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 were effective, as of the end of the period covered by this report, in ensuring the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosure. Remediation of Material Weakness in Internal Control over Financial Reporting 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 2021, 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. At December 31, 2022 and 2021, management believed 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 amounted to a material weakness in its internal control over financial reporting. As of December 31, 2023, management has evaluated the material weakness described above and believes that its design and implementation of internal control over financial reporting to remediate the aforementioned material weakness and enhance the Company’s internal control environment has been achieved through the strengthening of its accounting resources 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 were implemented in 2023. The Company has continued to use the services of the outside company to assist in its assessment of internal controls. Additionally, in December 2022, we had a change in the Chief Accounting Officer although the former Chief Accounting Officer continued to assist the Company on a part-time basis in the first half of 2023. In addition to continuing to enhance and refine control design, management added additional resources and focused efforts during 2023 to test the operational effectiveness of the controls that were established. In May 2023, we hired an additional accounting resource who serves as Controller. Based on the foregoing remediation activities and testing of controls, management concluded that the material weakness has been fully remediated. Inherent Limitations on Effectiveness of Controls The Company’s discl osure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their desired objectives. Management recognizes that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of their inherent limitations, disclosure controls and procedures and internal control over financial reporting may not prevent or detect all errors or misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation . 31 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 is effective as of December 31, 2023. Changes in Internal Control 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 2023 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 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. The Company was not informed by any of its directors or Section 16 officers of the adoption or termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Item 408 of Regulation S-K, during the fourth quarter of 2023. ITEM 9C.  DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. 32 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 2024 annual meeting of stockholders (“2024 Proxy Statement”) to be filed with the SEC no later than 120 days following the fiscal year ended December 31, 2023. ITEM 11.  EXECUTIVE COMPENSATION. The information called for by this Item 11 is incorporated herein by reference to our 2024 Proxy Statement to be filed with the SEC no later than 120 days following the fiscal year ended December 31, 2023. 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 2024 Proxy Statement to be filed with the SEC no later than 120 days following the fiscal year ended December 31, 2023. 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 2024 Proxy Statement to be filed with the SEC no later than 120 days following the fiscal year ended December 31, 2023. ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information called for by this Item 14 is incorporated herein by reference to our 2024 Proxy Statement to be filed with the SEC no later than 120 days following the fiscal year ended December 31, 2023. 33 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 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). 10.1* Empire Petroleum Corporation 2019 Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K dated April 3, 2019, which was filed on April 9, 2019). 10.2* Form of Non-Qualified Stock Option Award Agreement (incorporated herein by reference to Exhibit 10.2 to the Company's Form 8-K dated April 3, 2019, which was filed on April 9, 2019). 10.3 Senior Revolver Loan Agreement dated as of September 20, 2018 by and between Empire Louisiana, LLC and CrossFirst Bank (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated September 20, 2018 filed on September 25, 2018). 10.4 First Amendment to Senior Revolver Loan Agreement, dated as of March 27, 2019, by and between Empire Louisiana LLC, Empire North Dakota LLC and CrossFirst Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated March 27, 2019, which was filed on April 2, 2019). 10.5 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). 10.6 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). 34 10.7 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). 10.8 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). 10.9 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). 10.10 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). 10.11* 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). 10.12* 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). 10.13 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). 10.14 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). 10.15 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). 10.16* 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). 10.17 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). 10.18* 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). 10.19* 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). 10.20* 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). 10.21* 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). 10.22* 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). 10.23* Empire Petroleum Corporation 2023 Stock and Incentive Compensation Plan (incorporated herein by reference to Annex A to the Company’s Proxy Statement on Schedule 14A filed on May 1, 2023). 10.24 Shared Services Agreement, dated as of August 1, 2023, by and between PIE Operating, LLC and Empire Petroleum Corporation (incorporated herein by reference to Exhibit 10.8 to the Company’s Form 10-Q for the quarter ended September 30, 2023, which was filed on November 13, 2023). 35 10.25 Empire North Dakota LLC Promissory Note Due October 31, 2023 in the original aggregate principal amount of $5.0 million in favor of Phil Mulacek (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated September 19, 2023, which was filed on September 25, 2023). 10.26 Empire North Dakota LLC Promissory Note Due October 31, 2023 in the original aggregate principal amount of $5.0 million 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 19, 2023, which was filed on September 25, 2023). 10.27 Commercial Guaranty Agreement, dated as of September 19, 2023, issued by Empire Petroleum Corporation in favor of Phil Mulacek (incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K dated September 19, 2023, which was filed on September 25, 2023). 10.28 Commercial Guaranty Agreement, dated as of September 19, 2023, issued by Empire Petroleum Corporation in favor of Energy Evolution Master Fund, Ltd. (incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K dated September 19, 2023, which was filed on September 25, 2023). 10.29 Letter Agreement amending Senior Revolver Loan Agreement, dated as of September 19, 2023, by and among Empire Louisiana LLC and Empire North Dakota LLC, as borrowers, Empire Petroleum Corporation, as guarantor, and CrossFirst Bank, as lender (incorporated herein by reference to Exhibit 10.5 to the Company’s Form 8-K dated September 19, 2023, which was filed on September 25, 2023). 10.30 Subordination Agreement, dated as of September 19, 2023, by and among Phil Mulacek, Energy Evolution Master Fund, Ltd. and Empire North Dakota LLC in favor of CrossFirst Bank (incorporated herein by reference to Exhibit 10.6 to the Company’s Form 8-K dated September 19, 2023, which was filed on September 25, 2023). 10.31 Letter Amendment amending the Empire North Dakota LLC Promissory Notes Due October 31, 2023, dated as of October 31, 2023, by and among Phil Mulacek and Energy Evolution Master Fund, Ltd., as investors, Empire North Dakota LLC, as borrower, and Empire Petroleum Corporation, as guarantor (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated October 31, 2023, which was filed on November 1, 2023). 10.32 Empire North Dakota LLC Amended and Restated Promissory Note Due December 31, 2024 in the original aggregate principal amount of $5.0 million in favor of Phil Mulacek (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated November 9, 2023, which was filed on November 13, 2023). 10.33 Empire North Dakota LLC Amended and Restated Promissory Note Due December 31, 2024 in the original aggregate principal amount of $5.0 million in favor of Energy Evolution Master Fund, Ltd. (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated November 9, 2023, which was filed on November 13, 2023). 10.34 Securities Purchase Agreement, dated as of November 29, 2023, by and between Phil Mulacek and Empire Petroleum Corporation (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated November 29, 2023, which was filed on November 29, 2023). 10.35 Letter Amendment to Securities Purchase Agreement, dated as of December 1, 2023, by and between Phil Mulacek and Empire Petroleum Corporation (incorporated herein by reference to Exhibit 10 to the Company’s Form 8-K dated December 1, 2023, which was filed on December 1, 2023). 10.36 Securities Purchase Agreement, dated as of November 29, 2023, by and between Energy Evolution Master Fund, Ltd. and Empire Petroleum Corporation (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated November 29, 2023, which was filed on November 29, 2023). 10.37 Revolver Loan Agreement, dated as of December 29, 2023, by and between Empire North Dakota LLC and Empire ND Acquisition LLC, as borrowers, and Equity Bank, as lender (incorporated herein by reference to Exhibit 10 to the Company’s Form 8-K dated December 29, 2023, which was filed on January 5, 2024). 10.38 Empire Petroleum Corporation Promissory Note Due February 15, 2026 in the aggregate principal amount of $5.0 million in favor of Energy Evolution Master Fund, Ltd. (incorporated herein by reference to Exhibit 10 to the Company’s Form 8-K dated February 16, 2024, which was filed on February 21, 2024). 21 Subsidiaries of Empire Petroleum Corporation (submitted herewith). 36 23.1 Consent of Grant Thornton LLP (submitted herewith). 23.2 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 Stephen L. Faulkner, Jr., Chief Financial Officer (submitted herewith). 32.1 Section 1350 Certification of Michael R. Morrisett, Chief Executive Officer (submitted herewith). 32.2 Section 1350 Certification of Stephen L. Faulkner, Jr., Chief Financial Officer (submitted herewith). 97* Empire Petroleum Corporation Policy for the Recovery of Erroneously Awarded Compensation (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. 37 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 28, 2024 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 28, 2024 MICHAEL R. MORRISETT (Principal Executive Officer) /s/ Stephen L. Faulkner, Jr. Chief Financial Officer and Chief Accounting Officer March 28, 2024 STEPHEN L. FAULKNER, JR. (Principal Financial Officer and Principal Accounting Officer) /s/ Phil E. Mulacek Director and Chairman of the Board March 28, 2024 PHIL E. MULACEK /s/ Andrew L. Lewis Director March 28, 2024 ANDREW L. LEWIS /s/ Mason H. Matschke Director March 28, 2024 MASON H. MATSCHKE /s/ Benjamin J. Marchive II Director March 28, 2024 BENJAMIN J. MARCHIVE II /s/ J. Kevin Vann Director March 28, 2024 J. KEVIN VANN 38 EMPIRE PETROLEUM CORPORATION CONSOLIDATED FINANCIAL STATEMENTS CONTENTS Page No. Report of Independent Registered Public Accounting Firm – Grant Thornton LLP (PCAOB ID Number 248 ) 40 Consolidated Balance Sheets as of December 31, 2023 and 2022 41 Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 42 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2023 and 2022 43 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 44 Notes to Consolidated Financial Statements 45 39 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 sheets of Empire Petroleum Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, 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 audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. 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 28, 2024 40 EMPIRE PETROLEUM CORPORATION CONSOLIDATED BALANCE SHEETS As of December 31, 2023 2022 ASSETS Current Assets: Cash $ 7,792,508 $ 11,944,442 Accounts Receivable 8,354,636 7,780,239 Derivative Instruments 406,806 121,584 Inventory 1,433,454 1,840,274 Prepaids 757,500 1,048,434 Total Current Assets 18,744,904 22,734,973 Property and Equipment: Oil and Natural Gas Properties, Successful Efforts 93,509,803 63,986,339 Less: Accumulated Depreciation, Depletion and Impairment ( 22,996,805 ) ( 20,116,696 ) Total Oil and Gas Properties, Net 70,512,998 43,869,643 Other Property and Equipment, Net 1,883,211 1,441,529 Total Property and Equipment, Net 72,396,209 45,311,172 Sinking Fund — 2,779,000 Other Noncurrent Assets 1,474,503 719,930 Total Assets $ 92,615,616 $ 71,545,075 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts Payable $ 16,437,219 $ 5,843,366 Accrued Expenses 7,075,302 9,461,010 Current Portion of Lease Liability 432,822 256,975 Current Portion of Note Payable - Related Party (Note 4 and 7) 1,060,004 — Current Portion of Long-Term Debt 44,225 2,059,309 Total Current Liabilities 25,049,572 17,620,660 Long-Term Debt 4,596,775 4,063,115 Long-Term Note Payable - Related Party (Note 4 and 7) — 1,076,987 Long Term Lease Liability 544,382 547,692 Asset Retirement Obligations 27,468,427 25,000,740 Total Liabilities 57,659,156 48,309,194 Commitments and Contingencies (Note 16) Stockholders' Equity: Series A Preferred Stock - $ .001 Par Value, 10,000,000 Shares Authorized, 6 and 6 Shares Issued and Outstanding, Respectively — — Common Stock - $ .001 Par Value 190,000,000 Shares Authorized, 25,503,530 and 22,093,503 Shares Issued and Outstanding, Respectively 85,025 81,615 Additional Paid-in-Capital 99,490,253 75,303,479 Accumulated Deficit ( 64,618,818 ) ( 52,149,213 ) Total Stockholders' Equity 34,956,460 23,235,881 Total Liabilities and Stockholders' Equity $ 92,615,616 $ 71,545,075 See accompanying notes to consolidated financial statements. 41 EMPIRE PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2023 2022 Revenue: Oil Sales $ 36,684,494 $ 44,978,554 Gas Sales 1,726,754 4,534,370 NGL Sales 1,660,256 3,659,451 Total Product Revenues 40,071,504 53,172,375 Other 70,480 102,429 Gain (Loss) on Derivatives ( 65,693 ) ( 387,930 ) Total Revenue 40,076,291 52,886,874 Costs and Expenses: Lease Operating Expense 28,625,481 23,584,039 Production and Ad Valorem Taxes 3,044,411 3,943,466 Depletion, Depreciation & Amortization 3,096,533 1,949,191 Accretion of Asset Retirement Obligation 1,756,022 1,357,906 Impairment — 936,620 General and Administrative 15,178,935 12,331,489 Total Cost and Expenses 51,701,382 44,102,711 Operating Income (Loss) ( 11,625,091 ) 8,784,163 Other Income and (Expense): Interest Expense ( 1,000,427 ) ( 509,540 ) Other Income (Expense) 23,721 ( 981,595 ) Income (Loss) Before Taxes ( 12,601,797 ) 7,293,028 Income Tax (Provision) Benefit 132,192 ( 208,898 ) Net Income (Loss) $ ( 12,469,605 ) $ 7,084,130 Net Income (Loss) per Common Share: Basic $ ( 0.55 ) $ 0.34 Diluted $ ( 0.55 ) $ 0.30 Weighted Average Number of Common Shares Outstanding: Basic 22,718,890 21,003,563 Diluted 22,718,890 23,387,646 See accompanying notes to consolidated financial statements. 42 EMPIRE PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 2023 and 2022 Common Stock Preferred Stock Shares Par Value Shares Par Value Additional Paid-in-Capital Accumulated Deficit Total 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-Based Compensation 299,695 300 — — 2,716,452 — 2,716,752 Warrants Exercised 1,953,160 1,953 — — 3,598,887 — 3,600,840 Balances, December 31, 2022 22,093,503 81,615 6 — 75,303,479 ( 52,149,213 ) 23,235,881 Net Loss — — — — — ( 12,469,605 ) ( 12,469,605 ) Impact of Former CEO Settlement — — — — ( 2,126,131 ) — ( 2,126,131 ) Stock Issued for Purchase Option (See Note 3) 67,000 67 — — 600,990 — 601,057 Warrants Exercised 500,000 500 — — 2,499,500 — 2,500,000 Issuance of Shares for Redemption of Notes 1,263,664 1,264 — — 10,108,048 — 10,109,312 Issuance of Shares in Private Transaction 1,234,013 1,234 — — 9,959,962 — 9,961,196 Stock-Based Compensation 345,350 345 — — 3,144,405 — 3,144,750 Balances, December 31, 2023 25,503,530 85,025 6 — 99,490,253 ( 64,618,818 ) 34,956,460 See accompanying notes to consolidated financial statements. 43 EMPIRE PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2023 2022 Cash Flows From Operating Activities: Net Income (Loss) $ ( 12,469,605 ) $ 7,084,130 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By Operating Activities: Stock-Based Compensation 3,144,750 2,716,752 Amortization of Right of Use Assets 423,689 263,847 Depreciation, Depletion and Amortization 3,096,533 1,949,191 Accretion of Asset Retirement Obligation 1,756,022 1,357,906 Loss on Derivatives 65,693 387,930 Settlement on or Purchases of Derivative Instruments ( 353,695 ) ( 260,266 ) Impairment — 936,620 Loss on XTO Final Settlement — 1,448,363 PIE-Related Expense (See Note 4) — 1,399,030 Change in Operating Assets and Liabilities: Accounts Receivable ( 2,700,528 ) ( 1,812,230 ) Inventory, Oil in Tanks ( 160,827 ) ( 802,394 ) Prepaids, Current 745,648 ( 369,312 ) Accounts Payable 751,355 526,682 Accrued Expenses ( 3,082,928 ) 3,616,826 Other Long Term Assets and Liabilities ( 1,103,607 ) ( 387,292 ) Net Cash Provided By (Used In) Operating Activities ( 9,887,500 ) 18,055,783 Cash Flows from Investing Activities: Acquisition of Oil and Natural Gas Properties ( 2,094,419 ) ( 2,702,613 ) Capital Expenditures - Oil and Natural Gas Properties (a) ( 14,546,873 ) ( 10,161,711 ) Purchase of Other Fixed Assets ( 352,851 ) ( 311,229 ) Cash Paid for Right of Use Assets ( 552,196 ) ( 268,934 ) Sinking Fund Deposit 2,779,000 2,031,000 Net Cash Used In Investing Activities ( 14,767,339 ) ( 11,413,487 ) Cash Flows from Financing Activities: Proceeds from Debt Issued 14,492,484 — Principal Payments of Debt ( 6,450,774 ) ( 1,699,840 ) Proceeds from Stock Issuance and Warrant Exercises 12,461,195 3,390,115 Net Cash Provided By Financing Activities 20,502,905 1,690,275 Net Change in Cash ( 4,151,934 ) 8,332,571 Cash - Beginning of Period 11,944,442 3,611,871 Cash - End of Period $ 7,792,508 $ 11,944,442 Supplemental Cash Flow Information: Cash Paid for Interest $ 650,637 $ 473,205 _______ (a) Incurred capital expenditures were $25,053,107 and $11,206,207 for the respective periods. The differences between incurred and cash capital expenditures is due to changes in related accounts payable. See accompanying notes to consolidated financial statements. 44 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 New Mexico LLC d/b/a Green Tree New Mexico ○ Empire EMSU LLC ○ Empire EMSU-B LLC ○ Empire AGU LLC ○ Empire NM Assets LLC • Empire Rockies Region ○ Empire North Dakota LLC (“Empire North Dakota”) ○ Empire ND Acquisition LLC (“Empire NDA”) • Empire Texas (“Empire Texas”), consisting of the following entities: ○ Empire Texas LLC ○ Empire Texas Operating LLC ○ Empire Texas GP LLC ○ 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. Liquidity and Going Concern The Company determined that it was not in compliance with the current ratio covenant contained in its revolving line of credit agreement as of December 31, 2023 (see Note 7). Upon discovering this issue, we notified the lender to request a waiver. The noncompliance is due to a higher level of payables related to the capital spending program in North Dakota. On March 27, 2024, the Company obtained a compliance waiver from the lender for December 31, 2023. The Company will require funds to satisfy these payables related to the capital spending program which are greater than estimated cash flows from operations over the next 12 months. The Company intends and has announced a subscription rights offering (“Rights Offering”) to raise additional funds for the payables discussed above as well as the additional capital spending in 2024. In March 2024, the Company commenced a Rights Offering pursuant to which it intends to raise gross proceeds of up to approximately $25.0 million (see Note 18). As a result of a subsequent reduction in the subscription price per share, gross proceeds are now expected to be up to approximately $20.66 million. Phil Mulacek and Energy Evolution Master Fund, Ltd (“Energy Evolution”), both related parties of the Company (see Note 15) and our largest stockholders collectively holding 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. They have each also indicated that they intend to exercise their over-subscription rights to purchase their pro rata share of the underlying securities related to the Rights Offering that remain unsubscribed at the expiration date of the Rights Offering. The Rights Offering will not close until April 2024. As such, it is likely that the Company would not be in technical compliance with this same covenant as of March 31, 2024; however, in the opinion of the Company this would be cured within the allowable period under the Credit Facility at the close of the Rights Offering. Management has initiated plans that will allow the Company to remain in compliance with this covenant. The Company as stated above, has indications from existing stockholders for a majority portion of the Rights Offering. Management has considered these plans, including if they are within the control of the Company, in evaluating ASC 205-40, Presentation of Financial Statements-Going Concern . Management believes the above actions are sufficient to allow the Company to meet its obligations as they become due for a period of at least 12 months from the issuance of these financial statements. Management believes that the Rights Offering is probable and this has alleviated the substantial doubt regarding the Company’s ability to continue as a going concern. 45 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. Out of Period Adjustments 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 4. 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. 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 credit losses account only after all collection attempts have been exhausted. The Company did not have an allowance for credit losses at either December 31, 2023 or 2022. The Company’s accounts receivable as of December 31, 2023 and 2022 are as follows: Schedule of account receivable 2023 2022 Oil, Gas and NGL Receivables $ 2,784,745 $ 3,060,341 Joint Interest Billings 5,444,331 2,057,719 Receivable from Former CEO (See Note 14) — 2,130,614 Other 125,560 531,565 Total Accounts Receivable $ 8,354,636 $ 7,780,239 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. 46 Inventory Inventory primarily 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. 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. Debt Issuance Costs Debt issuance fees, which are recorded at cost, net of amortization, are amortized over the life of the respective debt agreements utilizing the straight-line method. Unamortized debt issuance costs related to the Company’s credit facility are recorded in other noncurrent assets on the Company’s Consolidated Balance Sheet. 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, r evenues 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 47 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. 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, 2023 and 2022, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material. Stock-Based Compensation The Company recognizes stock-based compensation expense associated with equity-based incentive awards consisting of stock options and restricted stock units. The Company accounts for forfeitures of equity-based incentive awards as they occur. Stock-based compensation expense related to equity-based awards is generally recognized as vesting occurs. See Note 10 for further discussion. 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. 48 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, 2023 and 2022. 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 and generally represent Level 2 fair values. 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. The fair value of the amount outstanding on our credit facility is equivalent to the carrying value due to the variable interest rate on such facility. 49 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 June 2016, the FASB issued Accounting Standards Update ("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 adoption of this ASU on January 1, 2023 by the Company did not have a material impact on the Company’s consolidated financial statements since the Company does not have a history of material credit losses. 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 currently expect a material impact as a result of adopting these standards. Note 3 – Property The capitalized costs of oil and natural gas properties as of December 31, 2023 and 2022 are as follows: 2023 2022 Proved Properties $ 75,346,623 $ 52,831,131 Unproved Properties 3,245,431 2,865,556 Work in process 14,917,749 8,289,652 Gross capitalized costs 93,509,803 63,986,339 Depreciation, Depletion, Amortization and Impairment ( 22,996,805 ) ( 20,116,696 ) Total Oil and Gas Properties, Net $ 70,512,998 $ 43,869,643 On August 9, 2023, the Company and a subsidiary of Energy Evolution Master Fund, Ltd. (“Energy Evolution”), a related party, collectively acquired additional working interests in certain of the Company’s New Mexico properties. The Company paid $ 2.1 million in cash and acquired 10% of the total acquired working interests in the transaction. The subsidiary of Energy Evolution acquired the other 90% of the acquired working interest ("EEF Interest”). The Company has a one-year option to acquire the EEF Interest for $ 5 million, subject to adjustments ("Purchase Option”). In exchange for the Purchase Option, the Company issued 67,000 shares of common stock valued at approximately $ 601,000 and reflected in Other Noncurrent Assets. The Company has the right to extend the initial one-year Purchase Option period for two successive one-year periods by agreeing to issue an additional 42,000 shares of common stock prior to the end of the one-year period then in effect. The Purchase Option may be exercised by the Company at any time during the one-year period then in effect by sending written notice to Energy Evolution prior to the expiration of such one-year period. 50 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. The Company did not identify any impairments in 2023. 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 . 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, 2023 and 2022 are as follows: 2023 2022 Other property and equipment, at cost $ 2,998,018 1,878,325 Less: accumulated depreciation ( 1,114,807 ) ( 436,796 ) Oher property and equipment, net $ 1,883,211 $ 1,441,529 Note 4 – Joint Development and Shared Services Agreements 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, 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, 2023 and 2022 approximately $ 1,100,000 was outstanding on this loan and is included in Current Portion of Note Payable – Related Party and Long-Term Note Payable – Related Party on the Consolidated Balance Sheet, respectively. 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 7). 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. The Company has also entered into a Shared Services Agreement with PIE effective August 1, 2023 that includes access to administrative, engineering and support services as well as building and insurance services. The agreement provides that the Company will reimburse PIE for the out-of-pocket or actual costs incurred by PIE in providing such services to the Company. Note 5 – 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. 51 The Company’s asset retirement obligation transactions during the years ended December 31, 2023 and 2022 are summarized in the table below. For the Year Ended December 31, 2023 2022 Asset retirement obligations, beginning of period $ 25,000,740 $ 20,640,599 Liabilities assumed in acquisitions 72,000 502,539 Revisions 2,303,938 2,660,653 Liabilities settled ( 964,274 ) ( 160,957 ) Accretion expense 1,756,023 1,357,906 Asset retirement obligation, end of period $ 28,168,427 $ 25,000,740 Less current portion included in Accrued Expenses 700,000 — Asset retirement obligation, long-term $ 27,468,427 $ 25,000,740 The revisions in 2023 primarily reflect cost revision estimates to wells in New Mexico based on 2023 plugging activity. The revisions in 2022 primarily relate to the identification of nonproducing wells, including injection wells and temporarily abandoned wells in New Mexico. Note 6 – 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 swaps and 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. These contracts are recognized and recorded at fair value 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, 2023 and 2022: For the Year Ended December 31, 2023 2022 Gain (loss) on derivatives: Oil derivatives $ ( 65,693 ) $ ( 387,930 ) The following represents the Company’s net cash receipts from (payments on) derivatives for the years ended December, 2023 and 2022: For the Year Ended December 31, 2023 2022 Oil derivatives $ ( 353,695 ) $ ( 260,266 ) The following table sets forth the Company’s outstanding derivative contracts at December 31, 2023: 1st Quarter 2024 2nd Quarter 2024 3rd Quarter 2024 4th Quarter 2024 2024 WTI Fixed-Price Swaps: Quarterly volume (MBbls) 38.00 30.00 30.00 30.00 Weighted-average fixed price (Bbl) $ 74.01 $ 72.15 $ 77.02 $ 75.57 52 Note 7 – Debt and Note Payable - Related Party The following table represents the Company’s outstanding debt. As of December 31, 2023 2022 Equity Bank Credit Facility $ 4,492,484 $ — CrossFirst Senior Revolver Loan Agreement — 5,869,500 Note Payable – Related Party 1,060,004 1,076,987 Equipment and vehicle notes, 0.00 % to 9.00 % interest rates, due in 2025 to 2028 with monthly payments ranging from $ 900 to $ 1,400 per month 148,516 252,924 Total Debt 5,701,004 7,199,411 Less: Current Maturities ( 44,225 ) ( 2,059,309 ) Less: Note Payable – Related Party ( 1,060,004 ) ( 1,076,987 ) Long-Term Debt $ 4,596,775 $ 4,063,115 On December 29, 2023, Empire North Dakota and Empire NDA ("Borrowers”), entered into a Revolver Loan Agreement with Equity Bank (the "Credit Facility”). Pursuant to the Credit Facility (a) the initial revolver commitment amount is $10,000,000; (b) the maximum revolver commitment amount is $15,000,000; (c) commencing on January 31, 2024, and occurring on the last day of each calendar month thereafter, the revolver commitment amount is reduced by $150,000; (d) commencing on March 31, 2024, there are scheduled semiannual collateral borrowing base redeterminations each year on March 31 and September 30; (e) the final maturity date is December 29, 2026; (f) outstanding borrowings bear interest at a rate equal to the prime rate of interest plus 1.50%, and in no event lower than 8.50%; (g) a quarterly commitment fee is based on the unused portion of the commitments; and (h) Borrowers have the right to prepay loans under the Credit Facility at any time without a prepayment penalty. The Credit Facility is guaranteed by the Company. Borrowers entered into a security agreement, pursuant to which the obligations under the Credit Facility are secured by liens on substantially all of the assets of Borrowers. Furthermore, the obligations under the Credit Facility are secured by a continuing, first priority mortgage lien, pledge of and security interest in not less than 80% of Borrowers’ producing oil, gas and other leasehold and mineral interests, including without limitation, those situated in the States of North Dakota and Montana. The Credit Facility requires Borrowers to, commencing as of the fiscal quarter ended December 31, 2023, maintain (a) a current ratio of 1.0 to 1.0 or more and (b) a ratio of funded debt to EBITDAX, calculated quarterly and annually based on a trailing twelve-month basis, of no more than 3.50 to 1.00. At December 31, 2023, the Borrowers were not in compliance with the current ratio, however, a waiver was obtained from the lender. The Company is in compliance with the other covenants as of December 31, 2023. 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 could be advanced under the Amended Agreement was $ 20,000,000 and the commitment amount following an August 9, 2023 amendment agreement was $ 5,180,000 . The Amended Agreement was subsequently retired with proceeds from the new Credit Facility discussed above. On September 19, 2023, each of Phil Mulacek, a member of the Company’s Board of Dierctors, and Energy Evolution made a bridge loan to Empire North Dakota in the amount of $ 5.0 million (collectively, the "Bridge Loans”). These Bridge Loans were subsequently converted to our common shares. Mr. Mulacek and Energy Evolution are each a related party of the Company. See Note 15 for additional information regarding these Bridge Loans and the subsequent conversion to our common shares. Note Payable - Related Party In August 2020, concurrent with the JDA with 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, 2023, $1,060,004 has been advanced from the PIE loan. 53 Note 8 – Leases As a lessee, the Company leases its corporate office headquarters in Tulsa, Oklahoma and one field office. The leases expire between 2024 and 2028. 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 also leases vehicles primarily for use by our field operations. These vehicle leases typically have a three-year life. 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 $ 424,000 and $ 267,000 for the years ended December 31, 2023 and 2022, respectively. Cash paid for right of use lease was approximately $ 404,000 and $ 268,000 for the same period. Supplemental balance sheet information related to the right of use leases is as follows: Schedule of right of use leases As of December 31, 2023 2022 Net operating lease asset (included in Other Property and Equipment) $ 1,077,031 $ 776,219 Current portion of lease liability $ 432,822 $ 256,975 Long-term lease liability 544,382 547,692 Total right of use lease liabilities $ 977,204 $ 804,667 The weighted average remaining term for the Company’s right of use leases is 2.28 years. The weighted average discount rate was 8.56 % in 2023. Maturities of lease liabilities as of December 31, 2023 are as follows: 2024 $ 498,654 2025 430,631 2026 136,545 2027 12,400 2028 — Thereafter — Total lease payments 1,078,230 Less imputed interest ( 101,026 ) Total lease obligation $ 977,204 Note 9 – 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 Company’s 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 Company’s 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 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 Energy Evolution. For so long as the Series 54 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 of the Company and one of the principals of Energy Evolution, as Energy Evolution’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. 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. 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 with that day being 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 such warrants 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 (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 55 common stock, conversion feature, and warrants was $ 10,125,177 . In September 2021, the Company and Energy Evolution 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. In July 2023, Energy Evolution exercised its remaining warrants for 500,000 shares of common stock for $5.00 per share. The Company received $2.5 million related to this transaction. See Note 15 for information regarding Bridge Loans issued from two related parties that were subsequently converted to our common shares and additional shares purchased with cash by those same parties. Note 10 – 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 . 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. As a result of such approval, no further awards will be made under the 2019 Incentive Plan. The total number of shares of common stock that could be issued pursuant to the 2021 Incentive Plan is 750,000 . 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. On June 9, 2023, the stockholders of the Company approved the Company’s 2023 Stock and Incentive Compensation Plan (the “2023 Incentive Plan”) which reserves 700,000 shares of the Company’s common stock for issuance thereunder. As a result of such approval, no further awards will be made under the 2022 Incentive Plan. The 2023 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 note). At December 31, 2023, 436,935 shares of our common stock were available for future grants. Stock-based compensation expense for restricted stock units and stock options 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. 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. RSUs are generally granted with 12-month, 13-month, or 3 year service periods. Total value assigned to the RSUs granted in 2023 based on grant date price approximated $ 1,837,000 . For the year ended December 31, 2023 and 2022, approximately $ 2,271,000 and $ 1,227,000 of compensation expense related to RSUs was recognized. At December 31, 2023, approximately $ 1,230,000 of unrecognized compensation expense remained and 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: Weighted Average Shares Fair Value (a) Outstanding, December 31, 2021 — $ — Granted 224,288 15.42 Vested — — Outstanding, December 31, 2022 224,288 $ 15.42 Granted 180,430 10.33 Vested ( 145,700 ) 16.20 Forfeited ( 54,201 ) 14.57 Outstanding, December 31, 2023 204,817 $ 10.61 _______ (a) Shares are valued at the grant-date market price. 56 2023 Weighted Average grant date fair value of restricted stock units granted during the year, per share $ 10.33 Total fair value of restricted stock units vested during the year $ 2,286,464 Stock Options Each stock option award provides the opportunity in the future to purchase Empire common shares at the market price of our common stock on the date the award is granted (the strike price). The options generally become exercisable in equal amounts over a three-year vesting period or over one-year for options awarded to the Board of Directors of the Company. Stock options have no financial statement effect on the date they are granted but rather are reflected over time through recording stock-based compensation expense. The stock-based compensation expense is based on the estimated fair value of the awards expected to vest, and that amount is amortized as compensation expense on a straight-line basis over the respective vesting period and is net of forfeitures, as incurred. The estimated fair value of an option is calculated using a Black-Scholes option valuation model with the following assumption inputs: dividend yield, expected annual volatility, risk free interest rate and an expected life of the option. The following table summarizes the weighted average fair value and assumptions for 2023 and 2022. 2023 2022 Weighted average grant-date fair value of stock options $ 4.52 $ 4.55 Stock Options Valuation Assumptions: Risk-free interest rate 3.9 % 1.6 % Dividend yield 0.0 % 0.0 % Expected volatility 64.9 % 56.0 % Expected option life (in years) 2.88 2.99 Other pricing model inputs: Weighted average grant-date market prices of Empire stock (strike price) $ 10.07 $ 11.80 For the year ended December 31, 2023 and 2022, approximately $ 874,000 and $ 1,458,000 of compensation expense related to stock options was recognized. At December 31, 2023, approximately $ 1,546,000 of unrecognized compensation expense remained and will be recognized on a straight-line basis depending on the service period of each grant. The following summary reflects stock option activity and related information: Weighted Average Options Exercise Price 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 Granted 533,000 10.07 Exercised ( 355,000 ) 1.35 Forfeited ( 492,319 ) 5.42 Outstanding, December 31, 2023 2,065,381 $ 4.89 The following table summarizes information about stock options outstanding as of December 31, 2023: Range of Options Weighted Average Weighted Options Weighted Exercise Outstanding Remaining Average Exercisable Average Prices at 12/31/23 Contractual Life Exercise Price at 12/31/23 Exercise Price $ 1.32 to $ 12.36 2,065,381 4.94 years $ 4.89 1,605,210 $ 3.09 57 Note 12 – Income Taxes The current and deferred income tax provision for the years ended December 31, 2023 and 2022 were comprised of the following: 2023 2022 Current $ ( 132,192 ) $ 208,898 Deferred — — Income tax provision $ ( 132,192 ) $ 208,898 In the event that an entity has an “ownership change” (as defined in Section 382 of the Internal Revenue Code of 1986, as amended ( “IRC”)), an entity’s federal net operating loss carryforwards (“NOLs”) generated prior to an ownership change would be subject to annual limitations, which could defer or eliminate the Company’s ability to utilize these tax losses against future taxable income. Generally, an “ownership change” occurs if one or more stockholders, each of whom owns 5% or more in value of a corporation’s stock, increase their aggregate percentage ownership by more than 50% over the lowest percentage of stock owned by those stockholders at any time during the preceding three-year period. A full Section 382 analysis was prepared in 2023 and it was determined that our NOLs were subject to limitations under IRC Section 382. The Company's ability to use NOLs and other tax attributes to reduce taxable income and income taxes could be materially impacted by a future IRC 382 ownership change. Future transactions involving the Company's stock including those outside of the Company's control could cause an IRC Section 382 ownership change resulting in a limitation on tax attributes currently not limited and a more restrictive limitation on tax attributes currently subject to the previous IRC 382 limitation. At December 31, 2023, the Company had approximately $ 24.3 million of federal NOLs generated in prior years available to offset against future taxable income, net of NOLs expected to expire unused due to IRC Section 382 limitations. Of the $24.3 million NOLs, approximately $ 23 million relate to periods after 2017 and have an indefinite life. Additionally, $ 1.3 million will begin to expire between 2023-2037 if not used. Approximately, $4.7 million of the NOLs were limited as of December 31, 2023 due to previous ownership changes. 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, 2023 and 2022 is as follows: 2023 2022 Deferred tax assets: Loss carry-forwards $ 6,269,503 $ 4,789,586 Right of use assets — 7,341 Stock option grants 2,022,184 1,369,105 Asset retirement obligation 7,433,670 6,616,407 Other 526,873 436,477 Total deferred tax assets 16,252,230 13,218,916 Deferred tax liabilities: Oil and Gas Properties ( 7,327,620 ) ( 5,552,159 ) Other property and equipment ( 123,915 ) ( 171,650 ) Derivatives ( 104,956 ) ( 31,369 ) Lease liabilities ( 25,133 ) — Other — ( 69,688 ) Total deferred tax liabilities ( 7,581,624 ) ( 5,824,866 ) Net deferred tax asset before valuation allowance 8,670,606 7,394,050 Valuation allowance ( 8,670,606 ) ( 7,394,050 ) Net deferred taxes $ — $ — Utilization of the Company’s loss carryforwards is dependent on realizing taxable income. The Company’s recorded valuation allowances of $ 8.7 million and $ 7.4 million as of December 31, 2023 and 2022, respectively, are 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 the limitation under Section 382 as discussed above. 58 Reconciliations of the tax provision (benefit) computed at the statutory federal rate to the Company’s total income tax benefit for the years ended December 31, 2023 and 2022 are as follows: 2023 2022 $ % $ % Provision (benefit) at statutory rate ( 2,646,378 ) 21.0 % 1,531,536 21.0 % State Taxes (net of federal impact) ( 598,191 ) 4.7 % 350,632 4.9 % Nondeductible Expenses 31,037 - 0.2 % 21,052 0.3 % Return to Accrual ( 72,448 ) 0.6 % ( 2,135,704 ) - 29.3 % NOLs Expected to Expire Unused Due to Section 382 Limitation 1,877,230 - 14.9 % — 0.0 % Valuation Allowance 1,276,558 - 10.1 % 441,382 6.1 % Income tax provision (benefit) ( 132,192 ) 1.0 % 208,898 2.9 % The Company has evaluated all tax positions for which the statute of limitations remains open and believes that the material positions taken would more likely than not be sustained by examination. Therefore, at December 31, 2023, the Company has not established any reserves for, nor recorded any unrecognized benefits related to uncertain tax positions. The Company’s only taxing jurisdiction is the United States (federal and state). The Company’s tax years 2020 to present remain open for federal examination. Additionally, tax years 2003 through 2019 remain subject to examination for the purpose of determining the amount of federal NOL and other carryforwards. The number of years open for state tax audits varies, depending on the state, but is generally from three to five years. Note 13 – 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. In addition, approximately 348,000 options were excluded due to the option exercise price exceeding the weighted-average market price of our common shares. The following table summarizes the calculation of income (loss) per share. 2023 2022 Net Income (Loss) $ ( 12,469,605 ) $ 7,084,130 Basic Weighted-Average Shares 22,718,890 21,003,563 Effect of Dilutive Securities: Restricted Stock Units and Stock Options (a) — 2,384,083 Diluted Weighted-Average Shares 22,718,890 23,387,646 Income (Loss) per Common Share Basic $ ( 0.55 ) $ 0.34 Diluted $ ( 0.55 ) $ 0.30 (a)       At December 31, 2023 the Company had approximately 1,361,200 RSUs and options that were excluded from the calculation of net income (loss) per share as their inclusion would be antidilutive due to a net loss for the period. (a) At December 31, 2023 the Company had approximately 1,361,200 RSUs and options that were excluded from the calculation of net income (loss) per share as their inclusion would be antidilutive due to a net loss for the period. Note 14 – Executive Separations 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. This was accrued as of March 31, 2023, and payment was made in April 2023. The Company also extended 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 RSUs 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 had a $ 2.1 million liability recorded at December 31, 2022, related to withholding payables that were remitted in 2023.  On March 17, 2023, the Board of Directors of the Company appointed Michael R. Morrisett to the position of Chief Executive Officer. Mr. Morrisett did not receive any additional compensation for assuming the role of Chief Executive Officer. In July 2023, the Company’s Chief Operating Officer separated from the Company and will receive severance of $ 145,000 over six months. Additionally, certain vested options were forfeited resulting in the reversal of $ 576,000 of previously recorded stock-based compensation. 59 Note 15 – Related Party Transactions Energy Evolution is a related party of the Company as it beneficially owns approximately 26.6 % of the Company’s outstanding shares of common stock as of December 31, 2023. Additionally, a board member of Energy Evolution was appointed to the Company’s Board of Directors in October 2021. This board member separately beneficially owns approximately 19.3 % of the Company’s outstanding shares of common stock as of December 31, 2023. This 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. The Company has a JDA with PIE to perform recompletion or workover on specified mutually agreed upon wells (See Note 4). As of December 31, 2023, the Company has incurred obligations of approximately $ 1.1 million as a part of the JDA. On November 29, 2023, the Company entered into a Securities Purchase Agreement with Phil Mulacek, which agreement was amended on December 1, 2023, pursuant to which Mr. Mulacek purchased from the Company (a) 609,013 shares of common stock of the Company for an aggregate purchase price of $5,000,000 (or $8.21 per share) in cash and (b) 631,832 shares of common stock of the Company for an aggregate purchase price of $5,054,658 (or $8.00 per share) which was paid through cancellation and extinguishment of the outstanding principal amount and all accrued interest thereon under that certain Amended and Restated Promissory Note due December 31, 2024, in the original aggregate principal amount of $5,000,000 issued by Empire North Dakota to Mr. Mulacek. On November 29, 2023, the Company entered into a Securities Purchase Agreement with Energy Evolution pursuant to which Energy Evolution purchased 1,256,832 shares of common stock of the Company for an aggregate purchase price of $10,054,658 (or $8.00 per share), of which $2,000,000 was advanced in cash to the Company on November 22, 2023, $3,000,000 was paid in cash to the Company and $5,054,658 was paid through cancellation and extinguishment of the outstanding principal amount and all accrued interest thereon under that certain Amended and Restated Promissory Note due December 31, 2024, in the original aggregate principal amount of $5,000,000 issued by Empire North Dakota to Energy Evolution. Accounts receivable on the Consolidated Balance Sheet includes approximately $ 895,000 receivable from Energy Evolution. Accrued Expenses includes approximately $ 452,000 of revenue payable to Energy Evolution. 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. 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, 2023, the Company sold 70 % of its oil, natural gas, and NGL to four customers. For the year ended December 31, 2022, the Company sold 68 % 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. 60 Note 18 – Subsequent Events Promissory Note On February 16, 2024, the Company issued a Promissory Note in the aggregate principal amount of $5,000,000 (the "Note”) to Energy Evolution. Energy Evolution has advanced the Company $5,000,000 under the Note. The proceeds of the Note will be used by the Company to fund, in part, its ongoing oil and gas drilling program and for working capital purposes. The Note matures on February 15, 2026 (the "Maturity Date”) and accrues interest at the rate of 7 % per annum. After the Maturity Date, any principal balance of the Note remaining unpaid accrues interest at the rate of 9% per annum. At the option of Energy Evolution, interest payments will be paid either in cash or in shares of common stock of the Company on each of the following dates (or if any such date is not a business day, the next following business day) (each an "Interest Payment Date”), except upon the occurrence of an Event of Default, in which case interest will accrue and be paid in cash on demand: (i) March 31, 2024; (ii) June 30, 2024; (iii) September 30, 2024; (iv) December 31, 2024; (v) March 31, 2025; (vi) June 30, 2025; (vii) September 30, 2025; (viii) December 31, 2025; and (ix) the Maturity Date. All or any portion of the outstanding principal amount of the Note may be converted into shares of common stock of the Company at a conversion price of $6.25 per share (the "Conversion Price”), at the option of Energy Evolution, at any time and from time to time. If the full principal amount of the Note is drawn and converted into shares of common stock of the Company, 800,000 shares would be issued (without giving effect to any interest that may be converted). Accrued interest on the principal amount converted will be due on the applicable date of conversion in cash or, at the option of Energy Evolution, by issuance of shares of common stock of the Company in the manner set forth in the Note (where the date of conversion is the relevant Interest Payment Date”). The Conversion Price is subject to customary adjustments. The Note may be prepaid at any time or from time to time without the consent of Energy Evolution and without penalty or premium, provided that the Company provides Energy Evolution with at least five business days prior written notice, each principal payment is made in cash and all accrued interest is paid in cash, or at the option of Energy Evolution, by issuance of shares of common stock of the Company in the manner set forth in the Note (where the Interest Payment Date is the date of prepayment). Rights Offering In March 2024, the Company announced that it has commenced a subscription rights offering (“Rights Offering”) pursuant to which it intends to raise gross proceeds of up to approximately $25.0 million. The Company has distributed at no charge to holders of its common stock, as of the close of business on March 7, 2024 (the record date for the Rights Offering), one subscription right for each share of Common Stock held. Each subscription right initially entitled the holder to purchase 0.161 shares of Common Stock at a subscription price of $6.05 per share per one whole share of Common Stock.  On March 28, 2024, the Company announced a reduction in the subscription price to $5.00 which results in gross proceeds to the Company of up to approximately $20.66 million. The subscription rights are non-transferable, and will not be listed for trading on any stock exchange or market. In addition, holders of subscription rights who fully exercise their subscription rights are entitled to over-subscribe for additional shares of Common Stock, subject to proration. The Rights Offering is expected to expire at 5:00 p.m., Eastern Time, on April 10, 2024, subject to extension or earlier termination. Phil Mulacek and Energy Evolution, both related parties of the Company (see Note 15) and our largest stockholders, 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. They have each also indicated that they intend to fully exercise their over-subscription rights to purchase their pro rata share of the underlying securities related to the Rights Offering that remain unsubscribed at the Expiration Date. 61 EMPIRE PETROLEUM CORPORATION Supplemental Information of Oil and Natural Gas Producing Activities (Unaudited) December 31, 2023 and 2022 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, 2023 2022 Acquisition $ 2,094,419 $ 2,702,613 Exploration — — Development 25,053,107 11,206,207 $ 27,147,526 $ 13,908,820 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, 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 Acquisition of Reserves 36 19 5 44 Revisions (1,625) (5,998) (960) (3,585) Extensions 175 — — 175 Production (488) (854) (136) (766) Balance, December 31, 2023 6,924 6,104 1,171 9,112 The 2023 acquisitions primarily relate to additional working interests in certain of the Company’s New Mexico properties (See Note 3). The 2022 acquisitions relate to small acquisition in our Rockies and New Mexico regions. The revisions in 2023 are primarily related to decreases in prices. 62 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, 2023 2022 Future cash inflows $ 543,067,776 $ 941,172,544 Future production costs (350,439,800 ) (509,154,924 ) Future development costs (42,475,160 ) (55,901,780 ) Future income tax expense (25,201,886 ) (90,724,632 ) Future net cash flows 124,950,930 285,391,208 10% annual discount for estimated timing of cash flows (41,934,370 ) (137,723,795 ) Standardized measure $ 83,016,560 $ 147,667,413 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: 2023 2022 Oil (BBl) $ 75.45 $ 91.14 Natural gas (MMBtu) $ 1.51 $ 4.23 NGLs (BBl) $ 9.82 $ 36.29 Changes in the Standardized Measure of Discounted Future Net Cash Flows at 10% per annum are as follows: December 31, 2023 2022 Beginning of year $ 147,667,413 $ 93,852,093 Net change in prices and production costs (71,619,375 ) 24,651,555 Net change in future development costs 3,314,220 (7,141,431 ) Oil & Gas net revenue (6,256,366 ) (21,418,327 ) Extensions 4,684,473 11,037,719 Acquisition of reserves 526,848 12,043,912 Revisions of previous quantity estimates (55,329,684 ) 46,871,217 Net change in taxes 33,317,731 (32,133,473 ) Accretion of discount 19,542,907 10,939,619 Changes in timing and other 7,168,393 8,964,529 End of year $ 83,016,560 $ 147,667,413 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. 63