Business Context and Reporting Period
Empire Petroleum Corporation filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The company explores and develops oil and gas interests, principally the Gabbs Valley Prospect in Nevada. As of October 31, 2014, 7,630,609 common shares were outstanding.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2014 |
|---|---|---|
| Petroleum sales | $0 | $0 |
| Operating loss | $77,268 | $176,753 |
| Net loss | $78,568 | $179,904 |
| Net loss per share | $0.01 | $0.02 |
| Cash used in operating activities | Not separately reported | $109,430 |
- Cash and cash equivalents were $216 at September 30, 2014, compared with $2,926 at December 31, 2013.
- Total assets were $195,298, including property and equipment of $191,715.
- Current liabilities were $151,263, including $148,300 of related-party notes payable and $2,963 of accounts payable and accrued liabilities.
- Stockholders’ equity declined to $44,035 from $136,439 at December 31, 2013.
- Nine-month financing cash inflows were $106,720, consisting of $56,720 in additional related-party borrowings and $50,000 from a call option agreement.
- The company recorded $37,500 of contributed executive services as a capital contribution. Its executive officer served without cash compensation.
- No depreciation expense was recorded because the depreciable assets were fully depreciated. The effective tax rate was 0% because valuation allowances offset potential tax benefits from net operating losses.
Material Changes Versus the Prior Comparable Period
- Third-quarter net loss increased to $78,568 from $56,488, primarily because of a $31,750 lease abandonment expense and $1,300 of interest expense.
- Nine-month net loss increased to $179,904 from $171,076. The increase reflected the $31,750 lease abandonment charge and $3,151 of interest expense, partly offset by lower general and administrative and production expenses.
- General and administrative expense decreased to $33,436 in the quarter and $127,998 for the nine months, compared with $43,141 and $150,541, respectively, in the prior-year periods.
- The company reassigned its South Okie leases to the original owner on September 10, 2014 because it had not drilled a well, resulting in the lease abandonment expense.
- Related-party notes payable increased by $56,720 during 2014, from $91,580 at December 31, 2013 to $148,300 at September 30, 2014, excluding accrued interest.
Outlook, Risks, Contingencies, and Unusual Items
- Management states that the company has incurred significant recurring losses and that continuation as a going concern depends on future profitable operations and/or additional debt or equity financing.
- Management expected cash on hand and additional loans from the Whitehead Trust to fund operations for approximately six months. Longer-term funding may require control sales, merger opportunities, or public or private financing.
- The Gabbs Valley leases have renewal periods beginning in November 2014 through September 2015. Commercial production had not been established as of September 30, 2014, and the company had not received results from further testing by other leaseholders.
- The Paradise Unit 2-12 well was suspended after drilling problems and unsuccessful swab tests. The related leases and wells were assigned to other leasehold owners for additional testing.
- A call option allowing Sierra Nevada Oil LLC to purchase 4,000,000 shares for an aggregate price of $1,000,000, less the $50,000 option payment, expired unexercised on September 1, 2014. The option also contemplated changes to the company’s board.
- Key risks include inability to secure financing, failure to achieve commercial production or profitability, uncertainty over recoverable reserves and lease interests, competition, market and technology changes, and environmental legislation.
- The filing reports no legal proceedings, defaults upon senior securities, or unregistered equity sales during the period.
Important Facts for Investors to Verify
- Verify the company’s ability to obtain financing beyond the approximately six-month liquidity period identified by management.
- Verify the terms, maturity, accrued interest, and repayment prospects of the $148,300 in related-party notes payable.
- Monitor renewal status and ownership interests for the Gabbs Valley leases and results of ongoing well testing.
- Assess whether the company’s oil and gas interests have economically recoverable reserves and whether any commercial production can be established.
- Reconcile the substantial property and equipment balance with the absence of revenue and the company’s continuing losses.
- Review the risk disclosures in the company’s December 31, 2013 Form 10-K, which the filing incorporates by reference for additional material risks.