Empire Petroleum Corp 10-Q for FY2024 Q1
Empire Petroleum Corp (EP)
About this 10-Q
Empire Petroleum Corp filed this 10-Q on May 15, 2024, covering the quarter ended March 31, 2024 (FY2024 Q1).
Headline figures
Quarter ended March 31, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $9.39M
- down 6.6% from $10.05M a year earlier
- Net loss
- $3.98M
- compared with a net loss of $2.46M a year earlier
- Diluted EPS
- -$0.15
- compared with -$0.11 a year earlier
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM
_________________
| (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 ____________ |
_____________________
(Exact name of registrant as specified in its charter)
_____________________
(State or Other Jurisdiction of Incorporation or Organization) |
(Commission File Number) |
(I.R.S. Employer Identification No.)
|
| (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)
_________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
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 |
||
| Emerging growth company |
||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The number of shares of the registrant's common stock, $0.001 par value, outstanding as of the latest practicable date of May 9, 2024 was .
EMPIRE PETROLEUM CORPORATION
TABLE OF CONTENTS
| 1 |
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
EMPIRE PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts Receivable | ||||||||
| Derivative Instruments | ||||||||
| Inventory | ||||||||
| Prepaids | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment: | ||||||||
| Oil and Natural Gas Properties, Successful Efforts | ||||||||
| Less: Accumulated Depreciation, Depletion 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 | ||||||||
| Derivative Instruments | ||||||||
| Current Portion of Lease Liability | ||||||||
| Current Portion of Note Payable - Related Party (Note 8) | ||||||||
| Current Portion of Long-Term Debt | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Debt | ||||||||
| Long-Term Note Payable - Related Party (Note 8) | ||||||||
| Long Term Lease Liability | ||||||||
| Derivative Instruments (Note 8) | ||||||||
| Asset Retirement Obligations | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 15) | ||||||||
| 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 condensed consolidated financial statements.
| 2 |
EMPIRE PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| 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 | ||||||||
| Depletion, Depreciation & Amortization | ||||||||
| Accretion of Asset Retirement Obligation | ||||||||
| General and Administrative Expense: | ||||||||
| General and Administrative Expense | ||||||||
| Stock-Based Compensation | ||||||||
| Total General and Administrative Expense | ||||||||
| Total Costs and Expenses | ||||||||
| Operating Income (Loss) | ( | ) | ( | ) | ||||
| Other Income and (Expense): | ||||||||
| Interest Expense | ( | ) | ( | ) | ||||
| Other Income (Expense) (Note 8) | ||||||||
| Income (Loss) Before Income Taxes | ( | ) | ( | ) | ||||
| Income Tax (Provision) Benefit | ||||||||
| Net Income (Loss) | $ | ( | ) | $ | ( | ) | ||
| Net Income (Loss) per Common Share: | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted Average Number of Common Shares Outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See accompanying notes to condensed consolidated financial statements.
| 3 |
EMPIRE PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2024 and 2023
(Unaudited)
| Additional | ||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Paid-In | Accumulated | |||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | Deficit | Total | ||||||||||||||||||||||
| Balances, December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net Loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock-Based Compensation | — | |||||||||||||||||||||||||||
| Balances, March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Additional | ||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Paid-In | Accumulated | |||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | Deficit | Total | ||||||||||||||||||||||
| Balances, December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net Loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Impact of Former CEO settlement | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock-Based Compensation | — | |||||||||||||||||||||||||||
| Balances, March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| 4 |
EMPIRE PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net Income (Loss) | $ | ( | ) | $ | ( | ) | ||
| Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By Operating Activities: |
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| Stock-Based Compensation | ||||||||
| Amortization of Right of Use Assets | ||||||||
| Depreciation, Depletion and Amortization | ||||||||
| Accretion of Asset Retirement Obligation | ||||||||
| Loss on Commodity Derivatives | ||||||||
| Settlement on or Purchases of Commodity Derivative Instruments | ( | ) | ( | ) | ||||
| Gain on Financial Derivatives | ( | ) | ||||||
| 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 (Used In) Operating Activities | ( | ) | ||||||
| Cash Flows From Investing Activities: | ||||||||
| Additions to Oil and Natural Gas Properties (a) | ( | ) | ( | ) | ||||
| Purchase of Other Fixed Assets | ( | ) | ( | ) | ||||
| Cash Paid for Right of Use Assets | ( | ) | ( | ) | ||||
| Sinking Fund Deposit | ||||||||
| Net Cash Provided By (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 Provided By (Used In) Financing Activities | ( | ) | ||||||
| Net Change in Cash | ( | ) | ( | ) | ||||
| Cash - Beginning of Period | ||||||||
| Cash - End of Period | $ | $ | ||||||
| Supplemental Cash Flow Information: | ||||||||
| Cash Paid for Interest | $ | $ | ||||||
________
| (a) |
See accompanying notes to condensed consolidated financial statements.
| 5 |
EMPIRE PETROLEUM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Basis of Presentation
Empire Petroleum Corporation (the “Company”, collectively with its subsidiaries) is an independent energy company operator engaged in optimizing developed production by employing field management methods to maximize reserve recovery while minimizing costs. Empire operates the following wholly-owned subsidiaries in its areas of operations:
| ● | Empire New Mexico, LLC (“Empire New Mexico”) | |||
| o | Empire New Mexico LLC d/b/a Green Tree New Mexico | |||
| o | Empire EMSU LLC | |||
| o | Empire EMSU-B LLC | |||
| o | Empire AGU LLC | |||
| o | Empire NM Assets LLC | |||
| ● | Empire Rockies Region | |||
| o | Empire North Dakota LLC (“Empire North Dakota”) | |||
| o | Empire North Dakota Acquisition LLC (“Empire NDA”) | |||
| ● | Empire Texas (“Empire Texas”), consisting of the following entities: | |||
| o | Empire Texas LLC | |||
| o | Empire Texas Operating LLC | |||
| o | Empire Texas GP LLC | |||
| o | Pardus Oil & Gas Operating, LP (owned 1% by Empire Texas GP LLC and 99% by Empire Texas LLC) | |||
| ● | Empire Louisiana LLC (“Empire Louisiana”) | |||
Empire was incorporated in the State of Delaware in 1985. The consolidated financial statements of Empire Petroleum Corporation and subsidiaries include the accounts of the Company and its wholly-owned subsidiaries.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company's financial position, the results of operations, and the cash flows for the interim period are included. All adjustments are of a normal, recurring nature. Certain amounts in prior periods have been reclassified to conform to current presentation. Operating results for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.
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, 2023 which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2024.
Note 2 – Summary of Significant Accounting Policies
Significant Accounting Policies
During the three months ended March 31, 2024, the Company added one significant accounting policy and estimate relating to convertible debt and derivative liability. Besides this, 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, 2023.
Convertible Debt and Derivative Liability
In connection with the Company’s issuance of a Promissory Note (the “Note”) in the first quarter of 2024, the Company bifurcated the embedded conversion option, and recorded the embedded conversion option as a long-term derivative liability in accordance with FASB ASC 815, Derivatives and Hedging. The convertible debt and the derivative liability associated with the Note are presented on the Condensed Consolidated Balance Sheets as the Long-Term Note Payable – Related Party and long-term Derivative Instruments. The convertible debt is carried at amortized cost. The derivative liability will be remeasured at each reporting period using a binomial lattice model with changes in fair value recorded in the Condensed Consolidated Statements of Operations in Other Income (Expense). See Note 8 for further details.
| 6 |
Fair Value Measurements
The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (ASC Topic 820), defines fair value, establishes a consistent framework for measuring fair value and establishes a fair value hierarchy based on the observability of inputs used to measure fair value.
The three-level fair value hierarchy for disclosure of fair value measurements defined by ASC Topic 820 is as follows:
Level 1 – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Inputs, other than quoted prices within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 – Prices or valuations that require unobservable inputs that are both significant to the fair value measurement and unobservable. Valuation under Level 3 generally involves a significant degree of judgment from management.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve a degree of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instrument’s complexity. The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level. There were no transfers between fair value hierarchy levels for the period ended March 31, 2024.
Financial instruments and other – The fair values determined for accounts receivable, accrued expenses and other current liabilities were equivalent to the carrying value due to their short-term nature.
Derivatives – Derivative financial instruments are carried at fair value and measured on a recurring basis. The Company’s commodity price hedges are valued based on discounted future cash flow models that are primarily based on published forward commodity price curves; thus, these inputs are designated as Level 2 within the valuation hierarchy.
The fair values of derivative instruments in asset positions include measures of counterparty nonperformance risk, and the fair values of derivative instruments in liability positions include measures of the Company’s nonperformance risk. These measurements were not material to the Condensed Consolidated Financial Statements.
Assets and Liabilities Measured at Fair Value on a Recurring Basis - The Company uses a binomial lattice valuation model to value the Level 3 derivative liabilities at inception and on subsequent valuation dates. This model incorporates transaction details such as the Company’s stock price, contractual terms of the Note and unobservable inputs classified as Level 3 including risk-free rate and expected volatility. As of March 31, 2024, these unobservable inputs were 4.6% and 50%, respectively. The fair value of the embedded derivative liability will be reassessed quarterly using the same binomial lattice valuation model.
Fair Value on a Nonrecurring Basis
The Company applies the provisions of fair value measurement on a non-recurring basis to its non-financial assets and liabilities, including oil and gas properties and asset retirement obligations. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments if events or changes in certain circumstances indicate that adjustments may be necessary. No triggering events that require assessment of such items were observed during the three months ended March 31, 2024.
Related Party Transactions
Transactions between related parties are considered to be related party transactions even though they may not be given accounting recognition. FASB ASC 850, Related Party Disclosures requires that transactions with related parties that would have influence in decision making shall be disclosed so that users of the financial statements can evaluate their significance. Related party transactions typically occur within the context of the following relationships: affiliates of the entity; entities for which investments in their equity securities is typically accounted for under the equity method by the investing entity; trusts for the benefit of employees; principal owners of the entity and members of their immediate families; management of the entity and members of their immediate families; and other parties that can significantly influence the management or operating policies of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
| 7 |
Concentrations of Credit Risk
The Company’s accounts receivable are primarily receivables from oil and natural gas purchasers and joint interest owners. The purchasers of the Company’s oil and natural gas production consist primarily of independent marketers, major oil and natural gas companies and gas pipeline companies. Historically, the Company has not experienced any significant losses from uncollectible accounts from its oil and natural gas purchasers. The Company operates a substantial portion of its oil and natural gas properties. As the operator of a property, the Company makes full payments for costs associated with the property and seeks reimbursement from the other working interest owners in the property for their share of those costs. Joint operating agreements govern the operations of an oil or natural gas well and, in most instances, provide for offsetting of amounts payable or receivable between the Company and its joint interest owners. The Company’s joint interest partners consist primarily of independent oil and natural gas producers. If the oil and natural gas exploration and production industry in general was adversely affected, the ability of the Company’s joint interest partners to reimburse the Company could be adversely affected.
Recently Adopted Accounting Standards
The FASB periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. The Company has reviewed the recently issued pronouncements and concluded that the following new accounting standards are applicable:
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in this ASU affect entities that issue convertible instruments and/or contracts in an entity’s own equity. The amendments in this ASU primarily affect convertible instruments issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed. However, all entities that issue convertible instruments are affected by the amendments to the disclosure requirements of this ASU. For contracts in an entity’s own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted for as derivatives under the current guidance because of failure to meet the settlement conditions of the derivatives scope exception related to certain requirements of the settlement assessment. Also affected is the assessment of whether an embedded conversion feature in a convertible instrument qualifies for the derivatives scope exception. Additionally, the amendments in this ASU affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. The amendments in this ASU are effective for public business entities, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Board specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The Board decided to allow entities to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Company has adopted this standard for the current year and does not expect it to have a material impact on our consolidated financial statements.
Note 3 – Property
The Company follows the successful efforts method of accounting for its oil and natural gas activities. Under this method, costs to acquire oil and natural gas properties and costs incurred to drill and equip development and exploratory wells are deferred until exploration and completion results are evaluated. Exploration drilling costs are expensed if recoverable reserves are not found. Upon sale or retirement of oil and natural gas properties, the costs and related accumulated depreciation, depletion and amortization are eliminated from the accounts and the resulting gain or loss is recognized.
Costs incurred to maintain wells and related equipment and lease and well operating costs are charged to expense as incurred.
Depletion is calculated on a units-of-production basis at the field level based on total proved developed reserves.
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, 2024.
| 8 |
Aggregate capitalized costs of oil and natural gas properties are as follows:
| March 31, 2024 | December 31, 2023 | |||||||
| Proved properties | $ | $ | ||||||
| Unproved properties | ||||||||
| Work in process | ||||||||
| Gross capitalized costs | ||||||||
| Depreciation, 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, 2024 and 2023 was approximately $
The Company completed four wells in North Dakota related to our Starbuck Drilling program during the first quarter of 2024.
Other property and equipment consists of operating lease assets, vehicles, office furniture, and equipment with lives ranging from three to five years.
Schedule of other property plant and equipment
| March 31, 2024 | December 31, 2023 | |||||||
| Other property and equipment, at cost | $ | $ | ||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Other property and equipment, net | $ | $ | ||||||
Depreciation
expense related to other property and equipment for the three months ended March 31, 2024 and 2023 was approximately $
Note 4 - Asset Retirement Obligations
The Company’s asset retirement obligations represent the estimated present value of the estimated cash flows the Company will incur to plug, abandon, and remediate its producing properties at the end of their productive lives, in accordance with applicable state laws. Market risk premiums associated with asset retirement obligations are estimated to represent a component of the Company’s credit-adjusted risk-free rate that is utilized in the calculations of asset retirement obligations.
The Company’s asset retirement obligation activity is as follows:
| For the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Asset retirement obligations, beginning of period | $ | $ | ||||||
| Additions | ||||||||
| Liabilities settled | ( | ) | ||||||
| Revisions | ( | ) | ||||||
| Accretion expense | ||||||||
| Asset retirement obligation, end of period | $ | $ | ||||||
| Less current portion included in Accrued Expenses | ||||||||
| Asset retirement obligation, long-term | $ | $ | ||||||
The additions in 2024 primarily relate to the completion of four wells in our North Dakota Starbuck Drilling Program during the quarter.
Note 5 – Commodity Derivative Financial Instruments
The Company uses derivative financial instruments to manage its exposure to commodity price fluctuations. Commodity derivative instruments are used to reduce the effect of volatility of price changes on the oil and natural gas the Company produces and sells. The Company does not enter into derivative financial instruments for speculative or trading purposes. The Company’s derivative financial instruments consist of swaps and put options.
| 9 |
The Company does not designate its derivative instruments in such a way that would qualify for hedge accounting. Accordingly, the Company reflects changes in the fair value of its derivative instruments in its consolidated statements of operations as they occur. Unrealized gains and losses related to the contracts are recognized and recorded as changes to the derivative asset or liability on the Company’s consolidated balance sheets.
The following table summarizes the net realized and unrealized losses reported in earnings related to the commodity derivative instruments for the three months ended March 31, 2024 and 2023:
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Loss on Derivatives: | ||||||||
| Oil derivatives (a) | $ | ( | ) | $ | ( | ) | ||
________
| (a) |
The following represents the Company’s net settlements related to derivatives for the three months ended March 31, 2024 and 2023:
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Oil derivatives | $ | ( | ) | $ | ( | ) | ||
The following table sets forth the Company’s outstanding derivative contracts at March 31, 2024:
| 2nd Quarter 2024 | 3rd Quarter 2024 | 4th Quarter 2024 | ||||||||||
| WTI Fixed-Price Swaps: | ||||||||||||
| Quarterly volume (MBbls) | ||||||||||||
| Weighted-average fixed price (Bbl) | $ | $ | $ | |||||||||
Note 6 – Accounts Receivable
The following table represents the Company’s accounts receivable as of March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| Oil, Gas and NGL Receivables | $ | $ | ||||||
| Joint Interest Billings | ||||||||
| Other | ||||||||
| Total Accounts Receivable | $ | $ | ||||||
Note 7 – Accrued Expenses
The following table represents the Company’s accrued expenses as of March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| Accrued and suspended third-party revenue | $ | $ | ||||||
| Accrued salaries and payroll taxes | ||||||||
| Accrued production taxes | ||||||||
| Other | ||||||||
| $ | $ | |||||||
| 10 |
Note 8 – Debt Including Debt with Related Parties
The following table represents the Company’s outstanding debt as of March 31, 2024 and December 31, 2023:
| As of March 31, 2024 | As of December 31, 2023 | |||||||
| Equity Bank Credit Facility | $ | $ | ||||||
| Promissory Note – Related Party | ||||||||
| Note Payable – Related Party | ||||||||
| Equipment and vehicle notes, 0.00% to 9.00% interest rates, due in 2025 to 2028 with monthly payments ranging from $900 to $1,400 per month | ||||||||
| Note Payable to insurance provider, bears 7.29% interest, matures January 2025, monthly payments of principal and interest of $51,067 | ||||||||
| Total Debt | ||||||||
| Less: Current Maturities | ( | ) | ( | ) | ||||
| Less: Promissory Note – Related Party | ( | ) | ||||||
| Less: Note Payable – Related Party | ( | ) | ( | ) | ||||
| Long-Term debt | $ | $ | ||||||
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, calculated quarterly and annually based on a trailing twelve-month basis, of no more than 3.50 to 1.00. At March 31, 2024, the Borrowers were technically not in compliance with the current ratio covenant, however, the noncompliance was resolved within the applicable cure period in accordance with the Credit Facility agreement following the completion of a subscription rights offering on April 10, 2024 in which the Company received approximately $20.66 million in cash (see Note 10). The Company is in compliance with the other covenants as of March 31, 2024.
Promissory Note – Related Party
On
February 16, 2024, the Company issued a Promissory Note in the aggregate principal amount of $
The
Note matures on February 15, 2026 (the "Maturity Date”) and accrues interest at the rate of
| 11 |
date is not a business day, the next following business day) (each an "Interest Payment Date”), except upon the occurrence of an Event of Default, in which case interest will accrue and be paid in cash on demand: (i) March 31, 2024; (ii) June 30, 2024; (iii) September 30, 2024; (iv) December 31, 2024; (v) March 31, 2025; (vi) June 30, 2025; (vii) September 30, 2025; (viii) December 31, 2025; and (ix) the Maturity Date. All or any portion of the outstanding principal amount of the Note may be converted into shares of common stock of the Company at a conversion price of $6.25 per share (the "Conversion Price”), at the option of Energy Evolution, at any time and from time to time. If the full principal amount of the Note is drawn and converted into shares of common stock of the Company, 800,000 shares would be issued (without giving effect to any interest that may be converted). Accrued interest on the principal amount converted will be due on the applicable date of conversion in cash or, at the option of Energy Evolution, by issuance of shares of common stock of the Company in the manner set forth in the Note (where the date of conversion is the relevant Interest Payment Date”). The Conversion Price is subject to customary adjustments. The Note may be prepaid at any time or from time to time without the consent of Energy Evolution and without penalty or premium, provided that the Company provides Energy Evolution with at least five business days prior written notice, each principal payment is made in cash and all accrued interest is paid in cash, or at the option of Energy Evolution, the accrued interest may be paid by issuance of shares of common stock of the Company in the manner set forth in the Note (where the Interest Payment Date is the date of prepayment).
The Company determined that an embedded conversion feature included in the Promissory Note required bifurcation from the host contract that is recognized as a separate derivative liability carried at fair value. The estimated fair value of the derivative liability, which represents a Level 3 valuation, was $1,292,000 as of March 31, 2024 and was determined using a binomial lattice model using certain assumptions and inputs discussed in Note 2. Accordingly, the Company has recognized a gain on the fair value adjustment of the derivative liability in the amount of approximately $738,000 in Other Income (Expense) in the Condensed Consolidated Statements of Operations for the quarter ended March 31, 2024. All of the other embedded features of the Note were clearly and closely related to the debt host and did not require bifurcation as a derivative liability.
Note Payable – Related Party
In
August 2020, the Company, through its wholly owned subsidiary, Empire Texas, entered into a joint development agreement (the "JDA”)
with Petroleum & Independent Exploration, LLC and related entities ("PIE”), a related party (see Note 14), dated August
1, 2020. Under the terms of the JDA, PIE will perform recompletion or workover on specified mutually agreed upon wells ("Workover
Wells”) owned by Empire Texas. Concurrent with the JDA with PIE, the Company entered into a term loan agreement
dated August 1, 2020, whereby PIE will loan up to $
Note 9 - Leases
As a lessee, the Company leases its corporate office headquarters in Tulsa, Oklahoma and one field office. The leases expire between 2024 and 2028. The corporate office has an option to renew for an additional five-year term. The option to renew the lease is generally not considered reasonably certain to be exercised. Therefore, the period covered by such optional period is not included in the determination of the term of the lease and the lease payments during these periods are similarly excluded from the calculation of right-of-use lease asset and lease liability balances.
The Company also leases vehicles primarily used in our field operations. These vehicle leases typically have a three-year life.
The Company recognizes right-of use lease expense on a straight-line basis, except for certain variable expenses that are recognized when the variability is resolved, typically during the period in which they are paid. Variable right-of-use lease payments typically include charges for property taxes, insurance, and variable payments related to non-lease components, including common area maintenance.
Right-of-use
lease expense was approximately $
Supplemental balance sheet information related to the right-of-use leases is as follows:
Schedule of right of use leases
| March 31, 2024 | December 31, 2023 | |||||||
| 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 | $ | $ | ||||||
| 12 |
The
weighted-average remaining term for the Company’s right-of-use leases is years. The weighted-average discount rate was
| 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 200,000,000, 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 Board of Directors and the directors also have the ability to fix dividend rates and rights, liquidation preferences, voting rights, conversion rights, rights and terms of redemption and other rights, preferences, privileges and restrictions as determined by the Board of Directors, subject to certain limitations set forth in the Charter.
Series A Voting Preferred Stock
On March 8, 2022, the Company formalized the issuance of preferred stock as was required under the terms of the Company's May 2021 financing agreements with Energy Evolution 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 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.
| 13 |
The
Series A Voting Preferred Stock is not redeemable at the Company’s election or the election of any holder, except the Company may
elect to redeem the
| • | 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.
The holders of shares of common stock are entitled to one vote per share for all matters on which common stockholders are authorized to vote on. Examples of matters that common stockholders are entitled to vote on include, but are not limited to, election of three of the six directors and other common voting situations afforded to common stockholders.
In April 2024, the Company completed a subscription rights offering (“Rights Offering”) which raised gross proceeds of $20.66 million. The Company 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 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.
Earnings Per Share
The computation of diluted shares outstanding for the three months ended March 31, 2024 excluded shares related to stock options, warrants, outstanding RSUs, and convertible debt as their effect would have been anti-dilutive. The computation of diluted shares outstanding for the three months ended March 31, 2023 excluded shares related to stock options, warrants, and outstanding RSUs, as their effect would have been anti-dilutive.
The Company recognizes stock-based compensation expense associated with granted stock options and restricted stock units (RSUs). The Company accounts for forfeitures of equity-based incentive awards as they occur. Stock-based compensation expense related to time-based restricted stock units is based on the price of the common stock on the grant date and recognized as vesting occurs. For options, the fair value is determined using the Black-Scholes option valuation assumptions on dividend yield, expected annual volatility, risk-free interest rate and an expected useful life. Stock-based compensation is recorded with a corresponding increase in Additional Paid-in Capital within the Condensed Consolidated Balance Sheets.
The following summary reflects nonvested restricted stock unit activity and related information for the three months ended March 31, 2024.
Schedule of non vested restricted stock unit activity
| Weighted Average | ||||||||
| RSUs | Fair Value (a) | |||||||
| Outstanding, December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Outstanding, March 31, 2024 | $ | |||||||
| (a) Shares are valued at the grant-date market price. | ||||||||
| 14 |
| Weighted Average | ||||||||
| Options | Exercise Price | |||||||
| Outstanding, December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Exercised | ( | ) | ||||||
| Cancelled | ||||||||
| Outstanding, March 31, 2024 | $ | |||||||
The following table summarizes information about stock options outstanding as of March 31, 2024.
| Range of | Options | Weighted Average | Weighted | Options | Weighted | |||||
| Exercise | Outstanding | Remaining | Average | Exercisable | Average | |||||
| Prices | at 3/31/24 | Contractual Life | Exercise Price | at 3/31/24 | Exercise Price | |||||
| $ to $ | years | $ |
$ |
Note 12 – Executive Separations
On
March 16, 2023, Thomas W. Pritchard resigned as Chief Executive Officer and a director of the Company to pursue other opportunities.
Although not required under Mr. Pritchard’s Employment Agreement with the Company, in recognition of Mr. Pritchard’s past
service to the Company, the Company will pay Mr. Pritchard severance benefits in the amount of approximately $
On March 17, 2023, the Board of Directors appointed Michael R. Morrisett to the position of Chief Executive Officer. Mr. Morrisett did not receive any additional compensation for assuming the role of Chief Executive Officer.
Note 13 – Income Taxes
For
all periods presented, the Company’s effective tax rate is
Schedule of reconciliation of effective income tax rate
| For the Three Months Ended March 31, | ||||||
| 2024 | 2023 | |||||
| $ | % | $ | % | |||
| Provision (benefit) at statutory rate | ( |
( |
||||
| State Taxes (net of federal impact) | ( |
( |
||||
| Nondeductible Expenses | |
- |
( |
|||
| Stock Options Exercised | ( |
|||||
| Valuation Allowance | |
- |
|
- | ||
| Income tax provision (benefit) | ||||||
Note 14 – Related Party Transactions
Energy
Evolution is a related party of the Company as it beneficially owns approximately
| 15 |
approximately
30.1% of the Company’s outstanding shares. Additionally, a board member of Energy Evolution was appointed to the Company’s
board in October 2021. This board member separately beneficially owns approximately
The
Company has a JDA with PIE to perform completions or workovers on specified mutually agreed upon wells (see Note 8). As of March 31,
2024, the Company has incurred obligations of approximately $
On February 16, 2024, the Company issued a Promissory Note in the aggregate principal amount of $5,000,000 (the "Note”) to Energy Evolution (see Note 8). As of March 31, 2024, Energy Evolution has advanced the Company $5,000,000 under the Note.
Accounts
receivable on the Condensed Consolidated Balance Sheet includes approximately $
Note 15 – Commitments and Contingencies
From time to time, the Company is subject to various legal proceedings arising in the ordinary course of business, including proceedings for which the Company may not have insurance coverage. While many of these matters involve inherent uncertainty, as of the date hereof, the Company does not currently believe that any such legal proceedings will have a material adverse effect on the Company’s business, financial position, results of operations or liquidity.
The Company is subject to extensive federal, state, and local environmental laws and regulations. These laws, among other things, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Management believes no materially significant liabilities of this nature existed as of the balance sheet date.
Agreed Compliance Order
In January 2024, the Company deposited $1 million into an escrow account in accordance with an Agreed Compliance Order (“ACO”) with the New Mexico Oil Conservation Division (“OCD”) for compliance work on certain inactive wells in New Mexico. Under the terms of the ACO, the escrow funds will be returned to the Company at a rate of $10,000 for each well as the compliance work is completed. In February 2024, $550,000 of the escrow funds were returned to the Company following the completion of work on 55 wells. As of March 31, 2024, the remaining escrow balance of $450,000 is included in other noncurrent assets in the Condensed Consolidated Balance Sheet. In April 2024, we completed work on an additional 25 wells and expect to receive $250,000 from the escrow account in the second quarter of 2024.
| 16 |
| Item 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q, including this section, includes certain statements that may be deemed “forward-looking statements” within the meaning of federal securities laws. All statements, other than statements of historical facts, which address activities, events, or developments that the Company expects, believes, or anticipates will or may occur in the future, including future sources of financing and other possible business developments, are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties and could be affected by a number of distinct factors, including the Company’s failure to secure short and long-term financing necessary to sustain and grow its operations, increased competition, changes in the markets in which the Company participates and the technology utilized by the Company and new legislation regarding environmental matters. These risks and other risks that could affect the Company's business are more fully described in reports the Company files with the SEC, including its Annual Report on Form 10-K for the year ended December 31, 2023. Actual results may vary materially from the forward-looking statements. The Company undertakes no duty to update any of the forward-looking statements in this Form 10-Q.
Overview
Our primary business is the optimization and development of oil and gas interests. In 2022 we had net income from operations but have incurred losses from operations in 2023 and 2024 and in years prior to 2022. There is no assurance that we will be profitable or obtain funds necessary to finance our future operations.
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.
Business Strategy
Our business strategy is to obtain long-term growth in reserves and cash flow on a cost-effective basis. Management regularly evaluates potential acquisitions of properties that would enhance current core areas of operation.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to use judgment to make estimates and assumptions that affect certain amounts reported in the consolidated financial statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts reported in the future. Critical accounting policies are those accounting policies that involve judgment and uncertainties affecting the application of those policies and the likelihood that materially different amounts would be reported under different conditions or using differing assumptions. Management periodically updates the estimates used in the preparation of the financial statements based on management’s latest assessment of the current and projected business and general economic environment. There have been no significant changes to the Company’s critical accounting policies during the three months ended March 31, 2024.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company’s primary sources of short-term liquidity are cash and cash equivalents, net cash provided by operating activities, and issuance of debt or equity securities. The Company’s short- and long-term liquidity requirements consist primarily of capital expenditures, acquisitions of oil and natural gas properties, payments of contractual obligations, and working capital obligations. Funding for these requirements may be provided by any combination of the Company’s sources of liquidity. Although the Company expects that its sources of funding will be adequate to fund its liquidity requirements, no assurance can be given that such funding sources will be adequate to meet the Company’s future needs.
| 17 |
Liquidity
As of March 31, 2024, the Company had approximately $3.5 million of cash on hand and approximately $1.1 million available on its Credit Facility. For additional information regarding the Credit Facility, see Note 8 to the Condensed Consolidated Financial Statements included in this report.
The Company expects to incur costs related to drilling activities in core areas as well as future oil and natural gas acquisitions in core areas. As of March 31, 2024, the Company has incurred approximately $25 million of cumulative costs related to the drilling program in the Starbuck field of North Dakota. It is expected that the Company will use a combination of debt or equity issuances, cash on hand, and cash flows from operations to fund capital programs, ongoing operations, and any potential acquisitions.
Working Capital
Working capital (presented below) decreased by approximately $6.9 million between December 31, 2023 and March 31, 2024. This change was primarily driven by payables related to the Starbuck Drilling Program and a lower cash balance at March 31, 2024.
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Current Assets | $ | 13,829,486 | $ | 18,744,904 | ||||
| Current Liabilities | 27,048,226 | 25,049,572 | ||||||
| Working Capital | $ | (13,218,740 | ) | $ | (6,304,668 | ) | ||
Cash Flows
| Three Months Ended March 31, | ||||||||||||
| Cash Flows Provided By (Used In): | 2024 | 2023 | Variance | |||||||||
| Operating Activities | $ | 3,907,689 | $ | (5,066,714 | ) | $ | 8,974,403 | |||||
| Investing Activities | (17,097,134 | ) | 455,281 | (17,552,415 | ) | |||||||
| Financing Activities | 8,888,402 | (569,136 | ) | 9,457,538 | ||||||||
Cash Flows from Operating Activities
The impact of higher commodity prices and lower general and administrative expenses during the first quarter of 2024 contributed to the increase in cash flows from operating activities. General and administrative expense in 2023 included $360,000 of severance paid to the Company’s former CEO.
Cash Flows from Investing Activities
Cash flows from investing activities in the first quarter of 2024 includes approximately $17 million of additions to oil and gas properties primarily due to the development of our operations in North Dakota.
Cash Flows from Financing Activities
Cash flows from financing activities for the first quarter of 2024 includes $5 million from a promissory note issued to the Company by a related party and approximately $4 million borrowed on the Company’s Credit Facility (see Note 8).
Capital Resources
Capital Expenditures
For the three months ended March 31, 2024, the Company incurred approximately $13.4 million of additions to oil and natural gas properties which primarily reflects continued drilling and completions activity in North Dakota. As previously discussed, the Company began a capital program in the third quarter of 2023 in North Dakota.
| 18 |
Production and Operating Data
The following table sets forth a summary of the Company’s production and operating data for the three months ended March 31, 2024 and 2023. Because of normal production declines, increased or decreased production due to future acquisitions, divestitures, and development, and fluctuations in commodity prices, the historical information presented below should not be interpreted as being indicative of future results.
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Production and Operating Data: | ||||||||
| Net Production Volumes: | ||||||||
| Oil (Bbl) | 130,760 | 120,257 | ||||||
| Natural Gas (Mcf) | 211,820 | 231,218 | ||||||
| Natural Gas Liquids (Bbl) | 34,785 | 39,756 | ||||||
| Total (Boe) | 200,848 | 198,549 | ||||||
| Average Price per Unit: | ||||||||
| Oil (Bbl) | $ | 72.21 | $ | 74.33 | ||||
| Natural Gas (Mcf) | $ | 1.78 | $ | 2.84 | ||||
| Natural Gas Liquids (Bbl) | $ | 11.97 | $ | 12.70 | ||||
| Total (Boe) | $ | 50.96 | $ | 50.87 | ||||
| Operating Costs and Expenses per Boe: | ||||||||
| Lease Operating Expense | $ | 36.78 | $ | 32.84 | ||||
| Production and Ad Valorem Taxes | $ | 4.15 | $ | 3.82 | ||||
| Depreciation, Depletion, Amortization and Accretion | $ | 9.84 | $ | 5.16 | ||||
| General and Administrative Expense: | ||||||||
| General and Administrative Expense | $ | 14.33 | $ | 15.23 | ||||
| Stock-Based Compensation | $ | 3.54 | $ | 4.78 | ||||
| Total General and Administrative Expense | $ | 17.87 | $ | 20.01 | ||||
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.
| 19 |
Three Months Ended March 31, 2024 and 2023
Results of Operations
The following table reflects the Company’s summary operating information. Because of normal production declines, increased or decreased drilling activity and the effects of acquisitions, the historical information presented below should not be interpreted as indicative of future results.
| Three Months Ended March 31, | ||||||||||||||||
| 2024 | 2023 | Variance | Variance % | |||||||||||||
| Oil Revenues | $ | 9,441,964 | $ | 8,938,715 | $ | 503,249 | 6% | |||||||||
| Natural Gas Revenues | 377,130 | 656,035 | (278,905 | ) | -43% | |||||||||||
| NGL Revenues | 416,211 | 504,954 | (88,743 | ) | -18% | |||||||||||
| Total Product Revenues | 10,235,305 | 10,099,704 | ||||||||||||||
| Lease Operating Expense (Including Workovers) | 7,387,423 | 6,520,163 | 867,260 | 13% | ||||||||||||
| Production and Ad Valorem Taxes | 833,447 | 758,114 | 75,333 | 10% | ||||||||||||
| Depreciation, Depletion, Amortization and Accretion | 1,975,479 | 1,023,764 | 951,715 | 93% | ||||||||||||
| General and Administrative Expense: | ||||||||||||||||
| General and Administrative Expense | 2,879,037 | 3,023,279 | (144,242 | ) | -5% | |||||||||||
| Stock-based Compensation | 710,002 | 949,639 | (239,637 | ) | -25% | |||||||||||
| Total General and Administrative Expense | 3,589,039 | 3,972,918 | (383,879 | ) | -10% | |||||||||||
| Interest Expense | 315,049 | 237,299 | 77,750 | 33% | ||||||||||||
| Operating Income (Loss) | (4,398,147 | ) | (2,222,714 | ) | (2,175,433 | ) | NM | |||||||||
| Net Income (Loss) | (3,975,196 | ) | (2,459,591 | ) | (1,515,605 | ) | NM | |||||||||
NM: A percentage calculation is not meaningful due to change in signs, a zero-value denominator or a percentage change that is greater than 200.
Revenues
Revenues for the three months ended March 31, 2024 increased over the same period as the prior year primarily due to higher oil sales volumes despite a decrease in realized prices.
Net oil sales volumes were approximately 131,000 Bbls for the three months ended March 31, 2024, an increase of approximately 9% over the same period in the prior year. Oil volumes in first-quarter 2024 increased primarily due to new wells completed in North Dakota during the period.
Realized oil prices for the three months ended March 31, 2024 were approximately $72.21 per barrel, while realized prices for the same period in the prior year were approximately $74.33 per barrel, a decrease in price of approximately 3%.
Realized natural gas prices for the three months ended March 31, 2024 were approximately $1.78 per mcf, while realized prices for the same period in the prior year were approximately $2.84 per mcf, a decrease in price of approximately 37%.
Realized NGL prices for the three months ended March 31, 2024 were approximately $11.97 per barrel, while realized prices for the same period in the prior year were approximately $12.70 per barrel, a decrease in price of approximately 6%.
Lease Operating Expense and Production Taxes
Lease operating expense was higher in 2024 due in part to higher power and fuel costs, higher contract labor and an increase in employee headcount in first-quarter 2024 compared to first-quarter 2023. Lease operating expense includes approximately $2.0 million workover expense for the three months ended March 31, 2024 as compared to $2.7 million for the same period in 2023. The higher workover expense in 2023 was primarily in New Mexico as the Company continued to work over wells in the region to enhance production.
Production taxes were higher for the first quarter of 2024 compared to the same period in 2023 as a result of the higher product revenues discussed above.
| 20 |
Depreciation, Depletion, Amortization and Accretion
DD&A was higher in the first quarter of 2024 compared to the same period in 2023 due in part to the increase in production and the impact of higher capitalized costs associated with the new drilling activity in North Dakota.
General and Administrative Expense
General and administrative expense, excluding stock-based compensation, decreased in 2024 compared to 2023 primarily due to the $360,000 of severance expense for the former CEO in first quarter of 2023 (see Note 12) despite an increase in salaries and benefits period over period associated with an increase in employee headcount.
Stock-based Compensation
The Company utilizes stock-based compensation to compensate the Board, members of management, and retain talented personnel. The Company anticipates stock-based compensation to continue to be utilized in 2024 and beyond to attract and retain talented personnel and compensate Board members and consultants.
Interest Expense
Cash-based interest expense was higher for the first quarter of 2024 compared to the same period in 2023 primarily due to the increase in the outstanding amount under the Company’s Credit Facility.
| 21 |
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and participation of the Company’s Principal Executive Officer and 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 Securities Exchange Act Rule 13a-15(e). Based on this evaluation, the Company’s Principal Executive Officer and 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 Securities 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 and 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, there were no changes to our internal control over financial reporting during the three months ended March 31, 2024, which were identified in connection with the evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. It is management’s expectation that the Company will implement enhanced controls throughout 2024 with additional controls implemented as they are identified by management. Management will continue to diligently and rigorously review the financial reporting controls and procedures on an ongoing basis.
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.
| 22 |
PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings |
For information regarding legal proceedings, see Note 15 of the Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
| Item 1A. | Risk Factors |
Not applicable.
| Item 2. | Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities |
None.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Mine Safety Disclosures |
Not applicable.
| Item 5. | Other Information |
The Company was not informed by any of its directors or Section 16 officers of the adoption or termination of a "Rule 10b5-1 trading arrangement” or "non-Rule 10b5-1 trading arrangement,” as those terms are defined in Item 408 of Regulation S-K, during the first quarter of 2024.
As previously reported, on March 12, 2024, Stephen L. Faulkner, Jr. (Larry) informed the Company that he was resigning as Chief Financial Officer and Chief Accounting Officer of the Company effective on March 28, 2024. The Company has engaged outside consultants to assist the Company’s Controller while the Company remains in a search process to identify Mr. Faulkner’s successor. Also as previously reported, on May 10, 2024, the Board of Directors of the Company appointed Michael R. Morrisett, the Company’s President and Chief Executive Officer, to temporarily serve as the Company’s principal financial officer until the Company hires a replacement principal financial officer.
| Item 6. | Exhibits |
| 10.1 |
| |
| 31.1 |
| |
| 31.2 | Rule 13a - 14 (a)/15(d) - 14(a) Certification of Michael R. Morrisett, Chief Executive Officer (principal financial officer) (submitted herewith). | |
| 32.1 | Section 1350 Certification of Michael R. Morrisett, Chief Executive Officer (submitted herewith).
| |
| 32.2 |
| |
| 101 | Financial Statements for Inline XBRL format (submitted herewith). | |
| 104 | Cover Page Interactive Data File (embedded within Inline XBRL document). | |
| 23 |
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 15, 2024 | By: | /s/ Michael R. Morrisett | |
| Michael R. Morrisett | |||
| Chief Executive Officer and President | |||
| (Principal Executive Officer and Principal Financial Officer) | |||
24
Exhibit 31.1
CERTIFICATION
I, Michael R. Morrisett, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Empire Petroleum Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
May 15, 2024 |
/s/ Michael R. Morrisett | |
| Michael
R. Morrisett President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Michael R. Morrisett, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Empire Petroleum Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d)
| Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| May 15, 2024 | /s/ Michael R. Morrisett | |
| Michael R. Morrisett President and Chief Executive Officer (principal financial officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Empire Petroleum Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael R. Morrisett, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| May 15, 2024 | /s/ Michael R. Morrisett | |
| Michael R. Morrisett President and Chief Executive Officer |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Report and shall not be considered filed as part of the Report.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Empire Petroleum Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael R. Morrisett, President and Chief Executive Officer (principal financial officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| May 15, 2024 | /s/ Michael R. Morrisett | |
Michael R. Morrisett (principal financial officer) |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Report and shall not be considered filed as part of the Report.