EMPIRE PETROLEUM CORP 10-K

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Market Information The Company's Common Stock is traded on the OTCQB under the symbol "EMPR". The following table sets forth the high and low bid information for the Company's common stock during the time periods indicated. Year ended December 31, 2019: Quarter ending : High Low 03/31/19 $0.39 $0.10 06/30/19 $0.75 $0.20 09/30/19 $0.35 $0.13 12/31/19 $0.20 $0.11 Year ended December 31, 2020: Quarter ending : High Low 03/31/20 $0.24 $0.01 06/30/20 $0.22 $0.05 09/30/20 $0.47 $0.11 12/31/20 $0.39 $0.31 Quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions. At December 31, 2020, there were approximately 270 stockholders of record of the Company's Common Stock. Dividends The Company has never paid cash dividends on its Common Stock. The Company intends to retain future earnings for use in its business and, therefore, does not anticipate paying cash dividends on its Common Stock in the foreseeable future. ITEM 6.       SELECTED FINANCIAL DATA. Not applicable. ITEM 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Cautionary Note Regarding Forward-Looking Statements. All statements, other than statements of historical fact, contained in this report are forward-looking statements. Forward-looking statements generally are accompanied by words such as "anticipate," "believe," "estimate," "expect," "may," "might," "potential," "project" or similar statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to be correct. Factors that could cause results to differ materially from the results discussed in such forward-looking statements include: · the need for additional capital, · the costs expected to be incurred in exploration and development, - 8 - · unforeseen engineering, mechanical or technological difficulties in drilling wells, · uncertainty of exploration results, · operating hazards, · competition from other natural resource companies, · the fluctuations of prices for oil and gas, · the effects of governmental and environmental regulation, and · general economic conditions and other risks described in the Company's filings with the Securities and Exchange Commission (the "SEC"). Information on these and other risk factors are discussed under "Factors That May Affect Future Results" below. Accordingly, the actual results of operations in the future may vary widely from the forward-looking statements included herein, and all forward-looking statements in this Form 10-K are expressly qualified in their entirety by the cautionary statements in this paragraph. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief and expectations only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Factors That May Affect Future Results The Company has limited financial resources. For the past four years, the Company has financed its operations significantly from sales of its equity securities and convertible notes issued to individual investors. There is no assurance that the Company will be able to continue to finance its operations through the sale of its equity securities, or through loans or advances by third parties. For the past three years, in addition to sales of equity securities and convertible notes, the Company has utilized bank note payable financing to fund property acquisitions and operations. There is no assurance that the Company will be able to obtain debt financing in the future. In 2020 and 2019, the Company acquired certain oil and gas properties. However, the Company reported losses of $(16,835,433) and $(6,654,602) for the years ended December 31, 2020 and 2019, respectively. The Company also had an accumulated deficit of $(40,618,381) as of December 31, 2020. The Company can provide no assurance that it will be profitable in the future and, if the Company does not become profitable, it may have to suspend its operations. As a result of the foregoing, the audit report of the Company's independent registered public accounting firm relating to the Company's financial statements has been modified because of a going concern uncertainty. If the Company is able to raise the funds necessary to continue its operations, its future performance will be dependent on the success of its investments. The failure of drilling activities to achieve sufficient quantities of economically attractive reserves and production would have a material adverse effect on the Company's liquidity, operations and financial results. Our management concluded that, as of December 31, 2020, our reporting and disclosure controls and procedures were not effective at a reasonable assurance level, and if we fail to remediate material weakness identified by our management, we may not be able to accurately report our financial results, and current and potential stockholders may lose confidence in our financial reporting. Our management concluded that, as of December 31, 2020, our reporting and disclosure controls and procedures were not effective at a reasonable assurance level. Notwithstanding the assessment that our internal control over financial reporting was not effective and that there is a material weakness as identified by our management, we believe that our consolidated financial statements contained in this Annual Report on Form 10-K fairly present our consolidated financial position, results of operations and cash flows for the periods covered thereby in all material respects. Any failure to remediate material weakness identified by our management could adversely impact our ability to report our financial results on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely basis as required by the SEC, we could face severe consequences from the SEC. In such event, there could result a material adverse effect on our business. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock. A substantial or extended decline in oil and natural gas prices may adversely affect our business, financial condition or results of operations and our ability to meet our capital expenditure obligations and financial commitments. The price we receive for our oil and natural gas production heavily influences our revenue, profitability, access to capital and future rate of growth. Oil and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, the markets for oil and natural gas have been volatile. These markets will likely continue to be volatile in the future. The prices we receive for our production, and the levels of our production, depend on numerous factors beyond our control. These factors include, but are not limited to, the following: ● changes in global supply and demand for oil and natural gas, which could be negatively affected by concerns about the ongoing impact of COVID-19; ● the price and quantity of imports of foreign oil and natural gas; ● political conditions, including embargoes, in or affecting other oil-producing activity; - 9 - ● the level of global oil and natural gas exploration and production activity; ● the level of global oil and natural gas inventories; ● weather conditions; ● technological advances affecting energy consumption; and ● the price and availability of alternative fuels. Lower oil and natural gas prices may not only decrease our revenues on a per unit basis but also may reduce the amount of oil and natural gas that we can produce economically. Lower prices also negatively impact the value of our proved reserves. The recent volatility in the price of oil has forced the Company, as well as other operators, to re-evaluate our current capital expenditure budget and make changes accordingly that we believe are in the best interest of the Company and its stockholders. A substantial or extended decline in oil or natural gas prices may materially and adversely affect our future business, financial condition, results of operations, liquidity or ability to finance planned capital expenditures. The Company could be adversely affected by increased costs of service providers utilized by the Company. In accordance with customary industry practice, the Company has relied and will rely on independent third-party service providers to provide most of the services necessary to operate. The industry has experienced significant price fluctuations for these services during the last year and this trend is expected to continue into the future. These cost uncertainties could, in the future, significantly increase the Company's production costs. Our producing properties and proved reserves are concentrated in North Dakota, Montana, Texas and Louisiana, making us vulnerable to risks associated with operating in limited major geographic areas. Our producing properties are geographically concentrated in North Dakota, Montana, Texas and Louisiana. At December 31, 2020, all of our total estimated proved reserves were attributable to properties located in these areas. As a result of this concentration, we are exposed to the impact of regional supply and demand factors, delays or interruptions of production from wells in this area caused by governmental regulation, processing or transportation capacity constraints, market limitations, severe weather events, water shortages or other drought related conditions or interruption of the processing or transportation of oil or natural gas. This concentration of assets exposes us to additional risks, such as changes in field-wide rules and regulations that could cause us to permanently or temporarily shut-in all of our wells within a field. The Standardized Measure and PV-10 of our estimated reserves may not be accurate estimates of the current fair value of our estimated proved oil and natural gas reserves. Standardized Measure is a reporting convention that provides a common basis for comparing oil and natural gas companies subject to the rules and regulations of the SEC. Our non-GAAP (Generally Accepted Accounting Principles) financial measure, PV-10, is a similar reporting convention that we have disclosed in this report. Both measures require the use of operating and development costs prevailing as of the date of computation. Consequently, they will not reflect the prices ordinarily received or that will be received for oil and natural gas production because of varying market conditions, nor may it reflect the actual costs that will be required to produce or develop the oil and natural gas properties. Accordingly, estimates included herein of future net cash flows may be materially different from the future net cash flows that are ultimately received. In addition, the 10 percent discount factor, which is required by the rules and regulations of the SEC to be used in calculating discounted future net cash flows for reporting purposes, may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with our company or the oil and natural gas industry in general. Therefore, Standardized Measure and PV-10 included in this report should not be construed as accurate estimates of the current fair value of our proved reserves. Our reserve estimates and our computation of future net cash flows at December 31, 2020 are based on SEC pricing of (i) $ 33.35 per Bbl oil price and (ii) $ 1.41 per MMBtu natural gas price. Climate change legislation, regulations restricting emissions of “greenhouse gases” (GHG’s) or legal or other action taken by public or private entities related to climate change could result in increased operating costs and reduced demand for the oil and natural gas that we produce. In response to findings that emissions of carbon dioxide, methane and other greenhouse gases present an endangerment to public health and the environment, the EPA has issued regulations to restrict emissions of GHGs under existing provisions of the CAA. These regulations include limits on tailpipe emissions from motor vehicles and preconstruction and operating permit requirements for certain large stationary sources. The EPA has also adopted rules requiring the reporting of GHG emissions from specified large GHG emission sources in the United States, as well as certain onshore oil - 10 - and natural gas production facilities, on an annual basis, including GHG emissions resulting from the completion and workover operations of hydraulically fractured oil wells. Recent federal regulatory action with respect to climate change has focused on methane emissions. For example, in June 2016, the EPA finalized new air emission controls for emissions of methane from certain equipment and processes in the oil and natural gas source category, including production, processing, transmission and storage activities. The final rule package includes first-time standards to address emissions of methane from equipment and processes across the source category, including hydraulically fractured oil and natural gas well completions, and also imposes leak detection and repair requirements on operators. However, in June 2017, the EPA proposed a two year stay of fugitive emissions monitoring requirements, pneumatic pump standards, and closed vent system certification requirements in the 2016 rule while it reconsiders these aspects of the rule. Additionally, on September 11, 2018, the EPA proposed targeted improvements to the 2016 rule, including amendments to the rule’s fugitive emissions monitoring requirements, and expects to “significantly reduce” the regulatory burden of the rule in doing so. The BLM finalized similar rules in November 2016 that limit methane emissions from new and existing oil and natural gas operations on federal lands through limitations on the venting and flaring of gas, as well as enhanced leak detection and repair requirements but then finalized a revised rule in 2018 which scaled back the waste prevention requirements of the 2016 rule. Environmental groups have sued in federal district court to challenge the legality of aspects of the revised rule, and the outcome of this litigation is currently uncertain. These methane emission rules have the potential to increase our compliance costs. While Congress has from time to time considered legislation to reduce emissions of GHGs, there has not been significant activity in the form of adopted legislation to reduce emissions of GHGs in recent years. In the absence of Congressional action, many states have established rules aimed at reducing GHG emissions, including GHG cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions, such as electric power plants, or major producers of fuels, such as refineries and natural gas processing plants, to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall GHG emission reduction goal. In the future, the United States may also choose to adhere to international agreements targeting GHG reductions. The adoption of legislation or regulatory programs to reduce emissions of GHGs could require us to incur increased operating costs, such as costs to purchase and operate emissions control systems, to acquire emissions allowances or to comply with new regulatory or reporting requirements. Any such legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for, the oil and natural gas we produce. Consequently, legislation and regulatory programs to reduce emissions of GHGs could have an adverse effect on our business, financial condition and results of operations. Reduced demand for the oil and natural gas that we produce could also have the effect of lowering the value of our reserves. It should also be noted that some scientists have concluded that increasing concentrations of GHGs in the earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our financial condition and results of operations. In addition, there have also been efforts in recent years to influence the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds promoting divestment of fossil fuel equities and pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations and ability to access capital. Finally, increasing attention to the risks of climate change has resulted in an increased possibility of lawsuits or investigations brought by public and private entities against oil and natural gas companies in connection with their GHG emissions. Should we be targeted by any such litigation or investigations, we may incur liability, which, to the extent that societal pressures or political or other factors are involved, could be imposed without regard to the causation of or contribution to the asserted damage, or to other mitigating factors. The ultimate impact of GHG emissions-related agreements, legislation and measures on our company’s financial performance is highly uncertain because the Company is unable to predict with certainty, for a multitude of individual jurisdictions, the outcome of political decision-making processes and the variables and tradeoffs that inevitably occur in connection with such processes. The Company's insurance policies may not adequately protect the Company against certain unforeseen risks. In accordance with customary industry practice, the Company maintains insurance against some, but not all, of the risks described herein. There can be no assurance that any insurance will be adequate to cover the Company's losses or liabilities. The Company cannot predict the continued availability of insurance, or its availability at premium levels that justify its purchase. The Company is subject to various environmental risks, and governmental regulation relating to environmental matters. The Company is subject to a variety of federal, state and local governmental laws and regulations related to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous materials. These regulations subject the Company to increased operating costs and potential liability associated with the use and disposal of hazardous materials. Although these laws and regulations have not had a material adverse effect on the Company's financial condition or results of operations, there can be no assurance that the Company will not be required to make material expenditures in the future. Moreover, the Company anticipates that such laws and regulations will become increasingly stringent in the future, which could lead to material costs for environmental compliance and remediation by the Company. Any failure by the Company to obtain required permits for, control the use of, or adequately restrict the discharge of hazardous substances under present or future regulations could subject the Company to substantial liability or could cause its operations to be suspended. Such liability or suspension of operations could have a material adverse effect on the Company's business, financial condition and results of operations. - 11 - The Company's activities are subject to extensive governmental regulation. Oil and gas operations are subject to various federal, state and local governmental regulations that may be changed from time to time in response to economic or political conditions. From time to time, regulatory agencies have imposed price controls and limitations on production in order to conserve supplies of oil and gas. In addition, the production, handling, storage, transportation and disposal of oil and gas, by-products thereof and other substances and materials produced or used in connection with oil and gas operations are subject to regulation under federal, state and local laws and regulations primarily relating to protection of human health and the environment. To date, expenditures related to complying with these laws and for remediation of existing environmental contamination have not been significant in relation to the operations of the Company. There can be no assurance that the trend of more expansive and stricter environmental legislation and regulations will not continue. Estimates of proved reserves and future net cash flows are not precise. The actual quantities of our proved reserves and our future net cash flows may prove to be lower than estimated. Numerous uncertainties exist in estimating quantities of proved reserves and future net cash flows therefrom. Our estimates of proved reserves and related future net cash flows are based on various assumptions, which may ultimately prove to be inaccurate. Petroleum engineering is a subjective process of estimating accumulations of oil and natural gas that cannot be measured in an exact manner. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows depend upon a number of variable factors and assumptions, including the following: - historical production from the area compared with production from other producing areas; - the assumed effects of regulations by governmental agencies; - the quality, quantity and interpretation of available relevant data; - assumptions concerning future commodity prices; and - assumptions concerning future operating costs, severance and ad valorem taxes, development costs and workover and remedial costs. Because all reserve estimates are to some degree subjective, each of the following items, or other items not identified below, may differ materially from those assumed in estimating reserves: - the quantities of oil and natural gas that are ultimately recovered; - the production and operating costs incurred; - the amount and timing of future development expenditures; and - future commodity prices. Furthermore, different reserve engineers may make different estimates of reserves and cash flows based on the same data. Our actual production, revenues and expenditures with respect to reserves will likely be different from estimates and the differences may be material. As required by the SEC, the estimated discounted future net cash flows from proved reserves are based on the average previous twelve months first-of-month prices preceding the date of the estimate and costs as of the date of the estimate, while actual future prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by factors such as: - the amount and timing of actual production; - levels of future capital spending; - increases or decreases in the supply of or demand for oil and natural gas; and - changes in governmental regulations or taxation. - 12 - Accordingly, estimates included herein of future net cash flows may be materially different from the future net cash flows that are ultimately received. Therefore, the estimates of discounted future net cash flows in this report should not be construed as accurate estimates of the current market value of our proved reserves. Our business requires substantial capital expenditures. We may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a decline in our oil and natural gas reserves. The oil and natural gas industry is capital intensive. We make and expect to continue to make substantial capital expenditures for the acquisition, exploration and development of oil and natural gas reserves. At December 31, 2020, we had approximately $8.1 million of debt outstanding under our Bank Credit Facility, and we had approximately $.4 million of unused commitments under our Credit Facility. Expenditures for acquisition, exploration and development of oil and natural gas properties are the primary use of our capital resources. We intend to finance our future capital expenditures partially through borrowings under our Credit Facility. However, our cash flow from operations and access to capital are subject to a number of variables, including: - the volume of oil and natural gas we are able to produce from existing wells; - our ability to transport our oil and natural gas to market; - the prices at which our commodities are sold; - the costs of producing oil and natural gas; - global and domestic demand for oil and natural gas - global credit and securities markets; - the ability and willingness of lenders and investors to provide capital and the cost of the capital; - our ability to acquire, locate and produce new reserves; - the impact of potential changes in our credit ratings; and - our proved reserves. We may not generate expected cash flows and obtain the capital necessary to sustain our operations at current or anticipated levels. A decline in cash flow from operations or our financing needs may require us to revise our capital program or alter or increase our capitalization substantially through the issuance of debt or equity securities. The issuance of additional equity securities could have a dilutive effect on the value of our common stock. Additional borrowings under our Credit Facility or the issuance of additional debt securities will require that a greater portion of our cash flow from operations be used for the payment of interest and principal on our debt, thereby reducing our ability to use cash flow to fund working capital, capital expenditures and acquisitions. Additional financing also may not be available on acceptable terms or at all. In the event additional capital resources are unavailable, we may curtail drilling, development and other activities or be forced to sell some of our assets on an untimely or unfavorable basis. The failure to obtain additional financing could result in a curtailment of our operations relating to the development of our undeveloped acreage or the curtailment of acquisitions that may be favorable to us, which in turn could lead to a decline in our oil and natural gas reserves, and could adversely affect our production, revenues and results of operations. We have substantial indebtedness and may incur substantially more debt. Higher levels of indebtedness make us more vulnerable to economic downturn and adverse developments in our business We had approximately $9.0 million of outstanding aggregate principal indebtedness at December 31, 2020. At December 31, 2020, commitments from our bank group (as amended) were $8.5 million, of which approximately $.4 million was unused commitments. We continue to review our existing indebtedness, and we may seek to repay, refinance, repurchase, redeem, exchange or otherwise terminate our indebtedness. If we do seek to refinance our existing indebtedness, there can be no guarantee that we would be able to execute the refinancing on favorable terms or at all. As a result of our indebtedness, we use a portion of our cash flow to pay interest, which reduces the amount we have available to fund our operations and other business activities and could limit our flexibility in planning for or reacting to changes in our business and the industry in which we operate. Our indebtedness under our Credit Facility is at a variable interest rate, and so a rise in interest rates will generate greater interest expense. - 13 - We may incur substantially more debt in the future. Our Credit Facility contains restrictions on our incurrence of additional indebtedness. Any increase in our level of indebtedness could have adverse effects on our financial condition and results of operations, including: - imposing additional cash requirements on us in order to support interest payments, which reduces the amount we have available to fund our operations and other business activities; - increasing the risk that we may default on our debt obligations; - increasing our vulnerability to adverse changes in general economic and industry conditions, economic downturns and adverse developments in our business; - limiting our ability to sell assets, engage in strategic transactions or obtain additional financing for working capital, capital expenditures, general corporate and other purposes; - limiting our flexibility in planning for or reacting to changes in our business and the industry in which we operate; and - increasing our exposure to a rise in interest rates, which will generate greater interest expense. Our ability to meet our debt obligations and to reduce our level of indebtedness depends on our future performance, which is affected by general economic conditions and financial, business and other factors, many of which are out of our control. If we are unable to comply with the covenants in our debt agreements, there could be a default under the terms of the agreements, which could result in an acceleration of payment of funds that we have borrowed. Our ability to meet our debt obligations and other expenses will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors, many of which we are unable to control. If our cash flow is not sufficient to service our debt, we may be required to refinance debt, sell assets or sell additional equity on terms that we may not find attractive if it may be done at all. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest, if any, on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the agreements governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default: - the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest; - the lenders could elect to terminate their commitments thereunder and cease making further loans; and - we could be forced into bankruptcy or liquidation. If our operating performance declines, we may need to obtain waivers under our Senior Revolver Loan Agreement to avoid being in default. If we breach our covenants and cannot obtain a waiver from the required lenders, we would be in default and the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation. Our ability to use our existing net operating loss carryforwards or other tax attributes could be limited. At December 31, 2020, we had approximately $16.2 million of federal NOL carryforwards available to offset against future taxable income. Utilization of any NOL depends on many factors, including our ability to generate future taxable income, which cannot be assured. The Company is subject to intense competition. The Company operates in a highly competitive environment and competes with major and independent oil and gas companies for the acquisition of desirable oil and gas properties, as well as for the equipment and labor required to develop and operate such properties. Many of these competitors have financial and other resources substantially greater than those of the Company. - 14 - The Company currently depends on the Company's President and Chief Executive Officer. The Company is dependent on the experience, abilities and continued services of its current President, Michael R. Morrisett, and its Chief Executive Officer, Thomas Pritchard, who currently serve the Company without formal compensation plans. The loss or reduction of services of Mr. Morrisett and/or Mr. Pritchard could have a material adverse effect on the Company. There has been a limited public trading market for the Company's common stock, and there can be no assurance that an active trading market will be sustained. There can be no assurance that the Common Stock will trade at or above any particular price in the public market, if at all. The trading price of the Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results or even mild expressions of interest on a given day. Accordingly, the Common Stock could experience substantial price changes in short periods of time. Even if the Company is performing according to its plan and there is no legitimate company-specific financial basis for this volatility, it must still be expected that substantial percentage price swings will occur in the Company's Common Stock for the foreseeable future. The Company does not expect to declare or pay any dividends in the foreseeable future. The Company has not declared or paid any dividends on its Common Stock. The Company currently intends to retain future earnings to fund the development and growth of its business, to repay indebtedness and for general corporate purposes, and therefore, does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The Company’s operations may be subject to the COVID pandemic. In 2020, there was a global outbreak of COVID-19 which has resulted in changes in global supply and demand of certain mineral and energy products. Decreased transportation, manufacturing and general economic activity levels prompted by COVID-19 and related governmental and societal actions reduced the demand for oil-based products such as gasoline, jet fuel and other refined products, which prompted purchasers of oil and condensate to reduce purchase levels. These situations led to production greater than storage capacity at some points during the 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 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. 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. The Company's common stock may be subject to secondary trading restrictions related to penny stocks. Certain transactions involving the purchase or sale of Common Stock of the Company may be affected by a SEC rule for "penny stocks" that imposes additional sales practice burdens and requirements upon broker-dealers that purchase or sell such securities. For transactions covered by this penny stock rule, broker-dealers must make certain disclosures to purchasers prior to purchase or sale. Consequently, the penny stock rule may impede the ability of broker-dealers to purchase or sell the Company's securities for their customers and the ability of persons now owning or subsequently acquiring the Company's securities to resell such securities. RESULTS OF OPERATIONS GENERAL TO ALL PERIODS The Company's primary business is the exploration and development of oil and gas interests. The Company has incurred significant losses from operations, and there is no assurance that it will achieve profitability or obtain funds necessary to finance its future 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 statement of operations and a deferred asset on the 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 statements of operations. - 15 - TWELVE MONTH PERIOD ENDED DECEMBER 31, 2020, COMPARED TO TWELVE MONTH PERIOD ENDED DECEMBER 31, 2019 For the twelve months ended December 31, 2020, and 2019, revenues from oil and natural gas sales were $5,988,963 and $5,825,446 respectively, an increase of $163,517 (3%). The Company purchased additional properties in Texas and Montana in 2020 and had production from North Dakota properties for the full year in 2020. The additional production was offset by declines in oil and natural gas prices. Variance 2020 Price Volume 2019 Oil Bbls 164,869 51,898 112,971 $ $ 5,402,757 $ (3,396,301 ) $ 2,770,275 $ 6,028,784 Unit Price $ 32.77 $ (20.60 ) $ 53.37 Natural Gas Mcf 139,412 98,698 40,714 $ $ 352,488 $ (58,553 ) $ 290,842 $ 120,199 Unit Price $ 2.53 $ (0.42 ) $ 2.95 Operating expenses, production taxes, depreciation, depletion, amortization and accretion increased $890,536 (11%) to $9,265,733 cumulatively for the twelve months ended December 31, 2020 from $8,375,197 for the same period in 2019. The increase was due to the acquisition of additional producing oil and natural gas properties in 2020 and full year production from the North Dakota properties in 2020. Realized and unrealized gain on derivatives increased $1,705,288 (5,069%) to $1,738,871 for the twelve months ended December 31, 2020 from $33,643 in the same period in 2019 due to decrease in oil prices since the agreements were entered into. Impairment of oil and natural gas properties increased to $8,671,303 for the twelve months ended December 31, 2020 compared to $-0- for the same period in 2019. The increase was due to the decrease in oil and natural gas prices at least partially attributable to COVID-19 in 2020 and management’s decision to focus on producing properties rather than drill undeveloped properties. General and administrative expenses increased by $3,738,922 (103%) to $7,373,809 for the twelve months ended December 31, 2020, from $3,634,887 for the same period in 2019. The increase was primarily due to stock options issued to management in 2020, travel and professional fees related to the acquisition of oil and natural gas properties and capital raises in 2020, and higher administrative expenses due to the growth in properties managed. Interest expense was $521,187 and $503,607 for the twelve months ended December 31, 2020 and 2019, respectively, an increase of $17,580 (3%). The increase in interest expense resulted primarily from the full year of interest on debt issued to acquire oil and natural gas properties in 2019. For the reasons discussed above, net loss increased $10,180,831 (153%) to $(16,835,433) for the twelve months ended December 31, 2020 from $(6,654,602) for the twelve months ended December 31, 2019. LIQUIDITY AND CAPITAL RESOURCES GENERAL As of December 31, 2020, the Company had $157,695 cash on hand and approximately $400,000 available on its bank line of credit. 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 and seek additional debt financing for future investment opportunities and working capital requirements. In 2020, the Company generated $(2,090,060) of cash from oil and natural gas activities after deducting cash operating costs and production taxes. A significant amount of the general and administrative cash costs of $4,298,553, after deducting the noncash option and warrant expenses, were for locating and closing acquisitions. OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any off-balance sheet arrangements. - 16 - CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because estimates and assumptions require significant judgment, future actual results could differ from those estimates and could have a significant impact on the Company's results of operations, financial position and cash flows. The Company re-evaluates its estimates and assumptions at least on a quarterly basis. The following policies may involve a higher degree of estimation and assumption: Successful efforts accounting - Under the successful efforts method of accounting, the Company capitalizes all costs related to property acquisitions and successful exploratory wells, all development costs and the costs of support equipment and facilities. Certain costs of exploratory wells are capitalized pending determination that proved reserves have been found. Such determination is dependent upon the results of planned additional wells and the cost of required capital expenditures to produce the reserves found. All costs related to unsuccessful exploratory wells are expensed when such wells are determined to be non-productive and other exploration costs, including geological and geophysical costs, are expensed as incurred. The application of the successful efforts method of accounting requires management's judgment to determine the proper designation of wells as either developmental or exploratory, which will ultimately determine the proper accounting treatment of the costs incurred. The results from a drilling operation can take considerable time to analyze, and the determination that commercial reserves have been discovered requires both judgment and application of industry experience. Wells may be completed that are assumed to be productive and actually deliver oil and gas in quantities insufficient to be economic, which may result in the abandonment of the wells at a later date. The evaluation of oil and gas leasehold acquisition costs requires management's judgment to estimate the fair value of exploratory costs related to drilling activity in a given area. Impairment of unproved oil and gas properties - Management’s assessment of the results of exploration activities, commodity price outlooks, planned future sales or expiration of all or a portion of such leaseholds impact the amount and timing of impairment provisions. An impairment expense could result if oil and gas prices decline in the future as it may not be economic to develop some of these unproved properties. Asset retirement obligations - the Company accounts for future abandonment costs of wells and related facilities in accordance with the provisions of Financial Accounting Standards Board ("FASB") Accounting for Asset Retirement Obligations. Under this method of accounting, the accrual for future dismantlement and abandonment costs is based on estimates of these costs for each of the Company's properties based upon the type of production structure, reservoir characteristics, depth of the reservoir, market demand for equipment, currently available procedures and consultations with construction and engineering consultants. Because these costs typically extend many years into the future, estimating these future costs is difficult and requires management to make estimates and judgments that are subject to future revisions based upon numerous factors, including changing technology and the political and regulatory environment and, estimates as to the proper discount rate to use and timing of abandonment. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements of the Company are set forth on pages 30 through 55 at the end of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.