UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
_________________
| (Mark One) |
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
For the quarterly period ended: |
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
For the transition period from: ____________to ____________ |
_____________________
EMPIRE PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
_____________________
| 001-16653 | 73-1238709 | |
(State or Other Jurisdiction of Incorporation or Organization) | (Commission File Number) | (I.R.S. Employer Identification No.) |
2200 South Utica Place, Suite 150Tulsa, OK74114 | ||
| (Address of principal executive offices)(Zip Code) | ||
(539) (539) 444-8002
(Registrant’s telephone number, including area code)
(Former name or former address and former fiscal year, if changed since last report)
_________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| None | EMPR | None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒þ No ☐£
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒þ No ☐£
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting"emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Non-accelerated filer ☒ | Smaller reporting company ☒ | |
| Emerging growth company ☐ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
-1-
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the registrant's common stock, $0.001 par value, outstanding as of SeptemberJune 30, 20202021 was 24,892,277..
-2-
EMPIRE PETROLEUM CORPORATION
INDEX TO FORM 10-Q
| PART I. | FINANCIAL INFORMATION | Page |
| Item 1. | Condensed Consolidated Financial Statements (Unaudited) | |
Condensed Consolidated Balance Sheets at | 4 | |
| Condensed Consolidated Statements of Operations – For the three and | 5 | |
Condensed Consolidated Statements of Changes in Stockholders' Deficit – For the | 6 | |
| Condensed Consolidated Statements of Cash Flows – For the | 7 | |
| Notes to Unaudited Condensed Consolidated Financial Statements | ||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 3. | Quantitative and Qualitative Disclosures About Market | |
| Item 4. | Controls and Procedures | |
| PART II. | OTHER INFORMATION | |
| Item 1. | Legal Proceedings | 24 |
| Item 1A. | Risk Factors | 24 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 24 |
| Item 3. | Defaults Upon Senior Securities | 24 |
| Item 4. | Mine Safety Disclosures | 24 |
| Item 5. | Other Information | 24 |
| Item 6. | Exhibits | 24 |
| Signatures | ||
-3-
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
EMPIRE PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2020 | December 31, 2019 | |||||||
| (UNAUDITED) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 134,374 | $ | — | ||||
| Accounts Receivable | 1,047,092 | 982,814 | ||||||
| Unrealized Gain on Derivative Instruments | 456,447 | — | ||||||
| Acquisition Deposit Receivable (see Note 4) | 50,000 | — | ||||||
| Inventory | 588,648 | 476,305 | ||||||
| Prepaids | 218,015 | 129,541 | ||||||
| Total Current Assets | 2,494,576 | 1,588,660 | ||||||
| Property and equipment: | ||||||||
| Oil and Natural Gas Properties, Successful Efforts | 24,678,466 | 12,660,457 | ||||||
| Less: Accumulated Depreciation, Depletion and Impairment | (5,172,137 | ) | (3,365,340 | ) | ||||
| 19,506,329 | 9,295,117 | |||||||
| Other Property and Equipment, net of $4,184 and $1,830 Accumulated Depreciation, respectively | 10,272 | 12,626 | ||||||
| Total Property and Equipment, net | 19,516,601 | 9,307,743 | ||||||
| Utility and Other Deposits | 747,739 | 118,177 | ||||||
| Total Assets | $ | 22,758,916 | $ | 11,014,580 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable | $ | 1,536,484 | $ | 1,025,585 | ||||
| Accrued Expenses | 2,262,844 | 1,103,916 | ||||||
| Unrealized Loss on Derivative Instruments | — | 11,861 | ||||||
| Current Portion of Long-term Notes Payable | 8,835,358 | 96,704 | ||||||
| Total Current Liabilities | 12,634,686 | 2,238,066 | ||||||
| Long Term Portion of Unrealized Loss on Derivative Instruments | — | 211,771 | ||||||
| Long-Term Notes Payable | 141,384 | 7,715,118 | ||||||
| Contingent Payments (see Note 5) | 985,820 | — | ||||||
| Asset Retirement Obligations | 15,928,473 | 5,788,280 | ||||||
| Total Liabilities | 29,690,363 | 15,953,235 | ||||||
| Stockholders' Deficit: | ||||||||
| Common Stock - $.001 Par Value 150,000,000 Shares Authorized, | ||||||||
| 24,892,277 and 20,367,277 Shares Issued and Outstanding, Respectively | 24,892 | 20,367 | ||||||
| Additional Paid-in Capital | 19,853,151 | 18,823,926 | ||||||
| Accumulated Deficit | (26,809,490 | ) | (23,782,948 | ) | ||||
| Total Stockholders' Deficit | (6,931,447 | ) | (4,938,655 | ) | ||||
| Total Liabilities and Stockholders' Deficit | $ | 22,758,916 | $ | 11,014,580 | ||||
See accompanying notes to unaudited consolidated financial statements
-4-
EMPIRE PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenue: | ||||||||||||||||
| Oil and Gas Sales | $ | 1,645,403 | $ | 1,695,264 | $ | 3,954,332 | $ | 4,016,232 | ||||||||
| Net realized and unrealized Gain (Loss) on Derivatives | (103,166 | ) | 492,862 | 2,003,505 | 925,231 | |||||||||||
| Total Revenue | 1,542,237 | 2,188,126 | 5,957,837 | 4,941,463 | ||||||||||||
| Costs and Expenses: | ||||||||||||||||
| Operating | 1,286,598 | 1,577,437 | 3,476,088 | 2,971,308 | ||||||||||||
| Taxes - Production | 88,630 | 109,878 | 233,158 | 259,351 | ||||||||||||
| Depletion, Depreciation & Amortization | 254,114 | 769,372 | 1,008,699 | 1,649,578 | ||||||||||||
| Impairment of Oil and Natural Gas Properties | — | — | 800,452 | — | ||||||||||||
| Accretion of Asset Retirement Obligation | 275,713 | 63,255 | 631,710 | 133,082 | ||||||||||||
| General and Administrative | 1,278,667 | 469,792 | 3,722,057 | 3,126,403 | ||||||||||||
| Total Cost and Expenses | 3,183,722 | 2,989,734 | 9,872,164 | 8,139,722 | ||||||||||||
| Operating Loss | (1,641,485 | ) | (801,608 | ) | (3,914,327 | ) | (3,198,259 | ) | ||||||||
| Other Income and (Expense): | ||||||||||||||||
| Gain on Sale of Assets | 125,000 | — | 1,268,760 | — | ||||||||||||
| Interest Expense | (124,887 | ) | (145,345 | ) | (380,975 | ) | (342,256 | ) | ||||||||
| Net Loss | $ | (1,641,372 | ) | $ | (946,953 | ) | $ | (3,026,542 | ) | $ | (3,540,515 | ) | ||||
| Net Loss per Common Share, Basic & Diluted | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.14 | ) | $ | (0.19 | ) | ||||
| Weighted Average Number of Common Shares Outstanding, | ||||||||||||||||
| Basic & Diluted | 23,469,200 | 19,867,277 | 21,971,947 | 19,020,236 | ||||||||||||
June 30, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 1,016,877 | $ | 157,695 | ||||
| Accounts Receivable | 3,600,234 | 1,251,634 | ||||||
| Oil Inventory | 1,690,674 | 531,309 | ||||||
| Prepaids | 191,839 | 281,895 | ||||||
| Total Current Assets | 6,499,624 | 2,222,533 | ||||||
| Property and equipment: | ||||||||
| Oil and Natural Gas Properties, Successful Efforts | 44,967,979 | 22,711,445 | ||||||
| Less: Accumulated Depreciation, Depletion and Impairment | (15,880,231 | ) | (15,148,444 | ) | ||||
| Oil and natural gas properties, successful efforts, net | 29,087,748 | 7,563,001 | ||||||
| Other Property and Equipment, net | 1,245,715 | 662,017 | ||||||
| Total Property and Equipment, net | 30,333,463 | 8,225,018 | ||||||
| Investment in Related Party | 1,250,000 | — | ||||||
| Sinking Fund (Note 7) | 3,850,000 | — | ||||||
| Other Assets | 1,156,642 | 802,050 | ||||||
| Total Assets | $ | 43,089,729 | $ | 11,249,601 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable | $ | 2,363,312 | $ | 1,937,743 | ||||
| Accrued Expenses | 3,712,549 | 2,697,831 | ||||||
| Unrealized Loss on Oil and Natural Gas Derivatives | 187,474 | 5,749 | ||||||
| Embedded Conversion Option | 6,126,961 | — | ||||||
| Contingent Payment (see Note 6) | — | 40,000 | ||||||
| Current Portion of Lease Liability | 145,433 | 89,769 | ||||||
| Notes Payable to Related Party, net of discount | 5,614,789 | — | ||||||
| Current Portion of Long-term Notes Payable, net of discount | 1,526,404 | 1,301,618 | ||||||
| Total Current Liabilities | 19,676,922 | 6,072,710 | ||||||
| Long-Term Notes Payable | 8,443,407 | 7,719,703 | ||||||
| Long Term Lease Liability | 684,426 | 534,009 | ||||||
| Asset Retirement Obligations | 20,488,906 | 15,364,217 | ||||||
| Total Liabilities | 49,293,661 | 29,690,639 | ||||||
| Commitments and Contingencies (Note 16) | ||||||||
| Stockholders' Deficit: | ||||||||
| Common Stock - $ Par Value Shares Authorized, | ||||||||
| and Shares Issued and Outstanding, Respectively | 65,661 | 24,892 | ||||||
| Common Stock Subscribed | — | — | ||||||
| Additional Paid-in Capital | 40,617,930 | 22,152,451 | ||||||
| Accumulated Deficit | (46,887,523 | ) | (40,618,381 | ) | ||||
| Total Stockholders' Deficit | (6,203,932 | ) | (18,441,038 | ) | ||||
| Total Liabilities and Stockholders' Deficit | $ | 43,089,729 | $ | 11,249,601 | ||||
See accompanying notes to unaudited consolidated financial statements
-5-
EMPIRE PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Nine Months Ended September 30, 2020 and 2019
(UNAUDITED)
| Additional | ||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | ||||||||||||||||||
| Shares | Par Value | Capital | Deficit | Total | ||||||||||||||||
| Balances, December 31, 2019 | 20,367,277 | $ | 20,367 | $ | 18,823,926 | $ | (23,782,948 | ) | $ | (4,938,655 | ) | |||||||||
| Net Income | — | — | — | 1,588,015 | 1,588,015 | |||||||||||||||
| Shares, Options, Warrants | ||||||||||||||||||||
| and Conversion Features Issued | 1,025,000 | 1,025 | 101,475 | — | 102,500 | |||||||||||||||
| Balances, March 31, 2020 | 21,392,277 | $ | 21,392 | $ | 18,925,401 | $ | (22,194,933 | ) | $ | (3,248,140 | ) | |||||||||
| Net Loss | — | — | — | (2,973,185 | ) | (2,973,185 | ) | |||||||||||||
| Shares, Options, Warrants | ||||||||||||||||||||
| and Conversion Features Issued | — | — | 406,250 | — | 406,250 | |||||||||||||||
| Balances, June 30, 2020 | 21,392,277 | 21,392 | 19,331,651 | (25,168,118 | ) | (5,815,075 | ) | |||||||||||||
| Net Loss | — | — | — | (1,641,372 | ) | (1,641,372 | ) | |||||||||||||
| Shares, Options, Warrants | ||||||||||||||||||||
| and Conversion Features Issued | 3,500,000 | 3,500 | 521,500 | — | 525,000 | |||||||||||||||
| Balances, September 30, 2020 | 24,892,277 | $ | 24,892 | $ | 19,853,151 | $ | (26,809,490 | ) | $ | (6,931,447 | ) | |||||||||
| Additional | ||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | ||||||||||||||||||
| Shares | Par Value | Capital | Deficit | Total | ||||||||||||||||
| Balances, December 31, 2018 | 17,345,609 | $ | 17,345 | $ | 16,960,818 | $ | (17,128,346 | ) | $ | (150,183 | ) | |||||||||
| Net Loss | — | — | — | (587,502 | ) | (587,502 | ) | |||||||||||||
| Shares, Options, Warrants | ||||||||||||||||||||
| and Conversion Features Issued | 1,446,668 | 1,447 | 215,553 | — | 217,000 | |||||||||||||||
| Balances, March 31, 2019 | 18,792,277 | $ | 18,792 | $ | 17,176,371 | $ | (17,715,848 | ) | $ | (520,685 | ) | |||||||||
| Net Loss | — | — | — | (2,006,060 | ) | (2,006,060 | ) | |||||||||||||
| Shares, Options, Warrants | ||||||||||||||||||||
| and Conversion Features Issued | 1,075,000 | 1,075 | 1,598,055 | — | 1,599,130 | |||||||||||||||
| Balances, June 30, 2019 | 19,867,277 | 19,867 | 18,774,426 | (19,721,908 | ) | (927,615 | ) | |||||||||||||
| Net Loss | — | — | — | (946,953 | ) | (946,953 | ) | |||||||||||||
| Balances, September 30, 2019 | 19,867,277 | $ | 19,867 | $ | 18,774,426 | $ | (20,668,861 | ) | �� | $ | (1,874,568 | ) | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements
-4-
EMPIRE PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue: | ||||||||||||||||
| Oil Sales | $ | 4,058,449 | $ | 887,901 | $ | 6,120,493 | $ | 2,174,288 | ||||||||
| Natural Gas Sales | 372,178 | 67,558 | 681,062 | 85,532 | ||||||||||||
| Natural Gas Liquids Sales | 425,480 | — | 473,392 | — | ||||||||||||
| Other Revenue | 45,357 | 39,070 | 82,975 | 49,109 | ||||||||||||
| Net Realized and Unrealized Gain (Loss) on Derivatives | (182,034 | ) | (402,374 | ) | (539,949 | ) | 2,106,671 | |||||||||
| Total Revenue | 4,719,430 | 592,155 | 6,817,973 | 4,415,600 | ||||||||||||
| Costs and Expenses: | ||||||||||||||||
| Operating | 2,312,932 | 723,535 | 3,730,942 | 2,189,490 | ||||||||||||
| Taxes - Production | 418,681 | 60,569 | 588,513 | 144,528 | ||||||||||||
| Depletion, Depreciation & Amortization | 565,333 | 486,568 | 745,873 | 754,585 | ||||||||||||
| Impairment of Oil and Natural Gas Properties | — | — | — | 800,452 | ||||||||||||
| Accretion of Asset Retirement Obligation | 270,155 | 257,043 | 554,620 | 355,997 | ||||||||||||
| General and Administrative | 3,220,101 | 1,914,406 | 4,126,149 | 2,443,390 | ||||||||||||
| Total Cost and Expenses | 6,787,202 | 3,442,121 | 9,746,097 | 6,688,442 | ||||||||||||
| Operating Loss | (2,067,772 | ) | (2,849,966 | ) | (2,928,124 | ) | (2,272,842 | ) | ||||||||
| Other Income and (Expense): | ||||||||||||||||
| Gain on Sale of Assets | — | — | — | �� | 1,143,760 | |||||||||||
| Other Expense | (435,584 | ) | — | (435,584 | ) | — | ||||||||||
| Interest Expense | (2,768,606 | ) | (123,219 | ) | (2,905,434 | ) | (256,088 | ) | ||||||||
| Net Loss | $ | (5,271,962 | ) | $ | (2,973,185 | ) | $ | (6,269,142 | ) | $ | (1,385,170 | ) | ||||
| Net Loss per Common Share, Basic & Diluted | $ | (0.09 | ) | $ | (0.14 | ) | $ | (0.14 | ) | $ | (0.07 | ) | ||||
| Weighted Average Number of Common Shares Outstanding, | ||||||||||||||||
| Basic & Diluted | 60,707,380 | 21,392,277 | 46,405,985 | 21,222,387 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
-5-
EMPIRE PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Six Months Ended September 30, 2021 and 2020
(UNAUDITED)
| Common | Additional | |||||||||||||||||||||||
| Common Stock | Stock | Paid-In | Accumulated | |||||||||||||||||||||
| Shares | Par Value | Subscribed | Capital | Deficit | Total | |||||||||||||||||||
| Balances, December 31, 2020 | 24,892,277 | $ | 24,892 | $ | — | $ | 22,152,451 | $ | (40,618,381 | ) | $ | (18,441,038 | ) | |||||||||||
| Net Loss | — | — | — | — | (997,180 | ) | (997,180 | ) | ||||||||||||||||
| Warrants Exercised | 23,628,185 | 23,628 | — | 3,325,424 | — | 3,349,052 | ||||||||||||||||||
| Issuance of Common Stock and Warrants | 8,995,458 | 8,995 | (13,000 | ) | 3,139,655 | — | 3,135,650 | |||||||||||||||||
| Balances, March 31, 2021 | 57,515,920 | 57,515 | (13,000 | ) | 28,617,530 | (41,615,561 | ) | (12,953,516 | ) | |||||||||||||||
| Net Loss | — | — | — | — | (5,271,962 | ) | (5,271,962 | ) | ||||||||||||||||
| Stock Compensation Expense | — | — | — | 406,250 | — | 406,250 | ||||||||||||||||||
| Warrants Exercised | 5,445,714 | 5,446 | 13,000 | 3,968,411 | — | 3,986,857 | ||||||||||||||||||
| Warrants Issued with Unsecured Convertible Notes | — | — | — | 544,824 | — | 544,824 | ||||||||||||||||||
| Unsecured Convertible Note Conversion | 1,200,000 | 1,200 | — | 1,498,800 | — | 1,500,000 | ||||||||||||||||||
| Right to Buy Issued with Unsecured Convertible Notes | — | — | — | 989,115 | — | 989,115 | ||||||||||||||||||
| Shares and Warrants Issued for Secured Convertible Note | 1,500,000 | 1,500 | — | 4,593,000 | — | 4,594,500 | ||||||||||||||||||
| Balances, June 30, 2021 | 65,661,634 | 65,661 | — | 40,617,930 | (46,887,523 | ) | (6,203,932 | ) | ||||||||||||||||
| Common | Additional | |||||||||||||||||||||||
| Common Stock | Stock | Paid-In | Accumulated | |||||||||||||||||||||
| Shares | Par Value | Subscribed | Capital | Deficit | Total | |||||||||||||||||||
| Balances, December 31, 2019 | 20,367,277 | $ | 20,367 | $ | — | $ | 18,823,926 | $ | (23,782,948 | ) | $ | (4,938,655 | ) | |||||||||||
| Net Income | — | — | — | — | 1,588,015 | 1,588,015 | ||||||||||||||||||
| Conversion of Convertible Notes | 1,025,000 | 1,025 | — | 101,475 | — | 102,500 | ||||||||||||||||||
| Balances, March 31, 2020 | 21,392,277 | $ | 21,392 | $ | — | $ | 18,925,401 | $ | (22,194,933 | ) | $ | (3,248,140 | ) | |||||||||||
| Net Loss | — | — | — | — | (2,973,185 | ) | (2,973,185 | ) | ||||||||||||||||
| Stock Compensation Expense | — | — | — | 406,250 | — | 406,250 | ||||||||||||||||||
| Balances, June 30, 2020 | $ | 21,392,277 | $ | 21,392 | $ | — | $ | 19,331,651 | $ | (25,168,118 | ) | $ | (5,815,075 | ) | ||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
-6-
EMPIRE PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net Loss | $ | (3,026,542 | ) | $ | (3,540,515 | ) | ||
| Adjustments to Reconcile Net Loss to Net Cash | ||||||||
| Provided by (used in) Operating Activities: | ||||||||
| Gain on Sales of Assets | (1,268,760 | ) | — | |||||
| Value of warrants and options granted | 406,250 | 1,491,630 | ||||||
| Amortization of Warrant Value and Conversion Feature on | ||||||||
| Convertible Notes | — | 4,447 | ||||||
| Amortization of Loan Issue Costs | 43,758 | 29,072 | ||||||
| Depreciation, Depletion and Amortization | 1,008,699 | 1,649,578 | ||||||
| Impairment of Oil and Natural Gas Properties | 800,452 | — | ||||||
| Accretion of Asset Retirement Obligation | 631,710 | 133,082 | ||||||
| Cash paid to Ovintiv (see Note 4) | (850,000 | ) | — | |||||
| Loss relating to Ovintiv Purchase Deposit (see Note 4) | 800,000 | — | ||||||
| Change in Operating Assets and Liabilities: | ||||||||
| Accounts Receivable | (64,278 | ) | (1,039,252 | ) | ||||
| Unrealized Gain on Derivative Instruments | (680,079 | ) | (663,350 | ) | ||||
| Inventory | 34,954 | (33,703 | ) | |||||
| Prepaids, Current | (88,474 | ) | (96,283 | ) | ||||
| Utility Deposits | (181,600 | ) | — | |||||
| Accounts Payable | 490,443 | 457,242 | ||||||
| Accrued Expenses | (26,659 | ) | 607,344 | |||||
| Net Cash Used In Operating Activities | (1,970,126 | ) | (1,000,708 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Acquisition of Oil and Natural Gas Properties | (506,000 | ) | (6,033,135 | ) | ||||
| Purchase of Other Fixed Assets | — | (14,456 | ) | |||||
| Proceeds From Sale of Oil and Natural Gas Properties | 1,309,800 | — | ||||||
| Net Cash Used in Investing Activities | 803,800 | (6,047,591 | ) | |||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from Debt Issued | 925,700 | 7,879,744 | ||||||
| Principal Payments of Debt | (150,000 | ) | (1,065,000 | ) | ||||
| Proceeds from Stock and Warrant Issuance | 525,000 | 167,000 | ||||||
| Net Cash Provided by Financing Activities | 1,300,700 | 6,981,744 | ||||||
| Net Change in Cash | 134,374 | (66,555 | ) | |||||
| Cash - Beginning of Period | — | 84,631 | ||||||
| Cash - End of Period | $ | 134,374 | $ | 18,076 | ||||
| Supplemental Cash Flow Information: | ||||||||
| Cash Paid for Interest | $ | 442,299 | $ | 316,809 | ||||
| Non-cash Investing and Financing Activities: | ||||||||
| Non-cash Additions to Asset Retirement Obligations | $ | 9,508,483 | $ | 3,400,770 | ||||
| Common Stock Issued in Exchange for Outstanding Notes Payable | $ | 102,500 | $ | 157,500 | ||||
| Purchases of oil and natural gas properties and deposits in accounts and notes payable, royalty suspense, and contingent payable to seller | $ | 2,569,863 | $ | — | ||||
| Note payable issued - PIE Agreement (see Note 8) | $ | 69,962 | $ | — | ||||
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net Loss | $ | (6,269,142 | ) | $ | (1,385,170 | ) | ||
| Adjustments to Reconcile Net Loss to Net Cash | ||||||||
| Provided by (used in) Operating Activities: | ||||||||
| Gain on Sales of Assets | — | (1,143,760 | ) | |||||
| Stock Compensation Expense | 406,250 | 406,250 | ||||||
| Right to Buy Issuance Costs | 989,115 | — | ||||||
| Unrealized Loss on Embedded Conversion Option | 596,284 | — | ||||||
| Amortization of Discount on Convertible Notes | 2,579,915 | — | ||||||
| Amortization of Loan Issue Costs | 14,587 | 29,172 | ||||||
| Changes in Right of Use Assets, net | 6,428 | — | ||||||
| Depreciation, Depletion and Amortization | 745,873 | 754,585 | ||||||
| Impairment of Oil and Natural Gas Properties | — | 800,452 | ||||||
| Accretion of Asset Retirement Obligation | 554,620 | 355,997 | ||||||
| Cash paid to Ovintiv (see Note 4) | — | (850,000 | ) | |||||
| Loss relating to Ovintiv Purchase Deposit (see Note 4) | — | 725,000 | ||||||
| Forgiveness of Payroll Protection Plan loan | (160,700 | ) | — | |||||
| Change in Operating Assets and Liabilities: | ||||||||
| Accounts Receivable | (2,348,605 | ) | 54,662 | |||||
| Unrealized Loss (Gain) on Oil and Natural Gas Derivative Instruments | 181,725 | (1,062,775 | ) | |||||
| Inventory | (840,819 | ) | 56,124 | |||||
| Prepaids | 90,056 | 46,294 | ||||||
| Other Assets | (206,907 | ) | 8,366 | |||||
| Accounts Payable | 425,567 | (6,005 | ) | |||||
| Accrued Expenses | 724,402 | 66,521 | ||||||
| Net Cash Used In Operating Activities | (2,511,351 | ) | (1,144,287 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Acquisition of Oil and Natural Gas Properties | (17,869,779 | ) | (506,000 | ) | ||||
| Purchase of Other Fixed Assets | (83,811 | ) | — | |||||
| Investment in Related Party | (1,250,000 | ) | — | |||||
| Sinking Fund Deposit | (3,850,000 | ) | — | |||||
| Proceeds From Sale of Oil and Natural Gas Properties | — | 1,160,400 | ||||||
| Net Cash Provided by (Used in) Investing Activities | (23,053,590 | ) | 654,400 | |||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from Debt Issued | 19,599,850 | 925,700 | ||||||
| Principal Payments of Debt | (3,647,286 | ) | (150,000 | ) | ||||
| Proceeds from Stock and Warrant Issuance | 10,471,559 | — | ||||||
| Net Cash Provided by Financing Activities | 26,424,123 | 775,700 | ||||||
| Net Change in Cash | 859,182 | 285,813 | ||||||
| Cash - Beginning of Period | 157,695 | — | ||||||
| Cash - End of Period | $ | 1,016,877 | $ | 285,813 | ||||
See accompanying notes to unaudited condensed consolidated financial statements
-7-
EMPIRE PETROLEUM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
June 30, 20202021
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIESGOING CONCERN
The accompanying unaudited condensed consolidated financial statements of Empire Petroleum Corporation ("Empire" or 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 United States generally accepted accounting principlesGAAP 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. Operating results for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.2021.
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, 20192020 which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 30, 2020.31, 2021.
The Company has incurred significant losses in recent years. The continuation of the Company as a going concern is dependent upon the ability of the Company to attain future profitable operations and/or additional debt or equity financing until profitable operations are achieved. The ultimate recoverability of the Company's investment in oil and natural gas interests is dependent upon the existence and discovery of economically recoverable oil and natural gas reserves, the ability of the Company to obtain necessary financing to further develop the interests, and the ability of the Company to attain future profitable production.
As of June 30, 2021, the Company had $1,016,877 of cash and working capital deficit of $13,177,298. The Company has proved reserves which have been acquired within the last two years. The Company plans to continue to look for oil and natural gas investments and will use a combination of debt and equity financing to fund potential acquisitions. The Company expects to also incur costs related to evaluating and acquiring oil and natural gas acquisitions for the foreseeable future. It is expected that management will attempt to raise additional capital for future investment and working capital opportunities.
However, there can be no assurances the Company will be able to refinance or restructure its existing indebtedness, raise sufficient capital to fund its strategic development plans, and meet its various capital needs. As a result of these uncertainties, management has concluded there is substantial doubt regarding the Company’s ability to continue as a going concern.
These financial statements have been prepared on the basis of United States generally accepted accounting principles applicable to a company with continuing operations, which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its obligations in the normal course of operations. Management believes the going concern assumption to be appropriate for these financial statements. If the going concern assumption were not appropriate for these financial statements, then adjustments might be necessary to adjust the carrying value of assets and liabilities and reported expenses.
The Company’s impairment assessment of proved and unproved mineral properties is based on several factors including oil and gas spot market prices and estimated futures prices that existed at SeptemberJune 30, 2020. 2021. In2020, crude oil prices in both the spot market and futures market experienced significant volatility. For the nine monthsyear ended September 30,December 31, 2020 the Company recorded an impairment expense of $800,452$8,671,303 as a result of the decline in oil prices (See Note 3).prices. Further, the effect of lower crude oil prices on the Company’s future financial position or results of operations is not currently determinable due to broader economic and industry uncertainties, including the impact to the operators and other working interest owners of the properties in which the Company owns mineral interests.
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In the event crude oil or natural gas prices remain low,decline significantly, there is the risk that, among other things:
| the Company’s revenues, cash flows and profitability may decline substantially, which could also indirectly impact expected production by reducing the amount of funds available to acquire future mineral interests; |
| reserves relating to the Company’s proved properties may become uneconomic to produce resulting in impairment of proved properties; and |
| operators and other working interest owners are unable to execute their drilling and exploration programs resulting in lower production or inability to prove reserves on unproved properties |
The occurrence of certain of these events may have a material adverse effect on the Company's business, results of operations and financial condition.
In early March 2020 there was a global outbreak of COVID-19 thatwhich has continued into the second and third quarters and has resulted in changes in global supply and demand of certain mineral and energy products. These changes, including the magnitude and length of the economic downturn and any potential resulting direct and indirect negative impact to the Company cannot be determined, but they could have a prospective material impact to the Company’s acquisition and project development activities, and cash flows and liquidity.
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Reclassification of prior year presentation. Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been made to the Consolidated Balance Sheet for the year ended December 31, 2019 to reclassify certain utility and other deposits in the amount of $118,177 which had previously been included in prepaids.
The continuation of the Company is dependent upon the ability of the Company to raise capital and attain future profitable operations. The ultimate recoverability of the Company's investment in oil and natural gas interests is dependent upon the existence and discovery of economically recoverable oil and natural gas reserves, the ability of the Company to obtain necessary financing to further develop the interests, and the ability of the Company to attain future profitable production.
As of SeptemberJune 30, 2020,2021, the Company had $134,374 of cash and working capital deficit of $10,140,110, which includes the net balance of the Senior Revolver Loan Agreement of $8,368,000 which matures March 27, 2021. The Company has proved reserves which have been acquired within the last two years. The Company plans to continue to look for oil and natural gas investments and will use a combination of debt and equity financing to fund the acquisitions. The Company expects to also incur costs related to evaluating and acquiring oil and natural gas acquisitions for the foreseeable future. It is expected that management will attempt to raise additional capital for future investment and working capital opportunities.
Compensation of Officers and Employees
As of September 30, 2020, the Company had twelvetwenty nine employees. No independent Board members received compensation from the Company in the first ninesix months of 2020 or 2019.2020; in 2021 independent Board members were compensated $33,000 and $84,000 was accrued but unpaid as of June 30, 2021. For the ninesix months ended SeptemberJune 30, 2020,2021, the Company paid its officers, Mr. Morrisett and Mr. Pritchard, $249,417$227,000 each for services rendered. For the ninesix months ended SeptemberJune 30, 2019,2020, the Company paid Mr. Morrisett $179,950 and Mr. Pritchard $183,950$116,000 each for services rendered excluding the value of options awarded. In addition, as of September 30, 2020 Mr. Pritchard has outstanding advances of $28,828.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation.consolidation. The condensed consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries, Empire Louisiana, LLC ("Empire Louisiana"), Empire North Dakota, LLC ("Empire North Dakota"), andEmpire New Mexico, LLC (“Empire New Mexico”), Empire ND Acquisitions, LLC (“Empire ND Acquisitions”), Empire Texas, LLC (“Empire Texas”), and Pardus Oil & Gas Operating, LP (“Pardus”). All material intercompany balances and transactions have been eliminated.
Use of estimates in the preparation of financial statements.statements. Preparation of financial statements in conformity with generally accepted accounting principles in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Depletion of oil and natural gas properties is determined using estimates of proved oil and natural gas reserves. There are numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and natural gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves, commodity price outlooks and prevailing market rates of other sources of income and costs. Other significant estimates include, but are not limited to, asset retirement obligations, fair value of assets purchased in acquisitions,business combinations, embedded derivatives (conversion features), commodity derivatives, and taxes.
Interim financial statements.statements. The accompanying condensed consolidated financial statements of the Company have not been audited by the Company's independent registered public accounting firm. In preparing the accompanying condensed consolidated financial statements, management has made certain estimates and assumptions that affect reported amounts in the condensed consolidated financial statements and disclosures of contingencies. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results.
Certain disclosures have been condensed in or omitted from these condensed consolidated financial statements. Accordingly, these condensed notes to the condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Inventory. Inventory consists of oil in tanks which has not been delivered and is valued at the contract price to the buyerbuyer.
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Convertible Debt. The Company accounts for conversion options embedded in a host instrument in accordance with ASC 815, Derivatives and pipeHedging ("ASC 815). ASC 815 requires a reporting entity to bifurcate conversion options embedded in convertible debt and to account for them as a free standing derivative when the embedded feature is not clearly and closely related to the host instrument and meets the definition of a derivative and does not qualify for the scope exception from derivative accounting.
The Company reviews the terms of convertible debt issued to determine whether there are embedded features, including embedded conversion options, which has not yet been put into production.are required to be bifurcated and accounted for separately as a derivative. In circumstances where the host instrument contains more than one embedded derivative, including the conversion option, that is required to be bifurcated, the derivative instruments are accounted for as a single, compound derivative instrument.
The separated derivative is initially recorded at fair value and subsequently revalued at each reporting date with changes in the fair value reported as other income or expense. When the convertible debt instrument contains embedded derivatives that are bifurcated and accounted for separately as a derivative liability, the total proceeds received are first allocated to the fair value of derivative liability. The remaining proceeds, if any, are then allocated to the debt, resulting in an initial discount on the debt. The debt discount is subsequently amortized under the interest method through periodic charges to interest expense.
For conversion options embedded in a host instrument which are required to be bifurcated and qualify for the scope exception from derivative accounting are accounted for under other models as required by ASC 470-20, Debt with Conversion and Other Options.
Revenue recognition.recognition. The Company recognizes revenues from the sales of oil and natural gas to its customers and presents them aggregated on the Company's condensed consolidated statements of operations. The Company enters into contracts with customers to sell its oil and natural gas production. Revenue on these contracts is recognized in accordance with the five-step revenue recognition model prescribed in ASC 606. Specifically, revenue is recognized when the Company's performance obligations under these contracts are satisfied, which generally occurs with the transfer of control of the oil and natural gas to the purchaser. Control is generally considered transferred when the following criteria are met: (i) transfer of physical custody, (ii) transfer of title, (iii) transfer of risk of loss and (iv) relinquishment of any repurchase rights or other similar rights. Given the nature of the products sold, revenue is recognized at a point in time based on the amount of consideration the Company expects to receive in accordance with the price specified in the contract. Consideration under the oil and natural gas marketing contracts is typically received from the purchaser one to two months after production. At SeptemberJune 30, 2020,2021, the Company had receivables related to contracts with customers of approximately $610,000.$2,800,000 and joint interest billings of approximately $800,000.
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Fair value measurements.measurements. The Financial Accounting Standards Board ("FASB") fair value measurement standards define fair value, establish a consistent framework for measuring fair value and establish a fair value hierarchy based on the observability of inputs used to measure fair value.
Convertible debt - The carrying valueImpairment of the convertible debt approximate fair value as of December 31, 2019. As of September 30, 2020 all of the convertible debt had been converted to shares of the Company’s common stock. Management's estimates are based on the assessment of qualitative factors that are considered Level 3 measurements in the fair value hierarchy as required by FASB ASC 820.
Oiloil and natural gas properties - The fair value of proved and unproved oil and natural gas properties was measured using valuation techniques that convert the future cash flows to a single discounted amount. Significant inputs to the valuation of proved and unproved oil and natural gas properties include estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average costs of capital. The Company utilized a combination of the New York Mercantile Exchange ("NYMEX") strip pricing and consensus pricing to value the reserves, then applied various discount rates depending on the classification of reserves and other risk characteristics. For significant purchases,acquisitions, management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired.
The fair value of asset retirement obligations is included in proved oil and natural gas properties with a corresponding liability. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate and timing associated with the incurrence of these costs.
The inputs used to value oil and natural gas properties for impairments and asset retirement obligations require significant judgment and estimates made by management and represent Level 3 inputs.
Embedded conversion feature – The conversion features of the Secured Convertible Note have been accounted for as a separated derivative and recorded at fair value using a binomial pricing model. The inputs used to value the derivative conversion feature require significant judgment and estimates made by management and represent Level 3 inputs.
Investment in related party – The value of the investment in related party is based on the cost of the investment due to its nature.
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.
-10-
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 (“FASB ASC 850”) requires that transactions with related parties that would make a difference 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.
3. INVESTMENT IN RELATED PARTY
Concurrent with the acquisition and financing of the XTO properties (See Notes 7 and 11), the Company made an investment in Energy Evolution Fund LP, an affiliate of Energy Evolution Ltd, a related party, in the amount of $1,250,000. The Energy Evolution Fund, LP is a hedge fund focused on global petroleum and sustainable energy. The investment in related party is accounted for as an investment in an equity security and recorded at historical cost. The investment was mutually terminated on August 19, 2021 (See Note 17).
4. PROPERTY AND EQUIPMENT
On January 27, 2020, the Company purchased lease interests in approximately 4,936 acres in Montana for $500,000.
In February, 2020, the Company in two transactions sold all of its interest in leases of approximately 337 acres in Montana for $1,160,400. The Company recognized a gain on the transactions of $1,143,760.
On April 6, 2020 the Company purchased oil and natural gas properties in Texas (see Note 6).
In May, 2021 the Company purchased oil and natural gas properties in New Mexico (see Note 7).
NYMEX strip prices experienced significant volatility in 2020, resulting in a significant decrease in value of the Company’s economically recoverable proved oil and natural gas reserves. As such, the carrying amount of the Company’s proved oil and natural gas properties exceeded the expected undiscounted future net cash flows for certain leases, resulting in impairment charges against earnings of $800,452 for the six months ended June 30, 2020. The Company did not recognize an impairment of proved oil and natural gas properties during the six months ended June 30, 2021.
The aggregate capitalized costs of oil and natural gas properties as of June 30, 2021, are as follows:
| Proved producing wells | $ | 18,632,940 | ||
| Proved undeveloped | 2,232,358 | |||
| Lease, well and gathering equipment | 4,913,874 | |||
| Asset retirement obligation | 18,696,199 | |||
| Unproved leasehold costs | 492,608 | |||
| Gross capitalized costs | 44,967,979 | |||
| Less: accumulated depreciation, depletion and impairment | (15,880,231 | ) | ||
| $ | 29,087,748 |
Other property and equipment consists of operating lease asset (See Note 11), vehicles, office furniture and equipment.
| Other property and equipment, at cost | $ | 1,347,631 | ||
| Less: accumulated depreciation | (101,916 | ) | ||
| Oher property and equipment, net | $ | 1,245,715 |
5. OVINTIV OIL AND NATURAL GAS PROPERTIES
On March 3, 2020 the Company entered into a Purchase and Sale Agreement (“the Ovintiv Agreement”) with Ovintiv USA, Inc. and several related companies to purchase certain oil and natural gas properties in Montana and North Dakota. The purchase price was $8,500,000, subject to adjustments with an effective date of January 1, 2020 and a closing date of April 30, 2020.
The Company made an $850,000 deposit relating to the purchase. Due to the COVID-19 pandemic and governmental state of emergency orders related thereto, the Company was unable to meet with and obtain financing to complete the purchase from its lenders. The Ovintiv Agreement was terminated and the parties agreed to settle with the Company receiving a $50,000 return of its deposit. The Company estimated a loss on the deposit of $725,000 in the quarter ending June 30, 2020 which is included in general and administrative expense, with the remainder recorded in the quarter ending September 30, 2020. No amounts were outstanding as of December 31, 2020.
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6. ACQUISITION OF PARDUS OIL AND NATURAL GAS PROPERTIES
On April 6, 2020 the Company, through its wholly owned subsidiary, Empire Texas, entered into a Purchase and Sale Agreement (“the Pardus Agreement”) with Pardus Oil & Gas, LLC and Pardus Oil & Gas Operating GP, LLC to purchase certain oil and natural gas properties in Texas comprising 139 gross wells and approximately 30,000 net acres, 77.3 miles of gathering lines and pipelines and related facilities and equipment, and all general and limited partner interest in Pardus Oil & Gas Operating, LP. The purchase price, as amended, included the assumption of certain obligations totaling $1,584,042 and a cash payment of $40,000 for a total purchase price of $1,624,042. The transaction closed on April 7, 2020.
The following table sets forth the Company's purchase price allocation:
| Fair Value of Assets Acquired | ||||
| Accounts receivable | $ | 100,208 | ||
| Inventory of oil in tanks | 147,297 | |||
| Deposits | 378,000 | |||
| Equipment and gathering lines | 109,200 | |||
| Oil and natural gas properties | 10,397,821 | |||
| Total Assets Acquired | $ | 11,132,526 | ||
| Fair Value of Liabilities Assumed | ||||
| Accounts payable – trade | $ | 20,455 | ||
| Note payable – current | 378,000 | |||
| Royalty suspense | 1,185,587 | |||
| Asset retirement obligations | 9,508,484 | |||
| Total liabilities assumed | $ | 11,092,526 | ||
| Purchase Price | $ | 40,000 |
The fair values of assets acquired and liabilities assumed were based on the following key inputs:
Oil and natural gas properties
The value of oil and gas properties was based on an allocation of the purchase price which included assignment of values to the other identifiable assets acquired and liabilities assumed.
The fair value of asset retirement obligations are included in proved oil and natural gas properties with a corresponding liability in the table above. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate and timing associated with the incurrence of these costs.
The inputs used to value oil and natural gas properties for impairments and asset retirement obligations require significant judgment and estimates made by management and represent Level 3 inputs.
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.
3. PROPERTY AND EQUIPMENT
In March 2019, the Company, through its subsidiary, Empire North Dakota, LLC, purchased oil and natural gas properties in Montana and North Dakota (See Note 7).
On January 27, 2020, the Company, through its wholly owned subsidiary, Empire North Dakota, LLC, entered into a Bill of Sale and Assignment to purchase lease interests in approximately 4,936 acres in Montana for $500,000.
On February 10, 2020, the Company, through its wholly owned subsidiary, Empire North Dakota, LLC, sold overriding royalty interests for leases it owned in Montana for up to $325,000 to a consultant of the Company, $200,000 of which was purchased in the first quarter of 2020 and the final $125,000 was purchased in the third quarter of 2020.
On February 17, 2020 the Company, through its wholly owned subsidiary, Empire North Dakota, LLC, sold all of its interest in leases of approximately 337 acres in Montana for $1,010,400.
On April 6, 2020 the Company, through its wholly owned subsidiary, Empire Texas, LLC, purchased oil and natural gas properties in Texas (see Note 5).
During the nine months ended September 30, 2020, NYMEX strip prices experienced significant volatility, resulting in a significant decrease in value of the Company’s economically recoverable proved oil and natural gas reserves. As such, the carrying amount of the Company’s proved oil and natural gas properties exceeded the expected undiscounted future net cash flows for certain leases, resulting in impairment charges against earnings of $800,452 for the quarter ended March 31, 2020. These impairment charges are included in impairments of long-lived assets on the consolidated statement of operations for the nine months ended September 30, 2020. The Company did not recognize an impairment of proved oil and natural gas properties during the nine months ended September 30, 2019.
-10-
The aggregate capitalized costs of oil and natural gas properties as of September 30, 2020, are as follows:
| Proved producing wells | $ | 5,284,041 | ||
| Proved undeveloped | 2,232,458 | |||
| Lease, well and gathering equipment | 1,680,692 | |||
| Asset retirement obligation | 14,988,534 | |||
| Unproved leasehold costs | 492,741 | |||
| Gross capitalized costs | 24,678,466 | |||
| Less: accumulated depreciation, depletion and impairment | (5,172,138 | ) | ||
| $ | 19,506,328 |
Other property and equipment consists of office furniture and equipment.
| Other property and equipment, at cost | $ | 14,456 | ||
| Less: accumulated depreciation | (4,184 | ) | ||
| Oher property and equipment, net | $ | 10,272 |
4. OVINTIV OIL AND NATURAL GAS PROPERTIES
On March 3, 2020 the Company, through its wholly owned subsidiary, Empire North Dakota, LLC, entered into a Purchase and Sale Agreement (“the Agreement”) with Ovintiv USA, Inc. and several related companies to purchase certain oil and natural gas properties in Montana and North Dakota comprising 26,600 net acres with 94 active wells. The purchase price was $8,500,000, subject to adjustments with an effective date of January 1, 2020 and a closing date of April 30, 2020.
The Company made an $850,000 deposit relating to the purchase. Due to the COVID pandemic and governmental state of emergency orders related thereto, the Company was unable to meet with and obtain financing to complete the purchase from its lenders. The Agreement has been terminated and the parties have agreed to settle with Empire receiving a $50,000 return of its deposit. The Company had estimated a loss on the deposit of $725,000 in the quarter ending June 30, 2020. The remainder of the loss has been recorded in the quarter ending September 30, 2020.
5. ACQUISITION OF PARDUS OIL AND NATURAL GAS PROPERTIES
On April 6, 2020 the Company, through its wholly owned subsidiary, Empire Texas, LLC, entered into a Purchase and Sale Agreement (“the Agreement”) with Pardus Oil & Gas, LLC and Pardus Oil & Gas Operating GP, LLC (collectively “the Seller”) to purchase certain oil and natural gas properties in Texas comprising 139 gross wells and approximately 30,000 net acres, 77.3 miles of gathering lines and pipelines and related facilities and equipment, and all general and limited partner interest in Pardus Oil & Gas Operating, LP. The purchase price included the assumption of certain obligations and a contingent payment not to exceed $2,000,000 reduced by certain revenue suspense amounts. The contingent payment is based on monthly oil production in excess of a specified level from the purchased properties and an average monthly realized oil price of $40 or more per barrel of oil through December 31, 2022. The transaction closed on April 7, 2020.
The following table sets forth the Company's purchase price allocation:
| Fair Value of Assets Acquired | ||||
| Oil and natural gas properties | $ | 1,935,366 | ||
| Inventory of oil in tanks | 147,297 | |||
| Deposits | 378,000 | |||
| Equipment and gathering lines | 109,200 | |||
| Asset retirement obligation asset | 9,508,484 | |||
| Total Assets Acquired | $ | 12,078,347 | ||
| Fair Value of Liabilities Assumed | ||||
| Accounts payable, net | $ | 20,456 | ||
| Note payable – current | 378,000 | |||
| Royalty suspense | 1,185,587 | |||
| Asset retirement obligations | 9,508,484 | |||
| Total liabilities assumed | $ | 11,092,527 | ||
| Total consideration | $ | 985,820 | ||
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The fair values of assets acquired and liabilities assumed were based on the following key inputs:
Oil and natural gas properties
The fair value of proved oil and natural gas properties was measured using valuation techniques that convert the future cash flows to a single discounted amount. Significant inputs to the valuation of proved oil and natural gas properties include estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average costs of capital. The Company utilized a combination of the New York Mercantile Exchange ("NYMEX") strip pricing and consensus pricing to value the reserves, then applied various discount rates depending on the classification of reserves and other risk characteristics. Management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired.
The fair value of asset retirement obligations totaled $9,508,484 and is included with a corresponding liability in the table above. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate and timing associated with the incurrence of these costs.
The total consideration consists of a contingent payment to the seller which is due based on monthly production of oil and natural gas through December 31, 2022 and a monthly average price of $40 or higher per barrel.
The inputs used to value oil and natural gas properties and asset retirement obligations require significant judgment and estimates made by management and represent non-recurring Level 3 inputs.inputs
Financial instruments and other
The fair values determined for accounts payable - trade were equivalent to the carrying value due to their short-term nature.
Accounts payable - trade includes $20,456 ofnature and include liabilities primarily related to well activity prior to close.
Inventory acquired as a part of the acquisition was based on oil in tanks at the date of acquisition multiplied by the day’s spot price.
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6.
7. ACQUISITION OF WARHORSEXTO OIL AND NATURAL GAS PROPERTIES
On September 10, 2019,March 12, 2021 the Company, receivedthrough its wholly owned subsidiary Empire New Mexico, entered into a process verbalpurchase and related sheriff's deed dated assale agreement with XTO Holdings, LLC (a subsidiary of May 29, 2019ExxonMobil) (the "Sheriff's Deed"“Seller’) pertaining to two wells in St. Landry Parish purchased from Business First Bancshares, Inc. d/b/a Business First Bank ("Business First").
Pursuant to the Sheriff's Deed, the Company acquiredacquire, among other things, certain oil and natural gas properties located in St. Landry Parish, Louisiana, including operated working interest in two producing wells.New Mexico. The purchase price was $17,800,000 subject to customary adjustments. The Company purchased Business First's position aswired a deposit of $1,780,000 to the superior lienholder and seizing creditorSeller on March 12, 2021. The transaction closed on May 14, 2021 with an effective date of such oil and natural gas properties, which were owned by Warhorse Oil & Gas, LLC,January 1, 2021.
The XTO acquisition has been accounted for $450,000 plus $16,993 sheriff fees. The payment was paid from loan proceeds under the loan agreement with CrossFirst Bank (see Note 9).
The Company treated the acquisition as an asset purchase. An amount equalacquisition using the acquisition method of accounting under FASB ASC 805, Business Combinations (“ASC 805”). Under the accounting for asset acquisitions, the acquisition is recorded using a cost accumulation and allocation model under which the cost of the acquisition is allocated on a relative fair value basis to $73,968 was allocated to leasethe assets acquired and well equipment and $378,110 was allocated to producing properties. Anliabilities assumed. For asset retirement obligationacquisitions under ASC 805, acquisition-related transaction costs are capitalized as a component of $19,732 was recorded in conjunction with the purchase.cost of the assets acquired.
7. ACQUISITION OF ENERGYQUEST II ASSETS
On March 28, 2019,As a condition of the sale, the Company purchased oil producing properties from EnergyQuest II, LLC ("EnergyQuest")a $5,000,000 performance bond for a purchase price of $5,600,000. The effective datethe benefit of the transaction was January 1, 2019. After certain adjustments related to the effective date, the total proceeds paid to EnergyQuest were $5,646,126. Such proceeds were paid from borrowing on notes payableseller for proper plugging, abandonment and sales of unregistered securitiesrestoration of the Company.purchased properties. The performance bond is collateralized with a letter of credit in the amount of $3,750,000. To effect the letter of credit, the Company entered into a Promissory Note Agreement with Bank of Oklahoma, NA in the amount of $3,750,000 which is due on demand with an interest rate established by the Bank, currently at 4 percent. The Promissory Note, and associated letter of credit, is collateralized with a bank certificate of deposit in a corresponding amount. In addition, the Company is required to deposit $100,000 per month, up to $1,250,000, into a sinking fund to be held by the surety.
The following table sets forth the Company's preliminary purchase price allocation:
| Fair Value of Assets Acquired | ||||
| Accounts receivable | $ | 1,308,748 | ||
| Inventory of oil in tanks | 438,321 | |||
| Oil properties | 10,878,429 | |||
| Total Assets Acquired | $ | 12,625,498 | ||
| Fair Value of Liabilities Assumed | ||||
| Accounts payable – trade | $ | 1,861,433 | ||
| Asset retirement obligations | 5,117,939 | |||
| Total liabilities assumed | $ | 6,979,372 | ||
| Total consideration paid | $ | 5,646,126 | ||
| Preliminary Fair Value of Assets Acquired | ||||
| Inventory of oil in tanks | 318,546 | |||
| Vehicles | 179,156 | |||
| Asset retirement obligation | 6,117,709 | |||
| Oil and natural gas properties | 17,662,402 | |||
| Total Preliminary Assets Acquired | $ | 24,277,813 | ||
| Preliminary Fair Value of Liabilities Assumed | ||||
| Royalty suspense | 290,325 | |||
| Asset retirement obligations | 6,117,709 | |||
| Total Preliminary Liabilities Assumed | $ | 6,408,034 | ||
| Purchase Price | $ | 17,869,779 |
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The fairvalue of oil and gas properties was based on an allocation of the purchase price which included assignment of values ofto the other identifiable assets acquired and liabilities assumed wereassumed. The value of inventory, vehicles, and royalty suspense was based on carrying value at the following key inputs:
Oil and natural gas properties
The fair value of proved oil and natural gas properties was measured using valuation techniques that convert the future cash flows to a single discounted amount. Significant inputs to the valuation of proved oil and natural gas properties include estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average costs of capital. The Company utilized a combinationtime of the New York Mercantile Exchange ("NYMEX") strip pricing and consensus pricing to value the reserves, then applied various discount rates depending on the classification of reserves and other risk characteristics. Management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired.acquisition.
The fair value of asset retirement obligations totaled $5,117,939 and isare included in proved oil and natural gas properties with a corresponding liability in the table above. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate and timing associated with the incurrence of these costs.
The inputs used to value oil and natural gas properties and asset retirement obligations require significant judgment and estimates made by management and represent Level 3 inputs.
Financial instruments and other
The fair values determined for accounts receivable and accounts payable - trade were equivalent to the carrying value due to their short-term nature.
Accounts payable - trade includes $1,861,433 of liabilities primarily related to well activity prior to close.
8. JOINT DEVELOPMENT AGREEMENT
On August 6, 2020 the Company, through its wholly owned subsidiary, Empire Texas, LLC (“ET”), entered into a joint development agreement (the “Agreement”“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 Agreement,JDA, PIE will perform recompletion or workover on specified mutually agreed upon wells (“Workover Wells”) owned by ET.Empire Texas. To fund the work, PIE entered into a term loan agreement with ETEmpire Texas dated August 1, 2020, whereby PIE will loan up to $2,000,000,$2,000,000, at an interest rate of 6%6% per annum, maturing August 7, 2024 unless terminated earlier by PIE. Proceeds of the loan will be used for recompletion or workover of the Workover Wells. As of SeptemberJune 30, 20202021 approximately $70,000$446,000 has been advanced from the loan. loan and is included in Long Term Notes Payable on the Condensed Consolidated Balance Sheet. As part of the Agreement, ETJDA, Empire Texas will assign to PIE a combined 85% working and revenue interest in the Workover Wells; an assignment was completed in October 2020 for the initial three Workover Wells. Of the assigned interest, 70% working and revenue interest will be used to repay the obligations under the term loan agreement. Once the term loan is repaid, PIE will reassign a 35% working and revenue interest to ETEmpire Texas in each of the Workover Wells and retain a 50% working and revenue interest (See(See Note 10). Activity resulting from the JDA is being treated as a conveyance.
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In addition, PIE and Empire entered into a Securities Purchase Agreement (“Securities Agreement”) whereby PIE purchased for $525,000 (a) 3,500,000 shares of Empire common stock, (b) warrants to purchase 2,625,000 shares of Empire common stock at an exercise price of $0.20 per share, (c) warrants to purchase 1,800,000 shares of Empire common stock at an exercise price of $0.25 per share, (d) warrants to purchase 8,136,518 shares of Empire common stock at an exercise price of $0.10 per share, and (e) warrants to purchase up to 11,066,667 shares of Empire common stock at an exercise price of $0.141 per share.share, pursuant to various vesting provisions as detailed in the Securities Agreement. On March 11, 2021 the Company amended the Securities Agreement to remove the vesting provisions for the warrants and PIE is obligated toexercised all of its warrants for an aggregate exercise the $0.20 warrants within 45 daysprice of when 3 month trailing average production from the Empire Texas properties have increased by 20% over the trailing 3 month trailing average production as of July 2020. PIE can only exercise the $0.25 warrants once all existing non-PIE outstanding warrants to purchase Empire common stock have been exercised or lapsed. For the $0.141 warrants, PIE may initially acquire 7,533,333 shares of Empire common stock, however the amount may be increased if any existing non-PIE warrants are exercised prior to December 31, 2020$3,349,052 (See Note 11)13).
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9.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’s derivative financial instruments consist of oil gas swaps.
The Company does not enter into derivative financial instruments for speculative or trading purposes. The Company’s derivative financial instruments consist of oil swaps.
The Company does not designate its derivative instruments to qualify for hedge accounting. Accordingly, the Company reflects changes in the fair value of its derivative instruments in its condensed consolidated statements of operations as they occur. Unrealized gains and losses related to the swap contracts are recognized and recorded as an asset or liability on the Company’s condensed consolidated balance sheet.sheets.
The following table summarizes the net realized and unrealized amounts reported in earnings related to the commodity derivative instruments for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019:2020:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Gain (loss) on derivatives: | ||||||||||||||||
| Oil derivatives | $ | (103,165 | ) | $ | 492,530 | $ | 2,003,505 | $ | 917,482 | |||||||
| Natural gas derivatives | — | 332 | — | 7,749 | ||||||||||||
| Total | $ | (103,165 | ) | $ | 492,862 | $ | 2,003,505 | $ | 925,231 | |||||||
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Gain (loss) on derivatives: | ||||||||||||||||
| Oil derivatives | $ | (182,034 | ) | (402,374 | ) | $ | (539,949 | ) | $ | 2,106,671 | ||||||
| Natural gas derivatives | — | — | — | — | ||||||||||||
| Total | $ | (182,034 | ) | (402,374 | ) | $ | (539,949 | ) | $ | 2,106,671 | ||||||
The following represents the Company’s net cash receipts from (payments on) derivatives for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019:2020:
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
| Net cash received from payments on derivatives | ||||||||||||||||||||||||||||||||
| Oil derivatives | $ | 279,533 | $ | 156,820 | $ | 1,323,427 | $ | 250,323 | $ | (230,279 | ) | $ | 510,609 | $ | (358,224 | ) | $ | 1,043,894 | ||||||||||||||
| Natural gas derivatives | — | 6,846 | — | 11,557 | — | — | — | — | ||||||||||||||||||||||||
| Total | $ | 279,533 | $ | 163,666 | $ | 1,323,427 | $ | 261,880 | $ | (230,279 | ) | $ | 510,609 | $ | (358,224 | ) | $ | 1,043,894 | ||||||||||||||
The following table sets forth the Company’s outstanding derivative contracts at SeptemberJune 30, 2020. 2021. The Company has no outstanding natural gas derivatives. All of the Company’s derivatives are expected to settle by October 2021:
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | 3rd Quarter | 4th Quarter | |||||||||||||||||||
| 2020 | ||||||||||||||||||||||||
| 2021 | ||||||||||||||||||||||||
| Oil Swaps: | ||||||||||||||||||||||||
| Volume (MBbl) | — | — | — | 15.78 | ||||||||||||||||||||
| Quarterly volume (MBbl) | 5.20 | — | ||||||||||||||||||||||
| Price per Bbl | — | — | — | $ | 55.18 | $ | 38.25 | — | ||||||||||||||||
| 2021 | ||||||||||||||||||||||||
| Oil Swaps: | ||||||||||||||||||||||||
| Volume (MBbl) | 15.26 | 15.18 | 5.20 | — | ||||||||||||||||||||
| Price per Bbl | $ | 49.40 | $ | 50.87 | $ | 38.25 | — | |||||||||||||||||
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10. NOTES PAYABLEDEBT
In February 2019,The following table represents the Company’s outstanding debt.
June 30, 2021 | December 31, 2020 | |||||||
| Senior Revolver Loan Agreement | $ | 7,669,500 | $ | 8,124,000 | ||||
| 2020 SBA Payroll Protection Plan loan | — | 160,700 | ||||||
| 2021 SBA Payroll Protection Plan loan | 106,850 | — | ||||||
| Unsecured Promissory Note – Pardus | — | 378,000 | ||||||
| PIE Joint Development Agreement loan, related party | 462,959 | 315,273 | ||||||
| Various Vehicle and Equipment notes | 242,379 | 57,935 | ||||||
| Secured Convertible Note, related party (see Note 11) | 13,450,000 | — | ||||||
| Unsecured Convertible Notes (see Note 11) | 1,743,000 | — | ||||||
| Total Debt | 23,674,688 | 9,035,908 | ||||||
| Unamortized Debt Issue Costs | — | (14,587 | ) | |||||
| Unamortized Discount | (8,090,088 | ) | — | |||||
| Total Debt net of Debt Issue Costs and Discount | 15,584,600 | 9,021,321 | ||||||
| Less current maturities | 7,141,193 | 1,301,618 | ||||||
| Total Long-Term Debt | $ | 8,443,407 | $ | 7,719,703 | ||||
On March 10, 2021 the Company entered into five unsecured promissory note agreements with accredited investors totaling $90,000. The notes were due May 1, 2019, and accrued interest at 8%. One of the notes, in the amount of $15,000 was issuedThird Amendment to Michael R. Morrisett, the Company's President. These notes and the related interest were paid in May 2019.
On September 20, 2018 the Company entered into aits Senior Revolver Loan Agreement (“the Amended Agreement”) with CrossFirst Bank (“CrossFirst”). The Agreement was amended March 27, 2019 and September 30, 2020 (effective as of June 30, 2020) (the “Amended Agreement”). The Amended Agreement commitment amount is $8,700,000$8,520,000 which is reduced by $180,000$180,000 per calendar quarter ($8,520,000 at Septemberbeginning June 30, 2020)2021 and the maximum amount that can be advanced under the Agreement is $20,000,000$20,000,000 and includes interest at Wall Street Journal Prime plus 150 basis points (4.75% (4.75% as of SeptemberJune 30, 2020)2021). The Amended Agreement matures on March 27, 2021.2022. Collateral for the loan is a lien on all of the assets of the Company’s wholly owned subsidiaries, Empire Louisiana and Empire North Dakota, and a first priority mortgage lien, pledge of and security interest in not less than 80%80% of Empire Louisiana’s and Empire North Dakota’s producing oil, gas and other leasehold and mineral interests. The Amended Agreement requires Empire Louisiana,the Company maintain commodity derivatives at certain thresholds based on projected production and, beginning DecemberMarch 31, 20182021, to maintain certain covenants including an EBITDAX to interest expense of at least 3:1 and funded debt to EBITDAX of 4:6:1 on a trailing twelve month basis. The Company is not in compliance with these covenantstwelve-month basis and reducing quarterly to 4:1 as of the Agreement at September 30, 2020.March 31, 2022 and thereafter. As of SeptemberJune 30, 2020,2021, the Company has an outstanding loan balance of $8,397,000$7,669,500 under the Amended Agreement. The Company was not in compliance with the commodity derivative requirement as of June 30, 2021. The Company was in compliance with the other covenants at June 30, 2021. On July 7, 2021 the Company entered into the Fourth Amendment to its Senior Revolver Loan Agreement, which among other things waived the Company's non-compliance with the commodity derivative requirement and extended the maturity to March 27, 2024. Accordingly, the Company's outstanding loan balance is presented as long-term as of June 30, 2021 (See Note 17).
During 2016 and 2017, the Company issued $ of Senior Unsecured Promissory Notes which contained a conversion feature allowing the investors to convert the Notes into shares of the Company’s common stock. In 2019, all but three of the Note holders converted their notes with a balance of $157,500 into shares of the Company’s common stock. In January 2020, three of the Senior Unsecured Promissory Note investors exercised the conversion feature and converted their $102,500$102,500 notes for shares of the Company's common stock. All of the Senior Unsecured Promissory Notes have been converted to common stock of the Company as of March 31,June 30, 2020.
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On April 1, 2020, in conjunction with the purchase of assets from Pardus Oil & Gas, LLC (see Note 5), the Company entered into a unsecured promissory note agreement with the seller in the amount of $378,000. $378,000. The note iswas payable in one installment on April 1, 2021 and bears interest at the one-year LIBOR rate (1% as of SeptemberJune 30, 2020)2021). The note was paid on April 1, 2021 (See Note 6).
On May 5, 2020, the Company through its wholly owned subsidiary, Pardus Oil & Gas Operating, LP, received an SBA Payroll Protection Plan (“PPP”) loan for $160,700.$160,700. The loan matured on May 5, 2022 and had an interest rate of 1%. In June, 2021 the Company was informed that the SBA had forgiven the entire loan balance.
In August 2020, concurrent with the Joint Development Agreement with Petroleum and Independent Exploration, LLC (“PIE”), a related party, the Company entered into a term loan agreement dated August 1, 2020, whereby PIE will loan up to $2,000,000, at an interest rate of 6% per annum, maturing August 7, 2024 unless terminated earlier by PIE. The loan proceeds will be used for recompletion or workover of certain designated wells. In addition, the Company assigned a 70% working and revenue interest to PIE in the designated wells which will be applied to repayment of the loan. As of June 30, 2021, $462,959 has been advanced from the loan (See Note 8).
On April 30,2021 the Company received a Second Draw SBA Payroll Protection Plan (“PPP”) loan for $106,850. The loan matures on May 5, 2022April 30, 2026 and has an interest rate of 1%1%. There are no payments due until ten months after the covered period which ended October 20, 2020, at which time the payment amount will be determined based on the portion of the loan which has not been forgiven under criteria established by the SBA, using an eighteen-month amortization.amortization of the remaining term of the loan. The Company expects that the majority of the loan amount will be forgiven based on currently published guidelines of the United States Small Business Administration.
In August 2020, concurrentThe Company has an outstanding Letter of Credit in the amount of $3,750,000 which was issued in conjunction with the Joint Development Agreement with Petroleumpurchase of oil and Independent Exploration, LLC (“PIE”),natural gas properties from XTO (See Note 7). To effect the letter of credit, the Company entered into a term loan agreement dated August 1, 2020, whereby PIE will loan up to $2,000,000,Promissory Note Agreement with Bank of Oklahoma, NA in the amount of $3,750,000 which is due on demand with an interest rate established by the Bank, currently at4 percent. The Promissory Note, and associated letter of credit, is collateralized with a bank certificate of deposit in a corresponding amount.
11. CONVERTIBLE NOTES PAYABLE
On May 14, 2021 Empire New Mexico entered into a Senior Secured Convertible Note Agreement (the “Secured Note”) in the amount of $16,250,000 with Energy Evolution Master Fund, Ltd., a related party (“Energy Evolution”) (See Note 14). The Secured Note is collateralized by all assets of Empire New Mexico, matures on December 31, 2021 and bears an interest rate of 6%3.8%. The Secured Note provides that up to 40% of the balance, together with accrued interest, can be converted into the Company’s common stock at the lesser of $1.25 per annum, maturing August 7, 2024 unless terminated earliershare or the offering price if the Company has a subsequent capital raise or an aggregate of 5,200,000 shares of common stock (without giving effect to any interest that may be converted). Additionally, the conversion price is reduced by PIE. The loan proceeds will$0.25 per share if any amount is due on the Secured Note as of October 1, 2021 or the Company has not filed a registration statement with the United States Securities and Exchange Commission within 120 days of the Secured Note. If the registration statement described above is not filed within 120 days of the date of the Secured Note, Energy Evolution has the option to convert 50% of the Secured Note amount into common stock of the Company at a rate of $1.00 per share. In such event, the maximum number of shares into which the Secured Note may be used for recompletion or workoverconverted increases to shares of certain designated wells. the Company’s common stock (without giving effect to any interest that may be converted). In addition, if any principal amount of the Secured Note remains outstanding on October 1, 2021, the conversion price shall be reduced by $0.25, provided the conversion price cannot be reduced by more than $0.25. The Company agreed to use commercially reasonable best efforts to (i) cause the number of members serving on the Company’s Board of Directors to be increased to six, (ii) cause an additional designee of Energy Evolution or its affiliate to be appointed to the Company’s Board of Directors, and (c) cause one of the designated directors of Energy Evolution or its affiliate to be appointed the Chairman of Empire Petroleum’s Board of Directors with the power to cast the deciding vote in case of a deadlocked board vote. The Secured Note may be prepaid without penalty, but Empire New Mexico must provide at least 30 days’ prior written notice so the holders thereof may exercise their conversion rights. As of June 30, 2021, there were conversions of the Secured Note to shares of the Company’s common stock. The Company made prepayments of $2,800,000 on the Secured Note through June 30, 2021.
The embedded conversion option has been bifurcated and accounted for separately as a derivative financial instrument. The separated derivative was initially recorded at fair value at the inception date and revalued as of June 30, 2021 resulting in a fair value of $5,530,677 and $6,126,961, respectively. The change in fair value for the three months ended June 30, 2021 of $596,284 and recorded in Other Income.
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As partial consideration for the issuance of the Secured Note, Energy Evolution received a closing fee of shares of the Company’s common stock and warrants to purchase shares of common stock for $ per share which expire on May 14, 2022. The Company determined these were equity-classified financing instruments and the proceeds are allocated on a relative fair value basis between the debt, warrants, and common shares at issuance. At issuance, the discount associated with the Secured Note was $10,125,177; consisting of $5,530,677 relating to the embedded derivative liability, $1,500 and $2,773,500 in common stock and paid in capital, respectively, relating to the issuance of shares of the Company's common stock, and $1,819,500 in paid in capital relating to the issuance of warrants to purchase common stock. The fair value of the warrants was determined using a Black-Scholes model. The warrants were exercised during the three months ended June 30, 2021 and the Company assignedreceived cash proceeds of $3,000,000. The discount associated with the Secured Note related to the embedded conversion liability and the issuance of the equity-classified financing instruments is amortized under the interest method and resulted in interest expense of $2,289,966 for the three months ended June 30, 2021.
In May, 2021 the Empire New Mexico entered into $3,243,000 of Unsecured Convertible Notes (the “Unsecured Notes”) with a 70% workinggroup of accredited investors, including the Company's related party Energy Evolution, constituting $1,500,000 of the total Unsecured Convertible Notes. The Unsecured Notes mature on May 9, 2022 with a single payment and revenuebear interest at 5%. The Unsecured Note holders may convert their notes to PIEcommon stock of the Company at the lesser of $1.25 per share or the price per share offered by the Company if the Company has a future capital raise for an aggregate 2,594,400 shares of common stock (without giving effect to any interest that may be converted). Pursuant to the Unsecured Notes, the Company agreed to use commercially reasonable best efforts to cause a registration statement on Form S-3 to be filed with Securities Exchange Commission within 90 days for all Common Stock underlying the Unsecured Notes. Empire New Mexico has the right to force conversion in the designated wells which will be applied to repaymentevent that (a) the 20-day weighted average price of the loan.Common Stock trades above $3.50 per share on the OTCQB or any exchange and (b) the Registration Statement has become effective. The Unsecured Notes may be prepaid without penalty, but Empire New Mexico must provide at least 30 days’ prior written notice so the holders thereof may exercise their conversion rights. As of SeptemberJune 30, 2020, approximately $70,0002021 Energy Evolution had converted their $1,500,000 Unsecured Note to shares of the Company’s common stock (See Note 13).
The Company determined the embedded conversion features of the Unsecured Notes were equity-classified financing instrument. The fair value of the conversion feature was determined using a beneficial conversion model based on the a 60-day weighted average stock price and the maximum number of shares to be received if converted. As issuance, the amount recorded to additional paid in capital was $544,824. The discount associated with these transactions is amortized under the interest method and resulted in interest expense of $289,949 for the three months ended June 30, 2021.
As an inducement for investors to enter into the Unsecured Convertible Notes, the Company’s Chief Executive Officer and President collectively offered to each investor the right to purchase a number of shares of common stock equal to 40% of such investor’s principal balance under its Unsecured Convertible Note at $ per share (the “right to buy”). Energy Evolution exercised its right to buy shares of the Company’s common stock. In conjunction with this transaction, each of the Company’s Chief Executive Officer and President partially exercised a warrant to purchase shares at an exercise price of $0.25. The Company determined that offering the “right to buy” shares resulted in an expense of $989,155 of the Company based on the fair value of contributions made by the Company’s Chief Executive Officer and President on its behalf. The fair value of the “right to buy” shares was determined using a Black-Scholes model. The expense is including in General and Administrative in the Condensed Consolidated Statement of Operations.
12. LEASES
As a lessee, the Company leases its corporate office headquarters in Tulsa, Oklahoma and three field offices. The leases expire between 2024 and 2027. The corporate office has been advancedan 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 loan (See Note 8).calculation of right-of-use lease asset and lease liability balances.
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 $78,712 for the six months ended June 30, 2021. Cash paid for right of use lease was $72,045 for the period.
Supplemental balance sheet information related to the right of use leases as of June 30, 2021:
| Operating lease asset (included in Other Property and Equipment | $ | 796,940 | ||
| Current portion of lease liability | $ | 145,433 | ||
| Long term lease liability | 684,426 | |||
| Total right of use lease liabilities | $ | 829,859 |
The weighted average remaining term for the Company’s right of use leases is 4.7 years.
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11. EQUITY
| 2021 | $ | 95,920 | |||
| 2022 | 212,175 | ||||
| 2023 | 215,124 | ||||
| 2024 | 215,837 | ||||
| 2025 | 243,260 | ||||
| Total lease payments | 982,316 | ||||
| Less imputed interest | (153,748 | ) | |||
| Total lease obligation | $ | 828,568 | |||
13. EQUITY
Diluted Earnings per Share ("EPS") gives effect to all dilutive potential common shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on losses. As a result, if there is a loss from continuing operations, Diluted EPS is computed in the same manner as Basic EPS. At SeptemberJune 30, 20202021 and 2019,2020, the Company had 5,004,167 and 4,167 respectively, options outstanding that were not included in the calculation of earnings per share for the periods then ended. Such financial instruments may become dilutive and would then need to be included in future calculations of Diluted EPS. At SeptemberJune 30, 20202021 and 2019,2020, the outstanding options and convertible notes were considered anti-dilutive sincebecause the strike prices were above the market price and since the Company has incurred operating losses year to date.
In March 2019, 1,446,668 outstanding $0.15 warrants were converted to shares of common stock of the Company. Proceeds received from the conversion was $217,000 including $50,000 of notes payable conversion by Mr. Kamin, a board member.
During May 2019, the Company issued warrants to purchase 300,000 shares of its common stock for $0.17 per share which expire on December 31, 2021 to a former employee for business assistance provided. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 217%, risk free interest rate of 1.92% and an expected useful life of 31 months. The fair value of the warrants of $58,380 was recorded as compensation expense and allocated to Paid in Capital.
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On April 3, 2019, the Board of Directors of the Company adopted the Empire Petroleum Corporation 2019 Stock Option Plan (the "Stock Option Plan"). The total number of shares of common stock that may be issued pursuant to stock options under the Stock Option Plan is 10,000,000.. Further, on April 3, 2019 the Company granted Mr. Pritchard and Mr. Morrissett each, options to purchase 2,500,000 shares of common stock of the Company at an exercise price of $0.33$0.33 per share. The options vestvested in three installments with 1,250,000 vesting immediately and 625,000 vesting each in April 2020 and April 2021. All of the options expire in April, 2029.2029. The value allocated to the vested options was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 213%%, risk free interest rate of 2.32%% and an expected useful life of years. The fair value of the vested options of $812,500$812,500 was recorded as compensation expense and allocated to Paid in Capital in 2019. In 2021 and 2020, the fair value of the options which vested in April 2020 of $406,250the respective year of $406,250 was recorded as compensation expense and allocated to Paid in Capital. The fairAll of the remaining unvested options is $406,250were vested as of SeptemberJune 30, 2020.2021.
On April 3, 2019 the Board of Directors of the Company amended certain warrant certificates which had been issued to Mr. Kamin covering 3,000,000 warrants to purchase common stock of the Company. The original warrants expired on December 31, 2021 and had exercise prices of $0.15 and $0.25 for 500,000 and 2,500,000 shares, respectively. The warrants were extended to expire on April 2, 2029. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 213%, risk free interest rate of 2.32% and an expected useful life of 5 years. The fair value of the warrants of $620,750 was recorded as compensation expense and allocated to Paid in Capital.
On August 7, 2020 concurrently with the Joint Development Agreement with Petroleum & Independent Exploration, LLC and related entities (“PIE”), the companies entered into a Securities Purchase Agreement (“Securities Agreement”) whereby PIE purchased for $525,000 (a) 3,500,000 shares of Empire common stock, (b) warrants to purchase 2,625,000 shares of Empire common stock at an exercise price of $0.20 per share, (c) warrants to purchase 1,800,000 shares of Empire common stock at an exercise price of $0.25 per share, (d) warrants to purchase 8,136,518 shares of Empire common stock at an exercise price of $0.10 per share, and (e) warrants to purchase up to 11,066,667 shares of Empire common stock at an exercise price of $0.141$ per share. PIE is obligatedshare pursuant to exercisevarious vesting provisions as detailed in the $0.20 warrants within 45 days of when 3 month trailing average production from the Empire Texas properties have increased by 20% over the trailing 3 month trailing average production as of July 2020. PIE can only exercise the $0.25 warrants once all existing non-PIE outstanding warrants to purchase Empire common stock have been exercised or lapsed. For the $0.141 warrants, PIE may initially acquire 7,533,333 shares of Empire common stock, however the amount may be increased if any existing non-PIE warrants are exercised prior to December 31, 2020.Securities Agreement. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 147%%, risk free interest rate of .19%.% and an expected useful life of . The fair value of the warrants of $450,848 $450,848 was allocated to paid in capital (See Note 8). On March 11, 2021 the Company amended the Securities Agreement to remove the vesting provisions for the warrants and PIE exercised the warrants for an aggregate exercise price of $3,349,052 (See Note 8).
During February and March 2021, the Company issued to a group of accredited investors 8,993,858 shares of its common stock and warrants to purchase shares of its common stock for $ per share which expires on December 31, 2022. Proceeds from the sale were $3,147,850. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of %, risk free interest rate of .14% and an expected useful life of 21 months. The fair value of the warrants of $2,350,407 was allocated to Paid in CapitalCapital. For the six months ended June 30, 2021, warrants for shares of common stock have been exercised.
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In connection with the purchase of XTO assets (See Note 7) the Company 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 Fund Ltd, a related party (See Note 11). 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 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. The value allocated to the common stock, conversion feature, and warrants was $10,125,177.
Additionally, in conjunction with the purchase of XTO assets (See Note 7), the Company entered into $3,243,000 of Unsecured Convertible Notes (the “Unsecured Notes”) with a group of accredited investors. The Unsecured Notes mature on May 9, 2022 with a single payment and bear interest at 5% (See Note 11). The Unsecured Note holders may convert their notes to common stock of the Company at the lesser of $1.25 per share or the price per share offered by the Company if the Company has a future capital raise. At June 30, 2021 $1,500,000 of the Unsecured Notes have been converted into shares of common stock of the Company. The value allocated to the conversion feature was $544,824.
14. RELATED PARTY TRANSACTIONS
The Energy Evolution Master Fund, Ltd. (“Energy Evolution”) is a related party of the Company as it beneficially owns approximately 21.4% of the Company’s outstanding shares of common stock as of June 30, 2021. Additionally, a board member of Energy Evolution is a related party of the Company as he separately beneficially owns approximately 23.58% of the Company’s outstanding shares of common stock as of June 30, 2021. The board member also is a majority owner of Petroleum & Independent Exploration, LLC and related entities (“PIE ”).
In March 2021, the majority owner of PIE, through the exercise of warrants, became a significant shareholder of the Company’s outstanding shares of stock (See Note 12). The Company has a joint development agreement with PIE to perform recompletion or workover on specified mutually agreed upon wells (See Note 8). As of June 30, 2021, the Company has incurred obligations of $462,959 as a part of the joint development agreement (See Note 10).
In connection with the purchase of XTO assets (See Note 7) the Company issued a Senior Secured Convertible Note due December 31, 2021, in the aggregate principal amount $16,250,000 (the “Secured Note”) to Energy Evolution Ltd (See Note 11). As partial consideration for the issuance of the Secured 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 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. As of June 30, 2021 the Company has repaid principal $2,800,000 plus interest of $56,472 on the Secured Note.
Additionally, Energy Evolution Ltd, provided an Unsecured Convertible Note in the principal balance of $1,500,000 (See Note 11). The funds received by the Company in connection with the issuance of the Unsecured Convertible Notes were used to pay a performance bond required in connection with the XTO acquisition. Energy Evolution Ltd. has converted its Unsecured Convertible Note to shares of the Company’s common stock as of June 30, 2021.
Energy Evolution, Ltd also purchased shares of the Company’s common stock in May, 2021 which had been offered as an inducement to purchase the Unsecured Convertible Notes (See Note 10).
Concurrent with the acquisition and financing of the XTO assets (See Note 7), the Company made an investment in Energy Evolution Fund LP, an affiliate of Energy Evolution Ltd, a related party, in the amount of $1,250,000 (See Note 3). The investment was mutually terminated on August 19, 2021 (See Note 17).
15. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental Cash Flow Information for the six months ended June 30, 2021 and 2020:
| 2021 | 2020 | |||||||
| Cash Paid for Interest | $ | 469,638 | $ | 306,333 | ||||
| Non-cash Investing and Financing Activities: | ||||||||
| Non-cash Additions to Asset Retirement Obligations | $ | 6,117,709 | $ | 9,508,484 | ||||
| Unsecured Convertible Note conversion | $ | 1,500,000 | $ | — | ||||
| Purchases of oil and natural gas properties and deposits in accounts and notes payable, royalty suspense, and contingent payable to seller | $ | 290,325 | $ | 2,569,863 | ||||
| Note payable issued - PIE Agreement (see Note 8) | $ | 147,686 | $ | — | ||||
| Equipment purchased utilizing notes payable | $ | 199,226 | $ | — | ||||
| Forgiveness of PPP loan | $ | 160,700 | $ | — | ||||
| Shares and warrants issued for Secured Convertible Note | $ | 4,594,500 | $ | — | ||||
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16. COMMITMENTS AND CONTINGENCIES
12.
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 June 30, 2021.
On March 22, 2021 the Company, through its wholly owned subsidiary, Empire ND Acquisitions, LLC, entered into a purchase and sale agreement with 31 Group, LLC to acquire among other things, certain oil and gas properties in North Dakota. The purchase price was $900,000, payable one year from the closing date, and is reduced by certain expenses which the Company might incur relating to the properties or assessment of certain wells as uneconomic for up to one year from the closing date. Prior to filing the assignment and the transfer of operatorship of the wells, Empire received notice of a temporary restraining order issued by the District Court in Rockwall County, Texas enjoining 31 Group from transferring any assets to Empire. The Company and 31 Group, LLC negotiated a termination agreement which was signed July 22, 2021 which returned both parties to their pre-Agreement position.
17. SUBSEQUENT EVENTS
On October July 7, 2021 the Company entered into the Fourth Amendment to its Senior Revolver Loan Agreement (“the Amended Agreement”) with CrossFirst Bank (“CrossFirst”). The Amended Agreement revolver extends the maturity of the loan to March 27, 2024 and provides a commitment amount of $7,980,000 which is reduced by $300,000 each calendar quarter beginning September 30, 2021. Beginning September 30, 2021, the Amended Agreement requires the Company maintain commodity derivatives at certain thresholds based on projected production and to maintain certain covenants including an EBITDAX to interest expense of at least 3:1 2020and funded debt to EBITDAX of 5:1 on a trailing twelve-month basis.
On July 22, 2021 the Company and 31 Group, LLC entered into a Mutual Termination Agreement which terminated the purchase and sale agreement of March 22, 2021 between the companies. (See Note 16).
On August 19, 2021 the Company entered into a new office lease agreement.Mutual Termination Agreement with the Energy Evolution Fund, LP to terminate and rescind the Company’s $1,250,000 investment in the Energy Evolution Fund, LP (See Note 3). The termproceeds from the recission were applied to the outstanding balance of the lease is 63 months commencing OctoberSecured Convertible Note Payable (See Note 11).
Between July 1, 2020 through 2021 and August 23, 2021 warrants to purchase 571,429 shares of the Company’s common stock were exercised. The Company realized $285,714 from the exercise. In addition, options to purchase shares of the Company’s common stock were exercised.
On August 18, 2021 the Board of Directors of the Company approved the compensation plan for non-employee members of the Company’s Board of Directors. Under the plan, each non-employee Director will receive a Board fee of $80,000 and shares of the Company’s common stock, which vests on December 31, 2025 with lease rates ranging from $0 per month for the first three months to $13,038 per month for the final year. The Company is accounting for the lease as an operating lease.2021.
In October 2020 the Company entered into a $306,000 Letter of Credit agreement, utilizing the commitment under its Senior Revolver Loan Agreement (see Note 10).
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| Item 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
GENERAL TO ALL PERIODS
RESULTS OF OPERATIONS
The Company's primary business is the exploration and development of oil and natural gas interests. The Company has incurred significant losses from operations, and there is no assurance that it will achieve profitability or obtain the funds necessary to finance its operations. For all periods presented, the Company's effective tax rate is 0%. The Company has generated net operating losses since inception, which would normally reflect a tax benefit in the condensed consolidated statement of operations and a deferred asset on the condensed consolidated balance sheet. However, because of the current uncertainty as to the Company's ability to achieve profitability, a valuation reserve has been established that offsets the amount of any tax benefit available for each period presented in the condensed consolidated statements of operations.
The following table sets forth a summary of our production and operating data for the three and nine month periods ended SeptemberJune 30, 2021 and 2020. Because of normal production declines, increased or decreased drilling activities, fluctuations in commodity prices and the effects of acquisitions or divestitures, the historical information presented below should not be interpreted as being indicative of future results.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Production and operating data: | ||||||||||||||||
| Net Production volumes: | ||||||||||||||||
| Oil (Bbl) (a) | 66,358 | 38,176 | 106,285 | 74,060 | ||||||||||||
| Natural gas (Mcf) (b) | 114,477 | 45,423 | 155,482 | 57,863 | ||||||||||||
| Natural gas liquids (Gal) (c) | 775,951 | — | 899,543 | |||||||||||||
| Total (Boe) (d) | 103,913 | 45,747 | 153,616 | 83,704 | ||||||||||||
| Average price per unit: | ||||||||||||||||
| Oil (Bbl) (a) | $ | 58.54 | $ | 36.63 | $ | 54.71 | $ | 43.45 | ||||||||
| Natural gas (Mcf) (b) | 2.60 | 1.95 | 3.57 | 1.84 | ||||||||||||
| Natural gas liquids (Gal) (c) | 0.55 | — | 0.53 | — | ||||||||||||
| Total (Boe) (d) | $ | 44.34 | $ | 32.51 | $ | 44.54 | $ | 39.72 | ||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Production and operating data: | ||||||||||||||||
| Net Production volumes: | ||||||||||||||||
| Oil (Bbl) (a) | 43,126 | 34,276 | 117,186 | 76,687 | ||||||||||||
| Natural gas (Mcf) (b) | 70,875 | 10,501 | 128,738 | 33,555 | ||||||||||||
| Total (Boe) (c) | 54,938 | 36,026 | 138,648 | 82,280 | ||||||||||||
| Average price per unit: | ||||||||||||||||
| Oil (Bbl) (a) | 40.58 | 52.92 | 42.39 | 54.03 | ||||||||||||
| Natural gas (Mcf) (b) | 1.44 | 3.14 | 1.62 | 2.98 | ||||||||||||
| Total (Boe) (c) | 33.72 | 51.27 | 37.34 | 51.57 | ||||||||||||
| (a) | Bbl - One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in reference to oil, condensate or natural gas liquids. |
| (b) | Mcf - One thousand cubic feet of natural gas. |
| (c) | Gal - One gallon of natural gas liquids. |
(d) | 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. |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Operating costs and expenses per Boe: | ||||||||||||||||
| Oil and natural gas production | $ | 23.42 | $ | 43.79 | $ | 25.07 | $ | 36.11 | ||||||||
| Production taxes | $ | 1.61 | $ | 3.05 | $ | 1.68 | $ | 3.15 | ||||||||
| Depreciation, depletion, amortization and accretion | $ | 4.63 | $ | 23.11 | $ | 7.28 | $ | 21.67 | ||||||||
| Impairment of oil and natural gas properties | $ | — | $ | — | $ | 5.77 | $ | — | ||||||||
| General and administrative | $ | 23.27 | $ | 13.04 | $ | 26.85 | $ | 38.00 | ||||||||
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | ||||||||||||||
| Operating costs and expenses per Boe: | ||||||||||||||||
| Oil and natural gas production | $ | 22.26 | $ | 15.82 | $ | 24.29 | $ | 26.16 | ||||||||
| Production taxes | $ | 4.03 | $ | 1.32 | $ | 3.83 | $ | 1.73 | ||||||||
| Depreciation, depletion, amortization and accretion | $ | 8.04 | $ | 16.26 | $ | 8.47 | $ | 13.27 | ||||||||
| Impairment of oil and natural gas properties | $ | — | $ | — | $ | — | $ | 9.56 | ||||||||
| General and administrative | $ | 30.99 | $ | 41.85 | $ | 26.86 | $ | 29.19 | ||||||||
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THREE-MONTH PERIOD ENDED SEPTEMBERJUNE 30, 20202021 COMPARED TO THREE-MONTH PERIOD ENDED SEPTEMBERJUNE 30, 2019.2020.
For the three months ended SeptemberJune 30, 20202021 and 2019,2020, revenues from oil, and natural gas, and other products sales were $ 1,645,4034,901,464 and $1,695,264$994,529 respectively. In 2020, due to COVID and other economic factors, prices of oil and natural gas declined, resulting in the Company reducing volumes produced. In 2021, the Company included revenue from the XTO properties for a portion of the period, which were not owned in 2020.
Operating expenses, production taxes, depreciation and depletion and amortization and accretion decreasedincreased to $1,905,055$3,567,101 cumulatively for the three months ended SeptemberJune 30, 20202021 from $2,519,942$1,527,715 for the same period in 2019.2020. The decreaseincrease was primarily due to increased production due to the addition of the XTO properties for a decrease in costs associated with oil and natural gas production, which was constrained duringportion of the period due to management’s reduction of production in response to lower prices.2021.
Net realized and unrealized gain (loss) on derivatives decreased to $(103,166)$(182,034) for the three months ended SeptemberJune 30, 2020,2021, from $492,862$(402,374) in the same period 20192020 due primarily to decreasesincreases in oil prices since June 30, 2020in 2021 and increasesdecreases in oil prices during the same period in 2019,2020, respectively, for those contracts in existence at that date.
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General and administrative expenses increased by $808,875$1,305,698 to $1,278,667$3,220,104 for the three months ended SeptemberJune 30, 2020,2021, from $469,792$1,914,406 for the same period in 2019.2020. The increase was primarily due to an increased number of employees and professional fees related to the Pardus acquisition. ForXTO asset acquisitions in 2021 and the three month period$989,115 “right to buy” expense in 2020, expenses includedconjunction with the $75,000 loss forissuance of the acquisition deposit on the Ovintiv properties.unsecured convertible notes.
Interest expense was $124,887$2,768,606 and $145,345$123,219 for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. The decreaseincrease in interest expense of $20,458$2,645,387 resulted primarily from lower interest ratesand amortization of debt issue costs for the convertible notes issued in 2020.2021 ($2,611,221 for the three months ended June 30, 2021).
For the reasons discussed above, the previous period net loss increased by $694,419$2,298,780 from $(946,953)$(2,973,185) for the three months ended SeptemberJune 30, 20192020 to net loss of $(1,641,372)$(5,271,965) for the three months ended SeptemberJune 30, 2020.2021.
NINE-MONTHSIX-MONTH PERIOD ENDED SEPTEMBERJUNE 30, 20202021 COMPARED TO NINE-MONTHSIX-MONTH PERIOD ENDED SEPTEMBERJUNE 30, 20192020
For the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, revenues from oil, and natural gas, and other products sales were $ 3,954,3327,357,922 and $4,016,232$2,308,929 respectively. The Company purchased significant oil and natural gas properties in the second quarter of 2019 which were not included in 2019 revenues. In the second and third quarter of 2020, due to COVID and other economic factors, prices of oil and natural gas declined, resulting in the Company reducing volumes produced. In 2021, the Company included revenue from the XTO properties for a portion of the period, which were not owned in 2020 and the Pardus assets for all of 2021 which were only owned for a portion of the 2020 period.
Operating expenses, production taxes, depreciation and depletion and amortization and accretion excluding impairment, increased to $5,349,655 cumulatively$5,619,948 for the ninesix months ended SeptemberJune 30, 20202021 from $5,013,319$3,444,600 for the same period in 2019.2020. The increase was primarily due primarilyto increased production due to the addition of the XTO properties for a portion of the period in 2021 which were not owned in 2020 and the production from the Pardus assets for the full period in 2021 compared to only a partial period of production in 2019 becauseportion of the EnergyQuest acquisition March 2019 and lower production volumessame period in 2020.
Impairment of oil and natural gas properties expense increaseddecreased to $800,452$-0- for the ninesix months ended SeptemberJune 30, 20202021 from $0$800,452 for the same period in 2019.2020. The increasedecrease was due to the change in market prices for oil and natural gas in 2020.2021.
Net realized and unrealized gainLoss on derivatives increased to $2,003,505$(539,949) for the ninesix months ended SeptemberJune 30, 2020,2021, from $925,231a gain of $2,106,671 in the same period 20192020 due to decreasean increase in oil prices since the agreements were entered into, or since December 31, 2020 and 2019 respectively, for those contracts in existence at that date, to the date of maturity or the balance sheet date. Additionally, the Company had fewer derivative contracts in 2021.
General and administrative expenses increased by $595,654$1,682,759 to $3,722,057$4,126,149 for the ninesix months ended SeptemberJune 30, 2020,2021, from $3,126,403$2,443,390 for the same period in 2019.2020. The increase was primarily due to $800,000an increased number of employees and professional fees related to the XTO asset acquisitions in 2021 and the $989,115 “right to buy” expense in conjunction with the issuance of the unsecured convertible notes. In 2020, expenses included the $725,000 allowance for the acquisition deposit on the Ovintiv properties in 2020 offset by options and warrants issued and professional fees and travel related to the acquisition of oil and natural gas properties in 2019.properties.
Interest expense was $380,975$2,905,434 and $342.256$256,088 for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. The increase in interest expense of $38,719$2,649,346 resulted primarily from interest and amortization of debt issue costs for the debt issued to acquire oil and natural gas propertiesconvertible notes in 2021 ($2,611,221 for the second quarter of 2019 and lower interest rates in 2020.six months ended June 30, 2021).
For the reasons discussed above, the previous period net loss decreasedincreased by $513,973$4,883,972 from $(3,540,515)$(1,385,170) for the ninesix months ended SeptemberJune 30, 20192020 to net loss of $(3,026,542)$(6,269,142) for the ninesix months ended SeptemberJune 30, 2020.2021.
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LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As of SeptemberJune 30, 2020,2021, the Company had $134,374$1,016,877 of cash. The Company expects to incur costs related to future oil and natural gas acquisitions for the foreseeable future. It is expected that management will attempt to raise additional capital for future investment opportunities and working capital opportunities.(See Note 1).
OUTLOOK
OUTLOOK
See Notes 3 through 85, 6 and 9 to the financial statements for information regarding the purchase and development agreements the Company entered into in 20192020 and 20202021 to purchase and develop existing oil and natural gas properties and mineral interests. The Company is also actively pursuing the acquisition of other operated and non-operated oil and natural gas properties. It is anticipated that such acquisitions will be financed through equity or debt transactions.
Lower oil and natural gas prices present challenges to our industry and our Company. The economic impact of the COVID-19 pandemic have caused oil price volatility in 2020. In the first three quarters of 2020, gains on settled derivatives offset a large portion of the impact of the recent decline in prices and slower production, and we currently have derivative positions in place for a substantial amountportion of our expected remaining 20202021 production. There can be no assurance that we will be able to add derivative positions to cover the remainder of our expected production at favorable prices.
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The Impact of COVID-19 on Our Business
During the first three quartersIn 2020, there was a global outbreak of 2020, we did not experience any material impact to our ability to operate or market our production due to the direct or indirect impactsCOVID-19 which has resulted in changes in global supply and demand of the COVID-19 pandemic. The Cybersecuritycertain mineral and Infrastructure Security Agency in the U.S. Department of Homeland Security classifies individuals engaged in and supporting exploration for and production of natural gas, oil and NGLs as “essential critical infrastructure workforce,” and to date, state and local governments where our wells are located have followed this guidance and exempted these activities from business closures. Should this situation change, our access to supplies or workers to drill, complete and operate wells could be materially and adversely affected.energy products.
However, as decreasedDecreased transportation, manufacturing and general economic activity levels prompted by COVID-19 and related governmental and societal actions have reduced the demand for oil-based products such as gasoline, jet fuel and other refined products, space to store oil and condensate production is reaching or may reach capacity in some areas, which is promptingprompted purchasers of oil and condensate to reduce future purchase levels and, in some cases, to claim force majeure for purchases already contracted.levels. These situations may leadled to production greater than storage capacity later inat some points during the year, depending on weather and other seasonal factors. In addition, commodity pricing challenges may cause our production costs to exceed the revenues associated with such production.year. To the extent that this decreased demand for our commodities continues and our margins are not at acceptable levels or storage for our production is not available, we may have to reduce production from or completely shut inshut-in portions of our currently producing wells. The inability to sell our production or the decision to potentially reduce or shut in our production could materially and adversely affect our operating results and our ability to comply with the financial covenants under our credit facility.Credit Facility.
There is uncertainty around the continuing extent and duration of the disruption. The degree to which the COVID-19 pandemic or any other public health crisis adversely impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, its impact on the economy and market conditions, and how quickly and to what extent normal economic and operating conditions can resume. Therefore, while we expect this matter will likely continue to disrupt our operations, the degree of the adverse financial impact cannot be reasonably estimated at this time.time
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, that 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 different 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 Form 10-K for the year ended December 31, 2019.2020. 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.
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MATERIAL RISKS
The Company has incurred significant losses from operations and there is no assurance that it will achieve profitability or obtain the funds necessary to finance continued operations. For other material risks, see the Company's Form 10-K for the year ended December 31, 2019,2020, which was filed on March 30, 2020.31, 2021.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an evaluation under the supervision of the Company's President (and principal financial officer) of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Securities Exchange Act Rules 13a - 15(e) and 15d - 15(e). Based on this evaluation, the Company's President (and principal financial officer) has concluded that the disclosure controls and procedures as of the end of the period covered by this report are not effective. As described in the Company‘s Annual Report on Form 10-K filed with the Securities and Exchange commission (the “SEC”) on March 31, 2021, our Chief Executive Officer and President (principal financial officer) concluded that, as of December 31, 2020, our reporting and disclosure controls and procedures were not effective at a reasonable assurance level as we do not have sufficient resources in our accounting function, which restricts the Company’s ability to gather, analyze and properly review information related to financial reporting in a timely manner. In addition, due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. The Company engaged a financial consultant during the first quarter to assist with the evaluation of its disclosure controls and procedures and will continue to perform additional analysis and procedures to implement appropriate disclosure controls and procedures. Notwithstanding the assessment that our disclosure controls and procedures were not effective, we believe that our condensed consolidated financial statements fairly present our consolidated financial position, results of operations and cash flows for the periods thereby covered in all material respects.
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PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings |
None.
| Item 1A. | Risk Factors |
Not applicable.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Mine Safety Disclosures |
Not applicable.
| Item 5. | Other Information |
None.
| Item 6. | Exhibits |
| 31.1 | Certification of Thomas Pritchard, Chief Executive Officer, pursuant to Rules 13a - 14 (a) and 15(d) - 14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(1) (31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (submitted herewith). |
| 31.2 | Certification of Michael R. Morrisett, President and principal financial officer, pursuant to Rules 13a - 14 (a) and 15(d) - 14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(1) (31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (submitted herewith). |
| 32.1 | Certification of Thomas Pritchard, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (submitted herewith). |
| 32.2 | Certification of Michael R. Morrisett, President and principal financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (submitted herewith). |
| 101 | Financial Statements for Inline XBRL format (submitted herewith). |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
-20--24-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: | By: | /s/ Michael R. Morrisett | |
| Michael R. Morrisett | |||
| President | |||
| (principal financial officer) | |||
| Date: | By: | /s/ Thomas Pritchard | |
| Thomas Pritchard | |||
| Chief Executive Officer | |||
-21--25-
EXHIBIT INDEX
-22-
-26-