EXHIBIT 99.2
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On March 28, 2019, a wholly owned subsidiary of Empire Petroleum Corporation ("Empire") closed on certain oil and gas properties owned by EnergyQuest II, LLC ("EnergyQuest"), under a Purchase and Sale Agreement dated March 28, 2019 (the "Agreement") for a purchase price of $5,418,653. The effective date of the transaction was January 1, 2019.
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 EnergyQuest 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, 2018, combine the historical statements of consolidated operations of Empire and the EnergyQuest assets purchased, giving effect to the purchase and related transactions as if they had been consummated on January 1, 2018, 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 EnergyQuest assets as of December 31, 2018, giving effect to the purchase as if it had been consummated on December 31, 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 EnergyQuest assets acquired and the liabilities assumed and the related allocations of purchase price. A final determination of the fair value of EnergyQuest'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 EnergyQuest 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 EnergyQuest's assets and liabilities based on preliminary valuation studies, due diligence and information obtained from the previous owner of the EnergyQuest 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 EnergyQuest 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:
| | • | | the accompanying notes to the unaudited pro forma financial statements; and |
| | • | | the historical audited consolidated financial statements of Empire for the year ended December 31, 2018, included in Empire's Annual Report on Form 10-K. |
EMPIRE PETROLEUM CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
As of December 31, 2018
| | | Empire Historical | | | Pro Forma Adjustments | | | Empire Pro Forma Combined | |
ASSETS | | | | | | | | | |
| Current assets: | | | | | | | | | |
| Cash | | $ | 84,631 | | | $ | — | | | $ | 84,631 | |
| Accounts receivable | | | 124,577 | | | | 1,256,094 | | C | | 1,380,671 | |
| Inventory | | | — | | | | 438,320 | | C | | 438,320 | |
| Unrealized gain on derivative instruments | | | 113,081 | | | | — | | | | 113,081 | |
| Prepaids and other current assets | | | 45,214 | | | | — | | | | 45,214 | |
| Total current assets | | | 367,503 | | | | 1,694,414 | | | | 2,061,917 | |
| | | | | | | | | | | | | |
| Property and equipment | | | | | | | | | | | | |
| Oil and gas properties, successful efforts method | | | 1,645,297 | | | | 11,338,745 | | B | | 12,984,042 | |
| Accumulated depletion and depreciation | | | (15,527 | ) | | | (193,565 | ) | A | | (209,092 | ) |
| Total oil and gas properties | | | 1,629,770 | | | | 11,145,180 | | | | 12,774,950 | |
| | | | | | | | | | | | | |
| Total assets | | $ | 1,997,273 | | | $ | 12,839,594 | | | $ | 14,836,867 | |
| | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | |
| Accounts payable | | $ | 320,749 | | | $ | 1,310,517 | | C | $ | 1,631,266 | |
| Accrued expenses | | | 141,033 | | | | 696,482 | | C | | 837,515 | |
| Current portion of long term notes payable | | | 279,204 | | | | — | | | | 279,204 | |
| Total current liabilities | | | 740,986 | | | | 2,006,999 | | | | 2,747,985 | |
| | | | | | | | | | | | | |
| Long term notes payable | | | 1,175,820 | | | | 5,187,882 | | B | | 6,363,702 | |
| Asset retirement obligations | | | 230,650 | | | | 3,267,380 | | B | | 3,498,030 | |
| Total liabilities | | | 2,147,456 | | | | 10,462,261 | | | | 12,609,717 | |
| | | | | | | | | | | | | |
| Stockholders' equity (deficit): | | | | | | | | | | | | |
| Common stock-$.001 par value authorized 150,000,000 shares, issued and outstanding 17,345,609 shares | | | 17,345 | | | | 1,280 | | D | | 18,625 | |
| Additional paid in capital | | | 16,960,818 | | | | 190,720 | | D | | 17,151,538 | |
| Retained earnings/ (accumulated deficit) | | | (17,128,346 | ) | | | 2,185,333 | | | | (14,943,013 | ) |
| Total stockholders' equity (deficit) | | | (150,183 | ) | | | 2,377,333 | | D | | 2,227,150 | |
| Total liabilities and stockholders' equity | | $ | 1,997,273 | | | $ | 12,839,594 | | | $ | 14,836,867 | |
| | | | | | | | | | | | | |
See accompanying notes to unaudited pro forma financial statements
EMPIRE PETROLEUM CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2018
| | | Empire Historical | | | Pro Forma Adjustments | | | Empire Pro Forma Combined | |
| Revenues: | | | | | | | | | |
| Oil and gas sales | | $ | 352,374 | | | $ | 6,905,014 | | C | $ | 7,257,388 | |
| Unrealized gain on derivative | | | 113,081 | | | | — | | | | 113,081 | |
| Total revenue | | | 465,455 | | | | 6,905,014 | | | | 7,370,469 | |
| | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | |
| Operating | | | 116,288 | | | | 4,051,783 | | C | | 4,168,071 | |
| Taxes – production | | | 21,194 | | | | 474,333 | | C | | 495,527 | |
| Depletion, depreciation and amortization | | | 15,527 | | | | 7,286 | | A | | 22,813 | |
| Accretion of asset retirement obligation | | | 1,929 | | | | 186,279 | | A | | 188,208 | |
| General and administrative | | | 1,226,465 | | | | — | | | | 1,226,465 | |
| Total costs and expenses | | | 1,381,403 | | | | 4,719,681 | | | | 6,101,084 | |
| Operating income (loss) | | | (915,948 | ) | | | 2,185,333 | | | | 1,269,385 | |
| | | | | | | | | | | | | |
| Other expense: | | | | | | | | | | | | |
| Interest expense | | | (101,183 | ) | | | — | | | | (101,183 | ) |
| | | | | | | | | | | | | |
| Net income (loss) | | $ | (1,017,131 | ) | | $ | 2,185,333 | | | $ | 1,168,202 | |
| | | | | | | | | | | | | |
| Net income (loss) per common share basic | | $ | (0.08 | ) | | $ | — | | | $ | 0.08 | |
| | | | | | | | | | | | | |
| Net income (loss) per common share diluted | | $ | (0.08 | ) | | $ | — | | | $ | 0.06 | |
| | | | | | | | | | | | | |
| Weighted average number of common shares outstanding basic | | | 13,150,325 | | | | 1,280,001 | | | | 14,430,326 | |
| | | | | | | | | | | | | |
| Weighted average number of common shares outstanding diluted | | | 13,150,325 | | | | — | | | | 18,188,659 | |
| | | | | | | | | | | | | |
See accompanying notes to unaudited pro forma financial statements
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The unaudited pro forma combined financial information has been derived from the historical consolidated financial statements of Empire and information provided by the previous owners of the EnergyQuest assets. The unaudited pro forma combined balance sheet as of December 31, 2018 gives effect to the purchase as if the purchase had been completed on December 31, 2018. The unaudited pro forma combined statements of operations for the year ended December 31, 2018 give effect to the purchase as if the purchase had been completed on January 1, 2018.
The unaudited pro forma combined financial statements reflect pro forma adjustments that are described in the accompanying notes and are based on available information and certain assumptions that Empire believes are reasonable; however, actual results may differ from those reflected in these statements. In Empire's opinion, all adjustments that are necessary to present fairly the pro forma information have been made. The unaudited pro forma combined financial statements do not purport to represent what the Empire's financial position or results of operations would have been if the transaction had actually occurred on the dates indicated above, nor are they indicative of Empire's future financial position or results of operations. These unaudited pro forma combined financial statements should be read in conjunction with the historical financial statements and related notes of Empire for the periods presented.
Note 2. Unaudited Pro Forma Combined Balance Sheet
The allocation of the preliminary estimated purchase price is based upon management's estimates of and assumptions related to the fair value of assets acquired and liabilities assumed as of June 30, 2018 using currently available information. Due to the fact that the unaudited pro forma combined financial information has been prepared based on these preliminary estimates, the final purchase price allocation and the resulting effect on financial position and results of operations may differ significantly from the pro forma amounts included herein. Empire expects to finalize its allocation of the purchase consideration as soon as practicable after the date of the purchase.
The fair values of assets acquired, and liabilities assumed were based on the following key inputs:
Oil and natural gas properties
The fair value of proved 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 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. Empire 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. 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 totaled $3,267,380 and is 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 estimated plugging and abandonment costs estimated in the reserve report.
The inputs used to value oil and natural gas properties 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 and accounts payable and accrued liabilities were equivalent to the carrying value due to their short-term nature.
Note 3. Pro Forma Adjustments
The following adjustments have been made to the accompanying unaudited pro forma combined financial statements:
| A. | Reflects estimate of depletion and accretion of acquired properties for the period presented based on the purchase price, asset retirement obligation, and production. |
| B. | Reflects the purchase of the oil and gas properties and recording of the related asset retirement obligation. |
| C. | Reflects oil and gas operations of the properties acquired for the period presented. |
| D. | Conversion of outstanding warrants to common shares to fund acquisition, in addition to debt. |
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