EMPIRE PETROLEUM CORP 10-K

ITEM 9A.     CONTROLS AND PROCEDURES. The Company’s 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 Chief Executive Officer and Chief 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. 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 Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as set forth in Internal Control - Integrated Framework. Based on our evaluation under that framework, our management concluded that our internal control over financial reporting was not effective as of December 31, 2021 due to a material weakness. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a possibility that a material misstatement in our interim financial statements will not be prevented or detected on a timely basis. A material weakness in internal control application was discovered related to the internal controls over financial reporting, including disclosures around complex and non-routine transactions. Management believes the Company’s lack of sufficient accounting personnel with appropriate accounting expertise to appropriately apply GAAP for complex and non-routine transactions and prepare associated financial statement disclosures amounts to a material weakness in its internal control over financial reporting. As a result, at December 31, 2021 and on the date of this Report, its internal control over financial reporting is not effective. Management’s Plant to Remediate the Material Weakness Management has evaluated the material weakness described above and is in the process of updating its design and implementation of internal control over financial reporting to remediate the aforementioned material weakness and enhance the Company’s internal control environment, including the hiring of our Chief Accounting Officer in October 2021 and will continue to increase our accounting and financial reporting capacity to effectively gather, analyze and review information related to financial reporting in a timely manner. However, the implemented and enhanced controls have not operated for a sufficient period of time to demonstrate that the material weakness was remediated as of, or subsequent to, December 31, 2021. We are committed to continuing to improve our internal control processes and will continue to diligently and vigorously review our financial reporting controls and procedures. Changes in Internal Controls over Financial Reporting While we continue to implement design enhancements to our internal control procedures, we believe that, other than the changes described above regarding the ongoing remediation efforts, there were no changes to our internal control over financial reporting which were identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) under the Exchange Act during the fourth quarter of 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Attestation Report of Registered Public Accounting Firm This Annual Report does not contain an attestation report of our independent registered public accounting firm related to internal control over financial reporting because the rules for smaller reporting companies provide an exemption from the attestation requirement. - 27 - ITEM 9B.    OTHER INFORMATION. None. ITEM 9C.     DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. PART III ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The following lists the directors and executive officers of the Company: Name Age Position Thomas W. Pritchard 60 Chief Executive Officer and Director Michael R. Morrisett 58 President and Director Eugene J. Sweeney 54 Chief Operating Officer Anthony N. Kamin 61 Director and Co-Chairman of the Board Phil E. Mulacek 61 Director and Co-Chairman of the Board Benjamin J. Marchive II 42 Director Mason H. Matschke 59 Director Directors hold office until their successors are elected by the stockholders of the Company and qualified. Executive officers serve at the pleasure of the Board of Directors. Recommendation of Nominees to the Company's Board of Directors The Company’s Board of Directors does not have a nominating committee. On November 19, 2021, the Company’s Board adopted resolutions requiring the independent directors of the Board (the “Independent Directors”) to participate in the consideration of director nominees and recommend for the Board’s selection the director nominees. The Independent Directors will consider director candidates submitted to them by other directors, employees and stockholders. The Independent Directors may engage professional search firms to assist them in identifying and evaluating potential candidates. Any stockholder recommendations of candidates proposed for consideration by the Independent Directors should include the candidate’s name and qualifications for director, reasons for the recommendation and the candidate’s written consent to being considered as a director nominee and should be addressed to: Attention: Independent Directors, c/o Secretary, 2200 S. Utica Place, Suite 150, Tulsa, Oklahoma 74114. The Independent Directors may require the stockholder submitting the recommendation or the recommended candidate to furnish such other information as the Independent Directors may reasonably request. In addition, the Company’s Amended and Restated Bylaws provide a process for stockholders to nominate directors for consideration at a meeting of stockholders. In considering prospective nominees for the Board, the Independent Directors will - 28 - endeavor to find individuals of high integrity who have a solid record of accomplishment in their chosen fields and who possess the qualifications, qualities and skills to effectively represent the best interests of all stockholders. Candidates are selected for their ability to exercise good judgment and provide practical insights and diverse perspectives. The Independent Directors consider the following qualifications at a minimum to be required in recommending to the Board potential new Board members or the continued service of existing members: · an attained position of leadership in the candidate’s field of endeavor; · business and/or financial expertise; · integrity; · objectivity; · demonstrated exercise of sound business judgment; · expertise relevant to Empire Petroleum’s lines of business; · corporate governance experience; · ability to serve the interests of all stockholders; · ability to devote the time, energy and attention as may be necessary to properly discharge his or her responsibilities as a director; and · independence; at least 50% of the Board shall consist of independent directors, as defined in the rules of the NYSE American. Other than the foregoing, there are no stated minimum criteria for director nominees, although the Independent Directors may also consider such other factors as they may deem are in the best interests of the Company and its stockholders. When considering potential nominees for the Board, the Independent Directors will consider the criteria above and each potential nominee’s individual skills and qualifications in context of the current composition of the Board and needs of the Board at such time. In connection therewith, the Independent Directors will consider diversity in professional background, experience, expertise, perspective, age, gender and ethnicity with respect to Board composition as a whole, although the Board does not have a specific diversity policy. With respect to diversity, particular emphasis is placed on identifying candidates whose skills and characteristics complement and augment the make-up of the Board as a whole and the needs of the Board given the circumstances of the Company. If the Company is legally required by contract or otherwise to provide third parties with the ability to nominate and/or appoint directors (e.g., the Company’s Series A Voting Preferred Stock), the selection and nomination of such directors is not subject to the foregoing process. Identification of Audit Committee; Audit Committee Financial Expert The Company has a separately-designated standing audit committee established in accordance with section 3(a)(58)(A) of the Exchange Act. The audit committee’s members are Anthony Kamin and Mason Matschke, both of whom are independent under the current director independence standards of the NYSE American. The Board has determined the Company does not have an audit committee financial expert serving on its audit committee. The Board has determined that both Messrs. Kamin and Matschke are able to read and understand fundamental financial statements and are financially sophisticated as contemplated under the rules of the NYSE American. The Board does not have an audit committee financial expert because it has not recruited one but will periodically review the need to add an expert. Code of Ethics The Company has adopted a Code of Business Conduct and Ethics that applies to all of the Company's directors and employees, including the Company's principal executive officer, principal financial officer and principal accounting officer or persons performing similar functions. The Code of Business Conduct and Ethics is available on the Company’s website at https://empirepetroleumcorp.com under the “Investor Relations – Corporate Governance” caption. If the Company amends or waives a provision of the Code of Business Conduct and Ethics that applies to the principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions, the Company will post the amendment or waiver at the same location on the Company’s website. Delinquent Section 16(a) Reports Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors, officers, and persons who beneficially own more than 10 percent of a registered class of the Company's equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Based solely on a review of the reports filed with the SEC and any written representations that no other reports were required during the year ended December 31, 2021, to the Company's knowledge, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners during the year ended December 31, 2021 were complied with on a timely basis, except that the initial report for (a) each of Messrs. Marchive and Matschke and Energy Evolution Master Fund, Ltd. was filed late and (b) Mr. Pritchard inadvertently omitted a holding which was later reported on a year-end report on Form 5. - 29 - ITEM 11.    EXECUTIVE COMPENSATION. Executive Compensation The following table set forth certain information regarding compensation of the Company's named executive officers. The persons named below constitute all of the executive officers of the Company as of December 31, 2021. On August 18, 2021, each of Messrs. Pritchard and Morrisett entered into an Employment Agreement with the Company. For additional information regarding their employment agreements, see “Employment Agreements” below. Name and Principal Position Year Salary ($) Bonus ($) Stock Awards Option Awards 1 ($) Non-Equity Incentive Plan Compensation ($) Life Insurance Premiums Paid ($) All Other Compensation ($) Total ($) Thomas W. Pritchard 2021 250,000 125,000 — — — 8,989 10,302 (3)        394,291 Chief Executive Officer 2020 226,667 287,750 — 779,800 — — 174,900 (2) 1,469,117 Michael R. Morrisett 2021 250,000 125,000 — — — 8,902 20,987 (3) 404,889 President 2020 226,667 287,750 — 779,800 — — 174,900 (2) 1,469,117 _______________________ 1 For further information on the assumptions used in the valuation of these awards, see Note 11 included in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. The amounts shown do not represent the amounts paid to the executives. 2 On December 31, 2020, warrant certificates issued to Messrs. Pritchard and Morrisett pursuant to which each such named executive officer had the right to acquire 125,000 shares of the Company’s common stock at an exercise price of $1.00 per share were extended so that such warrant certificates can be exercised on or before April 2, 2029 to make such grants consistent with the 2019 Stock Plan. On December 31, 2020, each of Messrs. Pritchard and Morrisett were issued options to acquire 500,000 shares of the Company’s common stock at an exercise price of $1.40 per share under the 2019 Stock Plan. 3 All Other Compensation in 2021 consists of vehicle allowances and club dues. Director Compensation Annual compensation for non-employee board members, as established in August 2021, is as follows: · Non-chair, non-employee board members - $80,000 per year, with pro-rata adjustments based on date of service as necessary · Chair, non-employee board members – additional $9,000 per quarter with pro-rata adjustments based on date of service as necessary · 30,000 shares of the Company’s common stock granted at December 31, 2021 with pro-rata adjustments based on date of service · The Company reimburses directors for out-of-pocket expenses in connection with attending Board and committee meetings · The Company does not pay its employees who serve on the Board of Directors any additional compensation for Board membership The following table shows total compensation received in 2021 by each of the Company’s non-employee directors. Name Fees Earned or Paid in Cash ($) Stock Awards 1 ($) Total ($) Anthony N. Kamin 116,000 — 116,000 Phil E. Mulacek 23,200 — 23,200 Benjamin J. Marchive II 16,000 — 16,000 Mason H. Matchske 53,333 — 53,333 1 As of December 31, 2021, Mr. Kamin had outstanding options to acquire 75,000 shares related to a 2020 grant date. - 30 - Outstanding Equity Awards at December 31, 2021 The following table sets forth certain information regarding outstanding equity awards of the Company's named executive officers. Option Awards Name Number of securities underlying unexercised options (#) exercisable Number of securities underlying unexercised options (#) unexercisable Equity incentive plan awards: Number of securities underlying unexercised unearned options (#) Option Exercise Price ($) Option Expiration Date Thomas Pritchard 589,100 — — 1.32 4/2/2029 500,000 — — 1.40 12/31/2030 Michael Morrisett 589,100 — — 1.32 4/2/2029 500,000 — — 1.40 12/31/2030 Employment Agreements On August 18, 2021 (the “Effective Date”), the Company entered into an Employment Agreement with Thomas W. Pritchard, Chief Executive Officer of the Company. The initial term of Mr. Pritchard’s Employment Agreement is three years; provided, however, that commencing on the third anniversary of the Effective Date of the Employment Agreement and each subsequent annual anniversary date, the term shall be automatically extended so as to terminate one year from such anniversary date, unless written notice of non-renewal is delivered by the Company or Mr. Pritchard within certain time periods. Mr. Pritchard’s initial guaranteed minimum base salary is $250,000 per year (“Guaranteed Base Salary”), but to the extent that funds are available and subject to the discretion of the Board of Directors of the Company (the “Board”), the Company may pay Mr. Pritchard additional salary compensation up to the maximum amount of $35,000 per year. Mr. Pritchard is eligible to receive a target annual bonus of 100% of his Actual Base Salary (as defined in the Employment Agreement) for each calendar year during the term of the Employment Agreement, with the actual amount of such bonus determined at the discretion of the Board based on performance targets established by the Board. Mr. Pritchard is eligible to participate in the Company’s long-term equity incentive program adopted by the Board; provided that he is entitled to an annual award of 25,000 shares of common stock of the Company. If Mr. Pritchard’s employment with the Company terminates for any reason, including Disability (as defined in the Employment Agreement) or death, Mr. Pritchard will be entitled to a lump sum cash payment consisting of his pro rata Actual Base Salary as earned and unpaid, and unreimbursed expenses, through the date of termination (collectively, the “Accrued Amounts”). In each case, any unvested equity awards held by Mr. Pritchard will vest and payout only in accordance with the applicable award agreements for such equity awards. If Mr. Pritchard’s employment is terminated by the Company for convenience or Mr. Pritchard resigns for Good Reason (as defined in the Employment Agreement), then, in addition to the Accrued Amounts, Mr. Pritchard will be entitled to the following: • monthly payments of his Guaranteed Base Salary for the Severance Period; and • monthly payments equivalent to the cost of COBRA for a certain period of time. Severance Period is defined in Mr. Pritchard’s Employment Agreement as 12 months if his employment is terminated on or before the first anniversary of the Effective Date and such period is increased by three months for each consecutive year that he remains employed by the Company; provided that the Severance Period can never be greater than 24 months. Payment of such amounts are conditioned on Mr. Pritchard’s execution and delivery to the Company of a waiver and release and his compliance with the covenants regarding confidentiality, non-competition, non-solicitation and intellectual property set forth in the Employment Agreement. On August 18, 2021, the Company also entered into an Employment Agreement with Michael R. Morrisett, President of the Company. The terms and conditions of Mr. Morrissett’s Employment Agreement are identical in all material respects to Mr. Pritchard’s Employment Agreement. - 31 - ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Securities Authorized for Issuance under Equity Compensation Plans On April 3, 2019, the Board of Directors of the Company adopted the Empire Petroleum Corporation 2019 Stock Option Plan (the "Stock Option Plan"). The total number of shares of common stock that may be issued pursuant to stock options under the Stock Option Plan is 2,500,000. Further, on April 3, 2019 the Company granted Mr. Pritchard and Mr. Morrissett each, options to purchase 625,000 shares of common stock of the Company at an exercise price of $1.32 per share. On December 31, 2020, the Company granted certain members of management and a member of the Board of Directors options to purchase 1,250,000 shares of common stock of the Company at an exercise price of $1.40 per share. No further grants will be made under the Stock Option Plan. On August 27, 2021, the Board of Directors of the Company adopted the Empire Petroleum Corporation 2021 Stock and Incentive Compensation Plan (the “Incentive Plan”). The total number of shares of common stock that may be issued pursuant to the Incentive Plan is 750,000. As of December 31, 2021, grants were made amounting to 187,500 options. (a) (b) (c) Number of securities remaining available for future Number of securities issuance under to be issued upon Weighted-average equity compensation exercise of exercise price of plans (excluding outstanding options outstanding options securities reflected Plan Category and rights and rights in column (a) 2019 Plan: Equity compensation plans not approved by security holders 2,500,000 $1.36 — 2021 Plan: Equity compensation plans approved by security holders 187,500 $12.20 562,500 Total 2,687,500 562,500 Security Ownership of Certain Beneficial Owners and Management The following table sets forth information regarding the beneficial ownership of our Common Stock as of March 15, 2022 for: * Each person who is known to own beneficially more than 5% of our outstanding Common Stock; * Each of our executive officers and directors; and * All executive officers and directors as a group. The percentage of beneficial ownership for the following table is based on 19,855,107 shares of Common Stock outstanding as of March 15, 2022. Unless otherwise indicated below, to the Company's knowledge, all persons and entities listed below have sole voting and investment power over their shares of Common Stock. - 32 - Security Ownership of Certain Beneficial Owners Name and address of beneficial owner Amount and nature of beneficial ownership Percent of class (1) Puckett Land Company 1,000,000 5% 5460 S. Quebec St., Suite 250 Greenwood Village, CO 80111 Energy Evolution Master Fund, LTD 5,466,637 (2) 26.86% 25025 I-45 North, Suite 420 The Woodlands, Texas 77380 Total 6,466,637 31.77% _______________________ (1) The percentage ownership for each person or entity is calculated in accordance with the rules of the SEC, which provide that any shares a person or entity is deemed to beneficially own by virtue of having a right to acquire shares upon the conversion of options or other rights are considered outstanding solely for purposes of calculating such person's percentage ownership. (2)   Includes 500,000 of common stock shares issued upon exercise of $5.00 warrants. Security Ownership of Management Name and address of beneficial owner Amount and nature of beneficial ownership Percent of class (1) Michael R. Morrisett 1,512,382 (2) 7.22% President and Director 2200 South Utica Place, Suite 150 Tulsa, Oklahoma 74114 Thomas W. Pritchard 1,108,683 (3) 5.29% Chief Executive Officer and Director 2200 South Utica Place, Suite 150 Tulsa, Oklahoma 74114 Anthony Kamin 1,374,528 (4) 6.64% Director and Board Co-Chairman 2200 South Utica Place, Suite 150 Tulsa, Oklahoma 74114 Phil Mulacek 3,424,021 (5) 17.13% Director and Board Co-Chairman 25025 I-45 North, Suite 420 The Woodlands, Texas 77380 Eugene J. Sweeney 92,500 (6) 0.47% Chief Operating Officer 2200 South Utica Place, Suite 150 Tulsa, Oklahoma 74114 Mason H. Matschke 660,277 (7) 3.32% Director 2200 South Utica Place, Suite 150 Tulsa, Oklahoma 74114 Benjamin J. Marchive II — 0% Director 2200 South Utica Place, Suite 150 Tulsa, Oklahoma 74114 Total 8,172,391 40.07% - 33 - (1) The percentage ownership for each person is calculated in accordance with the rules of the SEC, which provide that any shares a person is deemed to beneficially own by virtue of having a right to acquire shares upon the conversion of options or other rights are considered outstanding solely for purposes of calculating such person's percentage ownership. (2) The total includes options to purchase 1,089,100 shares of common stock at an exercise price of $1.32 and $1.40 per share. (3)   The total includes options to purchase 1,089,100 shares of common stock at an exercise price of $1.32 and $1.40 per share, and 19,583 shares owned by Pritchard Energy Partners. (4)   The total includes options to purchase 75,000 shares of common stock at an exercise price of $1.40 per share, 125,000 shares of common stock issued upon the exercise of $0.60 warrants, 625 shares of common stock issued upon the exercise of $1.00 warrants, and 625,000 shares of common stock issued upon the exercise of $2.00 warrants. (5)  The total includes 137,000 common stock shares issued upon the exercise of $2.00 warrants. (6)  The total includes options to purchase 62,500 shares of common stock at an exercise price of $12.20 per share and 15,000 shares issued upon the exercise of $2.00 warrants. (7)  The total includes 16,875 common shares issued upon the conversion of $2.00 warrants. ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. Director Independence The Company’s common stock is currently listed on the NYSE American. Under the corporate governance standards of the NYSE, generally, a director does not qualify as independent if the director (or in some cases, members of the director’s immediate family) has, or in the past three years has had, certain relationships or affiliations with the Company, the Company’s auditors or other companies that do business with the Company. The Company’s Board of Directors has determined that all of the Company’s directors, except Messrs. Pritchard and Morrisett, are independent under the NYSE standards. The Board determined that none of the independent directors has any material relationship with the Company that could impair such individual’s independence. Messrs. Pritchard and Morrisett are not considered to be independent directors because of their employment as executive officers of the Company. Each member of each of the Company’s Audit and Compensation Committees also qualifies as independent under NYSE standards. Related Party Transactions For information regarding a joint development agreement and loan agreement entered into with Petroleum & Independent Exploration, LLC, an entity controlled by the Company’s Co-Chairman of the Board (Phil E. Mulacek), see Note 5 to the financial statements of the Company set forth at the end of this Form 10-K. Neither Petroleum & Independent Exploration, LLC nor Phil E. Mulacek was a related party at the time the Company entered into the joint development agreement and loan agreement. ITEM 14.     FEES OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. The following is a summary of the fees billed or to be billed to the Company by Moss Adams and HoganTaylor LLP, the Company's current and former independent registered public accounting firms, respectively, for professional services rendered for the fiscal years ended December 31, 2021 and December 31, 2020 in which each firm was the designated independent auditor: Fee Category Fiscal 2021 Fees Fiscal 2020 Fees Audit Fees (1) $ 453,250 $ 265,000 Audit - Related Fees (2) — — Tax Fees — — All Other Fees (3) — — Total Fees $ 453,250 $ 265,000 (1) Audit Fees consist of aggregate fees billed for professional services rendered for the audit of the Company's annual financial statements and review of the interim financial statements included in quarterly reports or services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements for the years ended December 31, 2021 and December 31, 2020, respectively. These include work performed for the 8-K/A, S-3, and S-8 filings. - 34 - (2) Audit-Related fees consist of aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under "Audit Fees." (3) All Other Fees consist of aggregate fees billed for products and services provided by independent auditors, other than those disclosed above. Audit Committee Pre-Approval Policies and Procedures Beginning in 2022, the Audit Committee is responsible for the appointment, compensation and oversight of the work of the independent registered public accounting firm and approves in advance any services to be performed by the independent registered public accounting firm, whether audit-related or not. The Audit Committee reviews each proposed engagement to determine whether the provision of services is compatible with maintaining the independence of the independent registered public accounting firm. As no Audit Committee was in place as of December 31, 2021, all of the fees shown above were pre-approved by the entire Board of Directors. 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. (2)    Schedules NONE (3)    Exhibits Exhibit No. Description 2.1 Purchase and Sale Agreement dated as of April 6, 2020, by and between Pardus Oil & Gas, LLC and Pardus Oil & Gas Operating GP, LLC and Empire Texas LLC (incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K dated April 6, 2020, which was filed on April 10, 2020). 2.2 Purchase and Sale Agreement dated as of March 12, 2021, by and between Empire New Mexico LLC and XTO Holdings, LLC (incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K dated May 14, 2021, which was filed on May 17, 2021) . 3.1 Amended and Restated Certificate of Incorporation of Empire Petroleum Corporation (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K dated March 4, 2022, which was filed on March 9, 2022). 3.2 Certificate of Designation of Series A Voting Preferred Stock of Empire Petroleum Corporation (incorporated herein by reference to Exhibit 3.2 to the Company’s Form 8-K dated March 4, 2022, which was filed on March 9, 2022). 3.3 Amended and Restated Bylaws of Empire Petroleum Corporation (incorporated herein by reference to Exhibit 3.3 to the Company’s Form 8-K dated March 4, 2022, which was filed on March 9, 2022). 4.1 Description of the Common Stock of Empire Petroleum Corporation (submitted herewith). 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). - 35 - 4.3 Common Share Warrant Certificate No. Energy Evolution-1 dated May 14, 2021 (incorporated herein by reference to Exhibit 4.2 to the Company’s Form 8-K dated May 14, 2021, which was filed on May 20, 2021). 4.4 Form of Unsecured Convertible Note due May 9, 2022 (incorporated herein by reference to Exhibit 4.3 to the Company’s Form 8-K dated May 14, 2021, which was filed on May 20, 2021). 10.1* Empire Petroleum Corporation 2019 Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K dated April 3, 2019, which was filed on April 9, 2019). 10.2* Form of Non-Qualified Stock Option Award Agreement (incorporated herein by reference to Exhibit 10.2 to the Company's Form 8-K dated April 3, 2019, which was filed on April 9, 2019). 10.3 Senior Revolver Loan Agreement dated as of September 20, 2018 by and between Empire Louisiana, LLC and CrossFirst Bank (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated September 20, 2018 filed on September 25, 2018). 10.4 First Amendment to Senior Revolver Loan Agreement, dated as of March 27, 2019, by and between Empire Louisiana LLC, Empire North Dakota LLC and CrossFirst Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated March 27, 2019, which was filed on April 2, 2019). 10.5 Securities Purchase Agreement dated as of August 6, 2020, by and between Empire Petroleum Corporation and Petroleum Independent & Exploration LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020). 10.6 Common Share Warrant Certificate No. PIE-1 dated August 6, 2020 (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020). 10.7 Common Share Warrant Certificate No. PIE-2 dated August 6, 2020 (incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020). 10.8 Common Share Warrant Certificate No. PIE-3 dated August 6, 2020 (incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020). 10.9 Common Share Warrant Certificate No. PIE-4 dated August 6, 2020 (incorporated herein by reference to Exhibit 10.5 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020). 10.10 Loan Agreement dated as of August 6, 2020, by and between Empire Texas LLC and Petroleum Independent & Exploration LLC (incorporated herein by reference to Exhibit 10.6 to the Company’s Form 8-K dated August 6, 2020, which was filed on August 11, 2020). 10.11 Second Amendment to Senior Revolver Loan Agreement, dated as of June 30, 2020, by and between Empire Louisiana LLC, Empire North Dakota LLC and CrossFirst Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated September 30, 2020, which was filed on October 6, 2020). 10.12 Third Amendment to Senior Revolver Loan Agreement, dated as of December 31, 2020, by and between Empire Louisiana LLC, Empire North Dakota LLC and CrossFirst Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated March 10, 2021, which was filed on March 15, 2021). 10.13 Letter Agreement dated as of March 11, 2021 by and between Empire Petroleum Corporation and Petroleum Independent & Exploration LLC (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated March 10, 2021, which was filed on March 15, 2021). 10.14 Form of Securities Purchase Agreement entered into by and between Empire Petroleum Corporation and investors (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated March 30, 2021, which was filed on April 1, 2021). - 36 - 10.15* Form of Common Share Warrant Certificate issued by Empire Petroleum Corporation (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated March 30, 2021, which was filed on April 1, 2021). 10.16 Fourth Amendment to Senior Revolver Loan Agreement, dated as of July 7, 2021, by and between Empire Louisiana LLC, Empire North Dakota LLC, and CrossFirst Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated July 30, 2021, which was filed on August 4, 2021). 10.17 Employment Agreement dated as of August 18, 2021, by and between Empire Petroleum Corporation and Thomas W. Pritchard (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated August 18, 2021, which was filed on August 24, 2021). 10.18 Employment Agreement dated as of August 18, 2021, by and between Empire Petroleum Corporation and Michael R. Morrisett (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated August 18, 2021, which was filed on August 24, 2021). 10.19 Loan Modification Agreement dated as of September 29, 2021, by and among Empire New Mexico LLC d/b/a Green Tree New Mexico, Empire Petroleum Corporation and Energy Evolution Master Fund, Ltd. (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated September 29, 2021, which was filed on October 5, 2021). 10.20 Pledge and Security Agreement dated as of September 29, 2021, made by Empire Petroleum Corporation in favor of Energy Evolution Master Fund, Ltd. (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated September 29, 2021, which was filed on October 5, 2021). 10.21 Common Share Warrant Certificate dated as of September 30, 2021 issued by Empire Petroleum Corporation in favor of Energy Evolution Master Fund, Ltd. (incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K dated September 29, 2021, which was filed on October 5, 2021). 10.22* Empire Petroleum Corporation 2021 Stock and Incentive Compensation Plan (incorporated herein by reference to the Company’s Information Statement on Schedule 14C filed August 31, 2021). 10.23 Conversion Notice and Note Amendment dated as December 30, 2021 (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated December 30, 2021, which was filed on January 6, 2022). 10.24* Form of Non-Qualified Stock Option Award Agreement (submitted herewith). 10.25* Form of Restricted Stock Units Award Agreement (Non-Employee Directors) (submitted herewith). 10.26* Form of Restricted Stock Units Award Agreement (Executive Officers) (submitted herewith). 23.1 Consent of Moss Adams LLP (submitted herewith). 23.2 Consent of HoganTaylor LLP (submitted herewith). 23.3 Consent of Cawley, Gillespie & Associates, Inc. (submitted herewith). 31.1 Rule 13a – 14(a)/15d – 14(a) Certification of Thomas Pritchard, Chief Executive Officer (submitted herewith). 31.2 Rule 13a – 14(a)/15d – 14(a) Certification of Michael R. Morrisett, principal financial officer (submitted herewith). 32.1 Section 1350 Certification of Thomas Pritchard, Chief Executive Officer (submitted herewith). 32.2 Section 1350 Certification of Michael R. Morrisett, principal financial officer (submitted herewith). 99.1 Cawley, Gillespie & Associates, Inc. Summary Report (submitted herewith). 101 Financial Statements for XBRL format (submitted herewith). *Indicates a management contract or compensatory plan 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 31, 2022 By: /s/ Michael R. Morrisett Name: Michael R. Morrisett Title: President 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 and President March 31, 2022 MICHAEL R. MORRISETT (Principal Financial Officer) /s/ Thomas Pritchard Chief Executive Officer and Director March 31, 2022 THOMAS PRITCHARD (Principal Executive Officer) /s/ Angela M. Baker Chief Accounting Officer March 31, 2022 ANGELA M. BAKER (Principal Accounting Officer) /s/ Anthony J. Kamin Director and Co-Chairman of the Board March 31, 2022 ANTHONY J. KAMIN /s/ Phil E. Mulacek Director and Co-Chairman of the Board March 31, 2022 PHIL E. MULACEK /s/ Mason Matschke Director March 31, 2022 MASON MATSCHKE /s/ Benjamin J. Marchive II Director March 31, 2022 BENJAMIN J. MARCHIVE II - 38 - EMPIRE PETROLEUM CORPORATION CONSOLIDATED FINANCIAL STATEMENTS CONTENTS Page No. Report of Independent Registered Public Accounting Firm – Moss Adams LLP (PCAOB ID:    659 ) 40 Report of Independent Registered Public Accounting Firm – HoganTaylor LLP (PCAOB ID:   483) 43 Consolidated Balance Sheets as of December 31, 2021 and 2020 44 Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 45 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2021 and 2020 46 Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 47 Notes to Consolidated Financial Statements 48 - 39 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Empire Petroleum Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Empire Petroleum Corporation and subsidiaries (the “Company”) as of December 31, 2021, the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below 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. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. - 40 - Evaluation of Related Party Convertible Debt and the Valuation of the Embedded Conversion Option Thereof As described in Note 9 to the consolidated financial statements, on May 14, 2021 the Company’s wholly owned subsidiary Empire New Mexico entered into a Senior Secured Convertible Note Agreement (the “Secured Note’”) with Energy Evolution Master Fund, Ltd. (“Energy Evolution”), a related party, pursuant to which a portion of the Secured Note was convertible into common shares of the Company at the election of Energy Evolution. The value of the embedded conversion option of the Secured Note was bifurcated and accounted for separately as a derivative financial instrument; the derivative was initially recorded at fair value at the inception date and was revalued at each subsequent quarter-end date. On September 29, 2021 the parties entered into a Loan Modification Agreement (the “Amended Secured Note”) pursuant to which the Company induced the conversion of principal by Energy Evolution into common stock by increasing the maximum principal amount then convertible by Energy Evolution, issued Energy Evolution warrants to purchase additional shares of common stock at $1.25 per share and established that interest payments were to be paid in-kind or in cash at Energy Evolution’s election. Upon conversion of the amended maximum principal convertible, the remaining principal outstanding under the Secured Note became convertible into shares of common stock, the maturity date of the Secured Note was extended and the parties amended certain other terms of the Secured Note. The previously existing bifurcated derivative liability was extinguished in connection with this Amended Secured Note as Energy Evolution had fully converted the maximum amount and the Company bifurcated and recorded the newly established embedded conversion option of the remaining principal under the Amended Secured Note separately as a derivative liability. These agreements included requirements that the Company appoint one designee of Energy Evolution, or its affiliate, to the Board of Directors and appoint that designee, or one of the two designees previously appointed to the Board of Directors by Energy Evolution’s affiliate, the Chairman of the Board of Directors with the power to cast the deciding vote in the event of a deadlocked board vote. We identified these complex financing transactions as a critical audit matter due to the degree of complexity of the accounting and specialized skills and knowledge required by management’s specialists in order to accurately account for and value the embedded conversion options associated with these transactions. This in turn led to a high degree of auditor subjectivity and judgment, including consultation with Firm specialists, in order to evaluate the audit evidence supporting management’s valuation of the embedded conversion options of both the Secured Note and Amended Secured Note. The primary procedures we performed to address this critical audit matter included: • Reviewing the underlying agreements and amendments and assessing management’s analysis of the accounting treatment of the original transactions and subsequent amendments. • Gaining an understanding of management’s valuation estimation process and reviewing management’s specialists’ findings. • Assessing the qualifications and objectivity of management’s specialists. • Testing the significant assumptions used by management’s specialists in developing the estimated value of the embedded conversion features, including normalized volatility, risk free rates, expected dividend yields, and the probability of conversion under various scenarios. This included comparing inputs to market data and analyzing conversion probabilities in comparison to economic outcome of each scenario at that time. - 41 - • Utilizing Firm specialists to evaluate accounting treatment as well the accuracy and appropriateness of valuation calculations prepared by management’s specialists. • Mathematically recalculating the amortization associated with debt discount. • Evaluating agreements and amendments in order to verify the accuracy and completeness of disclosures and presentation of the related party nature of the Secured Note and the rights granted to Energy Evolution and its affiliates. The Impact of Proved Oil & Natural Gas Reserves on Depreciation, Depletion, and Amortization (“DD&A”) and Impairment Calculations The Company’s net proved oil and natural gas properties balance was $29,388,408 as of December 31, 2021, and the associated depreciation, depletion and amortization expense for the year ended December 31, 2021 was $2,420,736. The Company recorded no impairment expense for the year ended December 31, 2021. As described in Note 2 of the consolidated financial statements, the Company uses the successful efforts method of accounting for its oil and natural gas activities. Under this method, costs incurred are deferred until exploration and completion results are evaluated, at which time costs of activities associated with economically recoverable reserves are capitalized as proved properties and costs of unsuccessful or uneconomical activities are expensed. Depreciation, depletion, and amortization of producing properties is computed using the units-of-production method. Management’s assessment of the results of exploration activities, commodity price outlooks, planned future sales or expiration of all or a portion of leaseholds impacts the amount and timing of potential impairment provisions. We identified the impact of proved oil and natural gas reserves on depletion, depreciation, and amortization expense and the carrying value of the oil and gas properties as a critical audit matter due to the use of significant judgment by management, including the use of specialists, when developing the estimates of proved oil and natural gas reserves. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to the significant assumptions used in developing those estimates of proved oil and natural gas reserves. The primary procedures we performed to address this critical audit matter included: • Comparing the significant assumptions used by management in developing the estimates of proved oil and natural gas reserves, including pricing benchmarks to observable market data, and comparing pricing differentials, future operations costs, and future production rates to historical data. • Evaluating management’s specialists’ qualifications and objectivity, as well as the appropriateness of methods and assumptions used by the specialists in developing the estimates of proved oil and natural gas reserves. The procedures performed included tests of the data used by specialists and an analysis of the specialist’s findings. • Evaluating the significant assumptions relating to the estimates of proved oil and natural gas reserves and obtaining evidence to support the accuracy of the assumptions, including whether the assumptions used were consistent with the past performance of the Company and evidence obtained in other areas of the audit. • Testing the inputs and mathematically recalculating management’s depletion and depreciation expense calculation and assessed for compliance with industry and regulatory standards. • Testing management’s impairment assessment of proved oil and natural gas properties, including management’s cash flows analysis related to the proved oil and natural gas properties. • Comparing the working and net revenue interests used in the reserve report by testing a sample of land and division order records. /s/ Moss Adams LLP Dallas, Texas March 31, 2022 We have served as the Company’s auditor since 2021. - 42 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Empire Petroleum Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Empire Petroleum Corporation (the Company) as of December 31, 2020, the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, 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, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. 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 audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ HoganTaylor LLP We served as the Company’s auditor from 2003 to 2020. Tulsa, Oklahoma March 31, 2021 - 43 - EMPIRE PETROLEUM CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2021 AND 2020 2021 2020 ASSETS Current Assets: Cash $ 3,611,871 $ 157,695 Accounts Receivable 7,733,905 1,251,634 Unrealized Gain on Derivative Instruments 55,242 — Inventory 1,037,880 531,309 Prepaids 679,122 281,895 Total Current Assets 13,118,020 2,222,533 Property and equipment: Oil and Natural Gas Properties, Successful Efforts 46,914,326 22,711,445 Less: Accumulated Depreciation, Depletion and Impairment ( 17,525,918 ) ( 15,148,444 ) Net 29,388,408 7,563,001 Other Property and Equipment, net of $ 258,714 and $ 76,421 Accumulated Depreciation in 2021 and 2020, respectively 1,288,611 662,017 Total Property and Equipment, Net 30,677,019 8,225,018 Unrealized Gain on Derivative Instruments - Long Term 194,018 — Sinking Fund 4,810,000 — Utility and Other Deposits 1,290,594 802,050 Total Assets $ 50,089,651 $ 11,249,601 LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Accounts Payable 4,329,535 $ 1,937,743 Accrued Expenses 5,844,184 2,697,831 Unrealized Loss on Derivative Instruments — 5,749 Contingent Payment — 40,000 Current Portion of Lease Liability 180,105 89,769 Current Portion of Long-term Notes Payable 1,700,663 1,301,618 Total Current Liabilities 12,054,487 6,072,710 Long-Term Notes Payable 6,914,101 7,719,703 Long Term Lease Liability 646,311 534,009 Asset Retirement Obligations 20,640,599 15,364,217 Total Liabilities 40,255,498 29,690,639 Stockholders' Equity (Deficit): Common Stock - $ .001 Par Value 190,000,000 Common Shares Authorized, 19,840,648 and 6,223,069 Shares Issued and Outstanding, Respectively 79,362 24,892 Additional Paid-in Capital 69,988,134 22,152,451 Accumulated Deficit ( 59,233,343 ) ( 40,618,381 ) Total Stockholders' Equity (Deficit) 9,834,153 ( 18,441,038 ) Total Liabilities and Stockholders' Equity (Deficit) $ 50,089,651 $ 11,249,601 See accompanying notes to consolidated financial statements - 44 - EMPIRE PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2021 and 2020 2021 2020 Revenue: Oil Sales $ 22,326,289 $ 5,452,187 Gas Sales 2,593,081 347,355 NGL Sales 3,396,097 100,718 Other 174,609 88,703 Net Realized and Unrealized Gain (Loss) on Derivatives ( 586,181 ) 1,738,871 Total Revenue 27,903,895 7,727,834 Costs and Expenses: Operating 14,095,708 4,871,755 Taxes - Production 2,102,772 346,101 Depletion, Depreciation & Amortization 2,502,275 3,118,019 Impairment of Oil and Natural Gas Properties — 8,671,303 Accretion of Asset Retirement Obligation 1,214,479 929,858 General and Administrative 8,462,031 7,373,804 Total Cost and Expenses 28,377,265 25,310,840 Operating Loss ( 473,370 ) ( 17,583,006 ) Other Income and (Expense): Convertible Debt Modification Inducement Expense ( 2,276,813 ) — Loss on Convertible Debt Redemption Option ( 3,169,201 ) — Loss on Embedded Conversion Option ( 4,504,104 ) — Gain on Sale of Assets — 1,268,760 Other Income 409,225 — Interest Expense ( 8,600,699 ) ( 521,187 ) Net Loss $ ( 18,614,962 ) $ ( 16,835,433 ) Net Loss per Common Share, Basic & Diluted $ ( 1.27 ) $ ( 2.97 ) Weighted Average Number of Common Shares Outstanding, Basic & Diluted 14,630,168 5,677,008 See accompanying notes to consolidated financial statements - 45 - EMPIRE PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) Years ended December 31, 2021 and 2020 Additional Common Stock Paid-In Accumulated Shares Par Value Capital Deficit Total Balances, December 31, 2019 5,091,819 $ 20,367 $ 18,823,926 $ ( 23,782,948 ) $ ( 4,938,655 ) Net Loss — — — ( 16,835,433 ) ( 16,835,433 ) Shares, Options, Warrants and Conversion Features Issued 1,131,250 4,525 3,328,525 — 3,333,050 Balances, December 31, 2020 6,223,069 $ 24,892 $ 22,152,451 $ ( 40,618,381 ) $ ( 18,441,038 ) Net Loss — — — ( 18,614,962 ) ( 18,614,962 ) Stock Compensation Expense 34,192 137 1,502,083 — 1,502,220 Stock Options Exercised 209,679 839 93,936 — 94,775 Warrants Exercised 7,682,761 30,731 8,020,749 — 8,051,480 Issuance of Common Stock and Warrants 2,248,865 8,995 3,139,655 — 3,148,650 Shares and Warrants Issued for Secured Convertible Note 1,675,000 6,700 16,005,940 — 16,012,640 Warrants Issued with Unsecured Convertible Notes — — 544,824 — 544,824 Right to Buy Issued with Secured Convertible Notes — — 989,115 — 989,115 Unsecured Convertible Note Conversion 583,600 2,334 2,915,666 — 2,918,000 Shares Issued for Secured Convertible Note Conversion, Including Payment of Accrued Interest 1,183,482 4,734 13,623,715 — 13,628,449 Balances, December 31, 2021 19,840,648 $ 79,362 $ 68,988,134 $ ( 59,233,343 ) $ 9,834,153 See accompanying notes to consolidated financial statements - 46 - EMPIRE PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2021 and 2020 2021 2020 Cash Flows From Operating Activities: Net Loss $ ( 18,614,962 ) $ ( 16,835,433 ) Adjustments to Reconcile Net Loss to Net Cash Provided By (Used In) Operating Activities: Gain on Sale of Assets — ( 1,268,760 ) Value of Warrants and Options Granted 1,502,220 2,705,550 Stock Issued in Lieu of Cash Interest Payment - Senior Secured Convertible Note 296,127 — Right to Buy Issuance Costs 989,115 — Loss on Embedded Conversion Option - Senior Secured Convertible Note 4,504,104 — Convertible Debt Modification Inducement Expense 2,276,813 — Amortization of Discount on Convertible Notes 7,727,213 — Amortization of Loan Issue Costs 14,587 58,344 Loss on Extinguishment of Debt 3,169,201 — Change in Right of Use Assets, net 137,046 9,877 Depreciation, Depletion and Amortization 2,502,275 3,143,130 Impairment of Oil and Natural Gas Properties — 8,671,303 Accretion of Asset Retirement Obligation 1,214,479 929,858 Paycheck Protection Program Loan Forgiveness ( 267,550 ) — Deposit paid to Ovintiv — ( 800,000 ) Loss Relating to Ovintiv Purchase Deposit — 800,000 Change in Operating Assets and Liabilities: Accounts Receivable ( 6,482,271 ) ( 168,612 ) Unrealized Loss on Derivatives ( 255,009 ) ( 217,883 ) Inventory ( 506,571 ) 92,293 Prepaids, Current 95,371 ( 152,354 ) Other Assets ( 488,544 ) 9,400 Accounts Payable 2,210,285 891,702 Accrued Expenses 3,146,353 408,328 Net Cash Provided By (Used In) Operating Activities 3,170,282 ( 1,723,257 ) Cash Flows from Investing Activities: Acquisition of Oil and Natural Gas Properties ( 19,545,505 ) ( 507,411 ) Purchase of Other Fixed Assets ( 220,769 ) ( 6,099 ) Cash Paid for Right of Use Assets ( 140,604 ) — Sinking Fund Deposit ( 4,810,000 ) — Proceeds from Sale of Oil and Natural Gas Properties — 1,369,800 Net Cash Provided By (Used In) Investing Activities ( 24,716,878 ) 856,290 Cash Flows from Financing Activities: Proceeds from Debt Issued 19,493,000 765,000 Paycheck Protection Program Loan Proceeds 106,850 160,700 Principal Payments of Debt ( 5,893,984 ) ( 426,038 ) Proceeds from Stock and Warrant Issuance 11,294,906 525,000 Net Cash Provided by Financing Activities 25,000,772 1,024,662 Net Change in Cash 3,454,176 157,695 Cash - Beginning of Period 157,695 — Cash - End of Period $ 3,611,871 $ 157,695 Supplemental Cash Flow Information: Cash Paid for Interest $ 436,053 $ 599,350 Non-cash Investing and Financing Activities: Non-cash Additions and Revisions to Asset Retirement Obligations $ 4,021,953 $ 8,646,079 Common Stock Issued in Exchange for Outstanding Notes Payable $ 32,611,376 $ 102,500 Equipment purchased utilizing note payable $ 1,255,503 $ 60,719 Property additions in notes payable $ 181,507 $ — Purchases of oil and natural gas properties and deposits in accounts and notes payable, accrued expenses, royalty suspense, and contingent payable to seller $ — $ 1,523,834 Note Payable issued - PIE Agreement (see Note 5) $ — $ 315,273 See accompanying notes to consolidated financial statements - 47 - EMPIRE PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 and 2020 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 has four wholly-owned subsidiaries in its areas of operations: ● Empire North Dakota LLC (“Empire North Dakota”) ● Empire New Mexico, LLC (“Empire New Mexico”) ● Empire Texas (“Empire Texas”), consisting of the following entities: o Empire Texas LLC o Empire Texas GP LLC o Pardus Oil & Gas Operating, LP (owned 1% by Empire Texas GP LLC and 99% by Empire Texas LLC) ● Empire Louisiana LLC (“Empire Louisiana”) Empire was incorporated in the State of Utah in August 1983 and subsequently in the State of Delaware in 1985. The consolidated financial statements of Empire Petroleum Corporation and subsidiaries include the accounts of the Company and its wholly-owned subsidiaries. On August 27, 2021 the Company’s Board of Directors, in conjunction with the majority of the common stock holders, approved a one for four reverse stock split such that every holder of the Company’s common stock shall receive one share of Common Stock for every four shares owned. In addition, the Board authorized the Company to issue ten million shares of no-par value Preferred Stock. As of December 31, 2021, the Company had not made the reverse stock split effective, nor had it issued any Preferred Stock. The reverse stock split was made effective on March 7, 2022, simultaneous with the Company’s listing to the NYSE American. All shares amounts have retrospectively been stated at post-reverse split amounts and pricing. Note 2 – Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts and balances of the Company and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). All intercompany accounts and transactions, including revenues and expenses, 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 On Oil And Gas Exploration And Production 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 natural gas liquids 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, conversion features on debt convertible, 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. - 48 - 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 withing 60 days of production. For receivables from joint interest owners, the Company generally has the ability to withhold future revenue disbursements to recover any non-payment of joint interest billings. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for doubtful accounts only after all collection attempts have been exhausted. The Company did not have an allowance for doubtful accounts at either December 31, 2021 or 2020. 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 value of the outstanding contracts. Inventory Inventory consists of oil in tanks which has not been delivered and is valued at the lower of cost or net realizable value. Oil and Natural Gas and Other Properties The Company uses the successful efforts method of accounting for its oil and gas activities. Costs incurred are deferred until exploration and completion results are evaluated. At such time, costs of activities with economically recoverable reserves are capitalized as proven properties, and costs of unsuccessful or uneconomical activities are expensed. Capitalized drilling costs are reviewed periodically for impairment. Costs related to impaired prospects or unsuccessful exploratory drilling is charged to expense. Management's assessment of the results of exploration activities, commodity price outlooks, planned future sales or expiration of all or a portion of such leaseholds impact the amount and timing of impairment provisions. An impairment expense could result if oil and gas prices decline in the future as it may not be economical to develop some of these unproved properties. Lease options are capitalized as unproved property acquisition costs and are reviewed for impairment if indicators exist that the carrying value of the lease option may not be recoverable. If the lease options become impaired, expire or are abandoned, the options will be expensed. If proved reserves are discovered after the options are exercised, these costs will be reclassified as proved property. Depreciation, depletion and amortization of producing properties is computed on the units-of-production method on a property-by-property basis. The units-of-production method is based primarily on estimates of proved reserve quantities. Due to uncertainties inherent in this estimation process, it is at least reasonably possible that reserve quantities will be revised in the near term. Changes in estimated reserve quantities are applied to depreciation, depletion and amortization computations prospectively. Other property and equipment is depreciated on the straight-line method. 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. Comprehensive Income The Company has no elements of comprehensive income other than net income. 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. - 49 - 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 when the recognition criteria of Accounting Standards Codification 606 “Revenue from Contracts with Customers,” (“ASC 606”) are met, which generally occurs at a point in time when production is sold to a purchaser at a determinable price, delivery has occurred, control has transferred and collection of the revenue is probable . 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 and the Company receives payment from one to three months after delivery. Generally, each unit of product represents a separate performance obligation. The prices received for oil, natural gas and NGL sales under the Company’s contracts are generally derived from stated market prices which are then adjusted to reflect deductions including transportation, fractionation and processing. As a result, revenues from the sale of oil, natural gas and NGL will decrease if market prices decline. The sales of oil, natural gas and NGL, as presented on the Consolidated Statements of Operations, represent the Company’s share of revenues net of royalties and excluding revenue interests owned by others. When selling oil, natural gas and NGL on behalf of royalty or working interest owners, the Company is acting as an agent and thus reports the revenue on a net basis. To the extent actual volumes and prices of oil and natural gas sales are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volumes and prices for those properties are estimated and recorded. Variances between the Company’s estimated revenue and actual payment are recorded in the month the payment is received. Historically, these differences have been insignificant. At the end of each month when the performance obligation is satisfied, the variable consideration can be reasonably estimated and amounts due from customers are recorded in Accounts Receivable in the Consolidated Balance Sheets. Taxes assessed by governmental authorities on oil, natural gas and NGL sales are presented separately from such revenues in the Consolidated Statements of Operations. Oil Sales Oil production is transported from the wellhead to tank batteries or delivery points through flow-lines or gathering systems. Purchasers of the oil take delivery at the tank batteries and transport the oil by truck or at a pipeline delivery point and the Company collects a market price, net of pricing differentials. Revenue is recognized when control transfers to the purchaser at the net price received by the Company. Natural Gas and NGL Sales Under the Company’s natural gas sales arrangements, the purchaser takes control of wet gas at a delivery point near the wellhead or at the inlet of the purchaser’s processing facility. The purchaser gathers and processes the wet gas and remits proceeds to the Company for the resulting natural gas and NGL sales. Based on the nature of these arrangements, the processor is the agent and the purchaser is the Company’s customer, thus, the Company recognizes natural gas and NGL sales based on the net amount of proceeds received from the purchaser. Contract Balances Under the Company’s product sales contracts, the Company invoices customers once performance obligations have been satisfied, at which point payment is unconditional. Accordingly, the Company’s product sales contracts do not give rise to contract assets or liabilities under ASC 606. 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 NGLs 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, 2021 and 2020, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material. - 50 - Stock-Based Compensation The Company recognized stock-based compensation expense associated with granted stock options. The Company accounts for forfeitures of equity-based incentive awards as they occur. Stock-based compensation expense related to time-based restricted stock units is based on the price of the common stock on the grant date and recognized as vesting occurs. Income Taxes The Company accounts for income taxes in accordance with the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established if management determines it is more likely than not that some portion of a deferred tax asset will not be realized. Per Share Amounts The Company calculates and discloses basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS"). The computation of basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted 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. 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 year ended December 31, 2021. - 51 - Impairment of oil and natural gas properties - The fair value of proved and unproved oil and natural gas properties was measured using valuation techniques that convert the future cash flows to a single discounted amount. Significant inputs to the valuation of proved and unproved oil and natural gas properties include estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average costs of capital. The Company utilized a combination of the New York Mercantile Exchange ("NYMEX") strip pricing and consensus pricing to value the reserves, then applied various discount rates depending on the classification of reserves and other risk characteristics. For significant acquisitions, management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired. The fair value of asset retirement obligations is included in proved oil and natural gas properties with a corresponding liability. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate and timing associated with the incurrence of these costs. The inputs used to value oil and natural gas properties for impairments and asset retirement obligations require significant judgment and estimates made by management and represent Level 3 inputs. Financial instruments and other- The fair values determined for accounts receivable, accrued expenses and other current liabilities were equivalent to the carrying value due to their short-term nature. Derivatives – Derivative financial instruments are carried at fair value and measured on a recurring basis. The Company’s commodity price hedges are valued based on discounted future cash flow models that are primarily based on published forward commodity price curves and published LIBOR forward curves; thus, these inputs are designated as Level 2 within the valuation hierarchy. The fair values of derivative instruments in asset positions include measures of counterparty nonperformance risk, and the fair values of derivative instruments in liability positions include measures of the Company’s nonperformance risk. These measurements were not material to the Consolidated Financial Statements. Related Party Transactions Transactions between related parties are considered to be related party transactions even though they may not be given accounting recognition. FASB ASC 850, Related Party Disclosures (“FASB ASC 850”) requires that transactions with related parties that would have influence in decision making shall be disclosed so that users of the financial statements can evaluate their significance. Related party transactions typically occur within the context of the following relationships: affiliates of the entity; entities for which investments in their equity securities is typically accounted for under the equity method by the investing entity; trusts for the benefit of employees; principal owners of the entity and members of their immediate families; management of the entity and members of their immediate families; and other parties that can significantly influence the management or operating policies of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests. Recently Issued Accounting Pronouncements FASB periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. The Company has reviewed the recently issued pronouncements and concluded that the following new accounting standards are applicable: In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in this ASU affect entities that issue convertible instruments and/or contracts in an entity’s own equity. The amendments in this ASU primarily affect convertible instruments issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed. However, all entities that issue convertible instruments are affected by the amendments to the disclosure requirements of this ASU. For contracts in an entity’s own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted for as derivatives under the current guidance because of failure to meet the settlement conditions of the derivatives scope exception related to certain requirements of the settlement assessment. Also affected is the assessment of whether an embedded conversion feature in a convertible instrument qualifies for the derivatives scope exception. Additionally, the amendments in this ASU affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. The amendments in this ASU are effective for public business entities, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Board specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The Board decided to allow entities to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Company is analyzing the effect that adoption will have but does not expect a material impact as a result of adopting these standards. - 52 - Note 3 – Property In May 2021 the Company purchased oil and natural gas properties in New Mexico (see Note 4). The aggregate capitalized costs of oil and natural gas properties as of December 31, 2021 and 2020 are as follows: 2021 2020 Proved producing wells $ 20,689,548 $ 4,508,739 Proved undeveloped 2,724,966 2,715,980 Lease and well equipment 5,311,779 1,360,596 Asset retirement obligation 18,188,033 14,126,130 Gross capitalized costs 46,914,326 22,711,445 Depreciation, depletion, amortization and impairment ( 17,525,918 ) ( 15,148,444 ) Net capitalized costs $ 29,388,408 $ 7,563,001 Other property and equipment consists of operating lease assets, vehicles, office furniture, and equipment with lives ranging from three to five years . 2021 2020 Other property and equipment, at cost $ 1,547,325 738,438 Less: accumulated depreciation ( 258,714 ) ( 76,421 ) Oher property and equipment, net $ 1,288,611 662,017 Note 4 – Acquisition of XTO Properties On March 12, 2021 the Company, through its wholly owned subsidiary Empire New Mexico, entered into a purchase and sale agreement with XTO Holdings, LLC (a subsidiary of ExxonMobil) (the “Seller’) to acquire, among other things, certain oil and natural gas properties in New Mexico. The purchase price was $ 17,800,000 subject to customary adjustments. The transaction closed on May 14, 2021 with an effective date of January 1, 2021. The XTO acquisition has been assessed under the screen test for business combinations under FASB ASC 805, Business Combinations (“ASC 805”). The XTO acquisition met the screen test and has been accounted for as an asset acquisition using the acquisition method of accounting. Under the accounting for asset acquisitions, the acquisition is recorded using a cost accumulation and allocation model under which the cost of the acquisition is allocated on a relative fair value basis to the assets acquired and liabilities assumed. Acquisition-related transaction costs are capitalized as a component of the cost of the assets acquired. As a condition of the sale, the Company purchased a $ 5,000,000 performance bond for the benefit of the seller for proper plugging, abandonment and restoration of the purchased properties. The performance bond is collateralized with a letter of credit in the amount of $ 3,750,000 . To effect the letter of credit, the Company entered into a Promissory Note Agreement with Bank of Oklahoma, NA in the amount of $ 3,750,000 which is due on demand with an interest rate established by the Bank, currently at 4 %. The Promissory Note, and associated letter of credit, is collateralized with a bank certificate of deposit in a corresponding amount. In addition, the Company is required to deposit $ 100,000 per month, up to $ 1,250,000 , into a sinking fund to be held by the surety. Subsequent amendments increased the monthly payment amounts to $ 160,000 in response to additional bonding requested by the State of New Mexico. - 53 - The following table sets forth the Company's preliminary purchase price allocation: Preliminary Fair Value of Assets Acquired Oil and natural gas properties $ 17,662,402 Inventory of oil in tanks 318,546 Vehicles 179,156 Asset retirement obligations 6,117,709 Total preliminary assets acquired 24,277,813 Preliminary Fair Value of Liabilities Assumed Royalty suspense 290,325 Asset retirement obligations 6,117,709 Total preliminary liabilities assumed 6,408,034 Purchase Price 17,869,779 The value of oil and gas properties was based on an allocation of the purchase price which included assignment of values to the other identifiable assets acquired and liabilities assumed. The value of inventory, vehicles, and royalty suspense was based on their relative fair values as described above. The fair value of asset retirement obligations are included in proved oil and natural gas properties with a corresponding liability in the table above. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate and timing associated with the incurrence of these costs. Final settlement on this acquisition is in process and is expected to occur in 2022. Note 5 – Joint Development Agreement On August 6, 2020 the Company, through its wholly owned subsidiary, Empire Texas, entered into a joint development agreement (the “JDA”) with Petroleum & Independent Exploration, LLC and related entities (“PIE”), a related party (See Note 12), dated August 1, 2020. Under the terms of the JDA, PIE will perform recompletion or workover on specified mutually agreed upon wells (“Workover Wells”) owned by Empire Texas. To fund the work, PIE entered into a term loan agreement with Empire Texas dated August 1, 2020, whereby PIE will loan up to $ 2,000,000 , at an interest rate of 6 % per annum, maturing August 7, 2024 unless terminated earlier by PIE. Proceeds of the loan will be used for recompletion or workover of the Workover Wells. As of December 31, 2021 approximately $ 800,000 has been advanced from the loan and is included in Long Term Notes Payable on the Consolidated Balance Sheet. As part of the JDA, Empire Texas will assign to PIE a combined 85% working and revenue interest in the Workover Wells; an assignment was completed in October 2020 for the initial three Workover Wells. Of the assigned interest, 70% working and revenue interest will be used to repay the obligations under the term loan agreement. Once the term loan is repaid, PIE will reassign a 35% working and revenue interest to Empire Texas in each of the Workover Wells and retain a 50% working and revenue interest (See Note 8). To the extent the cash flows from the revenue interest are insufficient to repay the obligations under the term loan, the Company remains required to repay the obligation and the activity resulting from the JDA is being treated as a carried interest with a corresponding term loan. In addition, PIE and Empire entered into a Securities Purchase Agreement (“Securities Agreement”) whereby PIE purchased for $525,000 (a) 875,000 shares of Empire common stock, (b) warrants to purchase 656,250 shares of Empire common stock at an exercise price of $0.80 per share, (c) warrants to purchase 450,000 shares of Empire common stock at an exercise price of $1.00 per share, (d) warrants to purchase 2,034,129 shares of Empire common stock at an exercise price of $0.40 per share, and (e) warrants to purchase up to 2,766,666 shares of Empire common stock at an exercise price of $0.564 per share, pursuant to various vesting provisions as detailed in the Securities Agreement. On March 11, 2021 the Company amended the Securities Agreement to remove the vesting provisions for the warrants and PIE exercised all of its warrants for an aggregate exercise price of $ 3,349,052 . Note 6 - Asset Retirement Obligations The Company’s asset retirement obligations represent the estimated present value of the estimated cash flows the Company will incur to plug, abandon and remediate its producing properties at the end of their productive lives, in accordance with applicable state laws. Market risk premiums associated with asset retirement obligations are estimated to represent a component of the Company’s credit-adjusted risk-free rate that is utilized in the calculations of asset retirement obligations. - 54 - The Company’s asset retirement obligation transactions during the years ended December 31, 2021 and 2020 are summarized in the table below. For the Year Ended December 31, 2021 2020 Asset retirement obligations, beginning of period $ 15,364,217 $ 5,788,280 Liabilities assumed in acquisitions 6,117,709 9,508,484 Revision to estimates ( 2,055,806 ) ( 862,405 ) Accretion expense 1,214,479 929,858 Asset retirement obligation, end of period $ 20,640,599 $ 15,364,217 Note 7 – Commodity Derivative Financial Instruments The Company uses derivative financial instruments to manage its exposure to commodity price fluctuations. Commodity derivative instruments are used to reduce the effect of volatility of price changes on the oil and natural gas the Company produces and sells. The Company does not enter into derivative financial instruments for speculative or trading purposes. The Company’s derivative financial instruments consist of put options. The Company does not designate its derivative instruments to qualify for hedge accounting. Accordingly, the Company reflects changes in the fair value of its derivative instruments in its consolidated statements of operations as they occur. Unrealized gains and losses related to the contracts are recognized and recorded as an asset or liability on the Company’s consolidated balance sheets. The following table summarizes the net realized and unrealized amounts reported in earnings related to the commodity derivative instruments for the years ended December 31, 2021 and 2020: For the Year Ended December 31, 2021 2020 Gain (loss) on derivatives: Oil derivatives $ ( 586,181 ) $ 1,738,871 The following represents the Company’s net cash receipts from (payments on) derivatives for the years ended December, 2021 and 2020: For the Year Ended December 31, 2021 2020 Oil derivatives $ ( 299,481 ) $ 1,520,988 Natural gas derivatives ( 535,960 ) — Total $ ( 835,441 ) $ 1,520,988 The following table sets forth the Company’s outstanding derivative contracts at December 31, 2021: 1st Quarter 2 nd Quarter 3 rd Quarter 4 th Quarter 2022 WTI Index Put Options: Quarterly volume (MBbl) 20.56 20.43 20.32 15.72 Floor Price (Bbl) $ 40.00 $ 40.00 $ 40.00 $ 40.00 - 55 - 1 st Quarter 2 nd Quarter 3 rd Quarter 2023 WTI Index Put Options: Quarterly volume (MBbl) 13.40 15.34 10.86 Floor Price (Bbl) $ 40.00 $ 55.00 $ 55.00 Note 8 - Debt The following table represents the Company’s outstanding debt . December 31, 2021 2020 Senior Revolver Loan Agreement $ 7,069,500 $ 8,124,000 Term Loan – PIE 797,010 315,273 Equipment and vehicle notes, 0 % to 6.99 % interest rates, due in 2025 to 2027 with monthly payments ranging from $ 400 to $ 1,400 per month 305,739 57,935 Unsecured Note, Pardus Acquisition — 378,000 Note Payable to Insurance Provider, bears 3.63 % interest, matures November 2022, monthly payments of principal and interest of $ 50,083 442,515 — SBA Payroll Protection Program Note Payable — 160,700 Total Debt 8,614,764 9,035,908 Unamortized debt issue costs — 14,587 Total debt, net of debt issue costs 8,614,764 9,021,321 Less Current Maturities 1,700,663 1,301,618 Total Long-Term Debt $ 6,914,101 $ 7,719,703 On July 7, 2021 the Company entered into the Fourth Amendment to its Senior Revolver Loan Agreement (“the Amended Agreement”) with CrossFirst Bank (“CrossFirst”). The maximum amount that can be advanced under the Agreement is $20,000,000 and the existing commitment amount is $ 7,680,000 which is reduced by $ 300,000 per calendar quarter beginning September 30, 2021 and includes interest at Wall Street Journal Prime plus 150 basis points ( 4.75 % as of December 31, 2021). The Amended Agreement matures on March 27, 2024 . Collateral for the loan is a lien on all of the assets of Empire Louisiana and Empire North Dakota, wholly owned subsidiaries of the Company, and a first priority mortgage lien, pledge of and security interest in not less than 80 % of Empire Louisiana’s and Empire North Dakota’s producing oil, gas and other leasehold and mineral interests. The Amended Agreement requires the Company maintain commodity derivatives at certain thresholds based on projected production and, beginning March 31, 2021, to maintain certain covenants including an EBITDAX to interest expense of at least 3:1 and funded debt to EBITDAX of 6:1 on a trailing twelve-month basis and reducing quarterly to 4:1 as of March 31, 2022 and thereafter . As of December 31, 2021, the Company has an outstanding loan balance of $ 7,069,500 under the Amended Agreement. The current maturities of the Amended Agreement is $1,200,000. The Company was in compliance with the loan covenants at December 31, 2021. In August 2020, concurrent with the Joint Development Agreement with Petroleum and Independent Exploration, LLC (“PIE”), a related party, the Company entered into a term loan agreement dated August 1, 2020, whereby PIE will loan up to $ 2,000,000 , at an interest rate of 6 % per annum, maturing August 7, 2024 unless terminated earlier by PIE. The loan proceeds will be used for recompletion or workover of certain designated wells. In addition, the Company assigned 85% working and revenue interest to PIE in the designated wells which will be applied to repayment of the loan . As of December 31, 2021, $797,010 has been advanced from the PIE loan. - 56 - On April 1, 2020, in conjunction with the purchase of assets from Pardus Oil & Gas, LLC, the Company entered into an unsecured promissory note agreement with the seller in the amount of $ 378,000 . The note was payable in one installment on April 1, 2021 and bore interest at the one-year LIBOR rate. The note was paid on April 1, 2021 . On May 5, 2020, the Company received an SBA Payroll Protection Plan (“PPP”) loan for $ 160,700 . The loan was scheduled to mature on May 5, 2022 and had an interest rate of 1 %. In June 2021 the Company was informed that the SBA had forgiven the entire loan balance . Forgiveness is included in Other Income on the Consolidated Statements of Operations. On April 30, 2021 the Company received a Second Draw SBA “PPP” loan for $ 106,850 . The loan was scheduled to mature on April 30, 2026 and bore interest at 1%. In October 2021 the Company was informed that the SBA had forgiven the entire loan balance. Forgiveness is included in Other Income on the Consolidated Statements of Operations. Note 9 – Convertible Notes Payable Senior Secured Note Agreement On May 14, 2021, the Company’s wholly owned subsidiary, Empire New Mexico entered into a Senior Secured Convertible Note Agreement (the “Secured Note”) in the amount of $ 16,250,000 with Energy Evolution Master Fund, Ltd., a related party (“Energy Evolution”) (See Note 12). The Secured Note is collateralized by all assets of Empire New Mexico, matures on December 31, 2021 and bears an interest rate of 3.8 %. The Secured Note provides that up to 40% of the balance, together with accrued interest, can be converted into the Company’s common stock at the lesser of $1.25 per share or the offering price if the Company has a subsequent capital raise or an aggregate of 1,300,000 shares of common stock (without giving effect to any interest that may be converted) . The conversion terms of the Secured Note were subject to further adjustments as defined in that agreement. The embedded conversion option has been bifurcated and accounted for separately as a derivative financial instrument. The separated derivative was initially recorded at fair value at the inception date and revalued as of September 30, 2021 resulting in a fair value of $ 5,530,677 and $ 5,437,746 , respectively. On September 30, 2021, the existing bifurcated derivative liability was removed in connection with the Amended Secured Note as further discussed. As partial consideration for the issuance of the Secured Note, Energy Evolution received a closing fee of 375,000 shares of the Company’s common stock and warrants to purchase 750,000 three million shares of common stock for $ 4.00 per share which expire on May 14, 2022. The Company determined these were equity-classified financing instruments and the proceeds are allocated on a relative fair value basis between the debt, warrants, and common shares at issuance. At issuance, the discount associated with the Secured Note was $ 10,125,177 ; consisting of $ 5,530,677 relating to the embedded derivative liability, $1,500 and $ 2,773,500 in common stock and paid in capital, respectively, relating to the issuance of shares of the Company’s common stock, and $ 1,819,500 in paid in capital relating to the issuance of warrants to purchase common stock. The fair value of the warrants was determined using a Black-Scholes model. The warrants were exercised in 2021 and the Company received cash proceeds of $ 3,000,000 . The discount associated with the Secured Note related to the embedded conversion liability and the issuance of the equity-classified financing instruments is amortized under the interest method and resulted in interest expense. Prior to amending the Secured Note in September 2021, the Company made principal payments totaling $4,050,000. On September 29, 2021 the parties entered into a Loan Modification Agreement (the “Amended Secured Note”) pursuant to which Energy Evolution exchanged $ 6,500,000 in principal under the Secured Note in exchange for 1,326,302 shares of common stock, warrants to purchase 500,000 shares of the Company’s common stock at $ 1.25 per share and amended certain terms of the remaining $ 5,700,000 of principal under the Secured Note. As amended, the remaining principal balance matures and becomes due on June 30, 2023 and upon maturity of the Amended Secured Note, Energy Evolution has the sole discretion to require cash settlement or to redeem the principal balance, together with accrued interest, in exchange for the Company’s common stock at $ 8 per share. Prior to maturity, interest accrues quarterly at 3.8% and Energy Evolution has the option to receive interest in common stock at $5.00 per share in lieu of cash . Pursuant to the Amended Secured Note, the Company’s obligations with respect to a registration statement under the Secured Note were extended, the Company executed and delivered a Pledge and Security Agreement granting Energy Evolution a first priority perfected security interest in the Company’s membership interest in Empire New Mexico, d/b/a Green Tree New Mexico, the Company and Green Tree New Mexico agreed to use commercial reasonable best efforts to separate Green Tree New Mexico from the Company as an independent business on or before December 31, 2022 in a spin-off to stockholders of the Company. In accordance with ASC 470-20, the Company accounted for this exchange as an induced conversion based on the short period time of the offer was open and the substantive conversion feature offer. The Company accounted for the conversion of the - 57 - debt instruments as an inducement by expensing the fair value of the instruments that were issued in excess of the original terms of the Secured Notes. The Company reduced the outstanding debt by $ 9,141,327 , representing the face amount of the Secured Notes converted of $ 6,500,000 , net of unamortized discount costs of $ 2,796,419 , and the embedded conversion liability of $ 5,437,746 . The Company recorded induced conversion expense of $ 2,276,813 representing the difference in fair value of the instruments exchanged, including the fair value of the warrants to purchase 500,000 shares of common stock at $ 5.00 per share. The embedded conversion option of the principal balance outstanding after the conversion and amendment, has been bifurcated and accounted for separately as a derivative financial instrument. The separated derivative was initially recorded at fair value of $ 2,017,287 , with the amount recorded as a discount against the surviving Amended Secured Note balance and the derivative liability will be revalued on a quarterly basis. On September 30, 2021, 23,802 shares of common stock were issued as payment for the outstanding accrued interest on the Secured Note. On December 30, 2021, the Company amended the Amended Secured Note to allow full conversion of the remaining principal and accrued interest at that date. $ 5,715,353 of outstanding principal and $ 55,075 of accrued interest were converted into 1,154,085 shares of the Company’s common stock. As a result of this conversion, the mortgage that Energy Evolution held on the Company’s New Mexico assets was released. Unsecured Convertible Notes In May 2021 the Empire New Mexico entered into $ 3,243,000 of Unsecured Convertible Notes (the “Unsecured Notes”) with a group of accredited investors, including the Company’s related party Energy Evolution, constituting $1,500,000 of the total Unsecured Convertible Notes. The Unsecured Notes had a maturity of May 9, 2022 with a single payment and interest at 5 %. The Unsecured Note holders had the ability to convert their notes to common stock of the Company at the lesser of $5.00 per share or the price per share offered by the Company if the Company has a future capital raise for an aggregate 648,600 shares of common stock (without giving effect to any interest that may be converted) . In September 2021, $ 325,000 of the notes were repaid and the remaining Unsecured Notes were fully converted. The Company determined the embedded conversion features of the Unsecured Notes were equity-classified financing instruments. The fair value of the conversion feature was determined using a beneficial conversion model based on a 60-day weighted average stock price and the maximum number of shares to be received if converted. As issuance, the amount recorded to additional paid in capital was $ 544,824 . The discount associated with these transactions is amortized under the interest method and resulted in interest expense approximately $ 540,000 for the year ended December 31, 2021. As an inducement for investors to enter into the Unsecured Convertible Notes, the Company’s Chief Executive Officer and President collectively offered to each investor the right to purchase a number of shares of common stock equal to 40 % of such investor’s principal balance under its Unsecured Convertible Note at $ 3.00 per share (the “right to buy”). Energy Evolution exercised its right to buy 150,000 shares of the Company’s common stock. In conjunction with the conversion of the Unsecured Notes, each of the Company’s Chief Executive Officer and President partially exercised a warrant and options to purchase 160,000 shares at an exercise price of $ 1.00 and $1.32 respectively. The Company determined that offering the “right to buy” shares resulted in an expense of $ 989,155 of the Company based on the fair value of contributions made by the Company’s Chief Executive Officer and President on its behalf. The fair value of the “right to buy” shares was determined using a Black-Scholes model. The expense is included in General and Administrative in the Consolidated Statement of Operations. Note 10 - Leases As a lessee, the Company leases its corporate office headquarters in Tulsa, Oklahoma and three field offices. The leases expire between 2024 and 2027. The corporate office has an option to renew for an additional five-year term. The option to renew the lease is generally not considered reasonably certain to be exercised. Therefore, the period covered by such optional period is not included in the determination of the term of the lease and the lease payments during these periods are similarly excluded from the calculation of right-of-use lease asset and lease liability balances. The Company recognizes right-of use lease expense on a straight-line basis, except for certain variable expenses that are recognized when the variability is resolved, typically during the period in which they are paid. Variable right-of-use lease payments typically include charges for property taxes, insurance, and variable payments related to non-lease components, including common area maintenance. Right of use lease expense was approximately $ 190,000 for the year ended December 31, 2021. Cash paid for right of use lease was approximately $ 142,000 for the same period. - 58 - Supplemental balance sheet information related to the right of use leases as of December 31, 2021 is as follows: Operating lease asset (included in Other Property and Equipment) $ 779,183 Current portion of lease liability $ 180,105 Long-term lease liability 646,311 Total right of use lease liabilities $ 826,416 The weighted average remaining term for the Company’s right of use leases is 3.7 years. Maturities of lease liabilities as of December 31, 2021 are as follows: 2022 $ 235,983 2023 238,931 2024 239,644 2025 193,660 2026 37,200 Thereafter 12,400 Total lease payments 957,819 Less imputed interest ( 131,403 ) Total lease obligation $ 826,416 Note 11 – Equity Diluted Earnings per Share (“EPS”) gives effect to all dilutive potential common shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on losses. As a result, if there is a loss from continuing operations, Diluted EPS is computed in the same manner as Basic EPS. At December 31, 2021 and 2020, the Company had 2,440,700 and 2,500,000 options outstanding that were not included in the calculation of earnings per share for the periods then ended. Such financial instruments may become dilutive and would then need to be included in future calculations of Diluted EPS. On August 7, 2020 concurrently with the Joint Development Agreement with Petroleum & Independent Exploration, LLC and related entities (“PIE”), the companies entered into a Securities Purchase Agreement (“Securities Agreement”) whereby PIE purchased for $525,000 (a) 875,000 shares of Empire common stock, (b) warrants to purchase 656,250 shares of Empire common stock at an exercise price of $0.80 per share, (c) warrants to purchase 450,000 shares of Empire common stock at an exercise price of $1.00 per share, (d) warrants to purchase 2,034,129 shares of Empire common stock at an exercise price of $0.40 per share, and (c) warrants to purchase up to 2,766,666 shares of Empire common stock at an exercise price of $ 0.564 per share pursuant to various vesting provisions as detailed in the Securities Agreement. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 147 %, risk free interest rate of . 19 % and an expected useful life of 4 years. The fair value of the warrants of $ 450,848 was allocated to paid in capital. On March 11, 2021 the Company amended the Securities Agreement to remove the vesting provisions for the warrants and PIE exercised the warrants for an aggregate exercise price of $ 3,349,052 (See Note 6). 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 . 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 Paid in Capital. For the year ended December 31, 2021, warrants for 700,714 shares of common stock have been exercised. In connection with the purchase of XTO assets the Company issued a Senior Secured Convertible Note due December 31, 2021 , in the aggregate principal amount $ 16,250,000 (the “Secured Convertible Note”) to Energy Evolution, a related party. As partial consideration for the issuance of the Secured Convertible Note, Empire issued to Energy Evolution Ltd (i) 375,000 shares of common stock along with (ii) a warrant certificate to purchase up to 750,000 three million shares of common stock at an exercise price of $4.00 per Warrant Share until May 14, 2022. Under the warrant certificate, the exercise price is subject to customary downward adjustments . The value allocated to the common stock, conversion feature, and warrants was $ 10,125,177 . In September, 2021 the Company and the Energy Evolution Master Fund, Ltd. entered into a Loan Modification Agreement (the “Amended Secured Notes”). Under the Amended Secured Notes, among other terms the Company issued a warrant certificate to purchase up to 500,000 two million shares of common stock at an exercise price of $5.00 per Warrant Share until December 31, 2023 . The exercise price is subject to customary downward adjustments. An additional 1,154,085 shares of common stock were issued to Energy Evolution on December 30, 2021, in conjunction with its conversion of all remaining principal and accrued interest on the note. - 59 - Additionally, in conjunction with the purchase of XTO assets, the Company entered into $ 3,243,000 of Unsecured Convertible Notes (the “Unsecured Notes”) with a group of accredited investors. The Unsecured Notes had a maturity date of May 9, 2022 with a single payment and interest at 5 % (See Note 7). The Unsecured Note holders had the ability to convert their notes to common stock of the Company at the lesser of $ 5.00 per share or the price per share offered by the Company if the Company has a future capital raise. At December 31, 2021 $ 2,918,000 of the Unsecured Notes have been converted into 583,600 shares of common stock of the Company. The fair value of the warrants of $ 589,194 was allocated to Paid in Capital. On April 3, 2019, the Board of Directors of the Company adopted the Empire Petroleum Corporation 2019 Stock Option Plan (the “Stock Option Plan”). The total number of shares of common stock that may be issued pursuant to stock options under the Stock Option Plan is 2,500,000 . Further, on April 3, 2019 the Company granted Mr. Pritchard and Mr. Morrisett each, options to purchase 625,000 shares of common stock of the Company at an exercise price of $ 1.32 per share. The options vested in three installments with 312,500 vesting immediately and 156,250 vesting each in April 2020 and April 2021. All of the options expire in April 2029. The value allocated to the vested options was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 213%, risk free interest rate of 2.32 % and an expected useful life of 5.375 years. The fair value of the vested options of $ 812,500 was recorded as compensation expense and allocated to Paid in Capital in 2019. In 2021 and 2020, the fair value of the options which vested in April of the respective year of $ 406,250 was recorded as compensation expense and allocated to Paid in Capital. All of the options were vested as of December 31, 2021. On August 27, 2021, the Board of Directors of the Company adopted the Empire Petroleum Corporation 2021 Incentive Plan (the “Incentive Plan”). The total number of shares of common stock that may be issued pursuant to the Incentive Plan is three million. As of December 31, 2021, grants were made amounting to 187,500 options. A summary of the Company's Incentive Plan as of December 31, 2021, and changes during the year is presented below: Weighted Average Options Exercise Price Outstanding at December 31, 2019 1,251,042 $ 1.32 Granted 1,250,000 1.40 Expired ( 1,042 ) 12.48 Outstanding at December 31, 2020 2,500,000 $ 1.36 Granted 187,500 12.20 Exercised ( 246,800 ) 1.36 Outstanding at December 31, 2021 2,440,700 $ 2.19 The following table summarizes information about stock options outstanding at December 31, 2021: Options Outstanding Options Exercisable Weighted Average Weighted Weighted Range of Number Remaining Average Average Exercise Outstanding Contractual Exercise Exercise Prices at 12/31/21 Life Price Exercisable Price $ 1.32 to $ 12.20 2,440,700 8.83 years $ 2.19 2,315,700 $ 1.65 - 60 - Note 12 – Income Taxes The current income tax provision and deferred income tax provision for the years ended December 31, 2021 and 2020 were comprised for the following: 2021 2020 Expected tax benefit $ ( 4,802,660 ) $ ( 4,343,542 ) Nondeductible expenses 3,503,996 0 Increase in valuation allowance 1,298,664 4,343,542 Tax provision (benefit) as reported $ — $ — At December 31, 2021, the Company had net operating loss carryforwards of approximately $ 20.7 million for federal income tax purposes available to offset future taxable income, as limited by the applicable provisions, which expire at various dates beginning in 2022 for the federal net operating loss carryforwards. In accordance with Section 382 of the Internal Revenue Code, the usage of the Company's net operating loss carryforwards may be limited in the event of a change in ownership. A full Section 382 analysis has not been prepared and NOLs could be subject to limitation under Section 382. 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 nettax position as of December 31, 2021 and 2020 is as follows : 2021 2020 Deferred tax assets (liabilities): Loss carry-forwards $ 5,341,256 $ 4,071,054 Depreciation, depletion and impairment 1,239,723 2,696,706 Right of use assets 8,036 — Stock option grants 796,188 — Other property and equipment ( 459,745 ) — Unrecognized losses on derivatives 27,210 1,207 Total deferred tax assets 6,952,668 6,768,967 Valuation allowance ( 6,952,668 ) ( 6,768,967 ) Net deferred taxes $ — $ — Reconciliations of the tax expense (benefit) computed at the statutory federal rate to the Company’s total income tax benefit for the years ended December 31, 2021 and 2020 are as follows: 2021 2020 $ % $ % Pretax GAAP Loss ( 18,614,962 ) — ( 16,835,434 ) — Pretax GAAP Loss at Statutory Rate ( 3,909,142 ) 21.0 % ( 3,535,441 ) 21.0 % State Taxes ( 893,518 ) 4.8 % ( 808,101 ) 4.8 % Nondeductible Expenses 3,503,996 - 18.8 % — 0 % Valuation Allowance 1,298,664 -7.0% 4,343,542 -25.8% Effective — 0 % — 0 % Utilization of the Company’s loss carryforwards is dependent on realizing taxable income. The Company recorded valuation allowances as of December 31, 2021 and 2020 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. The Company has evaluated all tax positions for which the statute of limitations remains open and believes that the material positions taken would likely than not would be sustained by examination. Therefore, at December 31, 2021, the Company has not established any reserves for, nor recorded any unrecognized benefits related to uncertain tax positions. -61- Note 13 – Related Party Transactions The Energy Evolution Master Fund, Ltd. (“Energy Evolution”) is a related party of the Company as it beneficially owns approximately 27 % of the Company’s outstanding shares of common stock as of December 31, 2021. Additionally, a board member of Energy Evolution was appointed to the Company’s board in October 2021. This board member separately beneficially owns approximately 18 % of the Company’s outstanding shares of common stock as of December 31, 2021. The board member also is a majority owner of Petroleum & Independent Exploration, LLC and related entities (“PIE”). In October 2021 another Energy Evolution member was appointed to the Company’s board of directors. In March 2021, the majority owner of PIE, through the exercise of warrants, became a significant shareholder of the Company’s outstanding shares of stock (See Note 11). The Company has a joint development agreement with PIE to perform recompletion or workover on specified mutually agreed upon wells (See Note 5). As of December 31, 2021, the Company has incurred obligations of approximately $ 800,000 as a part of the joint development agreement (See Note 8). Note 14 – Commitments and Contingencies From time to time, the Company is subject to various legal proceedings arising in the ordinary course of business, including proceedings for which the Company may not have insurance coverage. While many of these matters involve inherent uncertainty, as of the date hereof, the Company does not currently believe that any such legal proceedings will have a material adverse effect on the Company’s business, financial position, results of operations or liquidity. The Company is subject to extensive federal, state, and local environmental laws and regulations. These laws, among other things, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Management believes no materially significant liabilities of this nature existed as of the balance sheet date. The Company is undergoing a sales tax audit related to its Texas entity. No formal assessment has been provided to the Company. The maximum exposure of this sales tax assessment is approximately $ 1.3 million though the Company is confident that the final assessment will be less than the maximum as previously stated. Note 15 – 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, 2021, the Company sold 63 % of its oil, natural gas, and NGL to four customers. For the year ended December 31, 2020, the Company sold 96 % 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. Note 16 – Subsequent Events The Company uplisted from the OTCQB to the NYSE American effective March 8, 2022. Immediately prior to the listing, a reverse stock split of 1 for 4 occurred. All pricing and share amounts have been stated at post-reverse split amounts. On February 28, 2022, the Company granted approximately 249,000 stock options under the 2021 Stock Option and Incentive plan to management and employees of the Company. These options vest in equal 1/3 increments over the course of three years and expire 3.5 years after the grant date and have a grant price of $ 11.80 . The Company named Eugene J. Sweeney as Chief Operating Officer in March 2022. Mr. Sweeney previously served as the Company’s Vice President of Operations from May 2021 to the date of his promotion. - 62 - EMPIRE PETROLEUM CORPORATION Supplemental Information “Oil and Natural Gas Producing Activities (Unaudited) December 31, 2021 and 2020 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 Capitalized costs include the cost of properties, equipment, and facilities for oil and natural gas producing activities. Capitalized costs for proved properties includes costs for oil and natural gas leaseholds where proved reserves have been identified and non-operated development wells and related equipment and facilities. Years Ended December 31, 2021 2020 Proved acquisition costs $ 23,780,111 $ 10,913,393 Revisions to abandonment costs (1,547,640 ) (862,405 ) Development costs 1,970,410 — Total additions $ 24,202,881 $ 10,050,988 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. Below are the net quantities of net proved developed reserves of the Company’s properties: Oil (MMBbls) Gas (MMcf) MBOE Balance, December 31, 2019 3,643 404 3,710 Acquisition of Reserves 580 1,092 762 Revisions (397) (385) (461) Production (165) (140) (188) Balance, December 31, 2020 3,661 971 3,823 Acquisition of Reserves 5,634 10,533 7,390 Revisions (617) 251 (576) Extensions 150 51 159 Divestiture of Reserves (47) 27 (42) Production (333) (625) (437) Total Reserves 8,449 11,208 10,317 - 63 - 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 year end 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, Description 2021 2020 Future cash inflows $ 627,654,125 $ 121,959,450 Future production costs (362,254,813 ) (55,350,840 ) Future development costs (33,021,749 ) (1,682,210 ) Future income tax expense (30,614,383 ) — Future net cash flows 201,763,180 64,926,400 10% annual discount for estimated timing of cash flows (107,911,087 ) (44,156,400 ) Standardized measure $ 93,852,093 $ 20,770,000 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: 2021 2020 Oil (BBl) $ 64.31 $ 32.94 Natural gas (MMBtu) $ 7.34 * $ 1.41 *Pricing includes revenue received from NGL sales as well as natural gas. Changes in the Standardized Measure of Discounted Future Net Cash Flows at 10% per annum are as follows: December 31, Description 2021 2020 Beginning of year $ 20,770,080 $ 37,301,920 Net change in prices and production costs 13,080,689 (18,386,232 ) Net change in future development costs 782,210 16,937,402 Oil & Gas net revenue (10,587,395 ) (2,164,496 ) Extensions 5,026,479 — Acquisition of reserves 90,104,017 13,694,856 Divestiture of reserves (318,813 ) — Revisions of previous quantity estimates (3,794,860 ) (4,348,703 ) Net change in taxes (15,544,094 ) — Accretion of discount 2,077,008 5,099,678 Changes in timing and other (7,743,228 ) (27,364,345 ) End of year $ 93,852,093 $ 20,770,080 - 64 - 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. -65-