Empire Petroleum Corporation 2014 Form 10-K Summary
Business Context and Reporting Period
Empire Petroleum Corporation filed its annual report for the fiscal year ended December 31, 2014. The company focused on oil and gas exploration and development but had no producing wells and no oil and gas properties at December 31, 2014.
- The South Okie Prospect leases were reassigned to the original owner on September 10, 2014 because the company had not drilled a well.
- The Gabbs Valley Prospect leasehold interests were transferred to the Whitehead Trust on December 30, 2014 in exchange for related-party debt.
- Following a December 2014 ownership transaction, J. C. Whorton, Jr. became Chairman and Chief Executive Officer and Michael R. Morrisett became President in January 2015.
Financial Performance, Cash Flow, Liquidity and Capitalization
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Petroleum sales revenue | $0 | $0 | No change |
| Production and operating expense | $35,887 | $36,756 | Decreased $869 |
| General and administrative expense | $154,326 | $191,067 | Decreased $36,741 |
| Lease abandonment expense | $31,750 | $0 | New expense |
| Loss on asset transfer and debt extinguishment | $11,471 | $0 | New expense |
| Interest expense | $3,151 | $0 | New expense |
| Net loss | $(236,585) | $(227,823) | Loss increased $8,762 |
| Net loss per share | $(0.03) | $(0.03) | No change |
| Net cash used in operating activities | $(154,564) | $(109,420) | Use increased $45,144 |
| Cash and cash equivalents | $82 | $2,926 | Decreased $2,844 |
| Total assets | $82 | $228,591 | Decreased $228,509 |
| Total current liabilities | $228 | $92,152 | Decreased $91,924 |
| Stockholders’ equity (deficit) | $(146) | $136,439 | Declined $136,585 |
The company had an accumulated deficit of $14,724,309 at December 31, 2014. Its effective income tax rate was 0% because deferred tax assets, including approximately $8.357 million of net operating loss carryforwards, were fully offset by a valuation allowance.
Financing cash inflows during 2014 included $101,720 of related-party borrowings and $50,000 from a call option agreement. The company had no off-balance-sheet arrangements. No clear operating, EBITDA or net margin percentage is provided; given zero revenue, conventional margins are not meaningful.
Material Changes Versus the Prior Comparable Period
- Revenue remained at zero because the company had no producing wells.
- General and administrative expense declined primarily because there was no annual stockholders’ meeting expense and salary costs were lower.
- Lease abandonment expense and the loss on transfer of assets were recorded in 2014 following the disposition of the South Okie and Gabbs Valley interests.
- The Gabbs Valley transfer extinguished approximately $193,300 of related-party debt plus $3,151 of accrued interest; the transferred leasehold interest had a carrying value of approximately $191,715.
- Total assets fell from $228,591 to $82, primarily because the company disposed of its oil and gas interests and other related assets.
- Related-party notes payable declined from $91,580 at December 31, 2013 to zero at December 31, 2014 through the asset transfer.
Guidance, Outlook, Risks and Unusual Items
Management stated that the company intends to continue pursuing oil and gas exploration and production, but it has limited financial resources and no significant ongoing income-producing properties. It expects general administrative and other expenses of approximately $7,500 per month and intends to seek additional equity and/or debt financing.
Subsequent to year-end, the company raised $135,000 in February 2015 through the issuance of 1,080,000 shares and warrants to purchase up to 540,000 shares at $0.25 per share. The proceeds were intended for exploratory development and general working capital.
The independent auditor’s report included a going-concern uncertainty. Continuation depends on obtaining financing, discovering and developing economically recoverable reserves, and achieving profitable production. The filing states that failure to raise funds could require the company to suspend operations.
- Key risks include volatile oil and gas prices, exploration and drilling uncertainty, operating hazards, rising service-provider costs, environmental liabilities, extensive regulation and competition from larger companies.
- The company had no employees at December 31, 2014. The current CEO and President serve without compensation, creating dependence on their continued services.
- The common stock trades on the OTCQB and has a limited public market; the filing identifies potential penny-stock trading restrictions and significant price volatility.
- The company has never paid cash dividends and does not expect to pay dividends in the foreseeable future.
- A $50,000 call option to purchase 4,000,000 shares expired unexercised on September 1, 2014.
- As of December 31, 2014, the company had no audit committee or audit committee financial expert because of its small board.
Important Facts for Investors to Verify
- Whether the February 2015 financing provides sufficient liquidity beyond the company’s stated monthly cash requirements.
- The company’s ability to obtain additional financing and avoid a suspension of operations.
- Whether management has acquired or will acquire new oil and gas properties and whether any future drilling can establish commercially recoverable reserves.
- The terms, exercise status and potential dilution from the 540,000 warrants issued in February 2015 and the 6,250 outstanding stock options.
- The implications of the going-concern uncertainty and the company’s accumulated deficit of $14.7 million.
- The effects of the change in control and related-party transactions involving the Whitehead Trust and Empire Petroleum Holdings, LLC.
- The expiration beginning in 2015 of approximately $8.357 million of net operating loss carryforwards and whether they can be utilized.