Empire Petroleum Corporation — Fiscal 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013; filed March 3, 2014. The filing is an annual report, although the requested period is identified as 2013 Q4. Empire is a small oil and gas exploration company with no producing wells and one employee.
Business Context
- Primary assets are the Gabbs Valley Prospect in Nye County, Nevada, and the South Okie Prospect in Natrona County, Wyoming.
- Gabbs Valley comprised approximately 34,186 gross acres, with a 50% working interest in 30,346 acres and an 88.5% interest in 3,840 acres.
- South Okie comprised approximately 110 net lease acres. Both prospects remained unproved and undeveloped.
- Two Gabbs Valley test wells had been drilled and tested but neither was completed. The 2010 Paradise Unit well recovered small amounts of oil, but production was considered non-commercial due in part to paraffin and limited infrastructure.
Financial Performance and Position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Petroleum sales | $0 | $0 | No change |
| Production and operating expense | $36,756 | $14,746 | Increased $22,010 |
| Lease abandonment expense | $0 | $31,750 | Decreased $31,750 |
| General and administrative expense | $191,067 | $198,936 | Decreased $7,869 |
| Operating loss | $(227,823) | $(245,432) | Improved $17,609 |
| Net loss | $(227,823) | $(253,348) | Improved $25,525 |
| Basic and diluted loss per share | $(0.03) | $(0.04) | Improved |
| Cash and cash equivalents | $2,926 | $20,766 | Decreased $17,840 |
| Total assets | $228,591 | $324,397 | Decreased $95,806 |
| Stockholders’ equity | $136,439 | $314,262 | Decreased $177,823 |
- Gross margin and operating margin are not meaningful because the Company had no revenue-producing wells and petroleum sales were zero.
- Net cash used in operating activities was $109,420, compared with $175,212 in 2012.
- Financing activities provided $91,580 in 2013, consisting of proceeds from a related-party note. Net cash decreased by $17,840 during the year.
- Accumulated deficit was $14,487,724 at December 31, 2013.
- Current liabilities were $92,152, including a $91,580 related-party note payable. The note bears interest at 4% and was due March 31, 2014.
- Management estimated ongoing general, office and other expenses of approximately $10,000 per month.
- The Company recorded $50,000 of contributed services from its CEO as additional paid-in capital and expense; the CEO received no cash compensation.
Material Changes Versus 2012
- Net loss improved by $25,525, primarily because 2012 included lease abandonment expense and higher legal and accounting costs.
- Production and operating expense increased because 2012 benefited from a refund related to the Gabbs Valley test well.
- Cash declined substantially from $20,766 to $2,926.
- Equity declined by $177,823, reflecting the 2013 net loss partially offset by $50,000 of contributed services.
- The Company completed a 1-for-12 reverse stock split effective August 12, 2013. The split did not change authorized shares or par value.
- During 2013, the Company documented $91,580 of prior advances from the Whitehead Trust in a 4% promissory note.
Liquidity, Outlook and Risks
- Management stated that existing cash was insufficient to fund operations for the next 12 months.
- The Company expected to seek merger opportunities and public or private financing. Management also expected to provide financial support for several months if necessary, but the CEO had no obligation to advance additional funds.
- The independent auditor included a going-concern qualification, citing recurring losses, dependence on financing, and uncertainty regarding economically recoverable reserves.
- Future performance depends on obtaining capital, attracting partners, and achieving successful drilling results on unproved Nevada and Wyoming prospects.
- Key risks include commodity-price volatility, exploration and drilling failure, limited infrastructure, dependence on independent service providers, environmental and regulatory obligations, competition from substantially larger companies, and dependence on CEO Albert E. Whitehead.
- The Company reported no legal proceedings, no off-balance-sheet arrangements, and no material unresolved SEC staff comments.
- The Common Stock traded on the OTCQB under “EMPR.” The filing states that no cash dividends are expected in the foreseeable future.
Other Unusual or Important Items
- The Whitehead Trust, whose trustee is the Company’s CEO and chairman, was the Company’s principal financing source. The Company converted $300,013 of related-party debt into 500,021 post-split shares in December 2012 and recorded an additional $91,580 related-party note in 2013.
- The Company had 7,630,609 shares outstanding at December 31, 2013. Directors and executive officers collectively beneficially owned approximately 46.02% based on the ownership information presented in the filing.
- At December 31, 2013, 60,417 stock options were outstanding, with a weighted-average exercise price of $1.82.
- The Company had approximately $8.1 million of net operating loss carryforwards, but related deferred tax assets were fully offset by a valuation allowance.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor was not required to provide an attestation report because of the Company’s smaller reporting company status.
Investor Verification Checklist
- Verify the Company’s ability to obtain financing or a merger transaction given only $2,926 of cash and ongoing monthly expenses.
- Review the terms, maturity status and repayment history of the $91,580 related-party note.
- Assess whether Gabbs Valley or South Okie can support economically recoverable reserves and commercial production.
- Confirm the status of the going-concern uncertainty and any subsequent financing, restructuring, or operational developments.
- Review lease expirations, renewal requirements, plugging and reclamation obligations, and federal permitting requirements.
- Reconcile post-reverse-split share counts, related-party ownership, outstanding options, and potential future dilution.
- Confirm subsequent events after December 31, 2013, including payment or refinancing of the note due March 31, 2014.