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 and participation of the Company’s Principal Executive Officer and Principal Financial Officer, along with our management, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on this evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that the disclosure controls and procedures as of the end of the period covered by this report are not effective due to a material weakness identified below. Management's Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of the Company’s management, including its Principal Executive Officer and Principal Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as set forth in Internal Control - Integrated Framework. Based on our evaluation under that framework, our management concluded that our internal control over financial reporting was not effective as of December 31, 2022, due to a material weakness. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a possibility that a material misstatement in our financial statements will not be prevented or detected on a timely basis. In the prior year, a material weakness in internal control application was discovered related to the internal controls over financial reporting, including disclosures around complex and non-routine transactions. Management believes the Company’s lack of sufficient accounting personnel with appropriate accounting expertise to appropriately apply GAAP for complex and non-routine transactions and prepare associated financial statement disclosures amounts to a material weakness in its internal control over financial reporting. As a result, at December 31, 2022 and on the date of this Report, its internal control over financial reporting is not effective. Management’s Plan to Remediate the Material Weak ness Management has evaluated the material weakness described above and is in the process of updating its design and implementation of internal control over financial reporting to remediate the aforementioned material weakness and enhance the Company’s internal control environment which to date has included the hiring of a Chief Accounting Officer in October 2021. In the first quarter of 2022, the Chief Accounting Officer engaged an outside company to undertake an internal controls review. This review concluded in the third quarter of 2022. Controls that would strengthen the Company’s internal control structure that were identified during the course of the review continue to be designed and will be implemented on an ongoing basis. In December 2022, we had a change in the Chief Accounting - 29 - Officer although the former Chief Accounting Officer has continued to assist the Company on a part-time basis. In addition to continuing to enhance and refine control design, management plans to add the appropriate resources and focus efforts during 2023 to test the operational effectiveness of the controls that will be established. We are committed to continuing to improve our internal control processes and will continue to diligently and vigorously review our financial reporting controls and procedures. Changes in Internal Controls over Financial Reporting While we continue to implement design enhancements to our internal control procedures, we believe that, other than the changes described above regarding the ongoing remediation efforts, there were no changes to our internal control over financial reporting which were identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) under the Exchange Act during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Attestation Report of Registered Public Accounting Firm This Annual Report does not contain an attestation report of our independent registered public accounting firm related to internal control over financial reporting because the rules for smaller reporting companies provide an exemption from the attestation requirement. ITEM 9B. OTHER INFORMATION. None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. - 30 - PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information called for by this Item 10 is incorporated herein by reference to our definitive Proxy Statement for 2023 annual meeting of stockholders (“2023 Proxy Statement”) to be filed with the SEC no later than 120 days following the fiscal year ended December 31, 2022. ITEM 11. EXECUTIVE COMPENSATION. The information called for by this Item 11 is incorporated herein by reference to our 2023 Proxy Statement to be filed with the SEC no later than 120 days following the fiscal year ended December 31, 2022. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information called for by this Item 12 is incorporated herein by reference to our 2023 Proxy Statement to be filed with the SEC no later than 120 days following the fiscal year ended December 31, 2022. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. The information called for by this Item 13 is incorporated herein by reference to our 2023 Proxy Statement to be filed with the SEC no later than 120 days following the fiscal year ended December 31, 2022. ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information called for by this Item 14 is incorporated herein by reference to our 2023 Proxy Statement to be filed with the SEC no later than 120 days following the fiscal year ended December 31, 2022. - 31 - 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 of this Annual Report on Form 10-K. (2)    Schedules NONE (3)    Exhibits Exhibit No. Description      2.1 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). 2.2 Purchase and Sale Agreement dated as of March 12, 2021, by and between Empire New Mexico LLC and XTO Holdings, LLC (incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K dated May 14, 2021, which was filed on May 17, 2021). 3.1 Amended and Restated Certificate of Incorporation of Empire Petroleum Corporation (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K dated March 4, 2022, which was filed on March 9, 2022). 3.2 Certificate of Designation of Series A Voting Preferred Stock of Empire Petroleum Corporation (incorporated herein by reference to Exhibit 3.2 to the Company’s Form 8-K dated March 4, 2022, which was filed on March 9, 2022). 3.3 Amended and Restated Bylaws of Empire Petroleum Corporation (incorporated herein by reference to Exhibit 3.3 to the Company’s Form 8-K dated March 4, 2022, which was filed on March 9, 2022). 4.1 Description of the Common Stock of Empire Petroleum Corporation (incorporated herein by reference to Exhibit 4.1 to the Company’s Form 10-K for the fiscal year ended December 31, 2021, which was filed on March 31, 2022). 4.2 Senior Secured Convertible Note due December 31, 2021 (incorporated herein by reference to Exhibit 4.1 to the Company’s Form 8-K dated May 14, 2021, which was filed on May 20, 2021). 4.3 Common Share Warrant Certificate No. Energy Evolution-1 dated May 14, 2021 (incorporated herein by reference to Exhibit 4.2 to the Company’s Form 8-K dated May 14, 2021, which was filed on May 20, 2021). 4.4 Form of Unsecured Convertible Note due May 9, 2022 (incorporated herein by reference to Exhibit 4.3 to the Company’s Form 8-K dated May 14, 2021, which was filed on May 20, 2021). 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). - 32 - 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). 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). 10.14 Form of Securities Purchase Agreement entered into by and between Empire Petroleum Corporation and investors (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated March 30, 2021, which was filed on April 1, 2021). 10.15 Form of Common Share Warrant Certificate issued by Empire Petroleum Corporation (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated March 30, 2021, which was filed on April 1, 2021). 10.16 Fourth Amendment to Senior Revolver Loan Agreement, dated as of July 7, 2021, 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 July 30, 2021, which was filed on August 4, 2021). 10.17* Employment Agreement dated as of August 18, 2021, by and between Empire Petroleum Corporation and Thomas W. Pritchard (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated August 18, 2021, which was filed on August 24, 2021). 10.18* Employment Agreement dated as of August 18, 2021, by and between Empire Petroleum Corporation and Michael R. Morrisett (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated August 18, 2021, which was filed on August 24, 2021). 10.19 Loan Modification Agreement dated as of September 29, 2021, by and among Empire New Mexico LLC d/b/a Green Tree New Mexico, Empire Petroleum Corporation and Energy Evolution Master Fund, Ltd. (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated September 29, 2021, which was filed on October 5, 2021). 10.20 Pledge and Security Agreement dated as of September 29, 2021, made by Empire Petroleum Corporation in favor of Energy Evolution Master Fund, Ltd. (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated September 29, 2021, which was filed on October 5, 2021). 10.21 Common Share Warrant Certificate dated as of September 30, 2021 issued by Empire Petroleum Corporation in favor of Energy Evolution Master Fund, Ltd. (incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K dated September 29, 2021, which was filed on October 5, 2021). 10.22* Empire Petroleum Corporation 2021 Stock and Incentive Compensation Plan (incorporated herein by reference to the Company’s Information Statement on Schedule 14C filed August 31, 2021). - 33 - 10.23 Conversion Notice and Note Amendment dated as December 30, 2021 (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated December 30, 2021, which was filed on January 6, 2022). 10.24* Form of Non-Qualified Stock Option Award Agreement (incorporated herein by reference to Exhibit 10.24 to the Company’s Form 10-K for the fiscal year ended December 31, 2021, which was filed on March 31, 2022). 10.25* Form of Restricted Stock Units Award Agreement (Non-Employee Directors) (incorporated herein by reference to Exhibit 10.25 to the Company’s Form 10-K for the fiscal year ended December 31, 2021, which was filed on March 31, 2022). 10.26* Form of Restricted Stock Units Award Agreement (Executive Officers) (incorporated herein by reference to Exhibit 10.26 to the Company’s Form 10-K for the fiscal year ended December 31, 2021, which was filed on March 31, 2022). 10.27* Empire Petroleum Corporation 2022 Stock and Incentive Compensation Plan (incorporated herein by reference to Annex A to the Company’s Proxy Statement on Schedule 14A filed on July 27, 2022). 10.28* Employment Agreement dated as of September 13, 2022, by and between Empire Petroleum Corporation and Eugene J. Sweeney (incorporated herein by reference to Exhibit 10 to the Company’s Form 8-K dated September 13, 2022, which was filed on September 19, 2022). 21 Subsidiaries of Empire Petroleum Corporation (submitted herewith). 23.1 Consent of Grant Thornton LLP (submitted herewith). 23.2 Consent of Moss Adams LLP (submitted herewith). 23.3 Consent of Cawley, Gillespie & Associates, Inc. (submitted herewith). 31.1 Rule 13a – 14(a)/15d – 14(a) Certification of Michael R. Morrisett, 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 Michael R. Morrisett, Chief Executive Officer (submitted herewith). 32.2 Section 1350 Certification of Michael R. Morrisett, Principal Financial Officer (submitted herewith). 99.1 Cawley, Gillespie & Associates, Inc. Summary Report (submitted herewith). 101 Financial Statements for Inline XBRL format (submitted herewith). 104 Cover Page Interactive Data File (embedded within Inline XBRL document). *Indicates a management contract or compensatory plan or arrangement identified under the requirements of Item 15 of Form 10-K. ITEM 16. FORM 10-K SUMMARY. None. - 34 - 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, 2023 By:    /s/ Michael R. Morrisett Name: Michael R. Morrisett Title: President and Chief Executive Officer 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/ Michael R. Morrisett Director, President and Chief Executive Officer March 31, 2023 MICHAEL R. MORRISETT (Principal Executive Officer and Principal Financial Officer) /s/ Stephen L Faulkner Chief Accounting Officer March 31, 2023 STEPHEN L. FAULKNER (Principal Accounting Officer) /s/ Phil E. Mulacek Director and Chairman of the Board March 31, 2023 PHIL E. MULACEK /s/ Andrew Lewis Director March 31, 2023 ANDREW LEWIS /s/ Mason H. Matschke Director March 31, 2023 MASON H. MATSCHKE /s/ Benjamin J. Marchive II Director March 31, 2023 BENJAMIN J. MARCHIVE II - 35 - EMPIRE PETROLEUM CORPORATION CONSOLIDATED FINANCIAL STATEMENTS CONTENTS Page No. Report of Independent Registered Public Accounting Firm – Grant Thornton LLP (PCAOB ID Number 248) 37 Report of Independent Registered Public Accounting Firm – Moss Adams LLP (PCAOB ID Number   659 ) 38 Consolidated Balance Sheets as of December 31, 2022 and 2021 39 Consolidated Statements of Operations for the years ended December 31, 2022 and 2021 40 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2022 and 2021 41 Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021 42 Notes to Consolidated Financial Statements 43 - 36 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Empire Petroleum Corporation Opinion on the financial statements We have audited the accompanying consolidated balance sheet of Empire Petroleum Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2022, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year ended December 31, 2022, and the related notes (collectively referred to as 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, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. 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 audit. 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 the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit 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 audit 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 audit 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 audit 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 audit provides a reasonable basis for our opinion. Critical audit matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee 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. We determined there are no critical audit matters . /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2022. Tulsa, Oklahoma March 31, 2023 - 37 - 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 sheet of Empire Petroleum Corporation and subsidiaries (the “Company”) as of December 31, 2021, the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. 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 the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit 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 consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ Moss Adams LLP Dallas, Texas March 31, 2022 We served as the Company’s auditor from 2021 to 2022. - 38 - EMPIRE PETROLEUM CORPORATION CONSOLIDATED BALANCE SHEETS As of December 31, 2022 2021 ASSETS Current Assets: Cash $ 11,944,442 $ 3,611,871 Accounts Receivable 7,780,239 7,733,905 Derivative Instruments 121,584 55,242 Inventory - Oil in Tanks 1,840,274 1,037,880 Prepaids 1,048,434 679,122 Total Current Assets 22,734,973 13,118,020 Property and Equipment: Oil and Natural Gas Properties, Successful Efforts 63,986,339 46,914,326 Less: Accumulated Depreciation, Depletion and Impairment ( 20,116,696 ) ( 17,525,918 ) Total Oil and Gas Properties, Net 43,869,643 29,388,408 Other Property and Equipment, Net 1,441,529 1,288,611 Total Property and Equipment, Net 45,311,172 30,677,019 Derivative Instruments - Long Term — 194,018 Sinking Fund 2,779,000 4,810,000 Utility and Other Deposits 719,930 1,290,594 Total Assets $ 71,545,075 $ 50,089,651 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts Payable $ 5,843,366 $ 4,329,535 Accrued Expenses 9,461,010 5,844,184 Current Portion of Lease Liability 256,975 180,105 Current Portion of Long-Term Debt 2,059,309 1,700,663 Total Current Liabilities 17,620,660 12,054,487 Long-Term Debt 4,063,115 6,117,091 Long-Term Note Payable - Related Party (Note 5 and 9) 1,076,987 797,010 Long Term Lease Liability 547,692 646,311 Asset Retirement Obligations 25,000,740 20,640,599 Total Liabilities 48,309,194 40,255,498 Commitments and Contingencies (Note 16) Stockholders' Equity: Series A Preferred Stock - $ .001 Par Value, 10,000,000 Shares Authorized, 6 and 0 Shares Issued and Outstanding, Respectively — — Common Stock - $ .001 Par Value 190,000,000 Shares Authorized, 22,093,503 and 19,840,648 Shares Issued and Outstanding, Respectively 81,615 79,362 Additional Paid-in Capital 75,303,479 68,988,134 Accumulated Deficit ( 52,149,213 ) ( 59,233,343 ) Total Stockholders' Equity 23,235,881 9,834,153 Total Liabilities and Stockholders' Equity $ 71,545,075 $ 50,089,651 See accompanying notes to consolidated financial statements. - 39 - EMPIRE PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2022 2021 Revenue: Oil Sales $ 44,978,554 $ 22,326,289 Gas Sales 4,534,370 2,288,481 NGL Sales 3,659,451 2,888,747 Total Product Revenues 53,172,375 27,503,517 Other 102,429 174,609 Gain (Loss) on Derivatives ( 387,930 ) ( 586,181 ) Total Revenue 52,886,874 27,091,945 Costs and Expenses: Lease Operating Expense 23,584,039 13,283,758 Production and Ad Valorem Taxes 3,943,466 2,102,772 Depletion, Depreciation & Amortization 1,949,191 2,502,275 Accretion of Asset Retirement Obligation 1,357,906 1,214,479 Impairment 936,620 — General and Administrative 12,331,489 8,462,031 Total Cost and Expenses 44,102,711 27,565,315 Operating Income (Loss) 8,784,163 ( 473,370 ) Other Income and (Expense): Other Income (Expense) ( 981,595 ) 409,225 Interest Expense ( 509,540 ) ( 8,600,699 ) Convertible Debt Modification Inducement Expense — ( 2,276,813 ) Loss on Convertible Debt Redemption Option — ( 3,169,201 ) Loss on Embedded Conversion Option — ( 4,504,104 ) Income (Loss) before Taxes 7,293,028 ( 18,614,962 ) Income Tax Provision ( 208,898 ) — Net Income (Loss) $ 7,084,130 $ ( 18,614,962 ) Net Income (Loss) per Common Share: Basic $ 0.34 $ ( 1.27 ) Diluted $ 0.30 $ ( 1.27 ) Weighted Average Number of Common Shares Outstanding: Basic 21,003,563 14,630,168 Diluted 23,387,646 14,630,168 See accompanying notes to consolidated financial statements. - 40 - EMPIRE PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years ended December 31, 2022 and 2021 Common Stock Preferred Stock Additional Shares Par Value Shares Par Value Paid in Capital Accumulated Deficit Total Balances, December 31, 2020 6,223,069 $ 24,892 — $ — $ 22,152,451 $ ( 40,618,381 ) $ ( 18,441,038 ) Net Loss — — — — — ( 18,614,962 ) ( 18,614,962 ) Stock Compensation Expense 34,192 137 — — 1,502,083 — 1,502,220 Stock Options Exercised 209,679 839 — — 93,936 — 94,775 Warrants Exercised 7,682,761 30,731 — — 8,020,749 — 8,051,480 Issuance of Common Stock and Warrants 2,248,865 8,995 — — 3,139,655 — 3,148,650 Shares and Warrants Issued for Secured Convertible Note 1,675,000 6,700 — — 16,005,940 — 16,012,640 Warrants Issued with Unsecured Convertible Notes — — — — 544,824 — 544,824 Right to Buy Issued with Secured Convertible Notes — — — — 989,115 — 989,115 Unsecured Convertible Note Conversion 583,600 2,334 — — 2,915,666 — 2,918,000 Shares Issued for Secured Convertible Note Conversion, Including Payment of Accrued Interest 1,183,482 4,734 — — 13,623,715 — 13,628,449 Balances, December 31, 2021 19,840,648 $ 79,362 — $ — $ 68,988,134 $ ( 59,233,343 ) $ 9,834,153 Net Income — — — — — 7,084,130 7,084,130 Issuance of Preferred Stock — — 6 — 6 — 6 Stock Compensation Expense — — — — 2,716,752 — 2,716,752 Options and Warrants Exercised 2,252,855 2,253 — — 3,598,587 — 3,600,840 Balances, December 31, 2022 22,093,503 $ 81,615 6 $ — $ 75,303,479 $ ( 52,149,213 ) $ 23,235,881 See accompanying notes to consolidated financial statements. - 41 - EMPIRE PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2022 2021 Cash Flows From Operating Activities: Net Income (Loss) $ 7,084,130 $ ( 18,614,962 ) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By Operating Activities: Stock Compensation and Issuances 2,716,752 1,502,220 Amortization of Right of Use Assets 263,847 137,046 Depreciation, Depletion and Amortization 1,949,191 2,502,275 Accretion of Asset Retirement Obligation 1,357,906 1,214,479 Impairment 936,620 — Loss on Settlement of Asset Retirement Obligation 181,386 — Loss on XTO Final Settlement (See Note 4) 1,448,363 — PIE-Related Expense (See Note 5) 1,399,030 — Amortization of Loan Issue Costs — 14,587 Right to Buy Issuance Costs — 989,115 Loss on Embedded Conversion Option — 4,504,104 Amortization of Discount on Convertible Notes — 7,727,213 Loss on Extinguishment of Debt — 3,169,201 Convertible Debt Modification Inducement Expense — 2,276,813 Stock Issued for Interest Expense Payment — 296,127 Forgiveness of Payroll Protection Plan Loan — ( 267,550 ) Change in Operating Assets and Liabilities: Accounts Receivable ( 1,812,230 ) ( 6,482,271 ) Derivative Instruments 127,676 ( 255,009 ) Inventory, Oil in Tanks ( 802,394 ) ( 506,571 ) Prepaids, Current ( 369,312 ) 95,371 Other Long Term Assets and Liabilities ( 568,690 ) ( 488,544 ) Accounts Payable 526,682 2,210,285 Accrued Expenses 3,616,826 3,146,353 Net Cash Provided By Operating Activities 18,055,783 3,170,282 Cash Flows from Investing Activities: Acquisition of Oil and Natural Gas Properties ( 2,702,613 ) ( 19,545,505 ) Additions to Oil and Natural Gas Properties ( 10,161,711 ) — Purchase of Other Fixed Assets ( 311,229 ) ( 220,769 ) Cash Paid for Right of Use Assets ( 268,934 ) ( 140,604 ) Sinking Fund Deposit 2,031,000 ( 4,810,000 ) Net Cash Used In Investing Activities ( 11,413,487 ) ( 24,716,878 ) Cash Flows from Financing Activities: Proceeds from Debt Issued — 19,493,000 Principal Payments of Debt ( 1,699,840 ) ( 5,893,984 ) Proceeds from Stock and Warrant Issuances — 11,294,906 Proceeds from Option and Warrant Exercise 3,390,115 — Paycheck Protection Program Loan Proceeds — 106,850 Net Cash Provided By Financing Activities 1,690,275 25,000,772 Net Change in Cash 8,332,571 3,454,176 Cash - Beginning of Period 3,611,871 157,695 Cash - End of Period $ 11,944,442 $ 3,611,871 Supplemental Cash Flow Information: Cash Paid for Interest $ 473,205 $ 436,053 Non-Cash Investing and Financing Activities: Non-Cash Additions and Revisions to Asset Retirement Obligations $ 3,163,193 $ 4,021,953 Right-of-use assets purchased with lease liability $ 186,126 $ — Note Payable Activity - PIE Agreement (see Note 5) $ 602,020 $ — Purchases of Oil and Natural Gas Properties in Accounts Payable $ 1,197,880 $ — Property Additions in Notes Payable $ — $ 181,507 Common Stock Issued in Exchange for Outstanding Notes Payable $ — $ 32,611,376 Equipment Purchased Utilizing Note Payable $ — $ 1,255,503 See accompanying notes to consolidated financial statements. - 42 - EMPIRE PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Organization and Basis of Presentation Empire Petroleum Corporation (the “Company”, collectively with its subsidiaries) is an independent energy company operator engaged in optimizing developed production by employing field management methods to maximize reserve recovery while minimizing costs. Empire operates the following wholly-owned subsidiaries in its areas of operations: ● Empire New Mexico, LLC (“Empire New Mexico”) ● Empire Rockies Region o Empire North Dakota LLC (“Empire North Dakota”) o Empire North Dakota A cquisition LLC (“Empire NDA”) ● Empire Texas (“Empire Texas”), consisting of the following entities: o Empire Texas LLC o Empire Texas Operating LLC o Empire Texas GP LLC o Pardus Oil & Gas Operating, LP (owned 1% by Empire Texas GP LLC and 99% by Empire Texas LLC) ● Empire Louisiana LLC (“Empire Louisiana”) Empire was incorporated in the State of Delaware in 1985. The consolidated financial statements of Empire Petroleum Corporation and subsidiaries include the accounts of the Company and its wholly-owned subsidiaries. On August 27, 2021, the Company’s Board of Directors, in conjunction with the majority of the common stockholders, approved a one for four reverse stock split such that every holder of the Company’s common stock shall receive one share of Common Stock for every four shares owned. In addition, the Board authorized the Company to issue ten million shares of $0.001 par value Preferred Stock. The reverse stock split was made effective on March 7, 2022, simultaneous with the Company’s listing to the NYSE American. All shares amounts have retrospectively been stated at post-reverse split amounts and pricing. Note 2 – Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts and balances of the Company and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). All intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with 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. Estimated quantities of crude oil, natural gas and natural gas liquids (“NGL”) reserves are the most significant of the Company’s estimates. All reserve data used in the preparation of the Consolidated Financial Statements, as well as included in Supplemental Information of Oil and Natural Gas Producing Activities (Unaudited) , are based on estimates. Reservoir engineering is a subjective process of estimating underground accumulations of crude oil, natural gas and NGL. There are numerous uncertainties inherent in estimating quantities of proved crude oil, natural gas and NGL reserves. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, reserve estimates may be different from the quantities of crude oil, natural gas and NGLs that are ultimately recovered. Other items subject to estimates and assumptions include, but are not limited to, the carrying amounts of property, plant and equipment, asset retirement obligations, valuation allowances for deferred income tax assets, and valuation of derivative instruments. Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic and commodity price environment. The volatility of commodity prices results in increased uncertainty inherent in such estimates and assumptions. Although management believes these estimates are reasonable, actual results may differ from estimates and assumptions of future events and these revisions could be material. Future production may vary materially from estimated oil and natural gas proved reserves. Actual future prices may vary significantly from price assumptions used for determining proved reserves and for financial reporting. - 43 - Out of Period Adjustments and Reclassifications In the third quarter of 2022, the Company identified and recorded an out-of-period adjustment related to the Joint Development Agreement discussed in Note 5. The impact of recording this adjustment reduced Utility and Other Deposits and increased Lease Operating Expense by approximately $ 1.3 million of which $ 797,000 related to prior periods. The impact of this adjustment was immaterial to the prior period financial statements and thus corrected in the current period. Gas and NGL sales in 2021 reflect an immaterial reclassification of approximately $ 800,000 for gathering and processing costs previously reported within Lease Operating Expense in 2021 and did not impact operating loss or cash flows from operations. This reclassification reflects the terms of the contracts that transferred to Empire as part of the XTO acquisition related to certain gas purchase contracts and conforms to the 2022 presentation. Accounts Receivable Accounts receivable include estimated amounts due from crude oil, natural gas, and NGL purchasers and from non-operating working interest owners. Accrued revenue related to product sales from purchasers and operators are due under normal trade terms, generally requiring payment within 60 days of production. For receivables from joint interest owners, the Company generally has the ability to withhold future revenue disbursements to recover any non-payment of joint interest billings. 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 at either December 31, 2022 or 2021. The Company’s accounts receivable as of December 31, 2022 and 2021 are as follows: Schedule of account receivable 2022 2021 Oil and Gas Receivables $ 3,060,341 $ 4,173,116 Joint Interest Billings 2,057,719 2,893,122 Receivable from Former CEO (See Note 18) 2,130,614 — Other 531,565 667,667 Total Accounts Receivable $ 7,780,239 $ 7,733,905 Derivative Instruments The Company enters into hedge agreements to manage its exposure to oil and natural gas price fluctuations. The fair value of derivative contracts is recognized as an asset or liability on the Company’s consolidated balance sheets. Realized gain or loss is recognized as a component of revenue when the derivative contracts mature. For contracts which have not matured, an unrealized gain or loss is recorded based on the change in the fair value of the outstanding contracts. Inventory Inventory consists of oil in tanks which has not been delivered and is valued at the lower of cost or net realizable value. Oil and Natural Gas and Other 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. - 44 - Segment Reporting Operating segments are components of an enterprise that engage in activities from which it may earn revenues and incur expenses and for which separate operational financial information is available and is regularly evaluated by management. Based on the Company’s organization and management, it has only one reportable operating segment, which is oil and natural gas exploration and production. 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. Revenue Recognition The Company’s revenues are comprised solely of revenues from customers and include the sale of oil, natural gas and NGL. The Company believes that the disaggregation of revenue into these three major product types, as presented in the Consolidated Statements of Operations, appropriately depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors based on its single geographic region, the continental United States. Revenues are recognized at a point in time when production is sold to a purchaser at a determinable price, delivery has occurred, control has transferred and it is probable substantially all of the consideration will be collected. The Company fulfills its performance obligations under its customer contracts through delivery of oil, natural gas and NGL and revenues are recorded on a monthly basis. The Company receives payment from one to three months after delivery. Generally, each unit of product represents a separate performance obligation. The prices received for oil, natural gas and NGL sales under the Company’s contracts are generally derived from stated market prices which are then adjusted to reflect deductions including transportation, fractionation and processing. As a result, revenues from the sale of oil, natural gas and NGL will decrease if market prices decline. The sales of oil, natural gas and NGL, as presented on the Consolidated Statements of Operations, represent the Company’s share of revenues net of royalties and excluding revenue interests owned by others. When selling oil, natural gas and NGL on behalf of royalty or working interest owners, the Company is acting as an agent and thus reports the revenue on a net basis. To the extent actual volumes and prices of oil and natural gas sales are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volumes and prices for those properties are estimated and recorded. Variances between the Company’s estimated revenue and actual payment are recorded in the month the payment is received. Historically, these differences have been insignificant. At the end of each month when the performance obligation is satisfied, the variable consideration can be reasonably estimated and amounts due from customers are recorded in Accounts Receivable in the Consolidated Balance Sheets. Taxes assessed by governmental authorities on oil, natural gas and NGL sales are presented separately from such revenues in the Consolidated Statements of Operations. Oil Sales Oil production is transported from the wellhead to tank batteries or delivery points through flow-lines or gathering systems. Purchasers of the oil take delivery at the tank batteries and transport the oil by truck or at a pipeline delivery point and the Company collects a market price, net of pricing differentials. Revenue is recognized when control transfers to the purchaser at the net price received by the Company. Natural Gas and NGL Sales Under the Company’s natural gas sales arrangements, the purchaser takes control of wet gas at a delivery point near the wellhead or at the inlet of the purchaser’s processing facility. The purchaser gathers and processes the wet gas and remits proceeds to the Company for the resulting natural gas and NGL sales. Based on the nature of these arrangements, the processor is the agent and the purchaser is the Company’s customer, thus, the Company recognizes natural gas and NGL sales based on the net amount of proceeds received from the purchaser. Transaction Price Allocated to Remaining Performance Obligations Substantially all of the Company’s product sales are short-term in nature with a contract term of one year or less. For these contracts, the Company has utilized the practical expedient in ASC 606 which exempts the Company from the requirements to disclose the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. - 45 - For the Company’s product sales that have a contract term greater than one year, the Company has utilized the practical expedient in ASC 606 which states the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required. Prior-Period Performance Obligations The Company records revenue in the month that product is delivered to the purchaser. Settlement statements for certain natural gas and NGL sales, however, may not be received for 30 to 90 days after the date the product is delivered, and as a result the Company is required to estimate the amount of product delivered to the purchaser and the price that will be received for the sale of the product. In these situations, the Company records the differences between its estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. Any identified differences between the Company’s revenue estimates and actual revenue received have historically been insignificant. For the years ended December 31, 2022 and 2021, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material. Stock-Based Compensation The Company recognized stock-based compensation expense associated with granted stock options. The Company accounts for forfeitures of equity-based incentive awards as they occur. Stock-based compensation expense related to time-based restricted stock units is based on the price of the common stock on the grant date and recognized as vesting occurs. 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. 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 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. Fair Value Measurements The Financial Accounting Standards Board ("FASB") fair value measurement standards define fair value, establish a consistent framework for measuring fair value and establish a fair value hierarchy based on the observability of inputs used to measure fair value. The three-level fair value hierarchy for disclosure of fair value measurements defined by ASC Topic 820 is as follows: Level 1 – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2 – Inputs, other than quoted prices within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Level 3 – Prices or valuations that require unobservable inputs that are both significant to the fair value measurement and unobservable. Valuation under Level 3 generally involves a significant degree of judgment from management. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instrument’s complexity. The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level. There were no transfers between fair value hierarchy levels for the years ended December 31, 2022 and 2021. - 46 - Impairment of oil and natural gas properties - The fair value of proved and unproved oil and natural gas properties was measured using valuation techniques that convert the future cash flows to a single discounted amount. Significant inputs to the valuation of proved and unproved oil and natural gas properties include estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average costs of capital. The Company utilized a combination of the New York Mercantile Exchange ("NYMEX") strip pricing and consensus pricing to value the reserves, then applied various discount rates depending on the classification of reserves and other risk characteristics. For significant acquisitions, management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired. The fair value of asset retirement obligations is included in proved oil and natural gas properties with a corresponding liability. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate and timing associated with the incurrence of these costs. The inputs used to value oil and natural gas properties for impairments and asset retirement obligations require significant judgment and estimates made by management and represent Level 3 inputs. Financial instruments and other- The fair values determined for accounts receivable, accrued expenses and other current liabilities were equivalent to the carrying value due to their short-term nature. Derivatives – Derivative financial instruments are carried at fair value and measured on a recurring basis. The Company’s commodity price hedges are valued based on discounted future cash flow models that are primarily based on published forward commodity price curves; thus, these inputs are designated as Level 2 within the valuation hierarchy. The fair values of derivative instruments in asset positions include measures of counterparty nonperformance risk, and the fair values of derivative instruments in liability positions include measures of the Company’s nonperformance risk. These measurements were not material to the Consolidated Financial Statements. Related Party Transactions Transactions between related parties are considered to be related party transactions even though they may not be given accounting recognition. FASB ASC 850, Related Party Disclosures (“FASB ASC 850”) requires that transactions with related parties that would have influence in decision making shall be disclosed so that users of the financial statements can evaluate their significance. Related party transactions typically occur within the context of the following relationships: affiliates of the entity; entities for which investments in their equity securities is typically accounted for under the equity method by the investing entity; trusts for the benefit of employees; principal owners of the entity and members of their immediate families; management of the entity and members of their immediate families; and other parties that can significantly influence the management or operating policies of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests. 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 August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in this ASU affect entities that issue convertible instruments and/or contracts in an entity’s own equity. The amendments in this ASU primarily affect convertible instruments issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed. However, all entities that issue convertible instruments are affected by the amendments to the disclosure requirements of this ASU. For contracts in an entity’s own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted for as derivatives under the current guidance because of failure to meet the settlement conditions of the derivatives scope exception related to certain requirements of the settlement assessment. Also affected is the assessment of whether an embedded conversion feature in a convertible instrument qualifies for the derivatives scope exception. Additionally, the amendments in this ASU affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. The amendments in this ASU are effective for public business entities, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Board specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The Board decided to allow entities to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Company is analyzing the effect that adoption will have but does not expect a material impact as a result of adopting these standards. - 47 - In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. This ASU, as further amended, affects trade receivables, financial assets and certain other instruments that are not measured through net income. This ASU will replace the currently required incurred loss approach with an expected loss model for instruments measured at amortized cost and is effective for financial statements issued for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company does not believe the adoption of this ASU will have a material impact on the Company's consolidated financial statements since the Company does not have a history of material credit losses. Note 3 – Property The capitalized costs of oil and natural gas properties as of December 31, 2022 and 2021 are as follows: 2022 2021 Proved Properties $ 52,831,131 $ 44,189,360 Unproved Properties 2,865,556 2,724,966 Work in process 8,289,652   — Gross capitalized costs 63,986,339 46,914,326 Depreciation, Depletion, Amortization and Impairment ( 20,116,696 ) ( 17,525,918 ) Total Oil and Gas Properties, Net $ 43,869,643 $ 29,388,408 The Company assesses its oil and gas properties for impairment when circumstances indicate the carrying value may be greater than its estimated future net cash flows. In 2022, estimated future cash flows from the Company’s properties in Louisiana were less than the net book value. As a result, the Company recorded a $936,000 impairment expense in 2022. In April 2022, the Company purchased working interests of oil and natural gas properties primarily located in the Landa field in North Dakota and assumed the role of operator. The Company paid approximately $ 1.4 million for eight producing properties, two properties with behind-pipe reserves, and related lease and well equipment. The Company allocated 80 % of the acquisition cost to leasehold costs and the remaining 20 % to related lease and well equipment. Non-cash asset retirement obligations were assumed of $ 233,659 . The acquisition was accounted for as an asset acquisition. The Company purchased additional oil and gas properties in 2022 totaling $ 1.3 million . In May 2021 the Company purchased oil and natural gas properties in New Mexico (see Note 4). Other property and equipment consists of operating lease assets, vehicles, office furniture, and equipment with lives ranging from three to five years. The capitalized costs of other property and equipment as of December 31, 2022 and 2021 are as follows: 2022 2021 Other property and equipment, at cost $ 1,878,325 $ 1,547,325 Less: accumulated depreciation ( 436,796 ) ( 258,714 ) Oher property and equipment, net $ 1,441,529 $ 1,288,611 Note 4 – Acquisition of XTO Properties 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. The XTO acquisition has been assessed under the screen test for business combinations under FASB ASC 805, Business Combinations (“ASC 805”). The XTO acquisition met the screen test and has been accounted for as an asset acquisition using the acquisition method of accounting. Under the accounting for asset acquisitions, the acquisition is recorded using a cost accumulation and allocation model under which the cost of the acquisition is allocated on a relative fair value basis to the assets acquired and liabilities assumed. Acquisition-related transaction costs are capitalized as a component of the cost of the assets acquired. As a condition of the sale, the Company purchased a $ 5,000,000 performance bond for the benefit of the seller for proper plugging, abandonment and restoration of the purchased properties. The performance bond is collateralized with a letter of credit in the amount of $ 3,750,000 . To effect the letter of credit, the Company entered into a Promissory Note Agreement with Bank of Oklahoma, NA in the amount of $ 3,750,000 which is due on demand with an interest rate established by the Bank, currently at 4 %. The Promissory Note, and associated letter of credit, is collateralized with a bank certificate of deposit in a corresponding amount. In addition, the Company is required to deposit $ 100,000 per month, up to $ 1,250,000 , into a sinking fund to be held by the surety. Subsequent amendments increased the monthly payment amounts to $ 160,000 in response to additional bonding requested by the State of New Mexico that increased the letter of credit requirement to $ 5.45 million . Payments on the sinking fund were made through April 2022 and no additional collateral deposits were required as of June 2022. At the end of 2022, the collateral requirement was removed and the Company received $ 2 million back from the sinking fund. - 48 - The following table sets forth the Company's purchase price allocation: Fair Value of Assets Acquired Oil and natural gas properties $ 17,662,402 Inventory of oil in tanks 318,546 Vehicles 179,156 Asset retirement obligations 6,117,709 Total assets acquired 24,277,813 Fair Value of Liabilities Assumed Royalty suspense 290,325 Asset retirement obligations 6,117,709 Total liabilities assumed 6,408,034 Purchase Price 17,869,779 The value of oil and gas properties was based on an allocation of the purchase price which included assignment of values to the other identifiable assets acquired and liabilities assumed. The value of inventory, vehicles, and royalty suspense was based on their relative fair values as described above. The fair value of asset retirement obligations is 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. On October 7, 2022, the Company entered into a final settlement agreement with XTO. The provisions of this settlement allowed the Company to substitute the performance bond and letter of credit that were put into place with the transaction for a new performance bond that does not require the Company to have collateral invested in the performance bond. Due to the nature and timing of the settlement, the result of the final settlement was a non-cash expense of approximately $1.4 million to Other Income (Expense) on the Consolidated Statements of Operations in 2022. Note 5 – Joint Development Agreement On August 6, 2020 the Company, through its wholly owned subsidiary, Empire Texas, entered into a joint development agreement (the “JDA”) with Petroleum & Independent Exploration, LLC and related entities (“PIE”), a related party (See Note 12), dated August 1, 2020. Under the terms of the JDA, PIE will perform recompletion or workover on specified mutually agreed upon wells (“Workover Wells”) owned by Empire Texas. To fund the work, PIE entered into a term loan agreement with Empire Texas 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. Proceeds of the loan will be used for recompletion or workover of the Workover Wells. As of December 31, 2022 and 2021 approximately $ 1,100,000 and $ 800,000 , respectively was outstanding on this loan and is included in Long Term Notes Payable on the Consolidated Balance Sheet. As part of the JDA, Empire Texas will assign to PIE a combined 85% working and revenue interest in the Workover Wells; an assignment was completed in October 2020 for the initial three Workover Wells. Of the assigned interest, 70% working and revenue interest will be used to repay the obligations under the term loan agreement. Once the term loan is repaid, PIE will reassign a 35% working and revenue interest to Empire Texas in each of the Workover Wells and retain a 50% working and revenue interest (See Note 8) . To the extent the cash flows from the revenue interest are insufficient to repay the obligations under the term loan, the Company remains required to repay the obligation. In the third quarter of 2022, a $ 1.4 million long-term asset that had previously been recorded as an offset to the note payable was expensed to workovers within Lease Operating Expense on the Consolidated Statements of Operations. In addition, PIE and Empire entered into a Securities Purchase Agreement (“Securities Agreement”) whereby PIE purchased for $525,000 (a) 875,000 shares of Empire common stock, (b) warrants to purchase 656,250 shares of Empire common stock at an exercise price of $0.80 per share, (c) warrants to purchase 450,000 shares of Empire common stock at an exercise price of $1.00 per share, (d) warrants to purchase 2,034,129 shares of Empire common stock at an exercise price of $0.40 per share, and (e) warrants to purchase up to 2,766,666 shares of Empire common stock at an exercise price of $0.564 per share, pursuant to various vesting provisions as detailed in the Securities Agreement . On March 11, 2021 the Company amended the Securities Agreement to remove the vesting provisions for the warrants and PIE exercised all of its warrants for an aggregate exercise price of $ 3,349,052 . - 49 - Note 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, 2022 and 2021 are summarized in the table below. For the Year Ended December 31, 2022 2021 Asset retirement obligations, beginning of period $ 20,640,599 $ 15,364,217 Liabilities assumed in acquisitions 502,539 6,117,709 Revisions 2,660,653 ( 2,055,806 ) Liabilities settled ( 160,957 ) — Accretion expense 1,357,906 1,214,479 Asset retirement obligation, end of period $ 25,000,740 $ 20,640,599 The revisions in 2022 primarily relate to the identification of nonproducing wells, including injection wells and temporarily abandoned wells in New Mexico. Note 7 – Commodity Derivative Financial Instruments The Company uses derivative financial instruments to manage its exposure to commodity price fluctuations. Commodity derivative instruments are used to reduce the effect of volatility of price changes on the oil and natural gas the Company produces and sells. The Company does not enter into derivative financial instruments for speculative or trading purposes. The Company’s derivative financial instruments consist of put options. 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 contracts are recognized and recorded as an asset or liability on the Company’s consolidated balance sheets. The following table summarizes the net realized and unrealized amounts reported in earnings related to the commodity derivative instruments for the years ended December 31, 2022 and 2021: For the Year Ended December 31, 2022 2021 Gain (loss) on derivatives: Oil derivatives $ ( 387,930 ) $ ( 586,181 ) The following represents the Company’s net cash receipts from (payments on) derivatives for the years ended December, 2022 and 2021: For the Year Ended December 31, 2022 2021 Oil derivatives $ ( 259,696 ) $ ( 299,481 ) Natural gas derivatives — ( 535,960 ) Total $ ( 259,696 ) $ ( 835,441 ) - 50 - The following table sets forth the Company’s outstanding derivative contracts at December 31, 2022: 1 st Quarter 2 nd Quarter 3 rd Quarter 4 th Quarter 2023 WTI Index Put Options: Quarterly volume (Bbl) 46,400 15,340 16,860 17,000 Floor Price (Bbl) $ 40.00 -$ 65.00 $ 40.00 -$ 55.00 $ 55.00 -$ 60.00 $ 50.00 Note 8 – Debt and Long Term Note Payable - Related Party The following table represents the Company’s outstanding debt. As of December 31, 2022 2021 Senior Revolver Loan Agreement $ 5,869,500 $ 7,069,500 Long Term Note Payable – Related Party 1,076,987 797,010 Equipment and vehicle notes, 0 % to 6.99 % interest rates, due in 2025 to 2027 with monthly payments ranging from $ 400 to $ 1,400 per month 252,924 305,739 Note Payable to Insurance Provider, bears 3.63 % interest, matures November 2022, monthly payments of principal and interest of $ 50,083 — 442,515 Total Debt 7,199,411 8,614,764 Less: Current Maturities ( 2,059,309 ) ( 1,700,663 ) Less: Long Term Note Payable – Related Party ( 1,076,987 ) ( 797,010 ) Long-Term Debt $ 4,063,115 $ 6,117,091 On July 7, 2021 the Company entered into the Fourth Amendment to its Senior Revolver Loan Agreement with CrossFirst Bank (“CrossFirst”) as further amended by Letter Agreements in conjunction with redetermination dates (“the Amended Agreement”). The maximum amount that can be advanced under the Agreement is $20,000,000 and the existing commitment amount following a February 27, 2023 Letter agreement is $ 6,180,000 which is reduced by $ 500,000 per calendar quarter beginning March 31, 2023 and includes interest at Wall Street Journal Prime plus 150 basis points ( 9.0 % as of December 31, 2022). The Amended Agreement matures on May 26, 2024 . Collateral for the loan is a lien on all of the assets of Empire Louisiana and Empire North Dakota, wholly owned subsidiaries of the Company, 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 Amended Agreement requires the Company maintain commodity derivatives at certain thresholds based on projected production and, beginning March 31, 2021, 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 . The current maturities of the Amended Agreement is $ 2,000,000 . The Company was in compliance with the loan covenants at December 31, 2022. On May 5, 2020, the Company received an SBA Payroll Protection Plan (“PPP”) loan for $ 160,700 . The loan was scheduled to mature on May 5, 2022, and had an interest rate of 1 %. In June 2021 the Company was informed that the SBA had forgiven the entire loan balance . Forgiveness is included in Other Income on the Consolidated Statements of Operations. On April 30, 2021, the Company received a Second Draw SBA PPP loan for $ 106,850 . The loan was scheduled to mature on April 30, 2026 , and bore interest at 1%. In October 2021 the Company was informed that the SBA had forgiven the entire loan balance. Forgiveness is included in Other Income on the Consolidated Statements of Operations. Long Term Note Payable - Related Party In August 2020, concurrent with the Joint Development Agreement with Petroleum and Independent Exploration, LLC (“PIE”), a related party, the Company entered into a term loan agreement dated August 1, 2020, whereby PIE will loan up to $ 2,000,000 , at an interest rate of 6 % per annum, maturing August 7, 2024 , unless terminated earlier by PIE. The loan proceeds will be used for recompletion or workover of certain designated wells. In addition, the Company assigned 85% working and revenue interest to PIE in the designated wells which will be applied to repayment of the loan. As of December 31, 2022, $1,076,987 has been advanced from the PIE loan . - 51 - Note 9 – Convertible Notes Payable Senior Secured Note Agreement On May 14, 2021, the Company’s wholly owned subsidiary, Empire New Mexico entered into a Senior Secured Convertible Note Agreement (the “Secured Note”) in the amount of $ 16,250,000 with Energy Evolution Master Fund, Ltd., a related party (“Energy Evolution”) (See Note 11). The Secured Note is collateralized by all assets of Empire New Mexico, matures on December 31, 2021 and bears an interest rate of 3.8 %. The Secured Note provides that up to 40% of the balance, together with accrued interest, can be converted into the Company’s common stock at the lesser of $1.25 per share or the offering price if the Company has a subsequent capital raise or an aggregate of 1,300,000 shares of common stock (without giving effect to any interest that may be converted). The conversion terms of the Secured Note were subject to further adjustments as defined in that agreement. The embedded conversion option has been bifurcated and accounted for separately as a derivative financial instrument. The separated derivative was initially recorded at fair value at the inception date and revalued as of September 30, 2021 resulting in a fair value of $ 5,530,677 and $ 5,437,746 , respectively. On September 30, 2021, the existing bifurcated derivative liability was removed in connection with the Amended Secured Note as further discussed. As partial consideration for the issuance of the Secured Note, Energy Evolution received a closing fee of 375,000 shares of the Company’s common stock and warrants to purchase 750,000 shares of common stock for $ 4.00 per share which expire on May 14, 2022. The Company determined these were equity-classified financing instruments and the proceeds are allocated on a relative fair value basis between the debt, warrants, and common shares at issuance. At issuance, the discount associated with the Secured Note was $ 10,125,177 ; consisting of $ 5,530,677 relating to the embedded derivative liability, $ 1,500 and $ 2,773,500 in common stock and paid in capital, respectively, relating to the issuance of shares of the Company’s common stock, and $ 1,819,500 in paid in capital relating to the issuance of warrants to purchase common stock. The fair value of the warrants was determined using a Black-Scholes model. The warrants were exercised in 2021 and the Company received cash proceeds of $ 3,000,000 . The discount associated with the Secured Note related to the embedded conversion liability and the issuance of the equity-classified financing instruments is amortized under the interest method and resulted in interest expense. Prior to amending the Secured Note in September 2021, the Company made principal payments totaling $4,050,000. On September 29, 2021 the parties entered into a Loan Modification Agreement (the “Amended Secured Note”) 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 $ 1.25 per share and amended certain terms of the remaining $ 5,700,000 of principal under the Secured Note. As amended, the remaining principal balance matures and becomes due on June 30, 2023 and upon maturity of the Amended Secured Note, Energy Evolution has the sole discretion to require cash settlement or to redeem the principal balance, together with accrued interest, in exchange for the Company’s common stock at $ 8 per share. Prior to maturity, interest accrues quarterly at 3.8% and Energy Evolution has the option to receive interest in common stock at $5.00 per share in lieu of cash. Pursuant to the Amended Secured Note, the Company’s obligations with respect to a registration statement under the Secured Note were extended, the Company executed and delivered a Pledge and Security Agreement granting Energy Evolution a first priority perfected security interest in the Company’s membership interest in Empire New Mexico, d/b/a Green Tree New Mexico, the Company and Green Tree New Mexico agreed to use commercial reasonable best efforts to separate Green Tree New Mexico from the Company as an independent business on or before December 31, 2022 in a spin-off to stockholders of the Company. In accordance with ASC 470-20, the Company accounted for this exchange as an induced conversion based on the short period time of the offer was open and the substantive conversion feature offer. The Company accounted for the conversion of the debt instruments as an inducement by expensing the fair value of the instruments that were issued in excess of the original terms of the Secured Notes. The Company reduced the outstanding debt by $ 9,141,327 , representing the face amount of the Secured Notes converted of $ 6,500,000 , net of unamortized discount costs of $ 2,796,419 , and the embedded conversion liability of $ 5,437,746 . The Company recorded induced conversion expense of $ 2,276,813 representing the difference in fair value of the instruments exchanged, including the fair value of the warrants to purchase 500,000 shares of common stock at $ 5.00 per share. The embedded conversion option of the principal balance outstanding after the conversion and amendment, has been bifurcated and accounted for separately as a derivative financial instrument. The separated derivative was initially recorded at fair value of $ 2,017,287 , with the amount recorded as a discount against the surviving Amended Secured Note balance and the derivative liability will be revalued on a quarterly basis. On September 30, 2021, 23,802 shares of common stock were issued as payment for the outstanding accrued interest on the Secured Note. On December 30, 2021, the Company amended the Amended Secured Note to allow full conversion of the remaining principal and accrued interest at that date. $ 5,715,353 of outstanding principal and $ 55,075 of accrued interest were converted into 1,154,085 shares of the Company’s common stock. As a result of this conversion, the mortgage that Energy Evolution held on the Company’s New Mexico assets was released. - 52 - 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 $5.00 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). In September 2021, $ 325,000 of the notes were repaid and the remaining Unsecured Notes were fully converted to Common Stock. 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 converted. As issuance, the amount recorded to additional paid in capital was $ 544,824 . The discount associated with these transactions is amortized under the interest method and resulted in interest expense approximately $ 540,000 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 $ 3.00 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 160,000 shares at an exercise price of $ 1.00 and $ 1.32 respectively. The Company determined that offering the “right to buy” shares resulted in an expense of $ 989,155 of the Company based on the fair value of contributions made by the Company’s Chief Executive Officer and President on its behalf. The fair value of the “right to buy” shares was determined using a Black-Scholes model. The expense is included in General and Administrative in the Consolidated Statement of Operations. Note 10 - Leases As a lessee, the Company leases its corporate office headquarters in Tulsa, Oklahoma and three field offices. The leases expire between 2024 and 2027. The corporate office has an option to renew for an additional five-year term. The option to renew the lease is generally not considered reasonably certain to be exercised. Therefore, the period covered by such optional period is not included in the determination of the term of the lease and the lease payments during these periods are similarly excluded from the calculation of right-of-use lease asset and lease liability balances. The Company recognizes right-of use lease expense on a straight-line basis, except for certain variable expenses that are recognized when the variability is resolved, typically during the period in which they are paid. Variable right-of-use lease payments typically include charges for property taxes, insurance, and variable payments related to non-lease components, including common area maintenance. Right of use lease expense was approximately $ 267,000 for the year ended December 31, 2022. Cash paid for right of use lease was approximately $2 68,000 for the same period. Supplemental balance sheet information related to the right of use leases is as follows: As of December 31, 2022 2021 Operating lease asset (included in Other Property and Equipment) $ 978,548 $ 779,183 Current portion of lease liability $ 256,975 $ 180,105 Long-term lease liability 547,692 646,311 Total right of use lease liabilities $ 804,667 $ 826,416 The weighted average remaining term for the Company’s right of use leases is 3.04 years. - 53 - Maturities of lease liabilities as of December 31, 2022 are as follows: 2023 $ 309,095 2024 309,808 2025 231,573 2026 37,200 2027 12,400 Thereafter — Total lease payments 900,076 Less imputed interest ( 95,409 ) Total lease obligation $ 804,667 Note 11 – Equity Pursuant to the Company’s Amended and Restated Certificate of Incorporation (“Charter”), effective as of March 4, 2022, the total number of shares of all classes of stock that the Company has the authority to issue is 200,000,000, consisting of 190,000,000 shares of common stock, par value $ 0.001 per share, and 10,000,000 shares of preferred stock, par value $ 0.001 per share. Preferred Stock Preferred stock may be issued from time to time in one or more series at the direction of the Board of Directors and the directors also have the ability to fix dividend rates and rights, liquidation preferences, voting rights, conversion rights, rights and terms of redemption and other rights, preferences, privileges and restrictions as determined by the Board of Directors, subject to certain limitations set forth in the Charter. Series A Voting Preferred Stock On March 8, 2022, the Company formalized the issuance of preferred stock as was required under the terms of the Company's May 2021 financing agreements with Energy Evolution (Master Fund), Ltd. (the “Fund”) and issued six shares of Series A Voting Preferred Stock. The Series A Voting Preferred Stock was issued in connection with the strategic investment in the Company by the Fund. For so long as the Series A Voting Preferred Stock is outstanding, the Company’s Board of Directors will consist of six directors. Three of the directors are designated as the Series A Directors and the three other directors (each, a “common director”) are elected by the holders of common stock and/or any preferred stock (other than the Series A Voting Preferred Stock) granted the right to vote on the common directors. Any Series A Director may be removed with or without cause but only by the affirmative vote of the holders of a majority of the Series A Voting Preferred Stock voting separately and as a single class. The holders of the Series A Voting Preferred Stock have the exclusive right, voting separately and as a single class, to vote on the election, removal and/or replacement of the Series A Directors. Holders of common stock or other preferred stock do not have the right to vote on the Series A Directors. The approval of the holders of the Series A Voting Preferred Stock, voting separately and as a single class, is required to authorize any resolution or other action to issue or modify the number, voting rights or any other rights, privileges, benefits, or characteristics of the Series A Voting Preferred Stock, including without limitation, any action to modify the number, structure and/or composition of the Company’s current Board of Directors. The Series A Voting Preferred Stock is held by Phil Mulacek, chairman of the Board of Directors and one of the principals of the Fund, as the Fund’s designee (the “Initial Holder”). The Series A Voting Preferred Stock may be transferred only to certain controlled affiliates of the Initial Holder (“Permitted Transferees”), and the voting rights of the Series A Voting Preferred Stock are contingent upon the Initial Holder and Permitted Transferees (collectively, the “Series A Holders”) holding together at least 3,000,000 shares of the Company’s outstanding common stock. The Series A Voting Preferred Stock is not entitled to receive any dividends or distributions of cash or other property except in the event of any liquidation, dissolution or winding up of the Company’s affairs. In such event, before any amount is paid to the holders of the Company’s common stock but after any amount is paid to the holders of the Company’s senior securities, the holders of the Series A Voting Preferred Stock will be entitled to receive an amount per share equal to $1.00. Except as discussed above or as otherwise set forth in the certificate of designation of the Series A Voting Preferred Stock, the holders of the Series A Voting Preferred Stock have no voting rights. The Series A Voting Preferred Stock is not redeemable at the Company’s election or the election of any holder, except the Company may elect to redeem the Series A Voting Preferred Stock for $1.00 per share following satisfaction of its notice and cure requirements in the event that: • any or all shares of Series A Voting Preferred Stock are held by anyone other than the Initial Holder or a Permitted Transferee; or • the Series A Holders together hold less than 3,000,000 shares of the Company’s outstanding common stock. The Series A Voting Preferred Stock is not convertible into common stock or any other security. - 54 - Common Stock On August 27, 2021 the Company’s Board of Directors approved a one-for-four reverse stock split such that every holder of the Company’s common stock would receive one share of common stock for every four shares owned. The reverse stock split was effective as of 6:00 p.m. Eastern Time on March 7, 2022, immediately prior to the Company’s listing of its common stock on the NYSE American. All share amounts have retrospectively been stated at post-reverse split amounts and pricing. The holders of shares of common stock are entitled to one vote per share for all matters on which common stockholders are authorized to vote on. Examples of matters that common stockholders are entitled to vote on include, but are not limited to, election of three of the six directors and other common voting situations afforded to common stockholders. 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) 875,000 shares of Empire common stock, (b) warrants to purchase 656,250 shares of Empire common stock at an exercise price of $0.80 per share, (c) warrants to purchase 450,000 shares of Empire common stock at an exercise price of $1.00 per share, (d) warrants to purchase 2,034,129 shares of Empire common stock at an exercise price of $0.40 per share, and (c) warrants to purchase up to 2,766,666 shares of Empire common stock at an exercise price of $ 0.564 per share pursuant to various vesting provisions as detailed in the Securities Agreement. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 147 %, risk free interest rate of . 19 % and an expected useful life of 4 years. The fair value of the warrants of $ 450,848 was allocated to paid in capital. 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 5). During February and March 2021, the Company issued to a group of accredited investors 2,248,464 shares of its common stock and warrants to purchase 2,248,464 shares of its common stock for $ 2.00 per share which expires on December 31, 2022 that would be accelerated should certain performance criteria be met. Proceeds from the sale were $ 3,147,850 . The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 180 %, risk free interest rate of . 14 % and an expected useful life of 21 months. The fair value of the warrants of $ 2,350,407 was allocated to Additional Paid in Capital. The performance criteria triggering early maturity occurred in April 2022, accelerating the warrant maturity date to July 2022. During the nine months ended September 30, 2022, 1,782,347 shares of common stock were issued as a result of warrant exercises. As of July 10, 2022, all warrants such were fully exercised. In September and October 2022, a former director of the Company exercised warrants granted in November 2017 to purchase 475,000 shares of common stock for $ 1.00 per share. In connection with the purchase of XTO assets the Company issued a Senior Secured Convertible Note due December 31, 2021 , in the aggregate principal amount $ 16,250,000 (the “Secured Convertible Note”) to Energy Evolution, a related party. As partial consideration for the issuance of the Secured Convertible Note, Empire issued to Energy Evolution Ltd (i) 375,000 shares of common stock along with (ii) a warrant certificate to purchase up to 750,000 shares of common stock at an exercise price of $4.00 per Warrant Share until May 14, 2022. Under the warrant certificate, the exercise price is subject to customary downward adjustments. The value allocated to the common stock, conversion feature, and warrants was $ 10,125,177 . In September 2021, the Company and the Energy Evolution Master Fund, Ltd. entered into a Loan Modification Agreement (the “Amended Secured Notes”). Under the Amended Secured Notes, among other terms the Company issued a warrant certificate to purchase up to 500,000 shares of common stock at an exercise price of $5.00 per Warrant Share until December 31, 2023. The exercise price is subject to customary downward adjustments. An additional 1,154,085 shares of common stock were issued to Energy Evolution on December 30, 2021, in conjunction with its conversion of all remaining principal and accrued interest on the note. Additionally, in conjunction with the purchase of XTO assets, the Company entered into $ 3,243,000 of Unsecured Convertible Notes (the “Unsecured Notes”) with a group of accredited investors. The Unsecured Notes had a maturity date of May 9, 2022 with a single payment and interest at 5 % (See Note 9). The Unsecured Note holders had the ability to convert their notes to common stock of the Company at the lesser of $ 5.00 per share or the price per share offered by the Company if the Company has a future capital raise. At December 31, 2021 $ 2,918,000 of the Unsecured Notes have been converted into 583,600 shares of common stock of the Company. The fair value of the warrants of $ 589,194 was allocated to Paid in Capital. Note 12 – Stock Based Compensation On April 3, 2019, the Board of Directors of the Company adopted the Empire Petroleum Corporation 2019 Stock Option Plan (the “2019 Stock Option Plan”). The total number of shares of common stock that may be issued pursuant to stock options under the 2019 Stock Option Plan was 2,500,000 . Further, on April 3, 2019 the Company granted Mr. Pritchard and Mr. Morrisett each, options to purchase 625,000 shares of common stock of the Company at an exercise price of $ 1.32 per share. The options vested in three installments with - 55 - 312,500 vesting immediately and 156,250 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 vested options of $ 812,500 was recorded as compensation expense and allocated to Paid in Capital in 2019. In 2021 and 2020, the fair value of the options which vested in April of the respective year of $ 406,250 was recorded as compensation expense and allocated to Additional Paid in Capital. All of the options were vested as of December 31, 2021. As a result of the adoption of a 2021 plan, the Board of Directors and management have determined that there would be no further issuances from the 2019 Stock Option Plan. In April 2022, Mr. Pritchard exercised options to purchase 235,000 shares of common stock. As of December 31, 2022, there were 1,943,200 unexercised options under the Stock Option Plan. On August 27, 2021, the Board of Directors of the Company adopted the Company’s 2021 Stock and Incentive Compensation Plan (the “2021 Incentive Plan”) which was subsequently approved by stockholders of the Company. The total number of shares of common stock that could be issued pursuant to the 2021 Incentive Pla n is 750,000 . Four grants were made in 2021 that amounted to 187,500 options. Two of the grants were for a cumulative amount of 62,500 options and vested immediately upon grant in November 2021. Valuation was calculated using the Black-Scholes option valuation model with the following assumptions: no dividend yield, expected annual volatility of 229 %, risk free interest rate of 0.81 %, and term of 3 years. The third grant was for 62,500 options and the valuation used the following inputs: no dividend yield, expected annual volatility of 277%, risk free interest rate of 0.99%, and term of 4 years. The fourth grant was for 62,500 options and inputs used to value the grant included no dividend yield, expected annual volatility of 335%, risk free interest rate of 1.16%, and a term of 5 years. On February 28, 2022, the Board of Directors of the Company granted a combination of stock options and restricted stock units under the 2021 Incentive Plan. Stock options totaling 249,000 shares were granted to employees and members of management with three -year vesting terms and expirations of August 2025 and 2026 . Stock option values were calculated using a Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 56 % as calculated by utilizing the stock price from the date of the XTO acquisition through grant date, risk free interest rate of 1.62 % and 1.67 % for the 2025 and 2026 options, respectively, and expected useful lives of 2.75 and 3.75 years for the 2025 and 2026 options, respectively. Total fair value of the stock option grants was approximately $ 1.2 million . The value of these options is recognized to expense on a straight-line method from date of grant through expiration date. On August 26, 2022, the stockholders of the Company approved the Company’s 2022 Stock and Incentive Compensation Plan (the “2022 Incentive Plan”) which reserves 750,000 shares of the Company’s common stock for issuance thereunder. As a result of such approval, no further awards will be made under the 2021 Incentive Plan. The 2022 Stock and Incentive Plan authorizes the grant of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other stock-based awards (restricted stock awards, restricted stock units, performance shares and performance units are collectively referred to as restricted stock units for purposes of this footnote. At December 31, 2022, 313,220 shares of our common stock were available for future grants. Restricted Stock Units Each RSU represents the contingent right to receive one share of common stock. The holders of outstanding RSUs do not receive dividends or have voting rights prior to vesting and settlement. The Company determines the fair value of granted RSUs based on the market price of the common stock on the date of the grant. Compensation expense for granted RSUs is recognized on a straight-line basis over the vesting and is net of forfeitures, as incurred. Stock-based compensation is included in General and Administrative expense in the Consolidated Statements of Operations and is recorded with a corresponding increase in Additional Paid-in Capital within the Consolidated Balance Sheets. RSUs were granted on February 28, 2022, May 22, 2022, October 11, 2022 and December 30, 2022 with 12- and 13-month service periods. Total value assigned to the RSUs based on grant date price approximated $ 3,151,000 . For the year ended December 31, 2022, approximately $ 1,227,000 of compensation expense related to RSUs was recognized, leaving approximately $ 1,971,000 of unrecognized compensation expense which will be recognized on a straight-line basis depending on the service period of each grant. The following summary reflects nonvested restricted stock unit activity and related information for the year ended December 31, 2022. Weighted Average Shares Fair Value (a) Outstanding, December 31, 2021 — $ — Granted 224,288 15.42 Vested — — Outstanding, December 31, 2022 224,288 $ 15.42 (a) Shares are valued at the grant-date market price. - 56 - 2022 Weighted Average grant date fair value of restricted stock units granted during the year, per share $ 15.42 Total fair value of restricted stock units vested during the year $ — Stock Options The following summary reflects stock option activity and related information: Weighted Average Options Exercise Price Outstanding, December 31, 2020 2,500,000 $ 1.36 Granted 187,500 12.20 Expired ( 246,800 ) 1.36 Outstanding, December 31, 2021 2,440,700 $ 2.19 Granted 249,000 11.80 Exercised ( 310,000 ) 1.34 Outstanding, December 31, 2022 2,379,700 $ 3.31 The following table summarizes information about stock options outstanding as of December 31, 2022: Range of Options Weighted Average Weighted Options Weighted Exercise Outstanding Remaining Average Exercisable Average Prices at 12/31/22 Contractual Life Exercise Price at 12/31/22 Exercise Price $ 1.32 to $ 11.80 2,379,700 6.38 years $ 2.97 2,068,200 $ 1.76 Note 13 – Income Taxes The current and deferred income tax provision for the years ended December 31, 2022 and 2021 were comprised for the following: 2022 2021 Current $ 208,898 $ — Deferred — — Income tax provision (benefit) $ 208,898 $ — At December 31, 2022, the Company had net operating loss carryforwards of approximately $ 18.6 million for federal income tax purposes available to offset future taxable income, as limited by the applicable provisions, which expire at various dates beginning in 2022 for the federal net operating loss carryforwards. In accordance with Section 382 of the Internal Revenue Code, the usage of the Company's net operating loss carryforwards may be limited in the event of a change in ownership. A full Section 382 analysis has not been prepared and NOLs could be subject to limitation under Section 382. - 57 - Deferred tax assets and liabilities are the result of temporary differences between the financial statement carrying values and the tax basis of assets and liabilities. The Company’s net tax position as of December 31, 2022 and 2021 is as follows: 2022 2021 Deferred tax assets: Loss carry-forwards $ 4,789,586 $ 5,341,256 Oil and gas Properties — 1,239,723 Right of use assets 7,341 8,036 Stock option grants 1,369,105 796,188 Asset retirement obligation 6,616,407 — Derivatives — 27,210 Other 436,477 — Total deferred tax assets 13,218,916 7,412,413 Deferred tax liabilities: Oil and gas Properties ( 5,552,159 ) — Other property and equipment ( 171,650 ) ( 459,745 ) Derivatives ( 31,369 ) — Other ( 69,688 ) — Total deferred tax liabilities ( 5,824,866 ) ( 459,745 ) Net deferred tax asset (liability) before valuation allowance 7,394,050 6,952,668 Valuation allowance ( 7,394,050 ) ( 6,952,668 ) Net deferred taxes $ — $ — Reconciliations of the tax provision computed at the statutory federal rate to the Company’s total income tax benefit for the years ended December 31, 2022 and 2021 are as follows: 2022 2021 $ % $ % Provision (benefit) at statutory rate 1,531,536 21.0 % ( 3,909,142 ) 21.0 % State taxes (net of federal impact) 350,632 4.9 % ( 893,518 ) 4.8 % Nondeductible expenses 21,052 0.3 % 3,503,996 - 18.8 % Return to Accrual ( 2,135,704 ) - 29.3 % — Valuation Allowance 441,382 6.1 % 1,298,664 - 7.0 % Income tax provision 208,898 3 % — 0 % Utilization of the Company’s loss carryforwards is dependent on realizing taxable income. The Company recorded valuation allowances of $ 7.4 million and $ 7.0 million as of December 31, 2022 and 2021, respectively, due to the uncertainty related to its ability to utilize some of its deferred income tax assets, primarily consisting of net operating loss carryforwards prior to expiration or limitation under Section 382 as discussed above. The Company has evaluated all tax positions for which the statute of limitations remains open and believes that the material positions taken would likely than not would be sustained by examination. Therefore, at December 31, 2022, the Company has not established any reserves for, nor recorded any unrecognized benefits related to uncertain tax positions. Note 14 – Earnings (loss) per share 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, 2021, the Company had 2,440,700 options outstanding that were not included in the calculation of earnings per share for the periods then ended. - 58 - Note 15 – Related Party Transactions The Energy Evolution Master Fund, Ltd. (“Energy Evolution”) is a related party of the Company as it beneficially owns approximately 21 % of the Company’s outstanding shares of common stock as of December 31, 2022. Additionally, a board member of Energy Evolution was appointed to the Company’s board in October 2021. This board member separately beneficially owns approximately 17 % of the Company’s outstanding shares of common stock as of December 31, 2022. The board member also is a majority owner of PIE. In October 2021 another Energy Evolution member was appointed to the Company’s board of directors. In March 2021, the majority owner of PIE, through the exercise of warrants, became a significant shareholder of the Company’s outstanding shares of stock (See Note 11). The Company has a joint development agreement with PIE to perform recompletion or workover on specified mutually agreed upon wells (See Note 5). As of December 31, 2022, the Company has incurred obligations of approximately $ 1.1 million as a part of the joint development agreement (See Note 9). Note 16 – Commitments and Contingencies From time to time, the Company is subject to various legal proceedings arising in the ordinary course of business, including proceedings for which the Company may not have insurance coverage. While many of these matters involve inherent uncertainty, as of the date hereof, the Company does not currently believe that any such legal proceedings will have a material adverse effect on the Company’s business, financial position, results of operations or liquidity. The Company is subject to extensive federal, state, and local environmental laws and regulations. These laws, among other things, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Management believes no materially significant liabilities of this nature existed as of the balance sheet date. The Company was subject to a sales tax audit related to its Texas entity and received the initial assessment notice in April 2022. The Company has accrued $ 528,000 for this contingency as of December 31, 2022. An agreement in principle was reached in 2022 and a final settlement agreement signed in 2023. The Company will remit a payment of $ 528,000 in the first quarter of 2023. Note 17 – Concentrations The Company’s producing properties and oil and natural gas reserves are all located in Louisiana, New Mexico, North Dakota, Montana, and Texas. 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. For the year ended December 31, 2022, the Company sold 68 % of its oil, natural gas, and NGL to four customers. For the year ended December 31, 2021, the Company sold 63 % 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. The Company’s cash balances may at times exceed FDIC insurance limits. The Company maintains cash accounts at reputable financial institutions. Note 18 – Subsequent Events On March 16, 2023, Thomas W. Pritchard resigned as Chief Executive Officer and a director of the Company to pursue other opportunities. Although not required under Mr. Pritchard’s Employment Agreement with the Company, in recognition of Mr. Pritchard’s past service to the Company, the Company will pay Mr. Pritchard severance benefits in the amount of approximately $ 360,000 , as set forth in Section 4.2 of his Employment Agreement, in one lump sum payment within 30 days after March 23, 2023, rather than in monthly installments. The Company is also extending the period under which Mr. Pritchard has the right to exercise his outstanding vested non-qualified stock options from three months after the date of his termination of employment to September 16, 2024.  In addition, Mr. Pritchard has surrendered to the Company 340,234 shares and options as satisfaction for the $ 2.1 million receivable that primarily resulted from incorrect withholdings associated with an April 2022 option exercise by Mr. Pritchard. The Company also has a $ 2.1 million liability recorded at December 31, 2022, related to withholding payables that were remitted in the first-quarter 2023.  On March 17, 2023, the Board of Directors appointed Michael R. Morrisett to the position of Chief Executive Officer, in addition to his current duties of President and Principal Financial Officer of the Company. Mr. Morrisett is not receiving any additional compensation for assuming the role of Chief Executive Officer. - 59 - EMPIRE PETROLEUM CORPORATION Supplemental Information of Oil and Natural Gas Producing Activities (Unaudited) December 31, 2022 and 2021 The following reserve estimates present the Company's estimate of the proven natural gas and oil reserves and net cash flow of the Company’s 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, New Mexico, North Dakota, Montana and Texas. Costs Incurred Related to Oil and Gas Activities Costs incurred includes capitalized costs of properties, equipment, and lease facilities for oil and natural gas producing activities. Years Ended December 31, 2022 2021 Acquisition $ 2,702,613 $ 23,780,111 Exploration — — Development 11,206,207 1,970,410 $ 13,908,820 $ 25,750,521 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. The information below excludes proved undeveloped reserves. Below are the net quantities of net proved developed reserves of the Company’s properties: Oil (MMBbls) Gas (MMcf) NGLs (a) MBOE Balance, December 31, 2020 3,661 971 3,823 Acquisition of Reserves 5,634 10,533 7,390 Revisions (617) 251 (576) Extensions 150 51 159 Divestiture of Reserves (47) 27 (42) Production (333) (625) (437) Balance, December 31, 2021 8,448 11,208 87 10,404 Acquisition of Reserves 650 205 61 745 Revisions (350) 1,834 2,248 2,203 Extensions 561 566 27 682 Production (483) (876) (161) (790) Balance, December 31, 2022 8,826 12,937 2,262 13,244 (a) The Company did not present NGLs separately in 2021. The 2021 acquisitions primarily relate to the XTO acquisition. The 2022 acquisitions relate to small acquisition in our Rockies and New Mexico regions. - 60 - 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 yearend 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: December 31, 2022 2021 Future cash inflows $ 941,172,544 $ 627,654,125 Future production costs (509,154,924 ) (362,254,813 ) Future development costs (55,901,780 ) (33,021,749 ) Future income tax expense (90,724,632 ) (30,614,383 ) Future net cash flows 285,391,208 201,763,180 10% annual discount for estimated timing of cash flows (137,723,795 ) (107,911,087 ) Standardized measure $ 147,667,413 $ 93,852,093 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: 2022 2021 Oil (BBl) $ 91.14 $ 64.31 Natural gas (MMBtu) $ 4.23 $ 7.34 * *Pricing includes revenue received from NGL sales as well as natural gas. Changes in the Standardized Measure of Discounted Future Net Cash Flows at 10% per annum are as follows: December 31, 2022 2021 Beginning of year $ 93,852,093 $ 20,770,080 Net change in prices and production costs 24,651,555 13,080,689 Net change in future development costs (7,141,431 ) 782,210 Oil & Gas net revenue (21,418,327 ) (10,587,395 ) Extensions 11,037,719 5,026,479 Acquisition of reserves 12,043,912 90,104,017 Divestiture of reserves — (318,813 ) Revisions of previous quantity estimates 46,871,217 (3,794,860 ) Net change in taxes (32,133,473 ) (15,544,094 ) Accretion of discount 10,939,619 2,077,008 Changes in timing and other 8,964,529 (7,743,228 ) End of year $ 147,667,413 $ 93,852,093 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. -61-