Empire Petroleum Corporation: Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
Empire Petroleum Corporation is an oil and gas exploration and development company. This unaudited quarterly report covers the three months ended March 31, 2018, with comparative results for the three months ended March 31, 2017. The company reported no employees as of March 31, 2018 and owned no oil and gas properties or equipment.
Financial Performance and Position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Petroleum sales | $0 | $0 | No change |
| General and administrative expense | $226,677 | $86,084 | Increased $140,593 |
| Interest expense | $19,628 | $18,286 | Increased $1,342 |
| Net loss | $246,305 | $104,370 | Loss increased $141,935 |
| Basic and diluted loss per share | $0.02 | $0.01 | Loss per share increased |
| Net cash used in operating activities | $143,542 | $64,320 | Use increased $79,222 |
| Cash at period end | $59,238 | $66,923 | Decreased $7,685 year over year |
The company had total assets of $359,238 at March 31, 2018, including $59,238 of cash and a $300,000 investment in Masterson West II. Total liabilities were $352,349, including $200,350 of net convertible notes and $151,999 of accounts payable and accrued liabilities. Stockholders’ equity was $6,889.
Convertible notes had a face amount of $260,000, consisting of $195,000 classified as current and $65,000 classified as long term. The notes accrue interest at 6% and are convertible at $0.15 per share; related warrants and conversion features reduced the carrying value by $59,650.
Cash used in operations was partially offset by $125,000 of proceeds from stock issuance, resulting in a net cash decrease of $18,542 during the quarter. The filing does not present a meaningful operating margin because revenue was zero and the company incurred operating expenses.
Material Changes Versus the Prior Comparable Period
- General and administrative expense increased approximately 163%, primarily due to professional fees and other costs related to potential asset purchases.
- Net loss more than doubled, increasing from $104,370 to $246,305.
- Interest expense increased due to additional convertible notes issued during 2017.
- Operating cash use increased from $64,320 to $143,542.
- The company raised $125,000 through stock issuance in Q1 2018; it raised $62,500 through convertible notes in Q1 2017.
- During Q1 2018, the company issued 1.2 million common shares in total, together with warrants to purchase an equal number of shares at $0.15 per share.
Guidance, Outlook, Risks, and Unusual Items
Management provided no quantified revenue, earnings, production, or cash-flow guidance. The company is pursuing acquisitions of operated and non-operated oil and gas properties and expects potential acquisitions and continuing operations to be financed through equity or debt transactions.
Management disclosed substantial doubt regarding the company’s ability to continue as a going concern absent future profitable operations and/or additional debt or equity financing. The company is continuing to seek partners and financing and stated that its $59,238 of cash is insufficient to sustain operations on a long-term basis.
The Masterson West II transaction remains unresolved. The required final closing did not occur by April 1, 2017 following the unexpected death of Masterson West’s majority owner. Neither party had terminated the agreement as of the filing date, but management anticipated that the contribution agreement and/or LLC agreement would be amended, replaced, or terminated in 2018. Completion would require the company to contribute between $9 million and $18 million in cash.
The company has generated net operating losses since inception and maintains a valuation allowance against related deferred tax benefits. Forward-looking results are subject to financing risk, competition, market changes, environmental legislation, and the ability to identify economically recoverable reserves and achieve profitable production. No legal proceedings, defaults, or market-risk disclosures were reported as applicable.
Investor Verification Points
- Verify the company’s near-term financing requirements and liquidity runway given $59,238 of cash, ongoing operating losses, and $195,000 of current convertible notes.
- Review the terms, maturity dates, conversion provisions, and warrant dilution associated with the $260,000 of convertible notes.
- Determine whether the Masterson West II transaction will be amended, terminated, or completed and assess the required $9 million to $18 million funding commitment.
- Reconcile share counts: the cover page reports 11,228,942 shares outstanding, while the balance sheet reports 9,993,942 issued and outstanding shares plus 3,235,000 subscribed but unissued shares.
- Assess the potential dilution from outstanding options and warrants, including 1,154,167 options and warrants issued with recent financings and compensation arrangements.
- Confirm whether the company can transition from an exploration and acquisition strategy to revenue-generating production, as petroleum sales were zero in both comparative periods.