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Item 7. Management’s Discussion and Analysis

2024-03-28 compared with 2023-03-31 · 306 added, 235 removed, 31 unchanged (95% of the section changed)

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

following discussion should be read together with the consolidated financial statements and notes to consolidated financial statements,

which are included in this Annual Report on Form 10-K in Item 8, Financial Statements and Supplementary Data, and the information set

forth in Part I, Item 1A – Risk Factors.

primary business is the exploration and development of oil and gas interests.

We have incurred significant losses from operations in

years prior to 2022, and there is no assurance that we will maintain profitability or obtain funds necessary to finance our future operations.

seek to increase shareholder value by growing reserves, production, revenues, and cash flow from operating activities by executing our

mission to use highly-skilled personnel to thoughtfully and expertly spend capital to realize reserves on producing properties.

places emphasis on operating cash flow in managing our business, as operating cash flow considers the cash expenses incurred during the

period and excludes non-cash expenditures not related directly to our operations.

business strategy is to obtain long-term growth in reserves and cash flow on a cost-effective basis.

Management regularly evaluates potential

acquisitions of properties that would enhance current core areas of operation.

XTO Acquisition

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) to acquire, among other things, certain oil and natural gas properties in New Mexico.

transaction closed in May 2021.

For more information about the transaction, refer to Note 4 of our Consolidated Financial Statements

included in this report.

of Operations

following table reflects our summary operating information.

Because of normal production declines, increased or decreased drilling activity

and the effects of acquisitions, the historical information presented below should not be interpreted as indicative of future results.

The following discussion should be read together with

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

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

Our primary business is the optimization and development

of oil and gas interests.

In 2022 we had net income from operations but have incurred losses from operations in 2023 and in years prior

There is no assurance that we will be profitable or obtain funds necessary to finance our future operations.

We seek to increase shareholder value by growing reserves,

production, revenues, and cash flow from operating activities by executing our mission to use highly-skilled personnel to thoughtfully

and expertly spend capital to realize reserves on producing properties as well as further develop fields.

Management places emphasis on operating cash flow

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

not related directly to our operations.

Production and Operating Data

The following table sets forth a summary of our production

and operating data for the years ended December 31, 2023 and 2022.

December 31, 2023

December 31, 2022

Production and operating data:

Net sales volumes:

Natural gas (Mcf)

Natural gas liquids (Bbl)

Average price per unit:

Natural gas liquids

Operating costs and expenses per Boe:

Lease operating expense (excluding workovers)

Total Lease operating expense

Production and ad valorem taxes

Depreciation, depletion, amortization and accretion

General & administrative (excluding stock-based compensation)

Stock-based compensation

(a) Excludes the effect of net cash receipts from (payments on) derivatives.

Business Strategy

Our business strategy is to obtain long-term growth

in reserves and cash flow on a cost-effective basis.

Management regularly evaluates potential acquisitions of properties that would enhance

current core areas of operation.

Results of Operations

The following table reflects our summary operating information.

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

below should not be interpreted as indicative of future results.

Years Ended December 31,

10 unchanged sentences

Operating Income (Loss)

(11,625,091 )

(20,409,254 )

Net Income (Loss)

(12,469,605 )

A percentage calculation is not meaningful due to change in signs, a zero-value denominator or a percentage change greater than 200.

increased primarily as a result of higher volumes due to a full year impact of the XTO acquisition as well as higher commodity prices

Average realized oil price in 2022 was approximately $93 per barrel, while average realized price in 2021 was approximately

$67, an increase in price of approximately 39%.

Realized natural gas price for 2022 was approximately $5.18 per Mcf, while realized pricing

for 2021 was approximately $3.68 per Mcf, an increase in price of approximately 41%.

Net oil volumes were approximately 483,000 Bbls

for 2022, an increase of 45% over the same period in the prior year.

Net natural gas volumes were approximately 876,000 Mcf for 2022

as compared to approximately 622,000 for 2021, an increase of approximately 41%.

NGL revenues are primarily from our New Mexico properties

acquired from XTO.

Operating Expense and Production Taxes

operating expense was higher in 2022 primarily as a result of a full year of operations in New Mexico after the May 2021 XTO acquisition.

Lease operating expenses for New Mexico were approximately $5.1 million more in 2022 than for 2021.

Production and ad valorem taxes have

increased as a direct result of the XTO acquisition’s properties and increased volumes produced and sold, paired with higher realized

In addition to recompletions and sidetrack well drilling activity in North Dakota, we also undertook workover and other lease

operating activities in 2022;

North Dakota’s lease operating expenses increased by approximately $3.3 million period-over-period

as a result of increased field activity.

Depreciation,

Depletion, Amortization and Accretion and Impairment

decreased in 2022 as compared to 2021 despite an increase in production volumes.

The decrease in the expense is primarily related to

New Mexico depletion rate due to the impact of a higher reserve base in 2022.

Accretion expense was slightly higher in 2022 as the overall

obligation increases over time.

We assess our 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 our properties in Louisiana were less than the net book value.

As a result, we recorded a $936,000 impairment

and Administrative Expense

compensation expense, exclusive of stock-based compensation, was approximately $388,000 in 2022 as compared to $209,000 in 2021.

personnel expense increased approximately $500,000 in 2022 over 2021.

In 2022, we recognized expenses totaling approximately

$1,269,000 in conjunction with resolution of a Texas sales tax audit for prior periods for which the initial assessment was received

in April 2022.

This total includes consulting fees and an accrual for $528,000 for the final settlement which will be paid in early

Fees paid for professional services including outsourced services and legal increased over 2021 by approximately $500,000 as a

direct result of acquisition-related work, SEC filings related to our operations, and our successful uplisting from the OTCQB to the

NYSE American.

Included in general and administrative expenses for 2021 is $989,000 for expense associated with a non-cash right to

buy shares in conjunction with the conversion of unsecured notes payable in 2021 as discussed in Note 9 to the Consolidated

Financial Statements included in this report.

utilize stock-based compensation to compensate members of management and retain talented personnel.

Our stock-based compensation increased

in 2022 due to a higher number of awards in 2022.

We anticipate stock-based compensation to continue to be utilized in 2023 and beyond

to attract and retain talented personnel and compensate Board members and consultants.

interest expense increased slightly as a decrease due to a lower outstanding balance under our Credit Facility was offset by the impact

of higher interest rates.

We have minimal interest-bearing vehicle and equipment notes payable.

interest expense is fully attributable to the related party notes payable as described in Note 9 to the Consolidated Financial Statements

included in this report.

In 2021, a non-cash charge was recorded to interest expense of approximately $7.0 million related to interest

and amortization of debt issuance costs for convertible notes issued in 2021 that were fully converted prior to December 31, 2021.

2022, we had income before income taxes which would result in a tax provision that was offset by a change in the valuation allowance

due to the anticipated use of the NOL carryforward.

For periods prior to 2022, our effective tax rate is 0%.

Due to having current

taxable income which cannot be fully offset by NOLs, the tax rate is 3% in 2022.

We have generated net operating losses since

inception, which would normally reflect a tax benefit in the consolidated statement of operations and a deferred asset on the

consolidated balance sheet.

However, because of the current uncertainty as to our ability to achieve sustained profitability and the

potential limitation of NOL carryforwards, a valuation reserve has been established that offsets the amount of any tax benefit

available for each period presented in the consolidated statements of operations.

of December 31, 2022, we had approximately $12 million cash on hand and approximately $300,000 available on the Credit Facility.

For additional information regarding the Credit Facility, see Note 8 to the Consolidated Financial Statements included in this report.

We expect to incur costs related to limited drilling activities in core areas as well as future oil and natural gas acquisitions.

(19,553,735 )

A percentage calculation is

not meaningful due to change in signs, a zero-value denominator or a percentage change greater than 200.

Revenues for 2023 decreased compared to the prior

year primarily due to lower realized oil, natural gas and NGL prices and lower NGL volumes, partially offset by higher oil volumes in

North Dakota.

Realized oil prices for 2023, were approximately $75.19

per barrel, while realized prices for the prior year were approximately $93.16 per barrel, a decrease in price of approximately 19%.

volumes were higher by approximately 5,000 barrels primarily due to increased production in North Dakota partially offset by lower production

in New Mexico.

Realized natural gas prices for 2023, were approximately

$2.02 per Mcf, while realized prices for the prior year were approximately $5.18 per Mcf, a decrease in price of approximately 61%.

Realized NGL prices for 2023, were approximately $12.21

per barrel, while realized prices for the prior year were approximately $22.76 per barrel, a decrease in price of approximately 46%.

sales volumes were lower in 2023 compared to 2022 primarily due to lower volumes in New Mexico.

Lease Operating Expense and Production Taxes

Lease operating expense was higher in 2023 primarily

due to higher workover activities.

Lease operating expense includes approximately $12.0 million of workover expense for 2023 as compared

to approximately $7.9 million for 2022.

Workover expense in New Mexico increased due in part to a higher level of compliance-related activities.

In addition, workover expense in North Dakota was higher for 2023 as the Company continued to work over wells in the state to enhance

production alongside capital recompletions and sidetrack drilling started in 2022.

Production taxes were lower for 2023 compared to 2022

as a result of the lower product revenues discussed above.

Depreciation, Depletion, Amortization and Accretion

and Impairment

The higher DD&A in 2023 as compared to 2022 primarily

related to a higher depletable basis from capital expenditures in 2023.

Accretion expense was higher in 2023 as the overall obligation

increases over time.

We assess our 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 our properties in Louisiana were less than the net book value.

As a result, we recorded a $936,000 impairment expense.

General and Administrative Expense (excluding stock-based

compensation)

General and Administrative Expense (excluding stock-based

compensation) increased primarily due to higher employee expenses related to increased headcount in 2023 compared to 2022 and $505,000

related to severance expense for two executives in 2023 (See Note 14 of Notes to Consolidated Financial Statements).

Board compensation

expense, exclusive of stock-based compensation, was approximately $588,000 in 2023 as compared to $388,000 in 2022.

In addition, 2023

expenses were higher due to legal costs related to potential financing transactions and compliance work related to our New Mexico operations.

In 2022, we recognized expenses totaling approximately $1,269,000 in conjunction with resolution of a Texas sales tax audit for prior

periods for which the initial assessment was received in April 2022.

This total includes consulting fees and an accrual for $528,000 for

the final settlement which was paid in 2023.

Stock-based Compensation

We utilize stock-based compensation to compensate

members of management and retain talented personnel.

Our stock-based compensation increased in 2023 due to a higher number of awards in

We anticipate stock-based compensation to continue to be utilized in 2024 and beyond to attract and retain talented personnel and

compensate our board members and consultants.

Interest Expense

Cash-based interest expense increased as higher interest

rates were partially offset by a lower outstanding balance under our Credit Facility.

We have minimal interest-bearing vehicle and equipment

notes payable.

Non-cash interest expense is primarily attributable

to the related party note payable as described in Note 7 of Notes to Consolidated Financial Statements.

In addition, 2023 includes interest

from $10,000,000 of bridge loans from related parties that were subsequently converted to equity (See Note 15 of Notes to Consolidated

Financial Statements).

We have generated net operating losses since inception,

which would normally reflect a tax benefit in the consolidated statement of operations and a deferred asset on the consolidated balance

However, because of the current uncertainty as to our ability to achieve sustained profitability and the potential limitation of

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

in the consolidated statements of operations.

For 2023, we had a loss before income taxes for which

the tax benefit was offset by a change in valuation allowance.

For 2022, we had income before income taxes which resulted in a tax

provision that was offset by a change in the valuation allowance due to the anticipated use of the NOL carryforward and intangible drilling

For 2023 and 2022, our effective tax rates were 1% and 3%, respectively.

As noted below, our working capital is negative as of December 31, 2023 and is primarily a result of a higher level of payables related

to capital spending in North Dakota.

In addition, the Company was not in compliance with the current ratio covenant under its Credit Facility

as of December 31, 2023;

however, the Company obtained a compliance waiver from the lender for December 31, 2023.

As of December 31, 2023,

we had approximately $8 million in cash on hand and approximately $5.5 million available on the Credit Facility.

For additional information

regarding the Credit Facility, see Note 7 of Notes to Consolidated Financial Statements.

The Company will require additional funds to

satisfy these payables related to the capital spending program which are greater than estimated cash flows from operations over the next

Management has initiated plans to raise the necessary funds including the commencement of a rights offering expected to raise

up to approximately $20.66 million (see Note 18 of Notes to Consolidated Financial Statements).

Phil Mulacek and Energy Evolution Master

Funds, Ltd, both related parties of the Company and largest shareholders collectively owning 46% of the common shares outstanding, have

indicated that they intend to participate in the rights offering and fully subscribe to the shares of Common Stock corresponding to their

subscription rights and intend to exercise their over-subscription rights.

See Note 1 - Liquidity and Going Concern of Notes to Consolidated

Financial Statements for further discussion of management’s plans.

We expect to incur costs related to drilling activities in core areas.

It is expected that management will use a combination of cash on hand and cash flows from operations as well as seeking additional debt

or equity funding for these acquisitions and to fund ongoing operations.

capital (presented below) was $5.1 million as of December 31, 2022 compared to $1.1 million as of December 31, 2021, representing a change

of approximately $4.0 million.

This change is primarily a result of the acquisition of producing properties in New Mexico, which served

to increase volumes sold for the year ended December 31, 2022, as well as the stronger pricing environment in 2022.

or equity funding to fund these ongoing activities.

Working Capital

Working capital (presented below) was $(6.3) million

as of December 31, 2023 compared to $5.1 million as of December 31, 2022, representing a change of approximately $(11.4) million.

change was primarily driven by payables related to the Starbuck Drilling Program.

As of December 31,

Current Assets

1 unchanged sentence

Working Capital

$ (6,304,668 )

Year Ended December 31,

1 unchanged sentence

Operating activities

$ (9,887,500 )

$ (27,943,283 )

Investing activities

2 unchanged sentences

Financing activities

(23,310,497 )

Flows from Operating Activities

operations from core assets contributed to cash flows provided by operating activities for the year ended December 31, 2022.

we incurred approximately $18.0 million in non-cash expenses related to the convertible notes payable (See Related Party Transactions

for more information) that contributed to a net loss for financial reporting purposes.

Flows from Investing Activities

flows from investing activities in 2022 reflect $2.7 million related to acquisitions of oil and natural gas properties as compared to

$19.5 million in 2021 which primarily related to the XTO acquisition that occurred in May 2021.

In 2022, we began recompletions and other

capitalizable efforts in multiple states as we sought to bring production online from existing wells and bring on new production from

sidetrack drilling in North Dakota which led to an increase in additions to oil and natural gas properties in 2022.

We also participated

in the drilling of four non-operated wells through Empire Rockies Region in 2022 spending approximately $600,000.

In 2021, we had a cash

outflow of approximately $2.5 million related to four other non-operated drilled wells.

As part of the XTO acquisition, we entered into

an agreement to create a sinking fund for future plugging liabilities, paying approximately $4.8 million into that fund in 2021.

we were able to negotiate for the release of the sinking fund requirement.

Approximately $2 million of the sinking fund balance was returned

to us in 2022.

Flows from Financing Activities

2022, we received approximately $3.4 million in cash from warrant exercises.

We also made approximately $1.2 million of principal payments

in 2022 on our Credit Facility.

In 2021, the XTO acquisition and operations executing our mission were funded by proceeds from debt issued

of approximately $20.5 million as well as proceeds from stock and warrant issuances of approximately $11.3 million.

We have quarterly

payment obligations related to our bank debt of $300,000 per quarter (increased to $500,000 per quarter in 2023) in addition to minimal

monthly payments for notes payable arising from the purchase of vehicles and equipment.

2022, additions to oil and natural gas properties totaled $14.6 million including $2.7 million related to acquisitions.

The $11.9 million

not related to acquisitions primarily reflects well enhancement projects in North Dakota and non-operated drilling.

We anticipate capital expenditures in 2023 that will be funded with cash on hand, cash flows from operations, debt, and/or equity issuances.

Related Party

2021 issuance of a secured convertible note and an unsecured convertible note to Energy Evolution, a related party, as well as the conversion

of these notes in 2021 are described further in Note 9 to the Consolidated Financial Statements included in this report.

These transactions

were related party transactions for accounting purposes.

Sheet Arrangements

do not have any off-balance sheet arrangements.

Critical Accounting

preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management

to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosures

of contingent assets and liabilities.

Because estimates and assumptions require significant judgment, future actual results could differ

from those estimates and could have a significant impact on our results of operations, financial position and cash flows.

We re-evaluate

our estimates and assumptions at least on a quarterly basis.

In our management’s opinion, the more significant reporting areas

impacted by management’s judgments and estimates are as follows:

Efforts Method of Accounting for Oil and Natural Gas Activities

use the successful efforts method of accounting for oil and natural gas operations.

Under this method, costs to acquire oil and natural

gas properties, drill successful exploratory wells, drill and equip development wells, and install production facilities are capitalized.

Estimated proved oil and natural gas reserves, management’s outlook on commodity prices and projected future cash flows of oil

and natural gas reserves are a significant part of our financial calculations.

Following are examples of how these estimates affect financial

increase (decrease) in estimated proved oil, natural gas and NGL reserves can reduce (increase)

our unit-of-production depletion and amortization rates;

in the oil, natural gas and NGL reserves and the projected future cash flows from our properties

can impact our periodic impairment analyses.

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

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

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

the Financial Accounting Standards Board (“FASB”).

Cash Flows from Operating Activities

Cash flows from operating activities in 2023 was impacted

by lower commodity prices and higher operating expenses compared to 2022, partially offset by higher oil volumes.

Cash flow from operating

activities in 2022 benefited from higher commodity prices and higher natural gas and NGL volumes.

Cash Flows from Investing Activities

Cash flows from investing activities in 2023 includes

approximately $25 million of additions to oil and gas properties primarily due to the development of our operations in North Dakota, partially

offset by approximately $9.9 million for a change in accounts payable related to capital expenditures.

In 2022, we had approximately $11.4

million of additions to oil and gas properties primarily, partially offset by approximately $1.2 million for a change in accounts payable

related to capital expenditures.

In 2022, we began recompletions and other capitalizable efforts in multiple states as we sought to bring

production online from existing wells and bring on new production from sidetrack drilling in North Dakota which led to an increase in

additions to oil and natural gas properties in 2022.

We also participated in the drilling of four non-operated wells through Empire Rockies

Region in 2022 spending approximately $600,000.

In 2022, we were able to negotiate for the release

of the sinking fund requirement.

Approximately $2.8 million and $2 million of the sinking fund balance was returned to us in 2023 and

2022, respectively.

In addition, 2023 includes $2 million related to the

acquisition of additional interest in our New Mexico oil and gas properties compared to $2.7 million of acquisitions in 2022.

Cash Flows from Financing Activities

In 2023, we received $10 million from related parties

in the form of bridge loans which were subsequently converted to our common shares (See Note 15 of Notes to Consolidated Financial Statements).

In 2023, we entered into a new revolving line of credit

with Equity Bank (See Note 7 of Notes to Consolidated Financial Statements) and used approximately $4.5 million to retire the outstanding

balance of our previous revolving line of credit with CrossFirst Bank.

Principal payments made on our revolving line of credit with CrossFirst

Bank were approximately $1.5 million and $1.2 million in 2023 and 2022, respectively.

In 2023, we received approximately $12.5 million from

stock issuances and warrant exercises.

In 2022, we received approximately $3.4 million in cash from warrant exercises.

Capital Resources

Capital Expenditures

For 2023, additions to oil and natural gas properties

totaled $27 million including $2.1 million related to acquisitions.

The $25 million not related to acquisitions primarily reflects development

of our North Dakota operations.

We anticipate capital expenditures in 2024 that will be funded with cash on hand, cash flows from operations,

debt, and/or equity issuances.

Related Party Transactions

In 2023, we received $10 million in bridge loan funds

from Phil Mulacek and Energy Evolution Master Fund, Ltd., related parties, which were subsequently converted to our common shares.

addition, we sold shares to both parties and received $5 million in proceeds from each party.

Both transactions are described further

in Note 15 of Notes to Consolidated Financial Statements.

These transactions were related party transactions for accounting purposes.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Estimates

The preparation of financial statements in conformity

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

reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities.

Because estimates

and assumptions require significant judgment, future actual results could differ from those estimates and could have a significant impact

on our results of operations, financial position and cash flows.

We re-evaluate our estimates and assumptions at least on a quarterly

In our management’s opinion, the more significant reporting areas impacted by management’s judgments and estimates

are as follows:

Successful Efforts Method of Accounting for Oil

and Natural Gas Activities

We use the successful efforts method of accounting

for oil and natural gas operations.

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

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

Estimated proved oil and natural gas reserves, management’s

outlook on commodity prices and projected future cash flows of oil and natural gas reserves are a significant part of our financial calculations.

Following are examples of how these estimates affect financial results:

· an increase (decrease) in estimated proved oil, natural gas and NGL reserves

can reduce (increase) our unit-of-production depletion and amortization rates;

· changes in the oil, natural gas and NGL reserves and the projected future

cash flows from our properties can impact our periodic impairment analyses.

Proved oil and natural gas reserves are the

estimated quantities of oil, natural gas and NGLs which geological and engineering data demonstrate with reasonable certainty to be recoverable

in future periods from known reservoirs under existing economic and operating conditions.

Reserve quantities and future cash flows included

in this report are prepared in accordance with guidelines established by the SEC and the Financial Accounting Standards Board (“FASB”).

The accuracy of reserve estimates is a function of:

quality and quantity of available data;

interpretation of that data;

accuracy of various mandated economic assumptions;

judgments of the persons preparing the estimates.

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

The independent petroleum engineers evaluated 100% of our estimated proved producing reserve quantities and their related future net

cash flows as of December 31, 2022.

· The quality and quantity of available data;

· The interpretation of that data;

· The accuracy of various mandated economic assumptions;

· The judgments of the persons preparing the estimates.

Proved reserves information included in this

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

The independent petroleum

engineers evaluated 100% of our estimated proved producing reserve quantities and their related future net cash flows as of December 31,

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

Because these estimates

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

of oil and natural gas that are ultimately recovered.

Management may make revisions to reserve estimates throughout the year as additional

information becomes available.

Such changes could trigger an impairment of our oil and natural gas properties and have an impact on our

depletion expense prospectively.

For example, a change of 10 percent in our total proved reserves could change our annual depletion and

amortization expense by $200,000.

Because these estimates depend on many assumptions, all

of which may differ substantially from actual results, reserve estimates may be different from the quantities of oil and natural gas that

are ultimately recovered.

Management may make revisions to reserve estimates throughout the year as additional information becomes available.

Such changes could trigger an impairment of our oil and natural gas properties and have an impact on our depletion expense prospectively.

For example, a change of 10 percent in our total proved reserves could change our annual depletion and amortization expense by $350,000.

The actual impact would depend on the specific areas impacted.

of Oil and Gas Properties

assess our proved properties for impairment using estimates of future undiscounted cash flows.

This assessment requires significant judgment

and assumptions including commodity price outlooks, estimates of reserve quantities, expected lease operating costs and capital costs.

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

We performed an assessment as of December 31, 2022 and identified one area that was impaired and recorded an impairment in

2022 of $936,000.

Retirement Obligation

retirement obligations (“AROs”) consist primarily of estimated future costs associated with the plugging and abandonment

of oil and natural gas wells, removal of equipment and facilities from leased acreage, and land restoration in accordance with applicable

local, state and federal laws.

The discounted fair value of an ARO liability is required to be recognized in the period in which it is

incurred, with the associated asset retirement cost capitalized as part of the carrying cost of the oil and natural gas asset.

The recognition

of an ARO requires that management make numerous assumptions regarding such factors as the estimated probabilities, amounts and timing

of settlements;

the credit-adjusted risk-free rate to be used;

Impairment of Oil and Gas Properties

We assess our proved properties for impairment

using estimates of future undiscounted cash flows.

This assessment requires significant judgment and assumptions including commodity

price outlooks, estimates of reserve quantities, expected lease operating costs and capital costs.

An impairment expense could

result if oil and gas prices decline in the future as it may not be economic to develop some of these unproved properties.

performed an assessment as of December 31, 2023 and did not identify any impairments.

Asset Retirement Obligation

Asset retirement obligations (“AROs”)

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

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

The discounted fair

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

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

The recognition of an ARO requires that management make numerous

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

the credit-adjusted risk-free rate

inflation rates;

and future advances in technology.

In periods subsequent

to the initial measurement of the ARO, we must recognize period-to-period changes in the liability resulting from the passage of time

and revisions to either the timing or the amount of the original estimate of undiscounted cash flows.

recognize stock-based compensation expense associated with restricted stock units, which consists of time-based awards and options.

account 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 our common stock on the grant date.

Stock-based compensation related to options is the fair value

of the option recognized over the vesting period.

The fair value of an option is determined using the Black-Scholes option valuation

with the following assumption inputs:

dividend yield, expected annual volatility risk free interest rate and an expected life.

Taxes and Uncertain Tax Positions

tax provision is based upon the tax laws and rates in effect in the applicable jurisdiction in which operations are conducted and income

As part of the process of preparing the consolidated financial statements, management is required to estimate the income tax

This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from

differing treatment of items, such as depreciation, amortization and certain accrued liabilities for tax and accounting purposes.

tax expense or benefit represents the change in the balance of deferred tax assets or liabilities.

Valuation allowances are established

to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

At December 31, 2022 and 2021, a valuation allowance for deferred tax assets was recorded.

applies the accounting standards related to uncertainty in income taxes.

This accounting guidance clarifies the accounting for uncertainties

in income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the

consolidated financial statements.

It requires that we recognize in the consolidated financial statements the financial effects of a

tax position, if that position is more likely than not of being sustained upon examination, including resolution of any appeals or litigation

processes, based upon the technical merits of the position.

It also provides guidance on measurement, classification, interest, penalties

and disclosure.

We have no uncertain tax positions at either December 31, 2022 or December 31, 2021.

AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK.

are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide this information.

STATEMENTS AND SUPPLEMENTARY DATA.

financial statements of the Company are set forth at the end of this Form 10-K.

IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

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

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

estimate of undiscounted cash flows.

Stock-Based Compensation

We recognize stock-based compensation expense associated

with restricted stock units and options.

We account 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 our common stock on the grant date.

Stock-based compensation

related to options is the fair value of the option recognized over the vesting period.

The fair value of an option is determined using

the Black-Scholes option valuation with the following assumption inputs:

dividend yield, expected annual volatility, risk free interest

rate and an expected life.

Income Taxes and Uncertain Tax Positions

Our tax provision is based upon the tax laws and rates

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

As part of the process of preparing the

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

This process involves estimating the actual

current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation,

amortization and certain accrued liabilities for tax and accounting purposes.

Deferred tax expense or benefit represents the change

in the balance of deferred tax assets or liabilities.

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

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

At December 31, 2023 and 2022, a valuation allowance

for deferred tax assets was recorded.

Management applies the accounting standards related

to uncertainty in income taxes.

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

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

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

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

of the position.

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

We have no uncertain tax

positions at either December 31, 2023 or December 31, 2022.

AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are a smaller reporting company as defined by Rule

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

FINANCIAL STATEMENTS

AND SUPPLEMENTARY DATA.

The financial statements of the Company are set forth

at the end of this Form 10-K.

CHANGES IN AND DISAGREEMENTS WITH

ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis