744.2 | |||||||||||
| (1) | All the proved reserves for the periods presented were classified as proved developed reserves. |
| (2) | The conversion of cubic feet equivalent to barrels of oil equivalent was determined using the ratio of six MCF of natural gas to one BBL of crude oil. The conversion ratio does not assume price equivalency, and the price on an equivalent basis for oil and natural gas may differ significantly. |
Volume measurements:
MMBOE – million barrels of oil equivalent
MBBLs – million barrels of oil
MMCF – million cubic feet of natural gas
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
The standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves (Standardized Measure) is a disclosure requirement under Accounting Standards Codification (ASC) 932. The Standardized Measure does not purport to be, nor should it be interpreted to present, the fair market value of the proved oil and natural gas reserves of the Properties but does present a standardized disclosure concerning possible future net cash flows that would result under the assumptions used. An estimate of fair market value would also take into account, among other things, the recovery of reserves not presently classified as proved, the value of unproved properties, and consideration of expected future economic and operating conditions.
For the December 31, 2020, calculations in the following tables, estimated proved reserve volumes and estimated future cash inflows were computed using the prior 12-month unweighted first-day-of-the-month average prices of $39.57 per barrel of oil and $1.99 per MMBTU of natural gas with no escalation in future years. These prices were adjusted for quality and geographic differentials, marketing and transportation deductions and existing contractual pricing provisions. Operating costs and production and ad valorem taxes are based on current costs with no escalation in future years. As mentioned above, the Standardized Measure presented here excludes the effects of income taxes as the tax basis for the Properties is not applicable on a go-forward basis. A discount factor of 10% was used to reflect the timing of future net cash flows.
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The standardized measure of discounted future net cash flows related to the proved oil and gas reserves of the Properties is as follows:
| Year Ended December 31, | ||||||||
| (in thousands) | 2020 | 2019 | ||||||
| Standardized Measure | ||||||||
| Future cash inflows | $ | 95,332 | $ | 111,421 | ||||
| Future costs: | ||||||||
| Production | (79,329 | ) | (92,963 | ) | ||||
| Future net cash inflows before 10% discount | 16,003 | 18,458 | ||||||
| 10% annual discount factor | (5,158 | ) | (6,010 | ) | ||||
| Standardized measure | $ | 10,845 | $ | 12,448 | ||||
Changes in the standardized measure of discounted future net cash flows related to the proved oil and gas reserves of the Properties are as follows:
| Year Ended December 31, | ||||||||
| (in thousands) | 2020 | 2019 | ||||||
| Standardized Measure | ||||||||
| Standardized measure, beginning of year | $ | 12,448 | $ | 15,661 | ||||
| Increases (decreases): | ||||||||
| Sales, net of production costs | (358 | ) | (1,647 | ) | ||||
| Accretion of discount | (1,245 | ) | (1,566 | ) | ||||
| Net increase (decrease) in standardized measure | (1,603 | ) | (3,213 | ) | ||||
| Standardized measure, end of year | $ | 10,845 | $ | 12,448 | ||||
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EXHIBIT 99.2
EMPIRE PETROLEUM CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Introduction
The unaudited pro forma condensed combined financial statements and accompanying notes reflect the pro forma effects of:
| (1) | Acquisition. On March 12, 2021, Empire New Mexico LLC (“Empire New Mexico”), a Delaware limited liability company and wholly owned subsidiary of Empire Petroleum Corporation (“Empire” or the “Company”), entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with XTO Holdings, LLC, a subsidiary of ExxonMobil (“Seller” or “XTO”), to acquire certain oil and gas properties in Lea County (the “Properties” or “New Mexico Properties”) for consideration of $17,800,000 (subject to customary adjustments). On May 14, 2021, Empire New Mexico closed on the purchase with XTO, with an effective date of January 1, 2021. |
| (2) | Financing. Under the Purchase Agreement, Empire New Mexico wired a deposit of $1,780,000 to XTO on March 12, 2021, using cash on hand. Upon closing with XTO, after accounting for customary closing adjustments, Empire New Mexico paid an adjusted purchase price of approximately $17,870,000 in connection with such closing. |
| a. | Senior Secured Convertible Note due December 31, 2021: In connection with such closing, Empire New Mexico issued a Senior Secured Convertible Note due December 31, 2021, in the aggregate principal amount $16,250,000 (the “Secured Convertible Note”) to Energy Evolution Master Fund, Ltd. (“Energy Evolution Ltd”). The funds received by Empire New Mexico were used to pay the adjusted purchase price under the Purchase Agreement. The Secured Convertible Note accrues interest at a rate of 3.8% per annum and all principal and accrued interest thereon is due on December 31, 2021. Under the terms of the Secured Convertible Note, 40% of the principal amount outstanding together with accrued interest thereon (the “Maximum Convertible Amount”) may be converted at a conversion price of $1.25 per share (the “Conversion Price”) into the common stock, par value of $0.001 per share (the “Common Stock”) of Empire. The Conversion Price is subject to downward adjustments. Please refer to Empire’s Current Report on Form 8-K filed May 20, 2021, for further detail as well as a copy of the Secured Convertible Note, which is filed as Exhibit 4.1 thereto. |
| i. | As partial consideration for the issuance of the Secured Convertible Note, Empire issued to Energy Evolution Ltd (i) 1,500,000 shares of Common Stock along with (ii) a warrant certificate to purchase up to 3,000,000 shares of Common Stock (the “Warrant Shares”) at an exercise price of $1.00 per Warrant Share until May 14, 2022. Under the Warrant Certificate, the exercise price is subject to customary downward adjustments. Please refer to Empire’s Current Report on Form 8-K filed May 20, 2021, for further detail as well as a copy of the Warrant Certificate, which is filed as Exhibit 4.2 thereto. |
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| b. | Unsecured Convertible Notes due May 9, 2022: In connection with the closing of the purchase with XTO and offering of the Secured Convertible Note, Empire New Mexico also closed on an offering of Unsecured Convertible Notes due May 9, 2022, in the aggregate principal amount of $3,243,000 (the “Unsecured Convertible Notes”) to sixteen accredited investors. The funds received by Empire New Mexico in connection with the issuance of the Unsecured Convertible Notes were used to pay a performance bond required in connection with the XTO acquisition. The Unsecured Convertible Notes accrue interest at a rate of 5% per annum and all principal and accrued interest thereon is due on May 9, 2022. Under the Unsecured Convertible Notes, 100% of the principal amount outstanding together with accrued interest thereon may be converted at a conversion price of $1.25 per share into Common Stock, subject to downward adjustments. Please refer to Empire’s Current Report on Form 8-K filed May 20, 2021, for further detail as well as a copy of the form of Unsecured Convertible Note, which is filed as Exhibit 4.3 thereto. |
The following unaudited pro forma condensed combined financial statements (which we refer to as the “Unaudited Pro Forma Financial Statements”) present the combination of the historical consolidated financial statements of Empire adjusted to give effect to the purchase of the New Mexico Properties and related transactions. The unaudited pro forma condensed combined statements of operations (which we refer to as the “Unaudited Pro Forma Statements of Operations”) for the three months ended March 31, 2021, and for the year ended December 31, 2020, combine the historical statements of consolidated operations of Empire and the purchase of the New Mexico Properties and related transactions, giving effect to the purchase and related transactions as if they had been consummated on January 1, 2020, the beginning of the earliest period presented. The unaudited pro forma condensed combined balance sheet (which we refer to as the “Unaudited Pro Forma Balance Sheet”) combines the historical consolidated balance sheet of Empire and the purchase of the New Mexico Properties and related transactions as of March 31, 2021, giving effect to the purchase as if it had been consummated on March 31, 2021.
Final working capital and other post-closing adjustments have not been reflected in these Unaudited Pro Forma Financial Statements. Furthermore, the initial accounting for the Acquisition and related Financing (including the calculation of the estimated fair value of the convertible debt) is not complete and adjustments to estimated amounts, or recognition of additional assets acquired, or liabilities assumed, may occur as more detailed reviews and valuations are completed and additional information is obtained about the facts and circumstances that existed as of the acquisition date. Additionally, the Unaudited Pro Forma Financial Statements do not reflect costs of integration activities or benefits that may result from other efficiencies.
The pro forma data is based on assumptions and include adjustments as explained in the notes herein. The historical financial statements may be adjusted in the Unaudited Pro Forma Financial Statements to give pro forma effect to provide for Transaction Accounting Adjustments reflecting only the application of required accounting for the transaction. The Company has not included any Management Adjustments as defined under Release No. 33-10786.
The accompanying Unaudited Pro Forma Balance Sheet and accompanying notes of Empire as of March 31, 2021, as well as the Unaudited Pro Forma Statements of Operations and accompanying notes of Empire for the three months ended March 31, 2021, and for the year ended December 31, 2020, which have been prepared by Empire management, are derived from (a) the unaudited consolidated financial statements of Empire as of and for the three months ended March 31, 2021, included in its Quarterly
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Report on Form 10-Q for the quarter ended March 31, 2021; (b) the audited consolidated financial statements of Empire as of and for the year ended December 31, 2020, included in its Annual Report on Form 10-K for the year ended December 31, 2020; (c) the audited Statements of Revenues and Direct Operating Expenses of the Oil and Natural Gas Properties Acquired by Empire Petroleum Corporation on May 14, 2021, from XTO Holdings, LLC for the year ended December 31, 2020, as well as the accompanying unaudited interim Statements of Revenues and Direct Operating Expenses for the three months ended March 31, 2021, as provided by XTO and as reported in this Form 8-K/A in Exhibit 99.1, of which certain adjustments have been made by Empire management to conform to Empire’s presentation.
The Unaudited Pro Forma Financial Statements are provided for illustrative purposes only and are not necessarily indicative of what the actual results would have been had the transaction been in effect on the periods indicated, or of the results that may occur in the future. The Unaudited Pro Forma Financial Statements are not necessarily indicative of Empire’s operations going forward because the presentation of the operations of the New Mexico Properties is limited to only revenues and direct operating expenses related thereto, while other indirect operating expenses related to these properties have been excluded. Furthermore, the marketing and transportation processes will vary from historical on a go-forward basis. The Unaudited Pro Forma Financial Statements should be read in conjunction with (a) the annual consolidated financial statements of Empire as of and for the year ended December 31, 2020, included in its Annual Report on Form 10-K for the year ended December 31, 2020; (b) Empire’s unaudited condensed consolidated financial statements of operations included in its Quarterly Report on Form 10-Q for the three months ended March 31, 2021; (c) the audited Statements of Revenues and Direct Operating Expenses of the Oil and Natural Gas Properties Acquired by Empire Petroleum Corporation on May 14, 2021, from XTO Holdings, LLC for the years ended December 31, 2020 and 2019, respectively, as well as the accompanying unaudited interim Statements of Revenues and Direct Operating Expenses for the three months ended March 31, 2021 and 2020, respectively, as reported in this Form 8-K/A in Exhibit 99.1; and (d) the accompanying notes to the Unaudited Pro Forma Financial Statements.
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EMPIRE PETROLEUM CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2021
| Transaction | Empire | |||||||||||||||
| Empire | New Mexico | Accounting | Pro Forma | |||||||||||||
| Historical | Acquisition | Adjustments | Combined | |||||||||||||
| ASSETS | ||||||||||||||||
| Current Assets: | ||||||||||||||||
| Cash | $ | 3,914,678 | $ | — | $ | (507,000 | ) C | $ | 3,407,678 | |||||||
| Accounts Receivable | 1,281,555 | — | 1,281,555 | |||||||||||||
| Inventory | 806,409 | 318,546 | A | 1,124,955 | ||||||||||||
| Prepaids | 216,360 | — | — | 216,360 | ||||||||||||
| Total Current Assets | 6,219,002 | 318,546 | (507,000 | ) | 6,030,548 | |||||||||||
| Property and Equipment: | ||||||||||||||||
| Oil and Natural Gas Properties, Successful Efforts | 22,711,446 | 23,650,007 | A, B | 46,361,453 | ||||||||||||
| Less: Accumulated Depreciation, Depletion, and Impairment | (15,324,596 | ) | — | — | (15,324,596 | ) | ||||||||||
| 7,386,850 | 23,650,007 | — | 31,036,857 | |||||||||||||
| Other Property and Equipment, net | 774,481 | 179,156 | A | — | 953,637 | |||||||||||
| Total Property and Equipment, net | 8,161,331 | 23,829,163 | — | 31,990,494 | ||||||||||||
| Utility and Other Deposits | 2,712,126 | (1,780,000 | ) A | — | 932,126 | |||||||||||
| Other Non-Current Assets | — | — | 3,750,000 | C | 3,750,000 | |||||||||||
| Total Assets | $ | 17,092,459 | $ | 22,367,709 | $ | 3,243,000 | $ | 42,703,168 | ||||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||||||||||
| Current Liabilities: | ||||||||||||||||
| Accounts Payable | $ | 2,105,518 | $ | — | $ | — | $ | 2,105,518 | ||||||||
| Accrued Expenses | 2,427,578 | — | — | 2,427,578 | ||||||||||||
| Derivatives | 235,720 | — | 6,237,387 | D | 6,473,107 | |||||||||||
| Current Portion of Lease Liability | 96,325 | — | — | 96,325 | ||||||||||||
| Current Portion of Long-Term Notes Payable | 8,401,791 | 16,250,000 | A | (10,772,494 | ) C, E, F | 13,879,297 | ||||||||||
| Total Current Liabilities | 13,266,932 | 16,250,000 | (4,535,107 | ) | 24,981,825 | |||||||||||
| Long-Term Notes Payable | 624,815 | — | — | 624,815 | ||||||||||||
| Long-Term Lease Liability | 505,546 | — | — | 505,546 | ||||||||||||
| Asset Retirement Obligations | 15,648,682 | 6,117,709 | B | 21,766,391 | ||||||||||||
| Total Liabilities | 30,045,975 | 22,367,709 | (4,535,107 | ) | 47,878,577 | |||||||||||
| Stockholders' Equity (Deficit): | ||||||||||||||||
| Common Stock - $.001 Par Value 150,000,000 Shares Authorized, | ||||||||||||||||
| 57,515,920 and 59,015,920 Shares Issued and Outstanding, respectively | 57,515 | — | 1,500 | E | 59,015 | |||||||||||
| Common Stock Subscribed | (13,000 | ) | — | — | (13,000 | ) | ||||||||||
| Additional Paid-In Capital | 28,617,530 | — | 7,776,607 | G | 36,394,137 | |||||||||||
| Accumulated Deficit | (41,615,561 | ) | — | — | (41,615,561 | ) | ||||||||||
| Total Stockholders' Equity (Deficit) | (12,953,516 | ) | — | 7,778,107 | (5,175,409 | ) | ||||||||||
| Total Liabilities and Stockholders' Equity (Deficit) | $ | 17,092,459 | $ | 22,367,709 | $ | 3,243,000 | $ | 42,703,168 | ||||||||
See accompanying notes to the unaudited pro forma combined financial statements.
4
EMPIRE PETROLEUM CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2021
| Transaction | Empire | |||||||||||||||
| Empire | New Mexico | Accounting | Pro Forma | |||||||||||||
| Historical | Acquisition | Adjustments | Combined | |||||||||||||
| Operating Revenue and Other: | ||||||||||||||||
| Oil and Gas Sales | ||||||||||||||||
| Oil and Condensate | $ | 2,062,043 | $ | 2,114,141 | A | $ | — | $ | 4,176,184 | |||||||
| Natural Gas | 256,930 | 825,734 | A | — | 1,082,664 | |||||||||||
| Natural Gas Liquids (NGLs) | 137,485 | 704,708 | A | — | 842,193 | |||||||||||
| Total Oil and Gas Sales | 2,456,458 | 3,644,583 | — | 6,101,041 | ||||||||||||
| Gain (Loss) on Derivatives (net) | (357,915 | ) | — | — | (357,915 | ) | ||||||||||
| Total Revenue | 2,098,543 | 3,644,583 | — | 5,743,126 | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Oil and Gas Production | 1,418,010 | 2,056,417 | A | — | 3,474,427 | |||||||||||
| Production Taxes | 169,832 | 307,908 | A | — | 477,740 | |||||||||||
| Depletion, Depreciation and Amortization | 180,540 | — | 580,674 | B | 761,214 | |||||||||||
| Impairment of Oil and Natural Gas Properties | — | — | — | — | ||||||||||||
| Accretion of Discount on Asset Retirement Obligation | 284,465 | — | 83,372 | C | 367,837 | |||||||||||
| General and Administrative | 906,048 | — | — | 906,048 | ||||||||||||
| Total Operating Expenses | 2,958,895 | 2,364,325 | 664,046 | 5,987,266 | ||||||||||||
| Operating Income (Loss) | (860,352 | ) | 1,280,258 | (664,046 | ) | (244,140 | ) | |||||||||
| Other Income and (Expense): | ||||||||||||||||
| Gain on Sale of Assets | — | — | — | — | ||||||||||||
| Unrealized Gain (Loss) | — | — | (4,735,794 | ) D | (4,735,794 | ) | ||||||||||
| Interest Expense | (136,828 | ) | — | — | (136,828 | ) | ||||||||||
| Net Income (Loss) | $ | (997,180 | ) | $ | 1,280,258 | $ | (5,399,840 | ) | $ | (5,116,762 | ) | |||||
| Net Income (Loss) per Common Share, Basic | $ | (0.03 | ) | $ | (0.15 | ) | ||||||||||
| Net Income (Loss) per Common Share, Diluted | $ | (0.03 | ) | $ | (0.15 | ) | ||||||||||
| Weighted Average Number of Common Shares Outstanding, Basic | 31,819,084 | 1,500,000 | G | 33,319,084 | ||||||||||||
| Weighted Average Number of Common Shares Outstanding, Diluted | 31,819,084 | 1,500,000 | F, G | 33,319,084 | ||||||||||||
See accompanying
notes to the unaudited pro forma combined financial statements.
5
EMPIRE PETROLEUM CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2020
| Transaction | Empire | |||||||||||||||
| Empire | New Mexico | Accounting | Pro Forma | |||||||||||||
| Historical | Acquisition | Adjustments | Combined | |||||||||||||
| Operating Revenue and Other: | ||||||||||||||||
| Oil and Gas Sales | ||||||||||||||||
| Oil and Condensate | $ | 5,452,187 | $ | 9,791,212 | A | $ | — | $ | 15,243,399 | |||||||
| Natural Gas | 251,764 | 1,182,739 | A | — | 1,434,503 | |||||||||||
| Natural Gas Liquids (NGLs) | 285,012 | 1,908,803 | A | — | 2,193,815 | |||||||||||
| Total Oil and Gas Sales | 5,988,963 | 12,882,754 | — | 18,871,717 | ||||||||||||
| Gain (Loss) on Derivatives (net) | 1,738,871 | — | — | 1,738,871 | ||||||||||||
| Total Revenue | 7,727,834 | 12,882,754 | — | 20,610,588 | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Oil and Gas Production | 4,871,755 | 11,392,396 | A | — | 16,264,151 | |||||||||||
| Production Taxes | 346,101 | 1,132,547 | A | — | 1,478,648 | |||||||||||
| Depletion, Depreciation and Amortization | 3,118,019 | — | 3,290,579 | B | 6,408,598 | |||||||||||
| Impairment of Oil and Natural Gas Properties | 8,671,303 | — | — | 8,671,303 | ||||||||||||
| Accretion of Discount on Asset Retirement Obligation | 929,858 | — | 333,488 | C | 1,263,346 | |||||||||||
| General and Administrative | 7,373,804 | — | — | 7,373,804 | ||||||||||||
| Total Operating Expenses | 25,310,840 | 12,524,943 | 3,624,067 | 41,459,850 | ||||||||||||
| Operating Income (Loss) | (17,583,006 | ) | 357,811 | (3,624,067 | ) | (20,849,262 | ) | |||||||||
| Other Income and (Expense): | ||||||||||||||||
| Gain on Sale of Assets | 1,268,760 | — | — | 1,268,760 | ||||||||||||
| Unrealized Gain (Loss) | — | — | (924,057 | ) D | (924,057 | ) | ||||||||||
| Interest Expense | (521,187 | ) | — | (14,584,105 | ) E | (15,105,292 | ) | |||||||||
| Net Income (Loss) | $ | (16,835,433 | ) | $ | 357,811 | $ | (19,132,229 | ) | $ | (35,609,851 | ) | |||||
| Net Income ( Loss) per Common Share, Basic | $ | (0.74 | ) | $ | (1.47 | ) | ||||||||||
| Net Income ( Loss) per Common Share, Diluted | $ | (0.74 | ) | $ | (1.47 | ) | ||||||||||
| Weighted Average Number of Common Shares Outstanding, Basic | 22,708,030 | 1,500,000 | G | 24,208,030 | ||||||||||||
| Weighted Average Number of Common Shares Outstanding, Diluted | 22,708,030 | 1,500,000 | F, G | 24,208,030 | ||||||||||||
See accompanying
notes to the unaudited pro forma combined financial statements.
6
EMPIRE PETROLEUM CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRO FORMA PRESENTATION
The following Unaudited Pro Forma Financial Statements present the combination of the historical consolidated financial statements of Empire adjusted to give effect to the purchase of the New Mexico Properties and related transactions (the “Acquisition”). The Unaudited Pro Forma Statements of Operations for the three months ended March 31, 2021, and for the year ended December 31, 2020, combine the historical statements of consolidated operations of Empire and the purchase of the New Mexico Properties and related transactions, giving effect to the purchase and related transactions as if they had been consummated on January 1, 2020, the beginning of the earliest period presented. The Unaudited Pro Forma Balance Sheet combines the historical consolidated balance sheet of Empire and the purchase of the New Mexico Properties and related transactions as of March 31, 2021, giving effect to the purchase as if it had been consummated on March 31, 2021. The pro forma adjustments are (1) directly attributable to the transaction, (2) factually supportable, and (3) represent management’s best estimates based on information available as for the date of this filing and subject to change as additional information becomes available and additional analyses are performed. The Unaudited Pro Forma Financial Statements should be read in conjunction with (a) the annual consolidated financial statements of Empire as of and for the year ended December 31, 2020, included in its Annual Report on Form 10-K for the year ended December 31, 2020; (b) Empire’s unaudited condensed consolidated financial statements of operations included in its Quarterly Report on Form 10-Q for the three months ended March 31, 2021; (c) the audited Statements of Revenues and Direct Operating Expenses of the Oil and Natural Gas Properties Acquired by Empire Petroleum Corporation on May 14, 2021, from XTO Holdings, LLC for the years ended December 31, 2020 and 2019, respectively, as well as the accompanying unaudited interim Statements of Revenues and Direct Operating Expenses for the three months ended March 31, 2021 and 2020, respectively, as reported in this Form 8-K/A in Exhibit 99.1; and (d) the accompanying notes to the Unaudited Pro Forma Financial Statements.
The Unaudited Pro Forma Financial Statements are for illustrative purposes only and are not intended to represent or to be indicative of the combined results of operations or financial position that the Company would have reported had the transaction been in effect as of the dates set forth in these Unaudited Pro Forma Financial Statements and should not be taken as indicative of the Company’s future combined results of operations or financial position. The Unaudited Pro Forma Financial Statements do not reflect Empire’s operations going forward because the presentation of the operations of the New Mexico Properties is limited to only revenues and direct operating expenses related thereto, while other indirect operating expenses related to these Properties have been excluded. The marketing and transportation processes of the Company will also vary from historical on a go-forward basis. Furthermore, the actual results may differ significantly from that reflected in the Unaudited Pro Forma Financial Statements resulted additional information becomes available and additional analyses are performed.
The Unaudited Pro Forma Financial Statements have been prepared assuming the Acquisition is accounted for as an asset acquisition using the acquisition method of accounting under Financial Accounting Standards Board (“FASB”) ASC 805, Business Combinations (“ASC 805”). Under the accounting for asset acquisitions, the Acquisition will be recorded using a cost accumulation and allocation model under which the cost of the acquisition is allocated on a relative fair value basis to the assets acquired and liabilities assumed. For asset acquisitions under ASC 805, acquisition-related transaction costs are capitalized as a component of the cost of the assets acquired.
7
Estimating the future ARO requires management to make estimates and judgments regarding timing and existence of a liability, as well as what constitutes adequate restoration. Inherent in the fair value calculation are numerous assumptions and judgments including the ultimate costs, inflation factors, credit adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental, and political environments.
Consideration paid for the Acquisition is approximately $17.9 million, which the Company allocated the cost of the Acquisition based on relative fair value of assets acquired and liabilities assumed. The acquisition-related transaction costs were approximately $0.02 million and were capitalized to oil and natural gas properties.
NOTE 2 – PRO FORMA ADJUSTMENTS
Pro Forma Adjustments to the Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 2021:
| A. | Reflects the preliminary purchase price allocation of the properties for $17.9 million. |
| B. | Reflects estimated asset retirement obligations assumed from properties acquired as well as an estimate of the related accretion of the asset retirement obligations. |
| C. | Reflects $3.8 million performance bond issued to Seller as required by the Purchase Agreement funded by the proceeds of $3.2 million from the Unsecured Convertible Note as well as an additional $0.5 million in cash on hand. |
| D. | Reflects fair value of the separated derivative conversion feature on the Secured Convertible Note. |
| E. | For the Secured Convertible Note, reflects common stock and debt discount of $6.1 million related to common stock and warrant certificates issued to Energy Evolution Ltd and $6.2 million debt discount related to the fair value of the conversion features. |
| F. | For the Unsecured Convertible Note, reflects $1.6 million debt discount related to the beneficial conversion feature. |
| G. | Reflects the associated increase to Additional Paid-In Capital for the $6.1 million related to common stock and warrant certificates issued to Energy Evolution Ltd and $1.6 million debt discount related to the Unsecured Convertible Note beneficial conversion feature. |
8
Pro Forma Adjustments to the Unaudited Pro Forma Condensed Combined Statement of Operations for the three months ended March 31, 2021, and for the twelve months ended December 31, 2020:
| A. | Reflects oil and gas operations of properties acquired for the periods presented. |
| B. | Reflects estimate of depletion of acquired properties for the periods presented, using the units-of-production method under the successful efforts method of accounting, considering the purchase price of properties acquired, asset retirement obligation and production. Additionally, estimated depreciation on related vehicles has been estimated using the straight-line method of depreciation. |
| C. | Reflects estimated asset retirement obligations assumed from properties acquired as well as an estimate of the related accretion of the asset retirement obligations. |
| D. | Reflects unrealized hedging loss on the fair value of the separated derivative for the beneficial conversion feature of the Secured Convertible Note. |
| E. | Reflects interest expense on the Secured Convertible Note and Unsecured Convertible Note of $0.6 million. Additionally, reflects amortization of $12.4 million debt discount related to the Secured Convertible Note and $1.6 million related to the beneficial conversion feature of the Unsecured Convertible Note. These amounts are reflected in the Unaudited Pro Forma Financial Statements for the year ended December 31, 2020, based upon the maturity of the underlying notes. |
Does not reflect the approxomtely 11,000,000 potentially dilutove shares from the assumed conversion.
| F. | Reflects assumed conversion of outstanding warrants using the if-converted method. |
9