Item 2. Management’s Discussion and Analysis
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q, including this section, includes certain statements that may be deemed “forward-looking statements” within the meaning of federal securities laws. All statements, other than statements of historical facts, which address activities, events, or developments that Empire expects, believes, or anticipates will or may occur in the future, including future sources of financing and other possible business developments, are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties and could be affected by a number of distinct factors, including Empire’s failure to secure short and long-term financing necessary to sustain and grow its operations, increased competition, changes in the markets in which Empire participates, the technology utilized by Empire, new legislation regarding environmental matters, general economic conditions including inflation, tariffs and interest rates, and uncertainties associated with legal and regulatory matters. These risks and other risks that could affect Empire’s business are more fully described in reports Empire files with the SEC, including its Annual Report on Form 10-K for the year ended December 31, 2025. Actual results may vary materially from the forward-looking statements. Empire undertakes no duty to update any of the forward-looking statements in this Form 10-Q.
Overview
Our primary business is the optimization and development of oil and gas properties. We have incurred losses from operations in 2026 and 2025. There is no assurance that we will be profitable or obtain the funds necessary to finance our future operations.
We seek to increase shareholder value by growing reserves, production, revenues, and cash flow from operating activities by executing our mission to use highly skilled personnel to thoughtfully and expertly spend capital to realize reserves on producing properties as well as further develop fields.
Management places emphasis on operating cash flow in managing our business, as operating cash flow considers the cash expenses incurred during the period and excludes non-cash expenditures not related directly to our operations.
Concentration
A majority of the Company’s producing properties and oil and natural gas reserves are located within three areas of the United States. Because of the concentration, the Company is exposed to the impact of regional supply and demand factors, processing or transportation capacity constraints, severe weather events, water shortages, and government regulations specific to the geographic area. The Company sells a large portion of its oil and natural gas production to a few customers. As a result of this concentration, we are exposed to the impact of our sales if one of these customers fails to meet their obligations or ceases its relationship with the Company. The loss in revenues may result in a disruption in the Company’s cash flows limiting the ability to meet its obligations or investing in capital projects.
Inflation
The effect of inflation on the Company has generally been to increase its cost of operations, general and administrative costs and direct costs associated with oil and natural gas production.
Properties
We are an independent operator in four geographic areas in the United States. For our operated properties, we manage and influence production using a combination of experienced field personnel and third-party service providers to execute our mission. Our producing properties have reasonably predictable production profiles and cash flows, subject to commodity price and cost fluctuations. As is common in the industry in which we operate, we selectively participate in drilling and developmental activities in non-operated properties. Decisions to participate in non-operated properties are made after technical and economic analysis of the projects which also considers the operating expertise and historical track record of the operators.
Seasonality of Business
Weather conditions often affect the demand for, and prices of, natural gas and can also delay oil and natural gas production. Demand for natural gas is traditionally higher in the winter, resulting in higher natural gas prices during the first and fourth quarters. Due to these seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of the results realized on an annual basis.
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Business Strategy
Our business strategy is to obtain long-term growth in reserves and cash flow on a cost-effective basis. Management regularly evaluates potential acquisitions of properties that would enhance current core areas of operation.
Critical Accounting Estimates
The preparation of financial statements in conformity with US GAAP requires management to use judgment to make estimates and assumptions that affect certain amounts reported in the unaudited interim consolidated financial statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts reported in the future. Because estimates and assumptions require significant judgment, future actual results could differ from those estimates and could have a significant impact on our results of operations, financial position and cash flows. We re-evaluate our estimates and assumptions at least on a quarterly basis and periodically update the estimates used in the preparation of the financial statements based on management’s latest assessment of the current and projected business and general economic environment. There have been no significant changes to Empire’s critical accounting estimates during the six months ended June 30, 2026.
LIQUIDITY AND CAPITAL RESOURCES
General
Empire’s primary sources of short-term liquidity are cash and cash equivalents, net cash provided by operating activities, our Credit Facility and issuance of debt or equity securities. Empire’s short- and long-term liquidity requirements consist primarily of capital expenditures, acquisitions of oil and natural gas properties, payments of contractual obligations, and working capital obligations. Funding for these requirements may be provided by any combination of Empire’s sources of liquidity. Although Empire expects that its sources of funding will be adequate to fund its liquidity requirements, no assurance can be given that such funding sources will be adequate to meet Empire’s future needs.
Liquidity
As noted below, our working capital is negative as of June 30, 2026, which is primarily the result of previous and unforeseen operational costs and lower production. As of June 30, 2026, we had approximately $3.1 million in cash on hand and approximately $2.0 million available under our Credit Facility; however, the Company’s available borrowing capacity under the Credit Facility continues to decrease due to a monthly reduction to the borrowing capacity under the Credit Facility. Mr. Mulacek also holds a warrant certificate issued in connection with a convertible note issued in September 2025. Finally, the Company received gross proceeds of $10.0 million from a rights offering in March 2026 and the potential of up to an additional $7.5 million less agency fees from an at-the-market offering pursuant to the sales agreement entered into in May 2026.
Despite these transactions, the Company will require additional funds to satisfy the payables discussed above which are greater than estimated cash flow from operations over the next 12 months. Energy Evolution and PIE, both related parties of Empire, have indicated that they will, and have the ability to, provide sufficient support to sustain the operating, investing, and financing activities of Empire, as necessary. Management continues to seek additional sources of capital via the debt or equity markets to improve liquidity going forward. See Liquidity and Going Concern in Note 1 of Notes to Unaudited Interim Condensed Consolidated Financial Statements for further discussion of management’s plans.
Empire expects to continue to incur costs related to drilling activities in core areas as well as future oil and natural gas acquisitions in core areas. During the first six months of 2026, Empire incurred approximately $4.0 million of total additions to oil and natural gas properties, primarily related to the gas development program in Texas. It is expected that Empire will use a combination of debt or equity issuances, cash on hand, and cash flows from operations to fund capital programs, ongoing operations, and any potential acquisitions.
Hedging Positions
We generally do not enter into derivative financial instruments for speculative or trading purposes. As of June 30, 2026, our remaining outstanding derivative financial instruments account for 58,000 Bbls at a blended price of $69.89 to help minimize expected pricing volatility and to strengthen forward cash flow visibility. Any additional derivative financial instruments Empire may enter into or anticipated production increases from our ongoing development projects will further strengthen Empire’s cash flows from operations.
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Working Capital
Working capital is presented in the table below. The change of approximately $0.2 million was primarily driven by a higher cash balance partially offset by the related party accounts payable further described in Note 13 – Related Party Transactions.
June 30,
December 31,
(in thousands)
2026
2025
Current Assets
$
11,989
$
8,180
Current Liabilities
28,338
24,342
Working Capital
$
(16,349)
$
(16,162)
Cash Flows
For the Six Months Ended June 30,
(in thousands)
2026
2025
Change
Cash flows provided by (used in):
Operating activities
$
(3,723)
$
(1,525)
$
(2,198)
Investing activities
(3,981)
(3,212)
(769)
Financing activities
9,639
4,779
4,860
Operating Activities
Cash used in operating activities increased period over period primarily due to lower production volumes.
Investing Activities
Investing activities are primarily related to approximately $3.6 million of additions to oil and natural gas properties during the first six months of 2026 from the Company’s gas development program in Texas compared to $3.2 million of additions in the prior year’s first six months associated with various projects in Texas and North Dakota.
Financing Activities
Financing activities in the first six months of 2026 include both a $2.0 million repayment and a $3.0 million borrowing on respective related party notes with Mr. Mulacek. We also completed a rights offering in March 2026 for net proceeds of approximately $9.9 million. In addition, we paid $1.0 million of the outstanding balance of our revolving credit facility in the first quarter of 2026.
Capital Resources
Capital Expenditures
For the six months ended June 30, 2026, Empire incurred approximately $4.0 million of total additions to oil and natural gas properties which is primarily from the Company’s gas development program in Texas.
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Production and Operating Data
The following table sets forth a summary of Empire’s production and operating data for the three and six months ended June 30, 2026 and 2025. Because of normal production declines, increased or decreased production due to future acquisitions, divestitures, development, and fluctuations in commodity prices, the historical information presented below should not be interpreted as being indicative of future results.
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2026
2025
2026
2025
Production and Operating Data:
Net Production Volumes:
Oil (Bbl)
116,316
135,854
228,633
255,489
Natural gas (Mcf)
124,061
237,133
359,578
437,001
Natural gas liquids (Bbl)
29,126
39,091
46,753
70,544
Total (Boe)
166,118
214,467
335,315
398,867
Average Price per Unit:
Oil (1)
$
58.26
$
58.92
$
61.57
$
62.84
Natural gas
$
(4.22)
$
0.93
$
(0.94)
$
1.76
Natural gas liquids
$
21.08
$
13.33
$
17.35
$
12.98
Total (2)
$
41.33
$
40.78
$
43.39
$
44.47
Operating Costs and Expenses per Boe:
Lease operating expense (excluding workovers)
$
26.38
$
27.56
$
26.59
$
28.31
Workovers
$
3.94
$
2.22
$
3.83
$
2.16
Total Lease operating expense
$
30.32
$
29.78
$
30.42
$
30.47
Production and ad valorem taxes
$
5.65
$
3.58
$
4.31
$
3.71
Depreciation, depletion, amortization and accretion
$
11.96
$
14.50
$
11.74
$
14.70
General and administrative (excluding stock-based compensation)
$
17.32
$
13.55
$
17.16
$
15.30
Stock-based compensation
$
1.26
$
2.27
$
1.18
$
2.55
Total General and administrative
$
18.58
$
15.82
$
18.34
$
17.85
(1) Average Oil Price per Unit excluding the effect of net settlements received (paid) for the three and six months ended June 30, 2026 were $94.72 and $80.12, respectively. There are no impacts for the three and six months ended June 30, 2025 as there were no open commodity derivatives during the respective periods.
(2) Average Total Price per Unit excluding the effect of net settlements received (paid) for the three and six months ended June 30, 2026 were $66.86 and $56.04, respectively. There are no impacts for the three and six months ended June 30, 2025 as there were no open commodity derivatives during the respective periods.
Bbl – One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in reference to oil, condensate, or natural gas liquids.
Mcf – One thousand cubic feet of natural gas.
Boe – One barrel of oil equivalent, a standard convention used to express oil and natural gas volumes on a comparable oil equivalent basis. Natural gas equivalents are determined under the relative energy content method by using the ratio of 6.0 Mcf of natural gas to 1.0 Bbl of oil or condensate.
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Three Months Ended June 30, 2026 and 2025
Results of Operations
The following table reflects Empire’s summary operating information for the three months ended June 30, 2026 and 2025. Because of normal production declines, increased or decreased drilling activity and the effects of acquisitions, the historical information presented below should not be interpreted as indicative of future results.
For the Three Months Ended June 30,
(in thousands)
2026
2025
Change
Oil Sales
$
11,017
$
8,005
$
3,012
Gas Sales
(524)
221
(745)
NGL Sales
614
521
93
Total Product Revenues
11,107
8,747
Lease Operating Expense
5,037
6,387
(1,350)
Production and Ad Valorem Taxes
938
768
170
Depreciation, Depletion, Amortization and Accretion
1,986
3,110
(1,124)
General and Administrative (excluding stock-based compensation)
2,878
2,906
(28)
Stock-Based Compensation
208
486
(278)
Cash-Based Interest Expense
323
324
(1)
Non-Cash Interest Expense
6
10
(4)
Loss on Derivatives
(1,612)
—
(1,612)
Operating Loss
(1,542)
(4,903)
3,361
Net Loss
(1,858)
(5,056)
3,198
Revenues
Total product revenues for the three months ended June 30, 2026 increased compared to the prior year primarily due to a higher realized oil price per barrel from general market pricing trends partially offset by lower production volumes year over year.
Net oil sales volumes were approximately 116,000 Bbls for the three months ended June 30, 2026, a decrease over the same period in the prior year primarily due to natural decline and certain wells within North Dakota being down for our steam unit performance enhancement projects which began in the second quarter of 2026.
Realized oil prices for the three months ended June 30, 2026, were $58.26 per barrel, while realized prices for the same period in the prior year were $58.92 per barrel, a decrease of approximately 1% including the impact of the Company’s hedging contracts. The average oil price per barrel excluding the effect of net settlements received (paid) for the three months ended June 30, 2026, was $94.72. There were no impacts to prior period pricing due to no open hedging contracts during the period.
Realized natural gas prices for the three months ended June 30, 2026, were ($4.22) per Mcf, while realized prices for the same period in the prior year were $0.93 per Mcf. This is primarily due to the depressed natural gas prices in the second quarter of 2026 in New Mexico leading to below zero prices as deductions exceeded the natural gas prices.
Realized NGLs prices for the three months ended June 30, 2026, were $21.08 per barrel, while realized prices for the same period in the prior year were $13.33 per barrel, an increase of approximately 58% driven by an increase in overall market prices year over year.
Lease Operating Expense and Production Taxes
Lease operating expense was lower for the three months ended June 30, 2026, compared to the same period in 2025 primarily due to lower overall production and efforts by the Company to reduce overall operating costs. This decrease was partially offset by an increase in workover expense period over period primarily in New Mexico. Workover expenses were approximately $0.7 million for the three months ended June 30, 2026, compared to approximately $0.5 million for the same period in 2025
Production and ad valorem taxes were higher for the three months ended June 30, 2026, compared to the same period in 2025 as a result of the higher product revenues discussed above.
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Depreciation, Depletion, Amortization and Accretion
The decrease in DD&A for the three months ended June 30, 2026, compared to the same period in 2025 is primarily due to the impact of impairments in the fourth quarter of 2025 and lower production volumes period over period, partially offset by the additional interests acquired in New Mexico in first-quarter 2026. Accretion increased slightly from prior period due to the additional interest acquired in New Mexico.
General and Administrative Expense (excluding stock-based compensation)
General and administrative expense, excluding stock-based compensation, decreased slightly for the three months ended June 30, 2026, compared to the same period in 2025 primarily due to a decrease in employee costs resulting from lower headcount in 2026 partially offset by additional professional fees and rent expense.
Stock-based Compensation
Stock-based compensation decreased period over period due to a lower number of awards in 2026. Empire utilizes stock-based compensation to compensate the Board, members of management, and retain talented personnel. Empire anticipates stock-based compensation to continue to be utilized in 2026 and beyond to attract and retain talented personnel and compensate Board members and consultants.
Interest Expense
Interest expense slightly decreased for the three months ended June 30, 2026, compared to the same period in 2025 due to a lower average outstanding balance and interest rate on the Company’s Credit Facility offset by additional equipment and vehicle notes.
Loss on Derivatives
The $1.6 million loss on derivatives for the three months ended June 30, 2026, is primarily due to higher market prices relative to our outstanding commodity derivative positions.
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Six Months Ended June 30, 2026 and 2025
Results of Operations
The following table reflects Empire’s summary operating information for the six months ended June 30, 2026 and 2025. Because of normal production declines, increased or decreased drilling activity and the effects of acquisitions, the historical information presented below should not be interpreted as indicative of future results.
For the Six Months Ended June 30,
(in thousands)
2026
2025
Change
Oil Sales
$
18,319
$
16,054
$
2,265
Gas Sales
(339)
769
(1,108)
NGLs Sales
811
916
(105)
Total Product Revenues
18,791
17,739
Lease Operating Expense
10,197
12,153
(1,956)
Production and Ad Valorem Taxes
1,445
1,480
(35)
Depreciation, Depletion, Amortization and Accretion
3,938
5,862
(1,924)
General and Administrative (excluding stock-based compensation)
5,754
6,103
(349)
Stock-Based Compensation
397
1,017
(620)
Cash-Based Interest Expense
704
592
112
Non-Cash Interest Expense
105
38
67
Loss on Derivatives
(4,203)
—
(4,203)
Operating Loss
(7,123)
(8,859)
1,736
Net Loss
(8,500)
(9,277)
777
Revenues
Total product revenues for the six months ended June 30, 2026, increased compared to the prior year primarily due to a higher realized oil price per barrel from general market pricing trends partially offset by lower production volumes year over year.
Net oil sales volumes were approximately 229,000 Bbls for the six months ended June 30, 2026, a decrease of approximately 11% over the same period in the prior year primarily due to natural decline and operational challenges in North Dakota and New Mexico.
Realized oil prices for the six months ended June 30, 2026, were $61.57 per barrel, while realized prices for the same period in the prior year were $62.84 per barrel, a decrease of approximately 2% including the impact of the Company’s hedging contracts. The average realized oil price per barrel excluding the effect of net settlements received (paid) for the six months ended June 30, 2026, was $80.12. There were no impacts to prior period pricing due to no open hedging contracts during the period.
Realized natural gas prices for the six months ended June 30, 2026, were $(0.94) per Mcf, while realized prices for the same period in the prior year were $1.76 per Mcf. This is primarily due to the depressed natural gas prices in the second quarter of 2026 in New Mexico leading to below zero prices as deductions exceeded the natural gas prices.
Realized NGLs prices for the six months ended June 30, 2026, were $17.35 per barrel, while realized prices for the same period in the prior year were $12.98 per barrel, an increase of approximately 34% driven by an increase in overall market prices year over year.
Lease Operating Expense and Production Taxes
Lease operating expense was lower for the six months ended June 30, 2026, compared to the same period in 2025 primarily due to lower overall production and efforts by the Company to reduce overall operating costs The decrease was partially offset by an increase in workover expense period over period. Workover expenses were approximately $1.3 million for the six months ended June 30, 2026, compared to approximately $0.9 million for the same period in 2025. The higher workover expense in 2026 was primarily in North Dakota from the Company’s steam unit performance enhancements and general projects in New Mexico.
Production and ad valorem taxes were slightly lower for the six months ended June 30, 2026, compared to the same period in 2025 primarily due to prior period adjustments during the period.
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Depreciation, Depletion, Amortization and Accretion
The decrease in DD&A for the six months ended June 30, 2026, compared to the same period in 2025 is primarily due to the impact of impairments in the fourth quarter of 2025 and lower production volumes period over period, partially offset by the additional interests acquired in New Mexico in first-quarter 2026. Accretion also increased slightly from prior period due to the additional interest acquired in New Mexico.
General and Administrative Expense (excluding stock-based compensation)
General and administrative expense, excluding stock-based compensation, decreased for the six months ended June 30, 2026, compared to the same period in 2025 primarily due to a decrease in employee costs resulting from a lower headcount in 2026.
Stock-based Compensation
Stock-based compensation decreased period over period due to a lower number of awards in 2026. Empire utilizes stock-based compensation to compensate the Board, members of management, and retain talented personnel. Empire anticipates stock-based compensation to continue to be utilized in 2026 and beyond to attract and retain talented personnel and compensate Board members and consultants.
Interest Expense
Cash-based interest expense increased for the six months ended June 30, 2026, compared to the same period in 2025 primarily due to additional equipment and vehicle notes partially offset by a lower average outstanding balance and interest rate on the Company’s Credit Facility. Additionally, the Company’s non-cash-based interest expense was higher for the six months ended June 30, 2026, due to the remaining unamortized discount related to the September Note being fully amortized upon full repayment during the first quarter of 2026.
Loss on Derivatives
The $4.2 million loss on derivatives for the six months ended June 30, 2026, is primarily due to higher market prices relative to our outstanding commodity derivative positions.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 (the “Exchange Act”) and are not required to provide this information.
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