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 six months ended June 30, 2011, with comparative periods ended June 30, 2010. The company was a smaller reporting company and reported 83,564,235 common shares outstanding as of August 12, 2011.
Financial Position and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Petroleum sales | $0 in 2011 and 2010 | $0 in 2011 and 2010 |
| Operating loss | $(56,777) in 2011; $(143,265) in 2010 | $(126,231) in 2011; $(220,256) in 2010 |
| Net loss | $(57,775) in 2011; $(141,999) in 2010 | $(127,471) in 2011; $(217,349) in 2010 |
| Net loss per share | $0.00 basic and diluted | $0.00 basic and diluted |
- At June 30, 2011, cash and cash equivalents were $15,421, down from $68,689 at December 31, 2010.
- Total current assets were $62,436, compared with $121,940 at year-end 2010. Total assets were $317,651.
- Total liabilities were $107,248, including a $100,000 related-party convertible note payable. The note matures in one year, bears 4% annual interest, and is convertible at $0.10 per share.
- Stockholders’ equity was $210,403, compared with $228,090 at December 31, 2010. Accumulated deficit was $13.9 million.
- Cash used in operating activities was $153,268 for the six months ended June 30, 2011, compared with $166,766 in the prior-year period. There was no investing cash flow in 2011, compared with $548,389 of investing outflows in 2010.
- Financing activities provided $100,000 in 2011 through the related-party note. The company had no private-placement proceeds during the period, compared with $460,000 in 2010.
- Operating margins and other revenue-based margins are not meaningful because the company reported no petroleum sales.
Material Changes Versus the Prior Comparable Period
- Second-quarter net loss improved by $84,224, from $(141,999) to $(57,775), primarily because production and operating expenses declined by $71,896 and general and administrative expenses declined by $14,592.
- Six-month net loss improved by $89,878, from $(217,349) to $(127,471). Production and operating expenses decreased by $93,105, to a reported negative $11,279, primarily because of expired Gabbs Valley leases and refunds of certain drilling costs previously expensed.
- General and administrative expenses declined modestly by $920 for the six-month period, to $137,510.
- Common stock increased to 83,564,235 shares outstanding from 83,069,235 at December 31, 2010. The company also recorded $73,490 of common stock issued for accounts payable as a noncash transaction.
- The company extended the expiration date of 2,222,226 warrants with a $0.50 exercise price to December 31, 2011.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that the $15,421 cash balance was expected to fund operations for approximately two months. Long-term operations depend on profitable operations and/or additional debt or equity financing.
- The company was seeking merger opportunities, public or private financing, and industry partners to fund further exploration and drilling.
- In the Gabbs Valley Prospect, the company ceased drilling and suspended testing of the Paradise Unit 2-12 well after drilling problems and unsuccessful swab tests. The company assigned the relevant leases and wells to other leaseholders, who assumed associated liabilities. Further testing was expected in the third quarter of 2011, subject to financing.
- The company was seeking an industry partner to farm out approximately 25,000 Gabbs Valley acres, with an obligation to drill a test well to the Triassic formation or 7,000 feet, whichever occurred first.
- Subject to financing or an industry partner, management planned to pursue a test well on the South Okie Prospect in 2011. Reported reserve potential for that prospect was an estimate of 1 million to 4 million barrels of oil, not proved reserves.
- The company had incurred significant recurring losses and disclosed substantial doubt regarding its ability to continue without future financing or profitable operations. Recoverability of its oil and gas investments depends on economically recoverable reserves, confirmation of its interests, financing, and profitable production.
- At June 30, 2011, the company had 1,245,000 options and 2,222,226 warrants outstanding that were excluded from diluted earnings per share because they were anti-dilutive.
- Management reported that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the period.
Most Important Facts for Investors to Verify
- Whether the company obtained financing or strategic partners after June 30, 2011, given its stated two-month cash runway.
- The maturity, conversion terms, and repayment or conversion status of the $100,000 related-party note.
- The status and results of third-party testing of the Paradise Unit 2-12 well and the company’s remaining Gabbs Valley acreage.
- Whether the South Okie drilling plan proceeded and whether any reserves were established through drilling.
- The expiration, exercise, or further extension of the 2,222,226 warrants and the potential dilution from outstanding options and warrants.
- The basis for the negative six-month production and operating expense and any related refunds or adjustments.
- Whether the company achieved any petroleum production or revenue, as the filing reports zero petroleum sales for both comparable periods.