EMPIRE PETROLEUM CORP (EP)

Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q, including this section, includes certain statements that may be deemed “forward-looking statements” within the meaning of federal securities laws. All statements, other than statements of historical facts, which address activities, events, or developments that Empire expects, believes, or anticipates will or may occur in the future, including future sources of financing and other possible business developments, are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties and could be affected by a number of distinct factors, including Empire’s failure to secure short and long-term financing necessary to sustain and grow its operations, increased competition, changes in the markets in which Empire participates, the technology utilized by Empire, new legislation regarding environmental matters, general economic conditions including inflation, tariffs and interest rates, and uncertainties associated with legal and regulatory matters. These risks and other risks that could affect Empire’s business are more fully described in reports Empire files with the SEC, including its Annual Report on Form 10-K for the year ended December 31, 2025. Actual results may vary materially from the forward-looking statements. Empire undertakes no duty to update any of the forward-looking statements in this Form 10-Q.

Overview

Our primary business is the optimization and development of oil and gas properties. We have incurred losses from operations in 2026 and 2025. There is no assurance that we will be profitable or obtain the funds necessary to finance our future operations.

We seek to increase shareholder value by growing reserves, production, revenues, and cash flow from operating activities by executing our mission to use highly skilled personnel to thoughtfully and expertly spend capital to realize reserves on producing properties as well as further develop fields.

Management places emphasis on operating cash flow in managing our business, as operating cash flow considers the cash expenses incurred during the period and excludes non-cash expenditures not related directly to our operations.

Concentration

A majority of the Company’s producing properties and oil and natural gas reserves are located within three areas of the United States. Because of the concentration, the Company is exposed to the impact of regional supply and demand factors, processing or transportation capacity constraints, severe weather events, water shortages, and government regulations specific to the geographic area. The Company sells a large portion of its oil and natural gas production to a few customers. As a result of this concentration, we are exposed to the impact of our sales if one of these customers fails to meet their obligations or ceases its relationship with the Company. The loss in revenues may result in a disruption in the Company’s cash flows limiting the ability to meet its obligations or investing in capital projects.

Inflation

The effect of inflation on the Company has generally been to increase its cost of operations, general and administrative costs and direct costs associated with oil and natural gas production.

Properties

We are an independent operator in four geographic areas in the United States. For our operated properties, we manage and influence production using a combination of experienced field personnel and third-party service providers to execute our mission. Our producing properties have reasonably predictable production profiles and cash flows, subject to commodity price and cost fluctuations. As is common in the industry in which we operate, we selectively participate in drilling and developmental activities in non-operated properties. Decisions to participate in non-operated properties are made after technical and economic analysis of the projects which also considers the operating expertise and historical track record of the operators.

Seasonality of Business

Weather conditions often affect the demand for, and prices of, natural gas and can also delay oil and natural gas production. Demand for natural gas is traditionally higher in the winter, resulting in higher natural gas prices during the first and fourth quarters. Due to these seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of the results realized on an annual basis.

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Business Strategy

Our business strategy is to obtain long-term growth in reserves and cash flow on a cost-effective basis. Management regularly evaluates potential acquisitions of properties that would enhance current core areas of operation.

Critical Accounting Estimates

The preparation of financial statements in conformity with US GAAP requires management to use judgment to make estimates and assumptions that affect certain amounts reported in the unaudited interim consolidated financial statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts reported in the future. Because estimates and assumptions require significant judgment, future actual results could differ from those estimates and could have a significant impact on our results of operations, financial position and cash flows. We re-evaluate our estimates and assumptions at least on a quarterly basis and periodically update the estimates used in the preparation of the financial statements based on management’s latest assessment of the current and projected business and general economic environment. There have been no significant changes to Empire’s critical accounting estimates during the six months ended June 30, 2026.

LIQUIDITY AND CAPITAL RESOURCES

General

Empire’s primary sources of short-term liquidity are cash and cash equivalents, net cash provided by operating activities, our Credit Facility and issuance of debt or equity securities. Empire’s short- and long-term liquidity requirements consist primarily of capital expenditures, acquisitions of oil and natural gas properties, payments of contractual obligations, and working capital obligations. Funding for these requirements may be provided by any combination of Empire’s sources of liquidity. Although Empire expects that its sources of funding will be adequate to fund its liquidity requirements, no assurance can be given that such funding sources will be adequate to meet Empire’s future needs.

Liquidity

As noted below, our working capital is negative as of June 30, 2026, which is primarily the result of previous and unforeseen operational costs and lower production. As of June 30, 2026, we had approximately $3.1 million in cash on hand and approximately $2.0 million available under our Credit Facility; however, the Company’s available borrowing capacity under the Credit Facility continues to decrease due to a monthly reduction to the borrowing capacity under the Credit Facility. Mr. Mulacek also holds a warrant certificate issued in connection with a convertible note issued in September 2025. Finally, the Company received gross proceeds of $10.0 million from a rights offering in March 2026 and the potential of up to an additional $7.5 million less agency fees from an at-the-market offering pursuant to the sales agreement entered into in May 2026.

Despite these transactions, the Company will require additional funds to satisfy the payables discussed above which are greater than estimated cash flow from operations over the next 12 months. Energy Evolution and PIE, both related parties of Empire, have indicated that they will, and have the ability to, provide sufficient support to sustain the operating, investing, and financing activities of Empire, as necessary. Management continues to seek additional sources of capital via the debt or equity markets to improve liquidity going forward. See Liquidity and Going Concern in Note 1 of Notes to Unaudited Interim Condensed Consolidated Financial Statements for further discussion of management’s plans.

Empire expects to continue to incur costs related to drilling activities in core areas as well as future oil and natural gas acquisitions in core areas. During the first six months of 2026, Empire incurred approximately $4.0 million of total additions to oil and natural gas properties, primarily related to the gas development program in Texas. It is expected that Empire will use a combination of debt or equity issuances, cash on hand, and cash flows from operations to fund capital programs, ongoing operations, and any potential acquisitions.

Hedging Positions

We generally do not enter into derivative financial instruments for speculative or trading purposes. As of June 30, 2026, our remaining outstanding derivative financial instruments account for 58,000 Bbls at a blended price of $69.89 to help minimize expected pricing volatility and to strengthen forward cash flow visibility. Any additional derivative financial instruments Empire may enter into or anticipated production increases from our ongoing development projects will further strengthen Empire’s cash flows from operations.

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Working Capital

Working capital is presented in the table below. The change of approximately $0.2 million was primarily driven by a higher cash balance partially offset by the related party accounts payable further described in Note 13 – Related Party Transactions.

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Cash Flows

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Operating Activities

Cash used in operating activities increased period over period primarily due to lower production volumes.

Investing Activities

Investing activities are primarily related to approximately $3.6 million of additions to oil and natural gas properties during the first six months of 2026 from the Company’s gas development program in Texas compared to $3.2 million of additions in the prior year’s first six months associated with various projects in Texas and North Dakota.

Financing Activities

Financing activities in the first six months of 2026 include both a $2.0 million repayment and a $3.0 million borrowing on respective related party notes with Mr. Mulacek. We also completed a rights offering in March 2026 for net proceeds of approximately $9.9 million. In addition, we paid $1.0 million of the outstanding balance of our revolving credit facility in the first quarter of 2026.

Capital Resources

Capital Expenditures

For the six months ended June 30, 2026, Empire incurred approximately $4.0 million of total additions to oil and natural gas properties which is primarily from the Company’s gas development program in Texas.

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Production and Operating Data

The following table

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis presents management’s perspective of our business, financial condition and overall performance. This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future and should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements, which are included in this Annual Report on Form 10-K in Item 8, Financial Statements and Supplementary Data, and the information set forth in Part I, Item 1A – Risk Factors.

Overview

Our primary business is the optimization and development of oil and gas interests. We have incurred losses from operations in 2025 and 2024. There is no assurance that we will be profitable or obtain funds necessary to finance our future operations.

We seek to increase shareholder value by growing reserves, production, revenues, and cash flow from operating activities by executing our mission to use highly-skilled personnel to thoughtfully and expertly spend capital to realize reserves on producing properties as well as further develop fields.

Management places emphasis on operating cash flow in managing our business, as operating cash flow considers the cash expenses incurred during the period and excludes non-cash expenditures not related directly to our operations.

Inflation

The effect of inflation on the Company has generally been to increase its cost of operations and direct costs associated with oil and natural gas production.

Business Strategy

Our business strategy is to obtain long-term growth in reserves and cash flow on a cost-effective basis. Management regularly evaluates potential acquisitions of properties that would enhance current core areas of operation.

Liquidity and Going Concern

The Company has a revolving line of credit agreement (Note 7) with Equity Bank which requires the Company to maintain compliance with certain financial covenants computed on a quarterly and annual basis. As of December 31, 2025, the Company was in compliance with all required covenants and projected to be in compliance with all debt covenants over the next 12 months. However, the Company carried a negative working capital of approximately $16.2 million as of December 31, 2025. Working capital decreased by approximately $7.2 million from prior year primarily due to the overall pricing environment reducing operating cash flows, capital spend on various projects within Texas and North Dakota resulting in increased payables as operating cash flows decline, and lower overall production from redrilling and operational activity resulting in certain wells being down for a period of time during the period. Additionally, the Company’s debt obligations continue to increase with various related parties as discussed below. To meet its obligations, the Company increased its revolver commitment to $20.0 million in November 2024 which had approximately $2.5 million remaining unused commitment as of December 31, 2025; however, the revolver commitment is reduced monthly by $0.25 million commencing on December 31, 2024 (Note 7), limiting future access to capital. Further, the Company entered into a promissory note and a convertible note with Phil Mulacek in June 2025 and September 2025, respectively. Each respective note provided up to $4.0 million of available borrowing capacity. As of December 31, 2025, the promissory note had fully expired and the convertible note had $2.0 million outstanding. The Company may borrow up to an additional $2.0 million of the convertible note’s available principal at the discretion of Mr. Mulacek, per the terms of the agreement (Note 7). The Company also issued warrants to Mr. Mulacek in connection with the convertible note (Note 7). Further, a subscription rights offering was completed in August 2025, which raised approximately $2.5 million of gross proceeds (Note 9). A portion of these proceeds were used to settle $2.0 million of the outstanding balance of the promissory note with Mr. Mulacek, per the terms of the note, during the third quarter. In February 2026, the Company entered into a convertible note with Mr. Mulacek for $3.0 million to be used towards full settlement of the convertible note in September 2025 and general working capital needs. In March 2026, this note was fully converted to common shares (Note 7). An additional subscription rights offering was also announced and expected to raise gross proceeds of up to $10.0 million (Note 9). While these transactions provide additional funding towards the Company’s obligations, the Company expects to have negative working capital for the next 12 months and future expected operating cash flows do not sufficiently meet the Company’s obligations. Given the negative working capital and insufficient expected operating cash flow there is substantial doubt about the Company’s ability to continue as a going concern.

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Empire has committed financial support from Phil Mulacek who owns approximately 24.5% of our common stock outstanding as of December 31, 2025, and Energy Evolution, our largest stockholder, who owns approximately 30.8% of our common stock outstanding as of December 31, 2025. Both are related parties of the Company (Note 13). Mr. Mulacek and Energy Evolution are willing and able to provide these additional funds for Empire to continue to meet its obligations over the next 12 months. These additional funds may be raised through related party warrants, or a related party note payable that may or may not have conversion rights into shares of common stock of Empire.

Management has considered these plans in evaluating FASB ASC 205-40, Presentation of Financial Statements - Going Concern. Management believes the above actions are sufficient to allow Empire to meet its obligations as they become due within one year after the date the financial statements are issued. Management believes that its plans, and support from the existing related-party stockholders discussed above, is probable and has alleviated the substantial doubt regarding Empire’s ability to continue as a going concern.

Recent Developments

The following is a brief listing of developments during the year ended December 31, 2025. Additional information including subsequent events may be found elsewhere in this report.

On May 1, 2025, the Company extended its option to purchase certain New Mexico interests from Energy Evolution to allow for payment for such extension to be made in cash in lieu the issuance of the 16,800 shares of common stock. The Company made a cash payment to Energy Evolution on September 30, 2025 to extend the purchase option for an additional year (Note 3).

On June 17, 2025, the Company issued a promissory note in the aggregate principal amount of $4.0 million to Mr. Mulacek who immediately advanced $2.0 million under the note. The Company may request in writing that Mr. Mulacek advance up to another $2.0 million to the Company from time to time during the period beginning 45 days and ending 90 days after June 17, 2025. The note accrues interest at 5.5% and may be repaid without penalty or premium prior to the maturity date of June 17, 2027. Per the terms of the note, in the event that the Company closes a sale of its equity, the Company shall promptly, but in no event later than five business days after receipt of the proceeds, repay the lesser of (a) the initial $2.0 million advanced (including any interest or fees thereon) or (b) the amount of the equity sale to Mr. Mulacek. In the event the Company receives proceeds from the sale of any of its equity after an initial equity sale repayment and any subsequent advance, the Company shall use such proceeds to promptly repay such subsequent advance, and all accrued and unpaid interest thereon, to Mr. Mulacek. In August 2025, Empire completed an equity sale further described in Note 9 and repaid the outstanding note balance and all accrued and unpaid interest (Note 7).

On June 18, 2025, the Company entered into the second amendment to the revolver loan agreement with Equity Bank. The amendment added Empire Texas Development LLC as a third borrower and extends the obligation security by liens on substantially all of the assets of Empire Texas Development LLC (Note 7).

In August 2025, Empire completed a subscription rights offering which raised gross proceeds of $2.5 million. Empire distributed at no charge to holders of its common stock, as of the close of business on July 10, 2025 (the record date), one non-transferable subscription right for each whole share of common stock owned by that stockholder on the record date. Each subscription right entitled a rights holder to purchase one unit at a subscription price equal to $0.07367 per unit, each unit consisting of 0.0139 shares of the Company’s common stock and one rights warrant to purchase 0.0136 shares of the Company’s common stock equal to $5.46 per whole share. No fractional shares of common stock are issued in the rights offering, including upon exercise of the warrants. The subscription rights were initially set to expire if they were not exercised or extended at the discretion of the Company by July 25, 2025; however, this date was subsequently extended to August 20, 2025. The warrants expired 90 days after August 20, 2025 (Note 9).

On September 24, 2025, the Company issued a convertible promissory note in the aggregate principal amount of $4.0 million to Mr. Mulacek and advanced an initial $2.0 million payable in full on September 23, 2027. An additional $2.0 million may be advanced from time to time from March 23, 2026 and for a period of six months thereafter. The note accrues interest at 5.5% and may be repaid without penalty or premium prior to the maturity date. At the discretion of Mr. Mulacek all or any portion of the outstanding principal amount of the note may be converted into shares of common stock at a conversion price of $4.27 per share, subject to customary adjustments up to a maximum conversion shares amount of 936,768. As partial consideration for the note, the Company issued Mr. Mulacek a warrant certificate to purchase up to 281,030 common shares at a $4.27 exercise price which will expire on September 24, 2028. (Note 7).

On November 5, 2025, the note was amended to change the conversion price of the initial $2.0 million advance to $4.32 per share for a maximum conversion shares amount of 462,962 and to provide that any further advances are at the discretion of Mr. Mulacek. The warrant certificate was also amended to change the exercise price to $4.32 and the maximum shares available for purchase to 138,889 (Note 7).

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On December 10, 2025, the Company entered into a letter agreement to acquire the remaining 40% of certain New Mexico interests from Energy Evolution which was finalized subsequent to December 31, 2025. As consideration, Empire issued 562,500 shares of common stock on January 5, 2026, which is the closing date of the letter agreement, based on an agreed upon price of $3.20 per share for an aggregate agreed upon value of $1.8 million (Note 3).

On December 29, 2025, the Company entered into the third amendment to the revolver loan agreement with Equity Bank. The amendment preserved the maximum revolver commitment amount of $20.0 million and extended the maturity date to December 29, 2028 (Note 7).

Commodity Derivatives

We use commodity derivatives to manage our exposure to commodity price fluctuations and reduce the effect of volatility. Our derivative instruments are not designated to qualify for hedge accounting and recorded at fair value as an asset or liability on the Company’s consolidated balance sheets. We entered into certain oil commodity derivative positions subsequent to December 31, 2025 through March 13, 2026 for approximatel

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