Empire Petroleum Corporation — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the period ended September 30, 2017, filed November 13, 2017. Empire explores and develops oil and gas interests, but had no oil and gas properties or equipment and generated no petroleum revenue during the periods presented. The company had no employees as of September 30, 2017.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Petroleum sales | $0 in 2017 and 2016 | $0 in 2017 and 2016 |
| General and administrative expense | $51,250 vs. $18,859 | $164,260 vs. $161,901 |
| Interest expense | $17,399 vs. $0 | $52,313 vs. $0 |
| Net loss | $68,649 vs. $18,859 | $216,573 vs. $161,901 |
| Basic and diluted loss per share | $0.01 vs. $0.00 | $0.02 vs. $0.02 |
| Net cash used in operating activities | $167,100 in 2017 vs. $17,316 in 2016 |
At September 30, 2017, cash was $14,143, down from $68,743 at December 31, 2016. Total assets were $352,037, including a $300,000 investment in Masterson West II. Current liabilities were $47,652, and convertible notes, net, were $170,092. Stockholders’ equity declined to $134,293 from $301,381.
Financing activities provided $112,500 during the first nine months of 2017. Gross convertible notes outstanding totaled $245,000, net of $74,908 in warrant and conversion-feature discounts. The notes generally bear 6% interest, are convertible at $0.15 per share, and include warrants exercisable at $0.25 per share.
Material Changes Versus Prior Comparable Period
- Third-quarter general and administrative expense increased $32,391, primarily due to legal and other costs related to potential asset purchases.
- Nine-month general and administrative expense increased $2,359. Management attributed the change to higher legal, financing, listing and investment-related costs, partially offset by the absence of the $65,660 stock-option expense recorded in 2016.
- Interest expense increased because convertible notes were issued beginning in late 2016 and during 2017.
- Nine-month net loss increased $54,672, reflecting higher operating costs and interest expense.
- Cash used in operations increased substantially, while cash declined despite $112,500 of note financing.
- Common shares outstanding increased to 8,803,942 from 8,710,609 at December 31, 2016. A total of 93,333 shares and warrants for 56,000 shares were issued to an investment banking service firm in July 2017.
Outlook, Risks, Contingencies and Unusual Items
- Management states that substantial historical losses create substantial doubt about the company’s ability to continue without profitable operations or additional debt or equity financing. The filing relies on the going-concern assumption.
- The company continues to seek financing and partners. It stated that available cash is insufficient to sustain long-term operations without additional funding.
- The Masterson West II transaction did not close by its April 1, 2017 target date following the unexpected death of Masterson West’s majority owner. Neither party had terminated the agreement as of the filing date, and discussions continued. The company expected the agreement to be amended, replaced or terminated in the fourth quarter of 2017.
- The proposed Masterson transaction would require Empire to contribute between $9 million and $18 million in cash and could result in a 25% to 50% ownership interest. The transaction’s properties were described as producing approximately 1,000 barrels of oil equivalent per day, but the transaction had not closed.
- A non-binding Louisiana acquisition term sheet expired on October 18, 2017; discussions continued. The company expected the term sheet to be amended, replaced or terminated by the first quarter of 2018.
- On October 11, 2017, after the reporting date, the company issued an additional $15,000 convertible note due December 31, 2019, bearing 6% interest and convertible at $0.15 per share, with related warrants.
- Key risks include inability to obtain financing, failure to achieve profitability, unsuccessful acquisitions or development activities, competition, market changes and environmental regulation. The filing reports no legal proceedings and no defaults upon senior securities.
Investor Verification Priorities
- Verify the company’s ability to raise sufficient capital to fund operations and any proposed acquisitions.
- Monitor cash burn, accrued liabilities, convertible-note maturities, interest obligations and potential equity dilution from conversion features and warrants.
- Confirm whether the Masterson West II agreement was amended, terminated or completed after the filing date.
- Assess whether the Louisiana asset opportunity or other acquisitions progressed, and identify their financing terms.
- Evaluate the recoverability of the $300,000 Masterson West II investment, given that the transaction had not closed.
- Review subsequent filings for changes in going-concern disclosures, operating assets, revenue generation and management’s stated controls.