Empire Petroleum Corporation — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2017, filed August 10, 2017. Empire explores and develops oil and gas interests, but had no oil and gas properties or equipment and generated no petroleum sales during the periods presented. The company had no employees as of June 30, 2017 and was classified as a smaller reporting company.
Financial Results and Position
| Metric | Three Months 2017 | Three Months 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Petroleum sales | $0 | $0 | $0 | $0 |
| General and administrative expense | $26,926 | $86,204 | $113,010 | $143,042 |
| Interest expense | $16,628 | $0 | $34,914 | $0 |
| Net loss | $(43,554) | $(86,204) | $(147,924) | $(143,042) |
| Basic and diluted loss per share | $(0.01) | $(0.01) | $(0.02) | $(0.02) |
- Cash was $21,830 at June 30, 2017, compared with $68,743 at December 31, 2016.
- Total assets were $359,724, including a $300,000 investment in Masterson West II.
- Current liabilities were $55,762, including $7,014 of accrued interest; convertible notes, net, were $116,556.
- Convertible notes had aggregate face value of $195,000, bear 6% interest, mature December 31, 2018, and are convertible at $0.15 per share. Related warrants are exercisable at $0.25 per share.
- Stockholders’ equity declined to $187,405 from $301,381 at December 31, 2016; accumulated deficit was $15.4 million.
- Six-month operating cash flow was $(109,413), compared with $(14,282) in the prior-year period. Financing provided $62,500 from convertible note issuances, producing a $46,913 decrease in cash.
- No depreciation expense was recorded because the company owned no oil and gas properties or equipment. The effective tax rate was 0%, with tax benefits offset by a valuation reserve.
Material Changes Versus the Prior Comparable Period
- Second-quarter general and administrative expense decreased by $59,278, primarily because no stock options were issued in 2017; six-month expense decreased by $30,032, partly offset by legal and over-the-counter listing costs.
- Interest expense increased by $16,628 for the quarter and $34,914 for the six-month period due to convertible notes issued in late 2016 and early 2017.
- Quarterly net loss improved by $42,650, while six-month net loss increased by $4,882 because lower operating expenses were more than offset by interest expense.
- Cash declined substantially during the first six months despite $62,500 of new financing, reflecting $109,413 of operating cash use.
Outlook, Risks, Contingencies and Unusual Items
- Management disclosed substantial going-concern risk. Continued operations depend on future profitable operations and/or additional debt or equity financing.
- The Masterson West II transaction did not close by its April 1, 2017 scheduled final closing date following the unexpected death of Masterson West’s majority owner. Neither party had terminated the agreement as of filing, but management expected the agreement or related LLC agreement to be amended, replaced or terminated in the third quarter of 2017.
- Completion would require Empire to provide $9 million to $18 million in cash and could result in a 25% to 50% ownership interest. The transaction contemplated oil and gas properties producing approximately 1,000 barrels of oil equivalent per day, approximately 8,000 net acres and an affiliated credit facility of approximately $20 million.
- Empire was pursuing other operated and non-operated oil and gas acquisitions, expected to be financed through equity or debt.
- Key risks include inability to obtain financing, failure to achieve profitable production, uncertainty regarding economically recoverable reserves, commodity-market and competitive pressures, environmental regulation, and failure or termination of the Masterson West II transaction.
- On July 25, 2017, after quarter-end, the company issued 93,333 common shares and warrants to purchase 56,000 shares at $0.25 per share to an investment banking service firm for past and future services.
Facts Investors Should Verify
- Current cash runway and the company’s ability to raise additional capital before liquidity is exhausted.
- Status, amended terms or termination of the Masterson West II agreement and any required funding commitment.
- Potential dilution from convertible notes, warrants, options, subscribed shares and subsequent equity issuances.
- Whether the company can acquire producing assets and transition from zero revenue to profitable operations.
- Debt maturity, accrued interest and conversion consequences associated with the convertible notes due December 31, 2018.
- Recoverability of the $300,000 Masterson West II investment and the company’s ability to continue as a going concern.