Empire Petroleum Corporation 2016 Form 10-K Summary
Business Context and Reporting Period
Empire Petroleum Corporation is a small, non-operating oil and gas exploration and development company. This Form 10-K covers the fiscal year ended December 31, 2016 and was filed March 31, 2017. The company had no employees, no producing wells, and no significant ongoing operating income.
At December 31, 2016, Empire held options covering approximately 160,000 gross leasable acres in South Dakota and North Dakota, but those options were fully impaired. The company also held a 50% interest in Masterson West II, LLC, subject to a proposed acquisition and funding transaction.
Financial Performance, Cash Flow, Debt, and Liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Petroleum revenue | $0 | $0 |
| Operating loss | $(378,078) | $(174,924) |
| Net loss | $(381,915) | $(174,924) |
| Basic and diluted loss per share | $(0.04) | $(0.02) |
| Net cash used in operations | $(81,862) | $(116,977) |
| Net cash provided by financing | $132,500 | $135,000 |
| Cash at year-end | $68,743 | $18,105 |
Operating expenses totaled $378,078 in 2016, including a $181,475 impairment of lease options and $196,603 of general and administrative expense. The company had no production expense in 2016. The effective tax rate was 0% because deferred tax assets related to approximately $8.7 million of net operating loss carryforwards were fully offset by a valuation allowance.
Total assets were $382,743, including $68,743 of cash, $14,000 of prepaid expenses, and a $300,000 investment in Masterson West II. Current liabilities were $22,518. Convertible notes, net of debt issuance costs, totaled $58,844. Stockholders’ equity was $301,381, and the audited balance sheet reported an accumulated deficit of $15,281,148.
In December 2016, Empire issued $132,500 of senior unsecured convertible notes bearing 6% interest and maturing December 31, 2018. The notes are convertible at $0.15 per share, and related warrants permit purchases at $0.25 per share through December 31, 2018.
Management estimated ongoing general and administrative cash needs at approximately $7,500 per month and stated that additional capital would be required. The independent auditor reported substantial doubt about the company’s ability to continue as a going concern.
Material Changes Versus 2015
- Revenue remained zero because the company had no producing wells.
- Net loss increased to $381,915 from $174,924, primarily because of the $181,475 lease-option impairment, higher general and administrative expense, and $3,837 of interest expense.
- General and administrative expense increased approximately 19% to $196,603, largely due to $65,660 of stock-option expense for options issued for services.
- Cash increased by $50,638 to $68,743, primarily from the issuance of convertible notes, partially offset by operating cash use.
- The company recorded a $300,000 investment in Masterson West II and recognized $2,000 of common stock subscribed but not yet issued.
- Outstanding options increased to 1,154,167 at a weighted-average exercise price of $0.21.
- J. C. Whorton, Jr. resigned as chairman and chief executive officer on December 22, 2016. Michael R. Morrisett remained president and became the principal executive and financial officer.
Outlook, Transactions, Risks, and Unusual Items
Under the December 22, 2016 Masterson West II agreements, Masterson West was expected to contribute Texas oil and gas properties producing approximately 1,000 barrels of oil equivalent per day, with approximately 8,000 net acres and identified development opportunities. Empire was required to contribute between $9 million and $18 million in cash to obtain a 25% to 50% interest. The proposed properties were also associated with an approximately $20 million credit facility.
There was no assurance that Empire could raise the required funds. Following the unexpected death of Masterson West’s majority owner on February 18, 2017, the scheduled April 1, 2017 closing did not occur. As of March 31, 2017, the parties were discussing whether to postpone the closing or modify the agreements. If the transaction failed, the properties would not be transferred and the additional 38 million shares would not be issued.
The company’s principal risks include insufficient capital, the going-concern uncertainty, lack of revenue-producing properties, volatile oil and gas prices, drilling and operating hazards, regulatory and environmental liabilities, competition from better-capitalized companies, reliance on President Michael R. Morrisett, and limited liquidity and trading activity in the company’s OTCQB common stock.
The company has never paid dividends and does not expect to pay dividends in the foreseeable future. No legal proceedings were reported as of December 31, 2016. Management concluded that disclosure controls and internal control over financial reporting were effective; the auditor did not provide an attestation report on internal control.
Most Important Facts for Investors to Verify
- Whether the Masterson West II transaction was ultimately completed, amended, or terminated, and whether any additional shares were issued.
- Whether Empire raised the required $9 million to $18 million and how any financing affected ownership, dilution, and liquidity.
- The company’s current cash balance, operating cash burn, debt obligations, and ability to fund operations beyond the disclosed runway.
- The status and terms of the $132,500 convertible notes, conversion rights, and related warrants.
- Whether Empire obtained producing properties and generated revenue after December 31, 2016.
- The treatment and expiration of the impaired South Dakota and North Dakota lease options.
- The going-concern disclosure and the company’s ability to achieve profitable operations or secure additional financing.