Business Context and Reporting Period
Empire Petroleum Corporation, an oil and gas exploration and development company, filed this unaudited Form 10-Q for the quarter ended March 31, 2013. The company was a smaller reporting company with 91,564,485 common shares outstanding as of May 13, 2013.
Operations centered on the Gabbs Valley Prospect in Nevada and the South Okie Prospect in Wyoming. The company had no petroleum sales during either comparable quarter.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2013 | Three Months Ended March 31, 2012 |
|---|---|---|
| Petroleum sales | $0 | $0 |
| Production and operating expenses | $5,098 | $12,161 |
| General and administrative expenses | $56,739 | $67,296 |
| Operating loss | $(61,837) | $(79,457) |
| Interest expense | $0 | $(1,000) |
| Net loss | $(61,837) | $(80,457) |
| Net loss per basic and diluted share | $(0.00) | $(0.00) |
| Net cash used in operating activities | $(17,529) | $(32,508) |
| Cash at period end | $3,237 | $6,073 |
Margins were not meaningful because the company reported no revenue. The filing does not provide a clear revenue-based margin percentage.
At March 31, 2013, total assets were $305,556, including $3,237 of cash, $223,465 of net property and equipment, and $77,754 of other assets. Current liabilities were $40,631, consisting of accounts payable and accrued liabilities. Stockholders’ equity was $264,925. The filing reports no interest-bearing debt at quarter-end; prior notes had been converted into equity.
Material Changes Versus the Prior Comparable Period
- Net loss improved by $18,620, or approximately 23%, to $61,837 from $80,457.
- Production and operating expenses declined by $7,063, primarily because of lower Okie Draw lease rentals.
- General and administrative expenses declined by $10,557, primarily because of lower professional fees.
- Interest expense decreased by $1,000 following conversion of shareholder notes into common stock.
- Operating cash use improved by $14,979, although cash declined by $17,529 during the quarter to $3,237.
- Accounts payable and accrued liabilities increased by $30,496 from December 31, 2012, while total assets declined by $18,841.
- The company recorded a $12,500 capital contribution representing services provided without compensation by its executive officer, consistent with the prior-year quarter.
Guidance, Outlook, Risks, and Unusual Items
Management stated that the company’s cash on hand was expected to finance operations for approximately one month. The company is seeking merger opportunities, public or private financing, and industry partners to support continued operations and exploration.
Commercial production had not been established at the Gabbs Valley Prospect as of March 31, 2013. The company was discussing a potential new test well with other companies, but no agreements had been reached. Subject to financing or an industry partner, management planned to pursue a test well on the South Okie Prospect in 2013.
The company disclosed substantial doubt regarding its ability to continue as a going concern. Continued operations depend on achieving profitable operations and/or obtaining additional debt or equity financing. Recovery of its oil and gas investments depends on discovering economically recoverable reserves, confirming its interests, obtaining development financing, and achieving profitable production.
The Gabbs Valley Paradise Unit 2-12 well was suspended after drilling problems and unsuccessful efforts to increase oil flow. The company assigned the relevant lease and wells to other leasehold owners, who pursued additional testing. The company reported no legal proceedings, no material changes in internal controls, and no applicable quantitative market-risk disclosures.
Facts Investors Should Verify
- Whether the company obtained financing, merger opportunities, or industry partners after the filing date.
- Whether commercial production was established at Gabbs Valley or any other prospect.
- The status and carrying value of the company’s oil and gas properties and the recoverability of those assets.
- Whether the approximately one month of stated cash runway resulted in additional equity issuance, related-party funding, or other financing.
- The increase in accounts payable and accrued liabilities to $40,631 and the timing of settlement.
- The company’s ability to continue as a going concern, given the absence of revenue and recurring operating losses.
- The potential dilution from 1,245,000 outstanding options and any subsequent equity issuance.