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Item 5. Market for Registrant’s Common Equity

2023-03-31 compared with 2022-03-31 · 12 added, 368 removed, 1 unchanged (100% of the section changed)

FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

The Company's Common Stock is traded on the NYSE

American under the symbol "EP".

At both December 31, 2021, and March 31, 2022, there

were approximately 900 stockholders of record of the Company's Common Stock.

The Company has never paid cash dividends on its

Common Stock.

The Company intends to retain future earnings for use in its business and, therefore, does not anticipate paying cash dividends

on its Common Stock in the foreseeable future.

Future payment of dividends will depend upon, but not be limited to, the Company’s

financial condition, funds available for operations, the amount of anticipated capital and other expenditures, future business prospects

and any restrictions imposed by present or future financing arrangements.

Issuer Repurchase of Equity Securities

No private or open market repurchases of Common

Stock were made by the Company for the year ended December 31, 2021.

Unregistered Sales of Equity Securities

No such sales that have not been previously reported

on a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read together

with the consolidated financial statements and notes to consolidated financial statements, which are included in this Annual Report on

Form 10-K in Item 8, Financial Statements and Supplementary Data and the information set forth in Part I, Item 1A – Risk Factors.

The Company's primary business is the exploration

and development of oil and gas interests.

The Company has incurred significant losses from operations, and there is no assurance that

it will achieve profitability or obtain funds necessary to finance its future operations.

The Company seeks to increase shareholder value

by growing reserves, production, revenues, and cash flow from operating activities by executing its mission to use highly-skilled personnel

to thoughtfully and expertly spend capital to realize reserves on producing properties.

Management places emphasis on operating cash flow

in managing its business, as operating cash flow considers the cash expenses incurred during the period and excludes non-cash expenditures

not related directly to the Company’s operations.

Business Strategy

The Company’s business strategy is to obtain

long-term growth in reserves and cash flow on a cost-effective basis utilizing experienced personnel throughout the Company.

regularly evaluates potential acquisitions of properties that would enhance current core areas of operation.

2021 XTO Acquisition

On March 12, 2021 the Company, through its

wholly owned subsidiary Empire New Mexico, 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 natural gas properties in New Mexico.

The purchase price was

$17,800,000 subject to customary adjustments.

The transaction closed on May 14, 2021 with an effective date of January 1, 2021.

information about the transaction, refer to the financial statements and footnotes incorporated by reference herein.

Results of Operations

The following table reflects our summary operating

Because of normal production declines, increased or decreased drilling activity and the effects of acquisitions, the historical

information presented below should not be interpreted as indicative of future results.

Years Ended December 31,

Natural gas revenues

Total revenues from product sales

Lease operating expense

Production and ad valorem taxes

Depreciation, depletion, amortization and accretion

Impairment expense

General and administrative expense (excluding stock-based compensation)

Stock-based compensation

Cash-based interest expense

Non-cash interest expense

Operating Loss

(17,583,006 )

(18,614,962 )

(16,835,433 )

Revenues increased as a result of more volumes produced

from legacy assets due to successful execution of the Company’s mission to cost-effectively produce more volumes paired with the

XTO acquisition’s revenues and volumes brought online from efforts to make the field produce more volumes combined with favorable

pricing environments in the Company’s core operating areas.

Approximately $11.2 million in oil revenues, $1.7 million in gas revenue,

and $3.1 million in NGL revenue was attributed to production acquired with the XTO acquisition.

Lease Operating Expense and Taxes

Lease operating expense rose with the XTO acquisition

and in response to the Company’s execution of its mission to increase production in its legacy assets.

The Company has worked to

cost-effectively increase production throughout its asset base utilizing experienced personnel and third-party service providers.

and ad valorem taxes have increased as a direct result of the XTO acquisition’s properties and increased volumes produced and sold.

The acquisition of New Mexico assets accounted for approximately $5.0 million of the increase in lease operating expenses and $1.3 million

of the increase in production and ad valorem taxes.

Depreciation, Depletion, Amortization and Accretion

and Impairment

There were no indicators of impairment on the Company’s

properties at year-end, primarily due to favorable futures pricing at December 31, 2021.

Due to favorable pricing realized throughout

2021 and the addition of PDP reserves in New Mexico, DD&A expense decline year-over-year from approximately 13% in 2020 to 6% in

General and Administrative Expense

The Company’s implemented a new Board of

Directors compensation plan in 2021 resulting in board compensation paid of approximately $475,000 in 2021, exclusive of stock-based

compensation received.

Fees paid for legal and outsourced services increased by approximately $425,000 as a direct result of

acquisition-related work, SEC filings related to the Company’s operations, and the Company’s successful uplisting from

the OTCQB to be freely traded on the NYSE American.

Outsourced accounting fees increased by approximately $375,000 as additional

work was required to integrate the New Mexico assets into the existing accounting system as well as additional resources required to

perform routine accounting services on the new assets.

Also included in general and administrative expenses is $989,000 in non-cash

right to buy costs related to the unsecured notes payable discussed in the Related Party Transactions note below.

The Company utilizes stock-based compensation to

compensate members of management and retain talented personnel.

The Company anticipates stock-based compensation to continue to be utilized

in 2022 and beyond to attract and retain talented personnel.

Interest Expense

Cash-based interest expense declined with a

corresponding decrease in the Company’s Credit Facility.

The Company has minimal interest-bearing vehicle and equipment notes payable.

Non-cash interest expense is fully attributable

to the related party notes payable as described in Related Party Transactions below.

As of December 31, 2021, the Company had approximately

$3.6 million cash on hand and approximately $300,000 available on its Credit Facility.

The Company expects to incur costs related

to future oil and natural gas acquisitions for the foreseeable future.

It is expected that management will use a combination of

cash flows from operations as well as seeking additional debt and equity funding for these acquisitions and to fund ongoing operations.

Working Capital

Working capital (presented below) was $1.1 million

as of December 31, 2021 compared to a deficit of $3.9 million as of December 31, 2020, representing a change of approximately $5 million.

This change is primarily a result of the acquisition of producing properties in New Mexico, which served to increase volumes sold for

the year ended December 31, 2021, as well as the stronger pricing environment in 2021.

Current Assets

Current Liabilities

Working Capital (Deficit)

Year Ended December 31,

Cash flows provided by (used in):

Operating activities

$ (1,723,257 )

Investing activities

(24,716,878 )

(25,573,168 )

Financing activities

Cash Flows from Operating Activities

The Company incurred approximately $18.0 million

in non-cash expenses related to the convertible notes payable (See Related Party Transactions for more information) that contributed

to a net loss for financial reporting purposes.

Ongoing operations from core assets contributed to cash flows provided by operating activities

for the year ended December 31, 2021.

Cash Flows from Investing Activities

Cash flows from investing activities primarily increased

due to the XTO acquisition that occurred in May 2021 and established the Company in the state of New Mexico, the Company’s largest

single acquisition to date that resulted in cash outflows of approximately $17.9 million.

The Company also participated in the drilling

of four non-operated wells through its Empire North Dakota subsidiary that had a cash outflow of approximately $2.5 million for the year

ended December 31, 2021.

As part of the XTO acquisition, the Company entered into an agreement to create a sinking fund for future plugging

liabilities, paying approximately $4.8 million into that fund for the year.

Flows from Financing Activities

The XTO acquisition and operations executing the

Company’s mission were funded by proceeds from debt issued of approximately $20.5 million as well as proceeds from stock and warrant

issuances of approximately $11.3 million.

The Company has quarterly payment obligations related to its bank debt of $300,000 per quarter

in addition to minimal monthly payments for notes payable arising from the purchase of vehicles and equipment.

Related Party Transactions

The issuance of the Secured Note and an Unsecured Note to Energy

Evolution as described below are related party transactions for accounting purposes, but are not required to be disclosed under Item 13

of this Form 10-K.

Senior Secured Convertible Note

On May 14, 2021, Empire New Mexico entered

into a Senior Secured Convertible Note Agreement (the “Secured Note”) in the amount of $16,250,000 with Energy Evolution

Master Fund, Ltd., a related party (“Energy Evolution”).

The Secured Note was collateralized by all assets of Empire New

Mexico prior to its conversion to common stock in December 2021.

Due to the terms of the Secured Note, the transaction had the following

non-cash elements for the year ended December 31, 2021:

debt discount of $2.2 million

million in derivative liability considerations, including the valuation of the redemption

interest expense of $7.4 million

On September 29, 2021 the parties entered into

a Loan Modification Agreement pursuant to which Energy Evolution exchanged $6,500,000 in principal under the Secured Note in exchange

for 1,326,302 shares of common stock, warrants to purchase 500,000 shares of the Company’s common stock at $5 per share and

amended certain terms of the remaining $5,700,000 of principal under the Secured Note.

On December 30, 2021, the Secured Note was

amended to allow full conversion of the remaining balance and Energy Evolution converted 100% of the remaining principal ($5.7 million)

and accrued interest ($55,000) outstanding at that date into 1,154,085 shares of the Company’s common stock.

Unsecured Convertible Notes

In May 2021 the Empire New Mexico entered into

$3,243,000 of Unsecured Convertible Notes (the “Unsecured Notes”) with a group of accredited investors, including the Company’s

related party Energy Evolution, constituting $1,500,000 of the total Unsecured Convertible Notes.

The Unsecured Notes had a maturity

of May 9, 2022 with a single payment and interest at 5%.

The Unsecured Note holders had the ability to convert their notes to common

stock of the Company at the lesser of $5 per share or the price per share offered by the Company if the Company has a future capital

raise for an aggregate 648,600 shares of common stock (without giving effect to any interest that may be converted).

At December 31,

2021 $2,918,000 of the Unsecured Notes had been converted into 583,600 shares of common stock of the Company and 5,594 shares of common

stock have been issued as payment for accrued interest on the Unsecured Note.

The remaining Unsecured Notes in the amount of $325,000

were repaid in September 2021.

Amortization of these notes was recorded as a non-cash interest expense

of approximately $545,000.

The Company determined the embedded conversion

features of the Unsecured Notes were equity-classified financing instruments.

The fair value of the conversion feature was determined

using a beneficial conversion model based on a 60-day weighted average stock price and the maximum number of shares to be received if

As issuance, the amount recorded to additional paid in capital was $544,824.

The discount associated with these transactions

is amortized under the interest method and resulted in interest expense of $544,824 for the year ended December 31, 2021.

As an inducement for investors to enter

into the Unsecured Convertible Notes, the Company’s Chief Executive Officer and President collectively offered to each investor

the right to purchase a number of shares of common stock equal to 40% of such investor’s principal balance under its Unsecured

Convertible Note at $3 per share (the “right to buy”).

Energy Evolution exercised its right to buy 150,000 shares of the

Company’s common stock.

In conjunction with the conversion of the Unsecured Notes, each of the Company’s Chief Executive

Officer and President partially exercised a warrant and options to purchase 160,900 shares at an exercise price of $1.00 and $1.32 respectively.

The Company determined that offering the “right to buy” shares resulted in a non-cash expense of $989,155 of the Company

based on the fair value of contributions made by the Company’s Chief Executive Officer and President on its behalf.

The fair value

of the “right to buy” shares was determined using a Black-Scholes model.

The expense is included in General and Administrative

in the Consolidated Statement of Operations.

Effective Tax Rate

For all periods presented, the Company's effective

tax rate is 0%.

The Company has generated net operating losses since inception, which would normally reflect a tax benefit in the statement

of operations and a deferred asset on the balance sheet.

However, because of the current uncertainty as to the Company's ability to achieve

profitability, a valuation reserve has been established that offsets the amount of any tax benefit available for each period presented

in the statements of operations.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any off-balance sheet

arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity

with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect

the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements

and the reported amounts of revenues and expenses during the reporting period.

Because estimates and assumptions require significant

judgment, future actual results could differ from those estimates and could have a significant impact on the Company's results of operations,

financial position and cash flows.

The Company re-evaluates its estimates and assumptions at least on a quarterly basis.

The following

policies may involve a higher degree of estimation and assumption:

Oil and Natural Gas Properties

The Company uses the successful efforts method of

accounting for oil and natural gas operations.

Under this method, costs to acquire oil and natural gas properties, drill successful exploratory

wells, drill and equip development wells, and install production facilities are capitalized.

Exploration costs, including unsuccessful

exploratory wells, geological and geophysical are charged to operations as incurred.

Depreciation, depletion and amortization of the

leasehold and development costs that are capitalized for proved oil and natural gas properties are computed using the units-of-production

method, at the field level, based on total proved reserves and proved developed reserves, respectively, as estimated by independent petroleum

Oil and natural gas properties are periodically assessed for impairment whenever changes in facts and circumstances indicate

a possible significant deterioration in the future cashflows expected to be generated by an asset group, but at least annually.

assets are grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent

of the cash flows of other groups of assets, generally on a state-by-state basis.

All of our properties are located within the continental

United States.

All costs related to unsuccessful exploratory wells

are expensed when such wells are determined to be non-productive and other exploration costs, including geological and geophysical costs,

are expensed as incurred.

The application of the successful efforts method of accounting requires management's judgment to determine

the proper designation of wells as either developmental or exploratory, which will ultimately determine the proper accounting treatment

of the costs incurred.

The results from a drilling operation can take considerable time to analyze, and the determination that commercial

reserves have been discovered requires both judgment and application of industry experience.

Wells may be completed that are assumed

to be productive and actually deliver oil and gas in quantities insufficient to be economic, which may result in the abandonment of the

wells at a later date.

The evaluation of oil and gas leasehold acquisition costs requires management's judgment to estimate the fair

value of exploratory costs related to drilling activity in a given area.

Impairment of Oil and Gas Properties

Management’s assessment of the results of

commodity price outlooks, planned future sales or expiration of all or a portion of such leaseholds impact the amount and timing of impairment

An impairment expense could result if oil and gas prices decline in the future as it may not be economic to develop some

of these unproved properties.

Oil and Natural Gas Reserve Quantities

Reserve quantities and the related estimates of future

net cash flows affect periodic calculations of depletion, impairment of oil and natural gas properties, and asset retirement obligations.

Proved oil and natural gas reserves are the estimated quantities of oil, natural gas and NGLs which geological and engineering data demonstrate

with reasonable certainty to be recoverable in future periods from known reservoirs under existing economic and operating conditions.

Reserve quantities and future cash flows included in this report are prepared in accordance with guidelines established by the SEC and

the Financial Accounting Standards Board (“FASB”).

The accuracy of reserve estimates is a function of:

quality and quantity of available data;

interpretation of that data;

accuracy of various mandated economic assumptions;

judgments of the persons preparing the estimates.

Proved reserves information included in

this report is based on estimates prepared by independent petroleum engineers, Cawley Gillespie &Associates.

The independent

petroleum engineers evaluated 100% of the Company’s estimated proved producing reserve quantities and their related future net

cash flows as of December 31, 2021.

Estimates prepared by others may be higher or lower than these estimates.

Because these

estimates depend on many assumptions, all of which may differ substantially from actual results, reserve estimates may be different

from the quantities of oil and natural gas that are ultimately recovered.

Management may make revisions to reserve estimates

throughout the year as additional information becomes available.

Management makes changes to depletion rates, impairment

calculations, and asset retirement obligations in the same period that changes to reserve estimates are made.

Depreciation, Depletion and Amortization

The rate used to calculate and record DD&A is

dependent upon estimates of total proved developed reserves, which incorporate various assumptions and future projections.

If the estimates

of total proved or proved developed reserves decline, DD&A expense increases.

Such a decline in reserves may result from lower commodity

prices, which may make it uneconomic to operate wells due to higher cost fields.

Management is unable to predict changes in reserve quantity

estimates as such quantities are dependent on the success of executing the Company’s mission as well as future economic conditions.

Asset Retirement Obligation

Asset retirement obligations (“AROs”)

consist primarily of estimated future costs associated with the plugging and abandonment of oil and natural gas wells, removal of equipment

and facilities from leased acreage, and land restoration in accordance with applicable local, state and federal laws.

The discounted

fair value of an ARO liability is required to be recognized in the period in which it is incurred, with the associated asset retirement

cost capitalized as part of the carrying cost of the oil and natural gas asset.

The recognition of an ARO requires that management make

numerous assumptions regarding such factors as the estimated probabilities, amounts and timing of settlements;

the credit-adjusted risk-free

rate to be used;

inflation rates;

and future advances in technology.

In periods subsequent to the initial measurement of the ARO, we

must recognize period-to-period changes in the liability resulting from the passage of time and revisions to either the timing or the

amount of the original estimate of undiscounted cash flows.

Increases in the ARO liability due to passage of time impact net income as

accretion expense.

The related capitalized cost, including revisions thereto, is charged to expense through DD&A over the life of

Stock-Based Compensation

The Company recognized stock-based compensation expense

associated with restricted stock units, which consists of time-based awards.

The Company accounts for forfeitures of equity-based incentive

awards as they occur.

Stock-based compensation expense related to time-based restricted stock units is based on the price of the Company’s

common stock, $0.001 par value per share on the grant date.

The Company classifies grants to be settled in shares as equity awards.

Income Taxes and Uncertain Tax Positions

The Company’s tax provision is based upon the

tax laws and rates in effect in the applicable jurisdiction in which operations are conducted and income is earned.

As part of the process

of preparing the consolidated financial statements, management is required to estimate the income tax provision.

This process involves

estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items,

such as depreciation, amortization and certain accrued liabilities for tax and accounting purposes.

The effective tax rate for financial

statement purposes is 0% for all periods presented.

Deferred tax expense or benefit represents the change

in the balance of deferred tax assets or liabilities.

Valuation allowances are established to reduce deferred tax assets when it is more

likely than not that some portion or all of the deferred tax assets will not be realized.

At December 31, 2021 and 2020, a valuation

allowance for deferred tax assets was recorded.

Management applies the accounting standards related

to uncertainty in income taxes.

This accounting guidance clarifies the accounting for uncertainties in income taxes by prescribing a

minimum recognition threshold that a tax position is required to meet before being recognized in the consolidated financial statements.

It requires that we recognize in the consolidated financial statements the financial effects of a tax position, if that position is more

likely than not of being sustained upon examination, including resolution of any appeals or litigation processes, based upon the technical

merits of the position.

It also provides guidance on measurement, classification, interest, penalties and disclosure.

The Company has

no uncertain tax positions at either December 31, 2021 or December 31, 2020.

Revenue Recognition

The Company predominantly derives its revenue from

the sale of produced oil, natural gas and NGLs.

Revenues are recognized when the recognition criteria of FASB ASC Topic 606, Revenue

from Contracts with Customers , are met, which generally occurs at the point in which title passes to the customers.

We receive payment

from one to three months after delivery.

At the end of each quarter, we estimate the amount of production delivered to purchasers and

the price we will receive.

Variances between our estimated revenue and actual payment are recorded in the month the payment is received.

Historically, differences have been insignificant.

AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company is a smaller reporting company as defined

by Rule 12b-2 of the Exchange Act and is not required to provide this information.

STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements of the Company are set

forth at the end of this Form 10-K.

IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

common stock is traded on the NYSE American under the symbol "EP".

March 31, 2023, there were approximately 900 stockholders of record of our common stock.

have never paid cash dividends on our common stock.

We intend to retain future earnings for use in our business and, therefore, do not

anticipate paying cash dividends on our common stock in the foreseeable future.

Future payment of dividends will depend upon, but not

be limited to, our financial condition, funds available for operations, the amount of anticipated capital and other expenditures, future

business prospects and any restrictions imposed by present or future financing arrangements.

Repurchase of Equity Securities

private or open market repurchases of common stock were made by us during the fourth quarter of 2022.

Sales of Equity Securities

such sales that have not been previously reported on a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity