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 quarterly report covers the three and nine months ended September 30, 2011; financial statements are unaudited except for the December 31, 2010 balance sheet. The company reported 85,564,235 common shares outstanding as of November 11, 2011.
Financial Position and Results
- Revenue: Petroleum sales were $0 for both the three and nine months ended September 30, 2011 and the comparable 2010 periods.
- Third-quarter net loss: $58,767, compared with $113,639 in the third quarter of 2010. The improvement primarily reflected lower production and operating expenses and lower general and administrative costs.
- Nine-month net loss: $186,238, compared with $330,988 in the first nine months of 2010.
- Operating loss: $57,769 for the third quarter and $183,999 for the nine-month period. Operating margins are not meaningful because the company generated no revenue.
- Cash flow: Net cash used in operating activities was $211,955 for the first nine months of 2011, compared with $96,008 in the prior-year period. No investing cash flows occurred in 2011, versus $1.7 million used primarily for drilling and well equipment in 2010.
- Financing: Financing activities provided $200,000, consisting of $100,000 from a private equity placement and $100,000 from a related-party note payable.
- Cash and liquidity: Cash declined from $68,689 at December 31, 2010 to $56,734 at September 30, 2011. Management stated that available cash was expected to fund operations for approximately three months.
- Debt: Current liabilities included a $100,000 related-party convertible note. The note bears 4% annual interest, has a one-year term, and is convertible at $0.10 per share.
- Assets and equity: Total assets were $374,197, including $255,215 of net property and equipment. Stockholders’ equity was $264,136, compared with $228,090 at December 31, 2010.
Material Changes Versus the Prior Comparable Period
- Third-quarter production and operating expense decreased to $15,552 from $68,067, primarily because certain Gabbs Valley leases were terminated and not renewed.
- Nine-month production and operating expense decreased to $4,273 from $149,892, reflecting terminated leases and refunds of certain drilling costs expensed in 2010.
- General and administrative expense declined to $42,217 from $56,119 for the quarter and to $179,726 from $194,549 for the nine-month period, primarily due to lower insurance costs and lower stock-option expense.
- Other income declined to zero in the third quarter from $10,000 in 2010 because the company did not sell well-log data during 2011.
- The company issued 2,000,000 common shares to its chief executive officer on August 24, 2011 for $100,000, or $0.05 per share, in an unregistered private transaction.
- Accounts payable and accrued liabilities fell to $10,061 from $149,065, while the new related-party note payable increased current liabilities to $110,061.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that the company has incurred significant historical losses and that continued operations depend on achieving profitable operations and/or obtaining additional debt or equity financing. The filing includes a going-concern risk.
- The company is seeking merger opportunities, public or private financing, and industry partners to fund future exploration. Management planned further exploration of the Gabbs Valley and South Okie prospects, with South Okie drilling targeted for 2012 subject to financing or a partner.
- At the Gabbs Valley Prospect, the Paradise Unit 2-12 test well encountered oil shows and recovered small amounts of oil containing paraffin, but swab testing did not increase flow. Operations were suspended, and the leases and wells were assigned to other leaseholders, who assumed associated liabilities. Further testing was dependent on financing.
- The company intends to seek an industry partner to farm out approximately 25,000 acres of the Gabbs Valley Prospect with an obligation to drill a Triassic test well or to 7,000 feet, whichever occurs first.
- Recoverability of oil and gas interests depends on economically recoverable reserves, confirmation of ownership interests, additional financing, successful exploration, and future profitable production.
- Forward-looking plans are subject to financing availability, exploration results, competition, market conditions, environmental regulation, and other risks identified in the company’s Form 10-K. The filing states that actual results may differ materially and that the company undertakes no duty to update forward-looking statements.
- The company recorded $37,500 of contributed officer services as a capital contribution during the nine months. It also had 1,245,000 options and 2,222,226 warrants outstanding that were anti-dilutive at September 30, 2011.
- No depreciation expense was recorded because the company’s depreciable assets were fully depreciated. The effective tax rate was 0%, with a valuation allowance offsetting tax benefits associated with net operating losses.
Important Facts for Investors to Verify
- Whether the company can obtain financing or strategic partners before its stated cash runway is exhausted.
- The terms, maturity, interest, and potential equity dilution associated with the $100,000 related-party convertible note.
- The status and results of additional testing at the Paradise Unit 2-12 well and the company’s remaining Gabbs Valley acreage.
- Whether the company can complete a farmout or otherwise fund planned Gabbs Valley and South Okie drilling.
- The economic recoverability and carrying value of the $255,215 of net property and equipment despite the absence of petroleum revenue.
- The potential dilution from 1,245,000 options, 2,222,226 warrants, and future equity financing.
- The filing’s inconsistent timing references for expected third- or fourth-quarter 2011 testing by the new Paradise Unit owners.