STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES

OF THE OIL AND GAS PROPERTIES EMPIRE PETROLEUM CORPORATION

PURCHASED ON AUGUST 28, 2018 FROM CARDINAL EXPLORATION AND PRODUCTION COMPANY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INDEPENDENT AUDITOR'S REPORT

 

 

 

To the Stockholders and Board of Directors of

Empire Petroleum Corporation

 

Report on the Statements of Revenues and Direct Operating Expenses

 

We have audited the accompanying statements of revenues and direct operating expenses of the oil and gas properties Empire Petroleum Corporation purchased on August 28, 2018 from Cardinal Exploration and Production Company (the Properties) for the years ended December 31, 2017 and 2016, and the related notes to the statements of revenues and direct operating expenses.

 

Management's   Responsibility   for   the   Statements   of   Revenues   and   Direct   Operating   Expenses

 

Management is responsible for the preparation and fair presentation of the statements of revenues and direct operating expenses in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the statements of revenues and direct operating expenses that is free from material misstatement, whether due to fraud or error.

 

Auditor's Responsibility

 

Our responsibility is to express an opinion on the statements of revenues and direct operating expenses based on our audits.  We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements of revenues and direct operating expenses are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statement.  The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statement in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.  Accordingly, we express no such opinion.  An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the statements of revenues and direct operating expenses referred to above present fairly, in all material respects, the revenues and direct operating expenses of the Properties for the years ended December 31, 2017 and 2016, in accordance with accounting principles generally accepted in the United States of America.

 

Basis of Presentation

 

As described in Note 1 to the statements of revenues and direct operating expenses, the accompanying statements of revenues and direct operating expenses were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the Form 8K/A Amendment No. 1 of Empire Petroleum Corporation and are not intended to be a complete presentation of the results of the operations of the Properties.  Our opinion is not modified with respect to this matter.

 

 

 

Tulsa, Oklahoma

 

November 14, 2018

 

 

 

 

See notes to statements of revenues and direct operating expenses.

 

 

 

 

 

 

 

 

 

 

 

 

NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES

OF THE OIL AND GAS PROPERTIES EMPIRE PETROLEUM CORPORATION

PURCHASED ON AUGUST 28, 2018 FROM CARDINAL EXPLORATION AND PRODUCTION COMPANY

Note 1 – The Properties

On August 28, 2018, a wholly owned subsidiary of Empire Petroleum Corporation ("Empire") purchased oil and gas properties (the "Properties") from Cardinal Exploration and Production Company ("Cardinal") under a Purchase and Sale Agreement dated July 23, 2018 (the "Purchase Agreement") for a purchase price of $323,000.  The effective date of the transaction was June 1, 2018.  After certain adjustments under the Purchase Agreement related to the effective date, the total proceeds paid to Cardinal were $293,966.  Such proceeds were paid from sales of unregistered securities of Empire.

The oil and gas properties purchased from Cardinal include a 100% working interest in four active operated wells in Louisiana currently producing approximately 35 barrels of oil equivalent (BOE) per day.

Note 2 – Basis of Presentation

During the periods presented, the Properties were not accounted for or operated as a separate division by Cardinal.  Certain costs, such as depreciation, depletion and amortization, interest, accretion, general and administrative expenses, and corporate income taxes were not allocated to the  Properties.  Accordingly, full separate financial statements prepared in accordance with generally accepted accounting principals do not exist and are not practicable to obtain in these circumstances.

Revenues and direct operating expenses included in the accompanying financial statements represent Empire's net working interest in the Properties for the years ended December 31, 2017 and 2016 and the six months ended June 30, 2018 and 2017 and are presented on the accrual basis of accounting. The revenues and direct operating expenses presented herein relate only to the interests in the producing oil and natural gas properties acquired and do not represent all the oil and natural gas operations of Cardinal, the other owners, or other third party working interest owners. Depreciation, depletion and amortization, interest, accretion, general and administrative expenses and corporate income taxes have been excluded.  The financial statements presented are not indicative of the results of operations of the Properties  going forward due to changes in the business, including the price of oil and inclusion of the above mentioned expenses.

The statements of revenues and direct operating expenses of the Properties for the six months ended June 30, 2018 and 2017 are unaudited. In the opinion of  Empire's management, such statements include the adjustments and accruals which are necessary for a fair presentation of results for the Properties. These interim results are not necessarily indicative of results for a full year.

Empire reviewed events occurring after the date of the latest financial statement which could affect the Properties' financial position and/or results of operations for the period.  Empire reviewed and evaluated events through November 14, 2018 the date these financial statements were issued.

Note 3 – Unaudited Interim Financial Information

 

The accompanying statements of revenues and direct operating expenses for the six months ended June 30, 2018 and 2017, are unaudited.  The unaudited interim statements of revenues and direct operating expenses were prepared on the same basis as the audited statement of revenues and direct operating expense for the years ended December 31, 2017 and 2016.  In the opinion of management, the unaudited  interim financial statements reflect all adjustments necessary to state fairly the statements of revenues and direct operating expenses of the Properties. The revenues and direct operating expenses for the interim periods ended June 30, 2018 and 2017, are not necessarily indicative of results that may be expected for the year ending December 31, 2018, or any future periods.

 

Note 4 – Commitments and Contingencies

Empire is not aware of any legal, environmental or other commitments or contingencies that would have a material effect on the statements of revenues and direct operating expenses.

 

 

 

 

 

 

 

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

On August 28, 2018, a wholly owned subsidiary of Empire Petroleum Corporation ("Empire") purchased oil and gas properties from Cardinal Exploration and Production Company ("Cardinal") under a Purchase and Sale Agreement dated July 23, 2018 (the "Purchase Agreement") for a purchase price of $323,000.  The effective date of the transaction was June 1, 2018.  After certain adjustments under the Purchase Agreement related to the effective date, the total proceeds paid to Cardinal were $293,966.  Such proceeds were paid from sales of unregistered securities of Empire.

The oil and gas properties purchased from Cardinal include a 100% working interest in four active operated wells in Louisiana currently producing approximately 35 barrels of oil equivalent (BOE) per day.

 

The following unaudited pro forma combined financial statements (which we refer to as the "unaudited pro forma financial statements") present the combination of the historical consolidated financial statements of Empire adjusted to give effect to the purchase of the Cardinal assets and related transactions. The unaudited pro forma combined statements of operations (which we refer to as the "unaudited pro forma statements of operations") for the year ended December 31, 2017, and for the six months ended June 30, 2018, combine the historical statements of consolidated operations of Empire and the Cardinal assets purchased, giving effect to the purchase and related transactions as if they had been consummated on January 1, 2017, the beginning of the earliest period presented. The unaudited pro forma combined balance sheet (which we refer to as the "unaudited pro forma balance sheet") combines the historical consolidated balance sheet of Empire and the purchase of the Cardinal assets as of June 30, 2018, giving effect to the purchase as if it had been consummated on June 30, 2018.

As of the date of this Form 8-K/A, Empire has not completed the detailed valuation study necessary to arrive at the required final estimates of the fair value of the Cardinal assets acquired and the liabilities assumed and the related allocations of purchase price. A final determination of the fair value of Cardinal's assets and liabilities, including intangible assets with both indefinite or finite lives, will be based on the actual net tangible and intangible assets and liabilities of Cardinal that exist as of the closing date of the purchase. As a result of the foregoing, the pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analysis is performed. The preliminary pro forma adjustments have been made solely for the purpose of providing the unaudited pro forma financial statements presented below. Empire estimated the fair value of Cardinal's assets and liabilities based on preliminary valuation studies, due diligence and information obtained from the previous owner of the Cardinal assets. Any increases or decreases in the fair value of assets acquired and liabilities assumed upon completion of the final valuations will result in adjustments to the unaudited pro forma balance sheet and/or statements of operations. The final purchase price allocation may be materially different than that reflected in the pro forma purchase price allocation presented herein.

 

Assumptions and estimates underlying the adjustments to the unaudited pro forma financial statements (which we refer to as the "pro forma adjustments") are described in the accompanying notes. The historical consolidated financial statements have been adjusted in the unaudited pro forma financial statements to give effect to the purchase that are directly attributable to the purchase, factually supportable and, with respect to the unaudited pro forma statements of operations, expected to have a continuing impact on the combined results of Empire and the Cardinal assets following the purchase. The unaudited pro forma financial statements have been presented for illustrative purposes only and are not necessarily indicative of the operating results and financial position that would have been achieved had the purchase occurred on the dates indicated. Further, the unaudited pro forma financial statements do not purport to project the future operating results or financial position of Empire following the purchase.

 

The unaudited pro forma financial statements have been developed from and should be read in conjunction with: