Empire Petroleum Corporation — Form 10-Q Summary
Business Context and Reporting Period
Empire Petroleum Corporation is an oil and gas exploration and development company. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, with comparisons to the corresponding 2012 periods. The company was a smaller reporting company and had 7,630,374 common shares outstanding as of November 4, 2013.
Financial Results and Position
- Revenue: Petroleum sales were $0 for both the three and nine months ended September 30, 2013 and 2012.
- Three-month results: Operating expenses were $56,488, consisting of $13,347 of production and operating costs and $43,141 of general and administrative expenses. Net loss was $56,488, compared with a $50,127 loss in the prior-year quarter.
- Nine-month results: Operating expenses were $171,076, consisting of $20,535 of production and operating costs and $150,541 of general and administrative expenses. Net loss was $171,076, compared with a $191,721 loss in the prior-year period.
- Margins: Operating and net margins were not meaningful because the company generated no revenue. No depreciation expense was recorded because the depreciable assets were fully depreciated.
- Cash flow: Net cash used in operating activities was $73,776 for the first nine months of 2013, compared with $161,314 in 2012. Financing provided $56,000 through a shareholder advance and related-party note payable. Cash decreased from $20,766 at December 31, 2012 to $2,990 at September 30, 2013.
- Liquidity: Current assets were $13,768, including $2,990 of cash and $8,578 of accounts receivable. Current liabilities were $56,547, including a $56,000 related-party note payable. Management stated that available cash was expected to finance operations for approximately one month.
- Capitalization: Total assets were $237,233, compared with $324,397 at December 31, 2012. Stockholders’ equity declined to $180,686 from $314,262, and accumulated deficit increased to $14,430,977.
- Taxes and per-share results: The effective tax rate was 0% because available tax benefits were offset by a valuation allowance. Basic and diluted loss per share was reported as $0.00 due to rounding.
Material Changes Versus the Prior Comparable Period
- Third-quarter net loss increased by $6,361, primarily because general and administrative expense increased by $7,523 and production and operating expense increased by $1,264.
- Nine-month net loss improved by $20,645, primarily because production and operating expense decreased by $3,793, general and administrative expense decreased by $11,090, and interest expense fell by $5,762 to zero.
- Interest expense was eliminated following the conversion of shareholder debt into common stock in December 2012.
- Cash declined substantially during the first nine months, while accounts receivable increased from $1,370 to $8,578 and a $56,000 related-party note payable was recorded.
- The company completed a one-for-twelve reverse stock split effective August 12, 2013. Prior-period share and per-share information was retroactively adjusted.
Guidance, Outlook, Risks, and Unusual Items
- Going concern: The company has incurred significant losses and stated that continued operations depend on achieving profitability and/or obtaining additional debt or equity financing. Management is pursuing merger opportunities, public or private financing, and industry partners.
- Exploration outlook: Commercial production had not been established at the Gabbs Valley Prospect as of September 30, 2013. The company was discussing a new test well with potential partners, but no agreements had been reached.
- South Okie Prospect: The company reduced its holdings to 600 gross, or 110 net, acres and planned a test well subject to financing and/or an industry partner.
- Exploration risk: Recovery of the company’s oil and gas investments depends on discovering economically recoverable reserves, confirming lease interests, securing financing, and achieving profitable production.
- Unusual noncash item: The company recorded $37,500 of contributed services from its executive officer as a capital contribution during the first nine months of 2013. The executive officer served without cash compensation.
- Controls and legal matters: Management concluded that disclosure controls were effective, with no material change in internal controls. The filing reported no legal proceedings, defaults, or unregistered securities sales.
Most Important Facts for Investors to Verify
- Whether the company obtained financing or strategic partners after September 30, 2013, given management’s statement that cash supported operations for approximately one month.
- The terms, maturity, and repayment requirements of the $56,000 related-party note payable.
- Whether Gabbs Valley or South Okie achieved drilling progress, commercial production, or reserve confirmation.
- The collectability and timing of the $8,578 accounts receivable balance.
- Whether additional equity issuance, dilution, reverse-split effects, or option exercises occurred after the reporting date.
- Whether the company remained a going concern and whether its oil and gas interests required impairment or other valuation adjustments.