EMPIRE PETROLEUM CORP 10-K

ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, the Company carried out an evaluation under the supervision of the Company's Chief Executive Officer and President (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 Chief Executive Officer and President (principal financial officer) concluded that the disclosure controls and procedures as of the end of the period covered by this report are not effective due to material weakness identified below. - 17 - Management's Annual Report on Internal Control Over Financial Reporting Limitations on Effectiveness of Controls . In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of reporting and disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Evaluation of Disclosure Controls and Procedures . Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) and for the assessment of the effectiveness of internal control over financial reporting. Our management, with the participation of our Chief Executive Officer and President (principal financial officer), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). The term “disclosure controls and procedures,” as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Reporting and disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be reported and disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required reporting figures and disclosures. Based on our evaluation, 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. In the first quarter of 2021, the Company engaged a financial consultant to assist with the evaluation of its disclosure controls and procedures. In connection with such engagement, our management had already concluded that the Company’s accounting resources became taxed during certain acquisition activities and the Company should hire additional knowledgeable accounting personnel, which the Company believes will assist with properly segregating duties and timely analyzing and reviewing information related to financial reporting. Our management will continue to work with this financial consultant and perform additional analysis and other procedures to help address the material weakness described above. Notwithstanding the assessment that our internal control over financial reporting was not effective and that there is a material weakness as identified herein, 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. Changes on Internal Control over Financial Reporting There was no change in the Company's internal control over financial reporting identified in connection with the Company's evaluation of disclosure controls and procedures which occurred during the Company's last fiscal quarter (the fourth fiscal quarter in the case of an annual report) that has materially affected or that is reasonably likely to materially affect the Company's internal control over financial reporting. ITEM 9B. OTHER INFORMATION. None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The following lists the directors and executive officers of the Company: Name Age Position Thomas Pritchard 59 Director and Chief Executive Officer Michael R. Morrisett 57 Director and President Anthony N. Kamin 60 Director and Chairman of the Board _________________ Directors hold office until their successors are elected by the stockholders of the Company and qualified. Executive officers serve at the pleasure of the Board of Directors. Thomas Pritchard Thomas Pritchard co-founded Pritchard Griffin Advisors (“PGA”) in 2015 to serve the unique investment banking needs of the energy sector, including upstream, midstream, downstream and renewables. Prior to PGA, he formed Pritchard Energy Advisors, LLC in 2014. From 2012 to 2014, Mr. Pritchard served as Managing Director of the Energy Investment Banking division of Imperial Capital. Prior to this role, Mr. Pritchard served as CEO and Managing Director of Pritchard Capital Partners, which he founded in 2001 and later sold majority ownership in 2011. Over a period of ten years, Pritchard Capital Partners participated in raising over $15 billion in capital for firms in the oil and gas industry and provided trading and research services annually to over 150 energy companies. In 1997, Mr. Pritchard co-founded Offshore Tool and Energy, Inc., an oilfield services company that was sold in 2001. He began his professional career in 1984 with Drexel Burnham Lambert, and later held key roles at Bear Stearns, Jefferies and Johnson Rice. Mr. Pritchard earned his undergraduate degree in Geology from Washington and Lee University. - 18 - Michael R. Morrisett Mr. Morrisett has served as a director of the Company and as the Company's President since January 19, 2015. Mr. Morrisett has over 25 years of experience in investment banking and considerable experience in the management of non-operated oil and gas operations. From April 2014 to May 2017, Mr. Morrisett served as the Chief Financial Officer and is currently a Director of a privately held media and technology portfolio company based in San Francisco, California. From November 2012 to January 2018 Mr. Morrisett served Total Energy Partners Funds, an investment fund engaged in the ownership of non-operated oil and gas working interests, in several capacities, including as a partner. Prior to 2013, Mr. Morrisett served in various executive capacities at other investment banking firms and oil and gas concerns. Anthony N. Kamin Anthony N. Kamin serves as the President of Eastwood Investment Management (EIM), which he founded in 2001. EIM is a multi-strategy, multi-asset class family office which has been an active investor in energy and resource companies. Mr. Kamin is the Founder and Executive Chairman of Clean Plate Restaurants Inc. He was a Venture Partner with Venture Strategy Partners from 1998 to 2003 helping launch its venture operations. Mr. Kamin received a Master’s Degree from Yale University in international relations with a concentration in international law in 1985. Identification of Audit Committee; Audit Committee Financial Expert As of December 31, 2020, the Company had not established any committees (including an audit committee) because of the small size of its Board of Directors. As such, the Company does not have an audit committee or an audit committee financial expert serving on such committee. As of December 31, 2020, the entire Board of Directors essentially serve as the Company's audit committee. Code of Ethics The Company has adopted a Code of Ethics that applies to all of the Company's directors and employees, including the Company's principal executive officer, principal financial officer and principal accounting officer or persons performing similar functions. The Company undertakes to provide any person without charge, upon request, a copy of the Code of Ethics. Requests may be directed to Empire Petroleum Corporation, 2200 South Utica Place, Suite 150, Tulsa Oklahoma, 74114, or by calling (539) 444-8002. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors, executive officers, and persons who beneficially own more than 10 percent of a registered class of the Company's equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on review of the copies of such reports furnished to the Company and any written representations that in other reports were required during the year ended December 31, 2020, to the Company's knowledge, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners during the year ended December 31, 2020 were complied with on a timely basis. - 19 - ITEM 11. EXECUTIVE COMPENSATION. The Board of Directors does not have a Compensation Committee. Executive Compensation The following table set forth certain information regarding compensation of the Company's named executive officers. Name and Principal Position Year Salary ($) Bonus ($) Stock Awards ($) Option Awards ($) 1 Non-Equity Incentive Plan Compensation ($) All Other Compensation ($) Total Compensation ($) Thomas Pritchard 2020 $ 226,667 2 $ 287,750 3 $ — $ 779,800 $ — $ 174,900 4 $ 1,469,117 Chief Executive Officer 2019 219,950 22,500 — 812,500 — — 1,054,950 Michael Morrisett 2020 226,667 2 287,750 3 — 779,800 — 174,900 4 1,469,117 President 2019 215,950 22,500 — 812,500 — — 1,050,950 Garry Smith 2020 100,000 5 10,000 — 272,930 — — 382,930 Controller 2019 — — — — — — — _______________________ 1 For information on the assumptions used in the valuation of these awards, see Note 11 included in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. 2 The current salary of both Mr. Pritchard and Mr. Morrisett is $250,000 per year. 3 $113,759 of this amount was a bonus for 2019 performance paid in 2020, and $174,000 of this amount was a bonus for 2020 performance, but will be paid over time in fiscal year 2021 subject to the Company having sufficient funds. 4 This amount is for the extension of warrants described immediately below this table. For information on the assumptions used in the valuation of these extensions, see Note 10 included in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. 5 Mr. Smith’s current salary is $190,000 per year. This amount represents payment for a partial year. As of December 31, 2020, none of the named executive officers had employment contracts. On December 31, 2020, warrant certificates issued to Mr. Pritchard and Mr. Morrisett pursuant to which each such named executive officer has the right to acquire 500,000 shares of the Company’s common stock at an exercise price of $0.25 per share were extended so that such warrant certificates can be exercised on or before April 2, 2029 to make such grants consistent with the 2019 Stock Plan. On December 31, 2020, each of Mr. Pritchard and Mr. Morrisett were issued options to acquire 2,000,000 shares of the Company’s common stock at an exercise price of $0.35 per share under the 2019 Stock Plan. - 20 - Outstanding Equity Awards at December 31, 2020 The following table set forth certain information regarding outstanding equity awards of the Company's named executive officers. Option and warrant awards Name Number of securities underlying unexercised options and warrants (#) exercisable Number of securities underlying unexercised options and warrants (#) unexercisable Equity incentive plan awards: Number of securities underlying unexercised unearned options and warrants (#) Option / warrant Exercise price ($) Option / warrant expiration date Thomas Pritchard Options 1,875,000 625,000 1 — $0.33 4/2/2029 Options 2,000,000 — — 0.35 12/31/2030 Warrants 500,000 — — 0.25 4/2/2029 Michael Morrisett Options 1,875,000 625,000 1 — 0.33 4/2/2029 Options 2,000,000 — — 0.35 12/31/2030 Warrants 500,000 — — 0.25 4/2/2029 Garry Smith Options 700,000 — — 0.35 12/31/2030 _______________________ 1 The vest date is April 2, 2021. As of December 31, 2020, the Company did not have any plan that provides for the payment of retirement benefits to named executive officers or benefits to a named executive officer in connection with the resignation, retirement or other termination of such named executive officer or a change in control of the registrant. Director Compensation The Board of Directors does not have a Compensation Plan. From time to time in the past, the Company has compensated Board members for service through the issuance of warrants or options. On December 31, 2020, Mr. Kamin was issued options to acquire 300,000 shares of the Company’s common stock at an exercise price of $0.35 per share under the 2019 Stock Plan. For further information on the assumptions used in the valuation of this award, see Note 11 included in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. - 21 - ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Securities Authorized for Issuance under Equity Compensation Plans 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 per share. On December 31, 2020 the Company granted certain members of management and a member of the Board of Directors options to purchase 5,000,000 shares of common stock of the Company at an exercise price of $0.35 per share. The following table provides certain information relating to the 2019 Stock Option Plan as of December 31, 2020: (a) (b) (c) Number of securities remaining available for future Number of securities issuance under to be issued upon Weighted-average equity compensation exercise of exercise price of plans (excluding outstanding options outstanding options securities reflected Plan Category and rights and rights in column (a) Equity compensation plans not approved by security holders 10,000,000 $0.34 — Total 10,000,000 — - 22 - Security Ownership of Certain Beneficial Owners and Management The following table sets forth information regarding the beneficial ownership of our Common Stock as of March 30, 2021 for: * each person who is known to own beneficially more than 5% of our outstanding Common Stock; * each of our executive officers and directors; and * all executive officers and directors as a group. The percentage of beneficial ownership for the following table is based on 57,515,919 shares of Common Stock outstanding as of March 31, 2021. Unless otherwise indicated below, to the Company's knowledge, all persons and entities listed below have sole voting and investment power over their shares of Common Stock. Security Ownership of Certain Beneficial Owners Amount and nature of Name and address of beneficial owner beneficial ownership Percent of class (1) Puckett Land Company 5460 S. Quebec St., Suite 250 Greenwood Village, CO 80111 5,000,000 8.69% Phil E. Mulacek 25025 I-45 North, Suite 420 The Woodlands, Texas 77380 13,694,185 (2) 23.58% (1) The percentage ownership for each person is calculated in accordance with the rules of the SEC, which provide that any shares a person is deemed to beneficially own by virtue of having a right to acquire shares upon the conversion of options or other rights are considered outstanding solely for purposes of calculating such person's percentage ownership. (2)   The total includes 548,000 shares of common stock issuable upon the exercise of a warrant at an exercise price of $0.50 per share. Security Ownership of Management Amount and nature of Name and address of beneficial owner beneficial ownership Percent of class (1) Michael R. Morrisett 6,068,128 (2) 9.80% Director and President 2200 South Utica Place, Suite 150 Tulsa, Oklahoma 74114 Anthony Kamin 5,498,114 (3) 8.91% Director 2200 South Utica Place, Suite 150 Tulsa, Oklahoma 74114 Thomas Pritchard Director and Chief Executive Officer 4,468,333 (4) 7.22% 2200 South Utica Place, Suite 150 Tulsa, Oklahoma 74114 All current directors and executive officers as a group (3 persons) 16,034,575 (5) 22.77% - 23 - (1) The percentage ownership for each person is calculated in accordance with the rules of the SEC, which provide that any shares a person is deemed to beneficially own by virtue of having a right to acquire shares upon the conversion of options or other rights are considered outstanding solely for purposes of calculating such person's percentage ownership. (2) The total includes 500,000 shares of common stock issuable upon the exercise of a warrant at an exercise price of $0.25 per share and options to purchase 3,875,000 shares of common stock at an exercise price of $0.33 and $0.35 per share. (3) The total includes 500,000 shares of common stock issuable upon the exercise of a warrant at $0.15 per share, 2,500,000 shares of common stock issuable upon the exercise of a warrant at an exercise price of $0.25 per share and options to purchase 300,000 shares of common stock at an exercise price of $0.35 per share and 428,571 shares of common stock issuable upon the exercise of a warrant at an exercise price of $0.50 per share. (4) The total includes 500,000 shares of common stock issuable upon the exercise of a warrant at $0.25 per share and options to purchase 3,875,000 shares of common stock at an exercise price of $0.33 and $0.35 per share. (5) The total includes 4,000,000 shares of common stock issuable upon the exercise of warrants and 8,050,000 options to purchase common stock . ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. Director Independence Because of the small size of the Company's Board of Directors, the Company has not established any committees. Rather, the entire Board acts as, and performs the same functions as, the audit committee, compensation committee and nominating committee, as necessary. Mr. Morrisett is not considered "independent" within the meaning of Rule 5605(a)(2) of the NASDAQ listing standards. ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES. The following is a summary of the fees billed or to be billed to the Company by HoganTaylor LLP, the Company's independent registered public accounting firm, for professional services rendered for the fiscal years ended December 31, 2019 and December 31, 2018: Fee Category Fiscal 2020 Fees Fiscal 2019 Fees Audit Fees (1) $ 210,000 $ 145,000 Audit - Related Fees (2) 2,500 25,000 Tax Fees — — All Other Fees (3) — — Total Fees $ 212,500 $ 170,000 (1) Audit Fees consist of aggregate fees billed for professional services rendered for the audit of the Company's annual financial statements and review of the interim financial statements included in quarterly reports or services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements for the years ended December 31, 2020 and December 31, 2019, respectively. (2) Audit-Related fees consist of aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under "Audit Fees." These include work performed for 8K/A filings. (3) All Other Fees consist of aggregate fees billed for products and services provided by HoganTaylor LLP, other than those disclosed above. The entire Board of Directors of the Company is responsible for the appointment, compensation and oversight of the work of the independent registered public accounting firm and approves in advance any services to be performed by the independent registered public accounting firm, whether audit-related or not. The entire Board of Directors reviews each proposed engagement to determine whether the provision of services is compatible with maintaining the independence of the independent registered public accounting firm. All of the fees shown above were pre-approved by the entire Board of Directors. - 24 - PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) (1) Financial Statements The financial statements under this item are included in Item 8 of Part II. (2) Schedules NONE (3) Exhibits Exhibit No. Description 2.1 Purchase and Sale Agreement dated as of February 15, 2019, by and between EnergyQuest and Empire North Dakota LLC (incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K dated February 27, 2019, which was filed on March 5, 2019). 2.2 Purchase and Sale Agreement dated as of April 6, 2020, by and between Pardus Oil & Gas, LLC and Pardus Oil & Gas Operating GP, LLC and Empire Texas LLC (incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K dated April 6, 2020, which was filed on April 10, 2020). 3.1 Articles of Incorporation of the Company, as amended (incorporated herein by reference to Exhibit 3.1 of the Company's Form 10-QSB for the period ended September 30, 1995, which was filed November 6, 1995). 3.2 Certificate of Amendment to Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company's Form 8-K dated May 31, 2012, which was filed on June 1, 2012). 3.3 Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company's Form 10-QSB for the period ended March 31, 1998, which was filed May 15, 1998). 4.2 Description of the Common Stock of Empire Petroleum Corporation Registered Under Section 12 of the Securities Exchange Act of 1934 (submitted herewith). 10.1 Empire Petroleum Corporation 2019 Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K dated April 3, 2019, which was filed on April 9, 2019). 10.2 Form of Non-Qualified Stock Option Award Agreement (incorporated herein by reference to Exhibit 10.2 to the Company's Form 8-K dated April 3, 2019, which was filed on April 9, 2019). 10.3 Senior Revolver Loan Agreement dated as of September 20, 2018 by and between Empire Louisiana, LLC and CrossFirst Bank (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated September 20, 2018 filed on September 25, 2018). 10.4 First Amendment to Senior Revolver Loan Agreement, dated as of March 27, 2019, by and between Empire Louisiana LLC, Empire North Dakota LLC and CrossFirst Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated March 27, 2019, which was filed on April 2, 2019). 10.5 Securities Purchase Agreement dated as of August 6, 2020, by and between Empire Petroleum Corporation and Petroleum Independent & Exploration LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020). 10.6 Common Share Warrant Certificate No. PIE-1 dated August 6, 2020 (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020). - 25 - 10.7 Common Share Warrant Certificate No. PIE-2 dated August 6, 2020 (incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020). 10.8 Common Share Warrant Certificate No. PIE-3 dated August 6, 2020 (incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020). 10.9 Common Share Warrant Certificate No. PIE-4 dated August 6, 2020 (incorporated herein by reference to Exhibit 10.5 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020). 10.10 Loan Agreement dated as of August 6, 2020, by and between Empire Texas LLC and Petroleum Independent & Exploration LLC (incorporated herein by reference to Exhibit 10.6 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020). 10.11 Second Amendment to Senior Revolver Loan Agreement, dated as of June 30, 2020, by and between Empire Louisiana LLC, Empire North Dakota LLC and CrossFirst Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated September 30, 2020, which was filed on October 6, 2020). 10.12 Third Amendment to Senior Revolver Loan Agreement, dated as of December 31, 2020, by and between Empire Louisiana LLC, Empire North Dakota LLC and CrossFirst Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated March 10, 2021, which was filed on March 15, 2021). 10.13 Letter Agreement dated as of March 11, 2021 by and between Empire Petroleum Corporation and Petroleum Independent & Exploration LLC (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated March 10, 2021, which was filed on March 15, 2021). 31.1 Rule 13a – 14(a)/15d – 14(a) Certification of Thomas Pritchard, Chief Executive Officer (submitted herewith). 31.2 Rule 13a – 14(a)/15d – 14(a) Certification of Michael R. Morrisett, principal financial officer (submitted herewith). 32.1 Section 1350 Certification of Thomas Pritchard, Chief Executive Officer (submitted herewith). 32.2 Section 1350 Certification of Michael R. Morrisett, principal financial officer (submitted herewith). 101 Financial Statements for XBRL format (submitted herewith). - 26 - 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: March 31, 2021 By: /s/ Michael R. Morrisett Name: Michael R. Morrisett Title: President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Thomas Pritchard Director and Chief Executive Officer March 31, 2021 THOMAS PRITCHARD /s/ Michael R. Morrisett Director and President March 31, 2021 MICHAEL R. MORRISETT (principal financial officer) /s/ Anthony J. Kamin Director and Chairman of the Board March 31, 2021 ANTHONY J. KAMIN - 27 - EXHIBIT INDEX Exhibit No. Description 2.1 Purchase and Sale Agreement dated as of February 15, 2019, by and between EnergyQuest and Empire North Dakota LLC (incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K dated February 27, 2019, which was filed on March 5, 2019). 2.2 Purchase and Sale Agreement dated as of April 6, 2020, by and between Pardus Oil & Gas, LLC and Pardus Oil & Gas Operating GP, LLC and Empire Texas LLC (incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K dated April 6, 2020, which was filed on April 10, 2020). 3.1 Articles of Incorporation of the Company, as amended (incorporated herein by reference to Exhibit 3.1 of the Company's Form 10-QSB for the period ended September 30, 1995, which was filed November 6, 1995). 3.2 Certificate of Amendment to Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company's Form 8-K dated May 31, 2012, which was filed on June 1, 2012). 3.3 Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company's Form 10-QSB for the period ended March 31, 1998, which was filed May 15, 1998). 4.2 Description of the Common Stock of Empire Petroleum Corporation Registered Under Section 12 of the Securities Exchange Act of 1934 (submitted herewith). 10.1 Empire Petroleum Corporation 2019 Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K dated April 3, 2019, which was filed on April 9, 2019). 10.2 Form of Non-Qualified Stock Option Award Agreement (incorporated herein by reference to Exhibit 10.2 to the Company's Form 8-K dated April 3, 2019, which was filed on April 9, 2019). 10.3 Senior Revolver Loan Agreement dated as of September 20, 2018 by and between Empire Louisiana, LLC and CrossFirst Bank (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated September 20, 2018 filed on September 25, 2018) . 10.4 First Amendment to Senior Revolver Loan Agreement, dated as of March 27, 2019, by and between Empire Louisiana LLC, Empire North Dakota LLC and CrossFirst Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated March 27, 2019, which was filed on April 2, 2019) . 10.5 Securities Purchase Agreement dated as of August 6, 2020, by and between Empire Petroleum Corporation and Petroleum Independent & Exploration LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020) . 10.6 Common Share Warrant Certificate No. PIE-1 dated August 6, 2020 (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020). 10.7 Common Share Warrant Certificate No. PIE-2 dated August 6, 2020 (incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020) . 10.8 Common Share Warrant Certificate No. PIE-3 dated August 6, 2020 (incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020). 10.9 Common Share Warrant Certificate No. PIE-4 dated August 6, 2020 (incorporated herein by reference to Exhibit 10.5 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020) . - 28 - 10.10 Loan Agreement dated as of August 6, 2020, by and between Empire Texas LLC and Petroleum Independent & Exploration LLC (incorporated herein by reference to Exhibit 10.6 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020). 10.11 Second Amendment to Senior Revolver Loan Agreement, dated as of June 30, 2020, by and between Empire Louisiana LLC, Empire North Dakota LLC and CrossFirst Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated September 30, 2020, which was filed on October 6, 2020) . 10.12 Third Amendment to Senior Revolver Loan Agreement, dated as of December 31, 2020, by and between Empire Louisiana LLC, Empire North Dakota LLC and CrossFirst Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated March 10, 2021, which was filed on March 15, 2021). 10.13 Letter Agreement dated as of March 11, 2021 by and between Empire Petroleum Corporation and Petroleum Independent & Exploration LLC (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated March 10, 2021, which was filed on March 15, 2021). 31.1 Rule 13a – 14(a)/15d – 14(a) Certification of Thomas Pritchard, Chief Executive Officer (submitted herewith). 31.2 Rule 13a – 14(a)/15d – 14(a) Certification of Michael R. Morrisett, principal financial officer (submitted herewith). 32.1 Section 1350 Certification of Thomas Pritchard, Chief Executive Officer (submitted herewith). 32.2 Section 1350 Certification of Michael R. Morrisett, principal financial officer (submitted herewith). 101 Financial Statements for XBRL format (submitted herewith). - 29 - EMPIRE PETROLEUM CORPORATION CONSOLIDATED FINANCIAL STATEMENTS CONTENTS Page No. Report of Independent Registered Public Accounting Firm 31 Consolidated Balance Sheets as of December 31, 2020 and 2019 34 Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 35 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2020 and 2019 36 Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 37 Notes to Consolidated Financial Statements 38 - 30 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Empire Petroleum Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Empire Petroleum Corporation (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred significant losses since inception. The Company's ability to continue as a going concern is dependent upon the existence, discovery, and development of economically recoverable oil and gas reserves and is dependent upon the Company obtaining necessary financing to carry out its exploration and development program. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. - 31 - Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that was communicated or required to be communicated to the board of directors and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Proved Oil and Natural Gas Properties – Oil and Natural Gas Reserve Quantities and Future Cash Flows Used to Determine Depletion and to Assess Impairment Critical Audit Matter Description As discussed in Note 2 to the financial statements, the Company's proved oil and natural gas properties are depleted using the units-of-production method based on the Company's oil and natural gas reserves and are evaluated for impairment by comparison to the future net cash flows of the underlying oil and natural gas reserves. The Company's oil and natural gas reserve quantities and the related future net cash flows required management to make significant estimates and assumptions. As a result of changing market conditions and commodity prices, assumptions can change from period to period, causing the estimates of proved reserves to change. The Company utilizes a petroleum engineering firm to estimate oil and natural gas reserves using generally accepted methods, calculation procedures and engineering data. Changes in these assumptions or engineering data could have a significant impact on the amount of depletion and any proved oil and natural gas property impairment. The proved oil and natural gas properties balance was $7,563,001 as of December 31, 2020, net of accumulated depreciation, depletion, amortization, and impairment. Related depreciation, depletion, and amortization expense was $3,118,019 and impairment expense was $8,671,303 for the year ended December 31, 2020. Given the significant judgments made by management, performing audit procedures to evaluate the Company's oil and natural gas reserve quantities and the related net cash flows including management's estimates and assumptions required a high degree of auditor judgment and an increased extent of effort. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures to address management's significant judgments and assumptions related to oil and natural gas reserve quantities and estimates of the future net cash flows included the following, among others: • Evaluated the experience, qualifications and objectivity of management's expert, including the methodologies and calculation procedures used to estimate oil and natural gas reserves. • Evaluated forecasted production by comparing to historical production and decline rates. • Assessed management's estimated oil and natural gas prices by: • Evaluated the methodology used by management for development of the oil and natural gas prices used for assessing impairment and compared the estimated prices to an independently determined range of prices, including published forward pricing indices and third-party industry sources. • Compared prices used in the determination of reserve quantities and the depletion calculation to average historical prices. • Compared the historical realized price differentials incorporated in the future oil and natural gas prices. • Evaluated future operating and capital costs used to estimate future cash flows by comparing them to historical cost data. - 32 - Going Concern Assessment Critical Audit Matter Description As described further in Note 1 to the consolidated financial statements, the Company has incurred net losses each year from inception through December 31, 2020, and has negative working capital as of December 31, 2020. The Company determined these, and other factors, raised substantial doubt as to the Company's ability to continue as a going concern one year from the issuance date of the consolidated financial statements. In making this determination, management prepared a short-term cash flow projection. Management used significant assumptions in preparing the short-term cash flow projection, which included expected operating costs and financing obligations. The principal considerations for our determination that the evaluation of management's going concern assessment was a critical audit matter are the significant judgment and subjectivity inherent in the Company's future cash flow and debt compliance projections and a high degree of auditor judgment in evaluating management's forecasts for at least the next 12 months. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the evaluation of management's forecasted future cash flow projections and going concern assessment included the following, among others: Assessed the overall reasonableness of the Company's future cash flow projections, including significant assumptions utilized by the Company. Compared January and February 2021 actual operating results to forecasted amounts to determine overall accuracy of future operating cash flow projections. Reviewed debt covenants and management projections of debt covenant compliance during 2021. Evaluated the adequacy of the Company's financial statement disclosures. /s/ HoganTaylor LLP We have served as the Company's auditor since 2003. Tulsa, Oklahoma March 31, 2021 - 33 - EMPIRE PETROLEUM CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2020 AND 2019 2020 2019 ASSETS Current Assets: Cash $ 157,695 $ — Accounts Receivable 1,251,634 982,814 Inventory 531,309 476,305 Prepaids 281,895 247,718 Total Current Assets 2,222,533 1,706,837 Property and equipment: Oil and Natural Gas Properties, Successful Efforts 22,711,445 12,660,457 Less: Accumulated Depreciation, Depletion and Impairment (15,148,444 ) (3,365,340 ) 7,563,001 9,295,117 Other Property and Equipment, net of $33,159 and $1,830 Accumulated Depreciation in 2020 and 2019, respectively 662,017 12,626 Total Property and Equipment, net 8,225,018 9,307,743 Utility and Other Deposits 802,050 — Total Assets $ 11,249,601 $ 11,014,580 LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Accounts Payable $ 1,937,743 $ 1,025,585 Accrued Expenses 2,697,831 1,103,916 Unrealized Loss on Derivative Instruments 5,749 11,861 Contingent Payment (see Note 4) 40,000 — Current Portion of Lease Liability 89,769 — Current Portion of Long-term Notes Payable 1,301,618 96,704 Total Current Liabilities 6,072,710 2,238,066 Long Term Portion of Unrealized Loss on Derivative Instruments — 211,771 Long-Term Notes Payable 7,719,703 7,715,118 Long Term Lease Liability 534,009 — Asset Retirement Obligations 15,364,217 5,788,280 Total Liabilities 29,690,639 15,953,235 Stockholders' Equity (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 22,152,451 18,823,926 Accumulated Deficit (40,618,381 ) (23,782,948 ) Total Stockholders' Equity (Deficit) (18,441,038 ) (4,938,655 ) Total Liabilities and Stockholders' Equity (Deficit) $ 11,249,601 $ 11,014,58 0 See accompanying notes to consolidated financial statements - 34 - EMPIRE PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2020 and 2019 2020 2019 Revenue: Oil and Gas Sales $ 5,988,963 $ 5,825,446 Net Realized and Unrealized Gain on Derivatives 1,738,871 33,643 Total Revenue 7,727,834 5,859,089 Costs and Expenses: Operating 4,871,755 4,337,649 Taxes - Production 346,101 379,604 Depletion, Depreciation & Amortization 3,118,019 3,351,643 Impairment of Oil and Natural Gas Properties 8,671,303 — Accretion of Asset Retirement Obligation 929,858 306,301 General and Administrative 7,373,804 3,634,887 Total Cost and Expenses 25,310,840 12,010,084 Operating Loss (17,583,006 ) (6,150,995 ) Other Income and (Expense): Gain on Sale of Assets 1,268,760 — Interest Expense (521,187 ) (503,607 ) Net Loss $ (16,835,433 ) $ (6,654,602 ) Net Loss per Common Share, Basic & Diluted $ (0.74 ) $ (0.33 ) Weighted Average Number of Common Shares Outstanding, Basic & Diluted 22,708,030 19,867,27 7 See accompanying notes to consolidated financial statements - 35 - EMPIRE PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) Years ended December 31, 2020 and 2019 (UNAUDITED) 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 — — — (6,654,602 ) (6,654,602 ) Shares, Options, Warrants and Conversion Features Issued 3,021,668 3,022 1,863,108 — 1,866,130 Balances, December 31, 2019 20,367,277 $ 20,367 $ 18,823,926 $ (23,782,948 ) $ (4,938,655 ) Net Loss — — — (16,835,433 ) (16,835,433 ) Shares, Options, Warrants and Conversion Features Issued 4,525,000 4,525 3,328,525 — 3,333,050 Balances, December 31, 2020 24,892,277 24,892 22,152,451 (40,618,381 ) (18,4 41,038 ) See accompanying notes to consolidated financial statements - 36 - EMPIRE PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2020 and 2019 2020 2019 Cash Flows From Operating Activities: Net Loss $ (16,835,433 ) $ (6,654,602 ) Adjustments to Reconcile Net Loss to Net Cash Provided by (used in) Operating Activities: Gain on Sale of Assets (1,268,760 ) — Value of Warrants and Options Granted 2,705,550 1,491,630 Amortization of Warrant Value and Conversion Feature on Convertible Notes — 5,796 Amortization of Loan Issue Costs 58,344 43,758 Depreciation, Depletion and Amortization 3,143,130 3,351,644 Impairment of Oil and Natural Gas Properties 8,671,303 — Accretion of Asset Retirement Obligation 929,858 306,301 Unrealized Gain (Loss) on Derivatives (217,883 ) 336,713 Accretion of Operating Lease Liability 9,877 — Deposit paid to Ovintiv (see Note 4) (800,000 ) — Loss Relating to Ovintiv Purchase Deposit (see Note 4) 800,000 — Change in Operating Assets and Liabilities: Accounts Receivable (168,612 ) (858,236 ) Inventory 92,293 (37,984 ) Prepaids, Current (152,354 ) (202,504 ) Utility Deposits 9,400 — Accounts Payable 891,702 704,835 Accrued Expenses 408,328 920,319 Net Cash Used In Operating Activities (1,723,257 ) (592,330 ) Cash Flows from Investing Activities: Acquisition of Oil and Natural Gas Properties (507,411 ) (6,159,585 ) Purchase of Other Fixed Assets (6,099 ) (14,460 ) Proceeds from Sale of Oil and Natural Gas Properties 1,369,800 — Net Cash Used in Investing Activities 856,290 (6,174,045 ) Cash Flows from Financing Activities: Proceeds from Debt Issued 925,700 8,379,744 Principal Payments of Debt (426,038 ) (1,865,000 ) Proceeds from Stock and Warrant Issuance 525,000 167,000 Net Cash Provided by Financing Activities 1,024,662 6,681,744 Net Change in Cash 157,695 (84,631 ) Cash - Beginning of Period — 84,631 Cash - End of Period $ 157,695 $ — Supplemental Cash Flow Information: Cash Paid for Interest $ 599,350 $ 462,795 Non-cash Investing and Financing Activities: Non-cash Additions to Asset Retirement Obligations $ 8,646,079 $ 5,251,329 Common Stock Issued in Exchange for Outstanding Notes Payable $ 102,500 $ — Purchases of oil and natural gas properties and deposits in accounts and notes payable, accrued expenses, royalty suspense, and contingent payable to seller $ 1,523,834 $ 42,566 Equipment purchased utilizing note payable $ 60,719 — Note Payable issued - PIE Agreement (see Note 5) $ 315,273 $ — See accompanying notes to consolidated financial statements - 37 - EMPIRE PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020 and 2019 General: On July 20, 2001, Americomm Resources Corporation merged with its wholly-owned subsidiary, Empire Petroleum Corporation, and simultaneously changed the name of the corporation to Empire Petroleum Corporation. Both the merger and name change were effective as of August 15, 2001. Americomm Resources Corporation was originally incorporated in the State of Utah on the 22nd day of August 1983, as Chambers Energy Corporation. On the 7th day of March 1985, the state of incorporation was changed to Delaware by means of a merger with Americomm Corporation, a Delaware corporation formed for the purpose of effecting the said change. In July 1995, its name was changed to Americomm Resources Corporation. Empire Petroleum Corporation has four wholly owned subsidiaries, Empire Louisiana, LLC, Empire North Dakota, LLC, Empire New Mexico, LLC, and Empire Texas, LLC. Empire Petroleum Corporation and subsidiaries. ("Empire" or the "Company"). consolidates the financial statements of these entities and material intercompany balances and transactions have been eliminated. 1. Continuing operations: The ultimate recoverability of the Company's investment in its oil and gas interests is dependent upon the existence, discovery, and development of economically recoverable oil and gas reserves, the ability of the Company to obtain necessary financing to further develop the interests, and upon the ability to attain future profitable production. The Company has been incurring significant losses in recent years and future financing is uncertain. These factors indicate that there is a substantial doubt about the Company's ability to continue as a going concern. The continuation of the Company is dependent upon the ability of the Company to raise capital and attain future profitable operations. 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. These financial statements do not include any adjustments that might be necessary to the carrying value of assets and liabilities, reported expenses and the balance sheet classifications used should the Company be unable to continue as a going concern. 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. 2. Significant accounting policies: The preparation of financial statements in conformity with United States generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. (a) Principles of consolidation The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries. The Company consolidates the financial statements of these entities. All material intercompany balances and transactions have been eliminated. (b) Use of estimates in the preparation of financial statements Preparation of financial statements in conformity with 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, goodwill, fair value of stock-based compensation, fair value of business combinations, fair value of nonmonetary transactions, fair value of derivative financial instruments and income taxes. - 38 - (c) Accounts receivable The Company sells oil and natural gas to various customers. The receivables related to these operations are generally unsecured. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for doubtful accounts only after all collection attempts have been exhausted. The Company did not have an allowance for doubtful accounts for the years ended December 31, 2020 or 2019. (d) Oil and natural gas properties The Company uses the successful efforts method of accounting for its oil and gas activities. Costs incurred are deferred until exploration and completion results are evaluated. At such time, costs of activities with economically recoverable reserves are capitalized as proven properties, and costs of unsuccessful or uneconomical activities are expensed. Capitalized drilling costs are reviewed periodically for impairment. Costs related to impaired prospects or unsuccessful exploratory drilling is charged to expense. Management's assessment of the results of exploration activities, commodity price outlooks, planned future sales or expiration of all or a portion of such leaseholds impact the amount and timing of impairment provisions. An impairment expense could result if oil and gas prices decline in the future as it may not be economical to develop some of these unproved properties. Lease options are capitalized as unproved property acquisition costs and are reviewed for impairment if indicators exist that the carrying value of the lease option may not be recoverable. If the lease options become impaired, expire or are abandoned, the options will be expensed. If proved reserves are discovered after the options are exercised, these costs will be reclassified as proved property. Depreciation, depletion and amortization of producing properties is computed on the units-of-production method on a property by property basis. The units-of-production method is based primarily on estimates of proved reserve quantities. Due to uncertainties inherent in this estimation process, it is at least reasonably possible that reserve quantities will be revised in the near term. Changes in estimated reserve quantities are applied to depreciation, depletion and amortization computations prospectively. Other property and equipment is depreciated on the straight-line method. (e) Derivative instruments The Company enters into swap agreements to manage its exposure to oil and natural gas price fluctuations. The fair value of derivative contracts are recognized as an asset or liability on the Company’s balance sheet. Realized gain or loss is recognized as a component of revenue when the swap contracts mature. For contracts which have not matured, an unrealized gain or loss is recorded based on the value of the outstanding contracts. (f) Asset retirement obligations The Company records the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related oil and natural gas property asset. Subsequently, the asset retirement cost included in the carrying amount of the related asset is allocated to expense through depletion of the asset. Changes in the liability due to passage of time are recognized as an increase in the carrying amount of the liability through accretion expense. Based on certain factors, including commodity prices and costs, the Company may revise its previous estimates of the liability, which would also increase or decrease the related oil and natural gas property asset. (g) Revenue recognition 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. The Company’s oil and natural gas marketing contracts transfer physical custody and title at or near the wellhead, which is generally when control of the oil has been transferred to the purchaser. - 39 - The Company follows the sales method of accounting for natural gas sales, recognizing revenue based on the Company’s actual proceeds from the natural gas sold to purchasers on an accrual basis. Revenues are reported net to working interest and after royalty amounts due. (h) Per share amounts: The Company calculates and discloses basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS"). The computation of basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of outstanding common shares during the period. 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 December 31, 2020 and 2019, the Company had 37,928,245 and 18,345,834 options and warrants outstanding, respectively, 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 December 31, 2020 and 2019, the outstanding options were considered anti-dilutive since the strike prices were above the market price and since the Company has incurred losses year to date. (i) Income taxes: The Company accounts for income taxes in accordance with the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established if management determines it is more likely than not that some portion of a deferred tax asset will not be realized. (j) Financial instruments: The carrying value of current assets and current liabilities approximate their fair value due to the relatively short period to maturity of the instruments. Management's estimates, including reserves and asset retirement obligations, are based on an assessment of qualitative factors that are considered Level 3 measurements in the fair value valuation hierarchy required by FASB ASC 820. (k) Stock option plan: The Company expenses options granted over the vesting period based on the grant date fair value of the award. (l) Recently issued accounting pronouncements: FASB periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. The Company has reviewed the recently issued pronouncements and concluded that the following new accounting standards are applicable: In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements,” (“ASU 2018-09”) which makes amendments to multiple codification topics to clarify, correct errors in, or make minor improvements to the accounting standards codification. The effective date of the standard is dependent on the facts and circumstances of each amendment. Some amendments do not require transition guidance and will be effective upon the issuance of this standard. Many of the amendments in ASU 2018-09 was effective in annual periods beginning after December 15, 2018. The Company adopted this standard in the first quarter of fiscal 2019. It did not have a material effect on the Company’s financial statements. - 40 - 3. Property: In 2020, the Company, through its subsidiaries purchased oil and natural gas properties in Texas, North Dakota and Montana (See Note 4). In 2019, the Company, through its subsidiary Empire North Dakota, LLC, purchased oil and gas properties in Montana and North Dakota (See Note 4). The aggregate capitalized costs of oil and natural gas properties as of December 31, 2020 and 2019 are as follows: 2020 2019 Proved producing wells $ 4,508,739 $ 3,826,522 Proved undeveloped 2,715,980 2,232,358 Lease and well equipment 1,360,596 1,121,527 Asset retirement obligation 14,126,130 5,480,050 Gross capitalized costs 22,711,445 12,660,457 Accumulated Depreciation, Depletion, Amortization and Impairment (15,148,444 ) (3,365,340 ) Net capitalized costs $ 7,563,001 $ 9,295,117 4. Acquisitions of oil and gas properties: 2020 Acquisitions Pardus Acquisition 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, 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. An asset retirement obligation of $9,508,484 was recorded in conjunction with the purchase. The transaction closed on April 7, 2020 and was treated as an asset acquisition. Ovintiv Acquisition 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. 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 forfeited deposit is included in general and administrative expenses in the financial statements. 2019 Acquisitions Warhorse Acquisition On June 10, 2019, the Company received a sheriff's deed dated as of May 29, 2019 (the "Sheriff's Deed") 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 acquired certain oil and natural gas properties located in St. Landry Parish, Louisiana, including operated working interest in two producing wells. The Company purchased Business First's position as the superior lienholder and seizing creditor of such oil and natural gas properties, which were owned by Warhorse Oil & Gas, LLC, for $450,000 plus $16,993 sheriff fees. The payment was paid from loan proceeds. - 41 - The Company treated the acquisition as an asset purchase. An amount equal to $73,968 was allocated to lease and well equipment and $378,110 was allocated to producing properties. An asset retirement obligation of $19,732 was recorded in conjunction with the purchase. EnergyQuest Acquisition On March 28, 2019, the Company purchased oil producing properties from EnergyQuest II, LLC ("EnergyQuest") for a purchase price of $5,600,000. The effective date 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 payable and sales of unregistered securities of the Company. The following table sets forth the Company’s purchase price allocations to the identifiable assets acquired and the liabilities assumed based on the fair values at the acquisition date, with any excess of the estimated fair value of the identifiable net assets acquired over the purchase price recorded as a reduction in value of the oil and natural gas properties. EnergyQuest Pardus Fair Value of Assets Acquired Accounts receivable $ 1,308,748 $ 100,208 Inventory of oil in tanks 438,320 147,297 Deposits — 378,000 Equipment & gathering lines — 109,200 Oil and natural gas properties 10,878,430 10,397,821 Total Assets Acquired $ 12,625,498 $ 11,132,526 Fair Value of liabilities Assumed Accounts payable – trade 1,861,433 20,455 Notes payable – current — 378,000 Royalty suspense — 1,185,587 Asset retirement obligations 5,117,939 9,508,484 Total Liabilities Assumed $ 6,979,372 $ 11,092,526 Purchase Price $ 5,646,126 $ 40,000 The fair values of assets acquired and liabilities assumed were based on the following key inputs: Oil and natural gas properties For the EnergyQuest acquisition, 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. For the Pardus acquisition, 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. - 42 - 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 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. 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. Deposits were valued based on the actual amount paid by the seller and held with third parties. Accounts payable - trade includes liabilities primarily related to well activity prior to close. For 2020, the financial statements include Pardus from the date of acquisition and EnergyQuest for the full year. 5. 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”) with Petroleum & Independent Exploration, LLC and related entities (“PIE”) dated August 1, 2020. Under the terms of the Agreement, PIE will perform recompletion or workover on specified mutually agreed upon wells (“Workover Wells”) owned by ET. To fund the work, PIE entered into a term loan agreement with ET dated August 1, 2020, whereby PIE will loan up to $2,000,000, at an interest rate of 6% per annum, maturing August 6, 2024 unless terminated earlier by PIE. Proceeds of the loan will be used for recompletion or workover of the Workover Wells. As of December 31, 2020, approximately $315,000 has been advanced from the loan. As part of the Agreement, ET 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 ET in each of the Workover Wells and retain a 50% working and revenue interest (See Note 8). Activity resulting from this agreement is being treated as a conveyance. 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. PIE is obligated to exercise 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 (See Note 10). On March 11, 2021 the Company amended the Securities Agreement to remove the vesting provisions for the warrants and PIE exercised all of its warrants for an aggregate exercise price of $3,349,052 (See Note 15). 6. Asset retirement obligations The Company’s asset retirement obligations represent the estimated present value of the estimated cash flows the Company will incur to plug, abandon and remediate its producing properties at the end of their productive lives, in accordance with applicable state laws. Market risk premiums associated with asset retirement obligations are estimated to represent a component of the Company’s credit-adjusted risk-free rate that is utilized in the calculations of asset retirement obligations. The Company’s asset retirement obligation transactions during the years ended December 31, 2020 and 2019 are summarized in the table below. For the year ended December 31, 2020 For the year ended December 31, 2019 Asset retirement obligations, beginning of period $ 5,788,280 $ 230,650 Liabilities assumed in acquisitions 9,508,484 5,251,329 Revision to estimates (862,405 ) — Accretion expense 929,858 306,301 Asset retirement obligation, end of period $ 15,364,217 $ 5,788,280 - 43 - 7. 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 gas the Company produces and sells. The Company’s derivative financial instruments consist of oil and natural gas swaps. The Company does not enter into derivative financial instruments for speculative or trading purposes. 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 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 balance sheet. The following table summarized the amounts reported in earnings, as a component of revenue, related to the commodity derivative instruments for the years ended December 31, 2020 and 2019: As of December 31, 2020 2019 Gain on derivatives: Oil derivatives $ 1,738,871 $ 25,894 Natural gas derivatives — 7,749 Total $ 1,738,871 $ 33,643 The following represents the Company’s net cash receipts from (payments on) derivatives for the years ended December 31, 2020 and 2019: As of December 31, 2020 2019 Net cash receipts from derivatives: Oil derivatives $ 1,520,988 $ 358,799 Natural gas derivatives — 11,557 Total $ 1,520,988 $ 370,356 The following table sets forth the Company’s outstanding oil derivative contracts at December 31, 2020. The Company has no outstanding natural gas derivatives. All of the Company’s derivatives are expected to settle by July 30, 2021: First quarter Second quarter Third quarter Fourth quarter Oil Swaps: Volume (Bbl) 15,255 15,180 5,200 — Price per Bbl $49.40 $50.87 $38.25 — - 44 - 8. Notes payable: The Company had the following debt outstanding as of December 31, 2020 and 2019. The expenses of issuing the Senior Revolver Loan Agreement were capitalized and included as a reduction to debt in the accompanying consolidated balance sheets. These costs are amortized over the expected life of the debt. When debt is retired before maturity, or modifications significantly change the cash flows, the related unamortized costs are expensed. No interest was capitalized in the three-year period ended December 31, 2020 or 2019. December 31, 2020 December 31, 2019 Senior Revolver Loan Agreement, 4.75%, due 2022 $ 8,124,000 $ 7,782,253 Unsecured note – Pardus acquisition, 1%, due 2021 378,000 — SBA Payroll Protection Plan note, 1%, due 2023 160,700 — Term Loan – PIE, 6%, due 2024 315,273 — Equipment note, 0%, due in 2025 57,935 — Senior Unsecured Promissory Notes, 6%, due 2020 — 102,500 Total debt 9,035,908 7,884,753 Unamortized debt issue costs 14,587 72,931 Total debt, net of debt issue costs $ 9,021,321 $ 7,811,822 In February 2019, 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 issued to Michael R. Morrisett, the Company's President. These notes and the related interest were paid in May 2019. In September 20, 2018 the Company entered into a Senior Revolver Loan Agreement (“the 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 revolver commitment amount is $8,700,000 which is reduced by $180,000 per calendar quarter and the maximum amount that can be advanced under the Agreement is $20,000,000 and includes interest at Wall Street Journal Prime plus 150 basis points (4.75% as of December 31, 2020). The Agreement matured on March 27, 2021. 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% of Empire Louisiana’s and Empire North Dakota’s producing oil, gas and other leasehold and mineral interests. The Agreement requires the Company to maintain certain covenants including an EBITDAX to interest expense of at least 3:1 and funded debt to EBITDAX of 4:1 on a trailing twelve month basis. As of December 31, 2020, the Company has $8,124,000 outstanding under the Agreement. In addition, the Company has a $306,000 outstanding letter of credit to its insurance carrier as of December 31, 2020. On March 10, 2021 the Agreement was amended (the “Third Amendment”). The Third Amendment, among other things, extended the maturity to March 27, 2022, redetermined the collateral base commitment of $8,520,000, provided for quarterly commitment reductions of $180,000, waived and suspended the leverage ratio covenant and minimum interest coverage ratio covenant until the fiscal quarter ending March 31, 2021, and amended the leverage ratio covenant to 6:1 at March 31, 2021 reducing quarterly to 4:1 as of March 31, 2022 and thereafter. On April 1, 2020, in conjunction with the purchase of assets from Pardus Oil & Gas, LLC (see Note 5), the Company entered into an unsecured promissory note agreement with the seller in the amount of $378,000. The note is payable in one installment on April 1, 2021 and bears interest at the one-year LIBOR rate (1% as of December 31, 2020). 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. The loan matures on May 5, 2022 and has an interest rate of 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. The Company expects that the loan amount will be forgiven based on currently published guidelines of the United States Small Business Administration. - 45 - In August 2020, concurrent with the Joint Development Agreement with Petroleum and Independent Exploration, LLC (“PIE”), 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 September 30, 2020, approximately $315,000 has been advanced from the loan (See Note 5). In December 2020 the Company purchased certain equipment totaling $66,819 to be used on lease sites. The equipment was financed through the manufacturer’s financing subsidiary. Terms of the note provide for monthly payments of $1,012 for 60 months with a 0% interest rate. 9. Senior unsecured convertible promissory notes: In December 2016, the Company entered into securities purchase agreements (each, a "Securities Purchase Agreement" and, collectively, the "Securities Purchase Agreements") with four accredited investors, pursuant to which it issued senior unsecured convertible promissory notes due December 31, 2018 (each, a "Convertible Note" and, collectively, the "Convertible Notes") in the aggregate amount of $132,500 in cash. Each Convertible Note accrued interest at 6%, was due December 31, 2018 and is convertible at the option of the holder at $0.15 per share. Each investor was also issued a warrant certificate (each, a "Warrant Certificate" and, collectively, the "Warrant Certificates"), pursuant to which such investor could acquire one share of Common Stock at $0.25 per share for each $0.25 invested in the applicable Convertible Note until December 31, 2018. The full amount interest under each Convertible Note was accrued and paid upon the maturity date or earlier conversion. The value allocated to the Warrant Certificates was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 112%, risk free interest rate of 0.91% and an expected useful life of two years, the fair value of the Warrant Certificates was allocated $38,115 to Paid in Capital and $38,115 as Debt Issue Costs. The Notes' conversion features were valued at their intrinsic value in excess of the debt's allocated value of $38,115 and resulted in additional Paid in Capital and Debt Issue Costs. The Debt Issue Costs represent a direct deduction of the face amount the Convertible Notes was amortized as interest expense over the life of the Notes. In January 2017, the Company entered into securities purchase agreements (each, a "Securities Purchase Agreement" and, collectively, the "Securities Purchase Agreements") with two accredited investors, pursuant to which it issued senior unsecured convertible promissory notes due December 31, 2018 (each, a "Convertible Note" and, collectively, the "Convertible Notes") in the aggregate amount of $62,500 in cash. Each Convertible Note accrued interest at 6%, is due December 31, 2018 and is convertible at the option of the holder at $0.15 per share. Each investor was also issued a warrant certificate (each, a "Warrant Certificate" and, collectively, the "Warrant Certificates"), pursuant to which such investor could acquire one share of Common Stock at $0.25 per share for each $0.25 invested in the applicable Convertible Note until December 31, 2018. The full amount of interest under each Convertible Note is accrued and paid upon the maturity date or earlier conversion. The value allocated to the Warrant Certificates was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 110%, risk free interest rate of 1.23% and an expected useful life of two years. The fair value of the Warrant Certificates was allocated $16,975 to Paid in Capital. The Notes' conversion features were valued at their intrinsic value in excess of the debt's allocated value of $16,975 and resulted in additional Paid in Capital. The Debt Issue Costs represent a direct deduction of the face amount the Convertible Notes and was amortized as interest expense over the life of the Notes. In September and October 2017, the Company entered into securities purchase agreements (each, a "Securities Purchase Agreement" and, collectively, the "Securities Purchase Agreements") with two accredited investors, pursuant to which it issued senior unsecured convertible promissory notes due December 31, 2019 (each, a "Convertible Note" and, collectively, the "Convertible Notes") in the aggregate amount of $65,000 in cash. Each Convertible Note accrued interest at 6%, is due December 31, 2019 and is convertible at the option of the holder at $0.15 per share. Each investor was also issued a warrant certificate (each, a "Warrant Certificate" and, collectively, the "Warrant Certificates"), pursuant to which such investor could acquire one share of Common Stock at $0.25 per share for each $0.25 invested in the applicable Convertible Note until December 31, 2019. The full amount of interest under each Convertible Note is accrued and paid upon the maturity date or earlier conversion. The value allocated to the September Warrant Certificates was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 154%, risk free interest rate of 1.35% and an expected useful life of 28 months. The value allocated to the October Warrant Certificates was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 180%, risk free interest rate of 1.51% and an expected useful life of 27 months. The fair value of the Warrant Certificates of $13,918 was allocated to Paid in Capital. The Notes' conversion features were valued at their intrinsic value in excess of the debt's allocated value of $13,918 and resulted in additional Paid in Capital. The Debt Issue Costs represent a direct deduction of the face amount the Convertible Notes and was amortized as interest expense over the life of the Notes. - 46 - On December 31, 2018 the Company and investors for all of the Senior Unsecured Convertible Promissory Notes entered into amended agreements whereby the maturity dates for the notes maturing December 31, 2018 were extended to December 31, 2019, the conversion feature of the notes was modified from $0.15 per share of common stock to $0.10 per share. Additionally, the Warrant Certificates to purchase shares of common stock of the Company, which were issued as a part of the original agreements, were repriced from $0.25 per share to $0.15 per share. The value allocated to the Warrant Certificates modification was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 167%, risk free interest rate of 2.63% and an expected useful life of 12 months. The change in fair value of the Warrant Certificates as a result of the modifications of $139,985 was allocated to Paid in Capital and included as an expense in 2018. The Notes conversion features were equivalent to their intrinsic value at the date of modification. In 2019, five of the Senior Unsecured Promissory Note investors exercised the conversion feature and converted their $157,500 notes for 1,575,000 shares of the Company's common stock. On December 31, 2019 the Company and investors for the remaining $102,500 Senior Unsecured Convertible Promissory Notes entered into amended agreements whereby the maturity dates for the notes maturing December 31, 2019 were extended to January 31, 2020. In January 2020 the remaining Senior Unsecured Promissory Note investors exercised the conversion feature and converted their $102,500 notes for 1,025,000 shares of the Company's common stock. 10. Common stock: During December 2016, the Company issued $132,500 of senior unsecured convertible promissory notes ("Convertible Notes") due December 31, 2018 to several accredited investors (See Note 9). The Convertible Notes, as modified, were convertible at the option of the holder into Common Stock at $0.10 per share. Each investor was also issued a warrant certificate, pursuant to which such investor could acquire one share of Common Stock at $0.15 per share for each $0.15 invested in the applicable Convertible Note until December 31, 2019. In December, 2019 the Convertible Notes were extended to January 31, 2020. During January 2017 the Company issued $62,500 of senior unsecured convertible promissory notes ("Convertible Notes") due December 31, 2018 to several accredited investors (See Note 9). The Convertible Notes, as modified, were convertible at the option of the holder into Common Stock at $0.10 per share. Each investor was also issued a warrant certificate, pursuant to which such investor could acquire one share of Common Stock at $0.15 per share for each $0.15 invested in the applicable Convertible Note until December 31, 2019. In December, 2019 the Convertible Notes were extended to January 31, 2020. During September and October 2017, the Company issued $65,000 of senior unsecured convertible promissory notes ("Convertible Notes") due December 31, 2019 to two accredited investors (See Note 9). The Convertible Notes, as modified, were convertible at the option of the holder into Common Stock at $0.10 per share. Each investor was also issued a warrant certificate, pursuant to which such investor could acquire one share of Common Stock at $0.15 per share for each $0.15 invested in the applicable Convertible Note until December 31, 2019. In December, 2019 the Convertible Notes were extended to January 31, 2020. In 2019 and 2020 all of the convertible promissory notes were converted into shares of the Company’s stock (see Note 9). During January 2018 the Company issued to several accredited investors 1,100,000 shares of its common stock and warrants to purchase 1,100,000 shares of its common stock for $.15 per share which expired on December 31, 2019. 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 185%, risk free interest rate of 2.05% and an expected useful life of 24 months. The fair value of the warrants of $108,900 was allocated to Paid in Capital. During March 2018 the Company issued to an accredited investor 100,000 shares of its common stock and warrants to purchase 100,000 shares of its common stock for $.15 per share which expired on December 31, 2019. 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 179%, risk free interest rate of 2.22% and an expected useful life of 22 months. The fair value of the warrants of $9,900 was allocated to Paid in Capital. During June 2018 the Company issued warrants to purchase 645,000 shares of its common stock for $.25 per share which expired on December 31, 2019 to several professionals 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 174%, risk free interest rate of 2.38% and an expected useful life of 19 months. The fair value of the warrants of $117,068 was recorded as compensation expense and allocated to Paid in Capital. During June 2018 the Company issued to an accredited investor 100,000 shares of its common stock and warrants to purchase 100,000 shares of its common stock for $.15 per share which expired on December 31, 2019. 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 197%, risk free interest rate of 2.43% and an expected useful life of 18 months. The fair value of the warrants of $9,900 was allocated to Paid in Capital. - 47 - During August and September 2018, the Company issued to a group of accredited investors 1,016,667 shares of its common stock and warrants to purchase 1,16,667 shares of its common stock for $.25 per share which expired on December 31, 2019. 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 210%, risk free interest rate of 2.49% and an expected useful life of 15 months. The fair value of the warrants of $150,833 was allocated to Paid in Capital. During August and September 2018, the Company issued to an accredited investor 5,000,000 shares of its common stock and warrants to purchase 5,000,000 shares of its common stock for $.15 per share which expires on December 31, 2020. 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 189%, risk free interest rate of 2.71% and an expected useful life of 27 months. The fair value of the warrants of $495,000 was allocated to Paid in Capital. Proceeds from the issuance were utilized for a portion of acquisitions. 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. 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. 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 $976,000 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 obligated to exercise 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. 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 4 years. The fair value of the warrants of $450,848 was allocated to Paid in Capital (See Note 5). 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 15). On December 31, 2020 the Board of Directors of the Company amended certain warrant certificates which had been issued to Mr. Pritchard and Mr. Morrisett covering 1,000,000 warrants to purchase common stock of the Company. The original warrants expired on December 31, 2021 and had an exercise prices of $0.25. The warrants were extended to expire on April 2, 2029. The value allocated to the warrant extension was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 329%, risk free interest rate of .36% and an expected useful life of 5 years. The fair value of the warrant extension of $349,800 was recorded as compensation expense and allocated to Paid in Capital. 11. Stock options: At the Company's 2006 Annual Meeting of Stockholders, the stockholders approved the 2006 Stock Incentive Plan (the "Plan"). The Plan permitted the issuance of stock options, restricted stock awards, and performance shares to employees, officers, directors, and consultants of the Company. Initially, and until such time as the Board creates a Compensation Committee, the Board of Directors will administer the Plan. The total number of shares of common stock that may be issued pursuant to awards under the Plan is 5,000,000. Under the Plan, no participant may receive awards of stock options that cover, in the aggregate, more than 500,000 shares of common stock in any fiscal year. Under the terms of the Plan, no additional options could be granted after the tenth anniversary of the Plan, which occurred on June 5, 2016. As of December 31, 2019, there were 4,167 options outstanding which expired on September 9, 2020. 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 per share. The options vest 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. 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 5.375 years. The fair value of the options of $812,500 was recorded as compensation expense and allocated to Paid in Capital in 2019. In 2020, the fair value of the options which vested in April 2020 of $406,250 was recorded as compensation expense and allocated to Paid in Capital. The fair of the remaining unvested options is $406,250 as of December 31, 2020. - 48 - On December 31, 2020 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 $0.35 per share. The options vested immediately. All of the options expire in December 2030. 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 344%, risk free interest rate of .36% and an expected useful life of 5 years. The fair value of the options of $1,949,500 was recorded as compensation expense in 2020 and allocated to Paid in Capital. The Company expenses the cost of options granted over the vesting period of the option based on the grant-date fair value of the award. Option fair values are estimated at the grant date using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. For purposes of determining the expected life of the options, the Company utilizes the Simplified Method as defined in Staff Accounting Bulletin No. 107 issued by the Securities and Exchange Commission. In addition, the Black-Scholes option valuation model requires the input of other highly subjective assumptions including stock price volatility. A summary of the Company's Incentive Plan as of December 31, 2020, and changes during the year is presented below: Weighted Average Options Exercise Price Outstanding at End of Year 2018 4,167 $ 3.12 Granted 5,000,000 .33 Outstanding at End of Year 2019 5,004,167 $ .33 Granted 5,000,000 .35 Expired 4,167 3.12 Outstanding at End of Year 2020 10,000,000 $ .34 The following table summarizes information about stock options outstanding at December 31, 2020: Options Outstanding Options Exercisable Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices at 12/31/20 Life Price at 12/31/20 Price $.33 to $.35 10,000,000 9.13 years $.34 8,750,000 $.34 - 49 - 12. Income taxes: The provision for income taxes differs from the amount obtained by applying the applicable Federal income tax rate of 21% at year-ends 2020 and 2019 to income before income taxes. The difference relates to the following items: 2020 2019 Statutory tax rate 21% 21% Expected tax benefit $ (1,232,000 ) $ (380,000 ) Nondeductible expenses — — Increase in valuation allowance 1,232,000 380,000 Tax provision (benefit) as reported $ — $ — The components of deferred income taxes at December 31, are as follows: 2020 2019 Deferred tax assets: Loss carry-forwards $ 4,071,054 $ 2,594,008 Depreciation, depletion and impairment 2,696,706 413,835 Unrecognized losses on derivatives 1 ,207 46,963 Total deferred tax assets 6,768,967 3,054,806 Valuation allowance (6,768,967 ) (3,054,806 ) Net deferred taxes $ — $ — At December 31, 2020, the Company has accumulated net operating loss carryforwards totaling approximately $19.4 million which begin to expire if not utilized starting in 2021. Utilization of the Company's loss carryforwards is dependent on realizing taxable income. The Company recorded a valuation allowance as of December 31, 2020 and 2019 due to uncertainty related to its ability to utilize some of its deferred income tax assets, primarily consisting of net operating loss carryforwards before they expire. The Company is no longer subject to income tax examinations by tax authorities for years before 2017. The Company is not currently the subject of any income tax examinations by any tax authorities. Based upon a review of its income tax filing positions, the Company believes that its positions would be sustained upon an audit and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded. The Company recognizes interest related to income taxes as interest expense and penalties as operating expenses. - 50 - 13. Operating lease: The Company adopted ASU No. 2016-02, Topic 842 (ASC 842) - Leases, effective January 1, 2020. This ASU requires lessees to recognize an operating lease or right-of-use ("ROU") asset and liability on the balance sheet for all right-of-use leases with an initial lease term greater than twelve months. Under the transition option, the Company will continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented and will make only annual disclosures for the comparative periods because ASC 840 does not require interim disclosures. Prior period amounts have not been adjusted and continue to be reflected in accordance with the Company’s historical accounting. The adoption of this standard on January 1, 2020, had no impact on the Company's consolidated statements of stockholders' equity or consolidated statements of operations. As a lessee, the Company leases its corporate office headquarters in Tulsa, Oklahoma. The lease expires on December 31, 2025 and has an option to renew for an additional five-year term. The option to renew the lease is generally not considered reasonably certain to be exercised. Therefore, the period covered by such optional period is not included in the determination of the term of the lease and the lease payments during these periods are similarly excluded from the calculation of right-of-use lease asset and lease liability balances. ROU lease expense consists of rent expense related to leases that were included in ROU assets under ASC 842. 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. As a result of adopting ASC 842, on the effective date, the Company recognized right-of-use assets and liabilities of $613,901. Right-of-use leases are included in right-of-use assets (included in Other Property and Equipment) and current or long-term right-of-use obligations on the consolidated balance sheets. Right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses a discount rate that approximates the rate of interest for a collateralized loan over a similar term as the discount rate for present value of lease payments when the rate implicit in the contract is not readily determinable. Right of use lease expanse was $34,989 for the year ended December 31, 2020. Cash flows for right of use leases was $-0- for the year as the lease payments did not commence until 2021. Supplemental balance sheet information related to the right of use leases as of December 31, 2020: Right of use lease assets $ 588,790 Right of use lease obligations – current $ 89,769 Right of use lease obligations – long term 534,009 Total right of use lease liabilities $ 623,778 The weighted average remaining term for the Company’s right of use leases is 5 years. Maturities of lease liabilities as of December 31, 2020: 2021 $ 127,100 2022 147,439 2023 150,385 2024 153,392 2025 156,460 Total Lease payments 734,776 Less imputed interest (110,995 ) Total lease obligation 623,781 Rent expense for the Company’s former Tulsa office for the year ended December 31, 2020 was $21,117 and $22,700 for the year ended December 31, 2019. - 51 - 14. Concentrations: The Company’s producing properties and oil and natural gas reserves are all located in Louisiana, North Dakota, and Montana. Because of the concentration, the Company is exposed to the impact of regional supply and demand factors, processing or transportation capacity constraints, severe weather events, water shortages, and government regulations specific to the geographic area. The Company sells 96% of its oil and natural gas production to four customers. The loss of these purchasers could result in a temporary interruption in sales or a lower price for production. 15. Subsequent events: On March 10, 2021 the Company entered into the Third Amendment (the “Third Amendment”) of its Senior Revolver Loan Agreement (the “Agreement’) with CrossFirst Bank (see Note 8). On March 11, 2021 the Company amended the Securities Agreement with Petroleum & Independent Exploration, LLC (“PIE) to remove the vesting provisions for the warrants, and PIE exercised all of its warrants to purchase 23,628,185 shares of the Company’s common stock for an aggregate exercise price of $3,349,052 (See Note 5). On March 12, 2021 the Company, through its subsidiary Empire New Mexico, LLC entered into a purchase and sale agreement with XTO Holdings, LLC (a subsidiary of ExxonMobil) (the “Seller’) to acquire, among other things, certain oil and gas properties in New Mexico. The purchase price is $17,800,000 subject to customary adjustments, is effective as of January 1, 2021, and is scheduled to close April 26,2021. The Company has wired a deposit of $1,780,000 to the Seller on March 12, 2021. As a part of the transaction, the Company established Empire New Mexico, LLC, a wholly owned subsidiary. 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 is $900,000 and is reduced by certain expenses which the Company may incur relating to the properties for up to one year from the April 21, 2021 closing date. As a part of the transaction, the Company established Empire ND Acquisition, LLC. During February and March 2021, the Company issued to a group of accredited investors 8,993,857 shares of its common stock and warrants to purchase 8,993,857 shares of its common stock for $.50 per share which expires on December 31, 2022. Proceeds from the sale were $3,147,850. - 52 - EMPIRE PETROLEUM CORPORATION UNAUDITED SUPPLEMENTARY DATA December 31, 2020 and 2019 The following reserve estimates present the Company's estimate of the proven natural gas and oil reserves and net cash flow of the Properties, in accordance with the guidelines established by the Securities and Exchange Commission. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing natural gas and oil properties. Accordingly, the estimates are expected to change as future information becomes available. All the oil and natural gas reserves are located in Louisiana, North Dakota, Montana and Texas. Reserve Quantity Information Proved oil and natural gas reserves are those quantities of oil and gas, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. Proved developed reserves are proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well. Proved undeveloped reserves are proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditures is required for recompletion. Below are the net quantities of net proved developed and undeveloped reserves of the Properties: As of December 31, As of December, 31 2020 2019 Oil (MMBbls) Natural Gas (MMcf) Oil (MMBbls) Natural Gas (MMcf) Proved developed reserves: Beginning of year 3,643 404 661 887 Purchase of minerals in place 580 1,092 2,886 17 Revision of previous estimates (397 ) (385 ) 209 (459 ) Production (165 ) (140 ) (113 ) (41 ) End of year 3,661 971 3,643 404 Proved developed 3,331 940 2,216 404 Proved undeveloped — — 1,311 — Proved behind pipe 85 — 103 — Proved shut in 245 31 13 — Total proved 3,661 971 3,643 404 - 53 - Standardized Measure of Discounted Future Net Cash Flows Relating to Oil and Natural Gas Reserves The standardized measure of discounted future net cash flows relating to oil and natural gas reserves and associated changes in standard measure amounts were prepared in accordance with the provision of Financial Accounting Standard Board ASC 932-235-555. Future cash inflows were computed by applying average prices of oil and natural gas for the last 12 months to estimated future production. Future production and development costs were computed by estimating the expenditures to be incurred in developing the oil and natural gas reserves at the end of the year, based on year end costs and assuming continuation of existing economic conditions. Future net cash flows are discounted at the rate of 10% annually to derive the standardized measure of discounted cash flows. Actual future cash inflows may vary considerably, and the standardized measure does not necessarily represent the fair value of the acquired properties' oil and natural gas reserves. Standard measure amounts are: 2020 2019 Future cash inflows $ 121,959,450 $ 184,779,880 Future production costs (55,350,840 ) (75,544,710 ) Future development costs (1,682,210 ) (19,459,800 ) Future net cash flows 64,926,400 89,775,370 10% annual discount for timing of cash flows (44,156,320 ) (52,473,450 ) Standardized Measure $ 20,770,080 $ 37,301,920 The 12-month average prices were adjusted to reflect applicable transportation and quality differentials on a well-by-well basis to arrive at realized sales prices used to estimate the properties' reserves. The prices for the properties' reserves were as follows: 2020 2019 Natural gas (MMBtu) $ 1.41 $ 2.58 Oil (Bbl) $ 32.94 $ 53.27 - 54 - Changes in the Standardized Measure of Discounted Future Net Cash Flows at 10% per annum are as follows: 2020 2019 Standardized measure – beginning of year $ 37,301,920 $ 12,977,620 Sales of oil and gas production (2,164,496 ) (1,315,488 ) Purchase of minerals in place 13,694,856 16,047,370 Changes in price and production costs (18,386,232 ) 12,536,044 Revisions of quantity estimates (4,348,703 ) 1,414,205 Changes in estimated development cost 16,937,402 653,957 Accretion of discount 5,099,678 2,902,499 Changes in estimated timing and other, net (27,364,345 ) (7,914,287 ) Change in standardized measure (16,531,840 ) 24,324,300 Standardized measure – end of year $ 20,770,080 $ 37,301,920 Estimates of economically recoverable natural gas and oil reserves and of future net revenues are based upon a number of variable factors and assumptions, all of which are to some degree subjective and may vary considerably from actual results. Therefore, actual production, revenues, development and operating expenditures may not occur as estimated. The reserve data are estimates only, are subject to many uncertainties, and are based on data gained from production histories and on assumptions as to geologic formations and other matters. Actual quantities of natural gas and oil may differ materially from the amounts estimated. Capitalization of Oil and Gas Properties Empire has not incurred and capitalized exploratory well costs for properties pending the determination of proved status, exploratory well costs reclassified to wells or exploratory well costs that were charged to expense. The aggregate capitalized costs of oil and gas properties are as follows: 2020 2019 Proved producing wells $ 4,499,519 $ 3,826,522 Proved undeveloped 547,882 2,232,358 Lease and well equipment 1,360,596 1,121,527 Unproved leasehold 2,177,317 — Asset retirement obligation 14,126,130 5,480,050 Gross capitalized costs 22,711,444 12,660,457 Depreciation, Depletion and Amortization (8,930,528 ) (3,365,340 ) Net capitalized costs $ 13,780,916 $ 9,295,117 2020 2019 Total gross capitalized costs $ 22,711,444 $ 12,660,457 -55-