EQUITY

9 Months Ended

Sep. 30, 2021

Equity [Abstract]

EQUITY

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 September 30, 2021 and 2020, the Company had 9,012,800 and 5,004,167 respectively, 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. At September 30, 2021 and 2020, the outstanding options and convertible notes were considered anti-dilutive because the strike prices were above the market price and the Company has incurred operating losses year to date.

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 ten million. Further, on April 3, 2019 the Company granted Mr. Pritchard and Mr. Morrissett each, options to purchase 2,500,000 shares of common stock of the Company at an exercise price of $0.33 per share. The options vested in three installments with 1,250,000 vesting immediately and 625,000 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 September 30, 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 September 30, 2021 no grants have been made.

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) 3,500,000 shares of Empire common stock, (b) warrants to purchase 2,625,000 shares of Empire common stock at an exercise price of $0.20 per share, (c) warrants to purchase 1,800,000 shares of Empire common stock at an exercise price of $0.25 per share, (d) warrants to purchase 8,136,518 shares of Empire common stock at an exercise price of $0.10 per share, and (e) warrants to purchase up to 11,066,667 shares of Empire common stock at an exercise price of $0.141 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 (See Note 6). 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 8,993,858 shares of its common stock and warrants to purchase 8,993,858 shares of its common stock for $.50 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 nine months ended September 30, 2021, warrants for 2,518,743 shares of common stock have been exercised.

In connection with the purchase of XTO assets (See Note 5) 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 Fund Ltd, a related party (See Note 9). As partial consideration for the issuance of the Secured Convertible Note, Empire issued to Energy Evolution Ltd (i) 1,500,000 shares of common stock along with (ii) a warrant certificate to purchase up to three million shares of common stock at an exercise price of $1.00 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”) (See Note 9). Under the Amended Secured Notes, among other terms the Company issued a warrant certificate to purchase up to two million shares of common stock at an exercise price of $1.25 per Warrant Share until December 31, 2023. The exercise price is subject to customary downward adjustments.

Additionally, in conjunction with the purchase of XTO assets (See Note 5), 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 $1.25 per share or the price per share offered by the Company if the Company has a future capital raise. At September 30, 2021 $2,918,000 of the Unsecured Notes have been converted into 2,334,400 shares of common stock of the Company. The remaining Unsecured Notes in the amount of $325,000 were repaid in September 2021 and no amounts remain outstanding or convertible. The fair value of the warrants of $544,824 was allocated to Paid in Capital.

On August 27, 2021 the Company’s Board of Directors recommended 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 recommended the Company to issue ten million shares of no-par value Preferred Stock. The majority of the stockholders, and the majority of the minority stockholders approved the recommendations. As of September 30, 2021 the Company has not made the reverse stock split effective, nor has it issued any Preferred Stock.