Empire Petroleum Corporation: Q3 2012 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 nine months ended September 30, 2012, with comparisons to the corresponding 2011 periods. The company held interests in the Gabbs Valley Prospect in Nevada and the South Okie Prospect in Wyoming but reported no petroleum sales.
Financial Results and Position
| Metric | Three Months Ended Sept. 30, 2012 | Nine Months Ended Sept. 30, 2012 |
|---|---|---|
| Petroleum sales | $0 | $0 |
| Production and operating expense | $12,083 | $24,328 |
| General and administrative expense | $35,618 | $161,631 |
| Operating loss | $(47,701) | $(185,959) |
| Interest expense | $2,426 | $5,762 |
| Net loss | $(50,127) | $(191,721) |
| Basic and diluted loss per share | $(0.00) | $(0.00) |
Revenue-based margins are not meaningful because the company generated no petroleum sales. No depreciation expense was recorded because the depreciable assets were fully depreciated. The effective tax rate was 0% because tax benefits related to net operating losses were offset by a valuation allowance.
At September 30, 2012, cash and cash equivalents were $2,267, compared with $4,978 at December 31, 2011. Total current assets were $6,613, while current liabilities were $275,788. The balance sheet included a $258,603 related-party note payable, compared with $100,000 at year-end 2011. Stockholders’ equity declined to $61,222 from $215,443, and accumulated deficit increased to $14.2 million.
Operating activities used $161,314 of cash during the first nine months of 2012, compared with $211,955 in the 2011 period. Financing activities provided $158,603 from shareholder advances and related-party notes. Cash decreased by $2,711 during the period.
Material Changes Versus Prior Comparable Period
- Third-quarter net loss improved by $8,640, to $50,127 from $58,767, primarily due to lower production and operating expenses and lower general and administrative expenses.
- Nine-month net loss increased by $5,483, to $191,721 from $186,238. Production and operating expense increased by $20,055, while general and administrative expense decreased by $18,095.
- Interest expense increased by $3,512 for the nine-month period because of the higher shareholder-related debt balance.
- Cash used in operations improved by $50,641 compared with the prior-year period, but the company remained dependent on financing.
- Related-party debt increased substantially, including additional advances and notes from the Albert E. Whitehead Living Trust.
Guidance, Outlook, Risks, and Unusual Items
Management stated that the $2,267 cash balance was expected to fund operations for approximately one month. The company is seeking merger opportunities, public or private financing, and industry partners to continue exploration and development.
Commercial production had not been established at the Gabbs Valley Prospect as of September 30, 2012. The company was discussing a potential new test well with other companies, but no agreement had been reached. Subject to financing or an industry partner, management planned to pursue a South Okie test well in 2013.
Management identified substantial doubt regarding the company’s ability to continue operations without future profitable operations or additional debt or equity financing. Recovery of the oil and gas investments depends on economically recoverable reserves, confirmation of the company’s interests, financing, successful exploration, and profitable production.
Related-party financing included a $100,000 convertible note due February 2013, additional advances and a $100,000 convertible note due April 2013, and a $25,000 promissory note due November 28, 2012. The August note was used to pay Gabbs Valley lease rentals and bears interest at 4% annually.
The company’s chief executive officer served without compensation; the estimated value of those services, $37,500 for the first nine months of 2012, was recorded as a capital contribution. The filing reported no legal proceedings, no unregistered equity sales during the period, and no defaults upon senior securities. Management concluded that disclosure controls were effective and reported no material change in internal controls.
Important Facts for Investors to Verify
- Whether the company can obtain financing or strategic partners before its limited cash is exhausted.
- The maturity, accrued interest, conversion terms, and potential equity dilution associated with the related-party notes.
- Whether commercial production or economically recoverable reserves can be established at Gabbs Valley or South Okie.
- The recoverability and carrying value of the company’s oil and gas interests.
- The implications of the going-concern disclosure and the company’s continued history of operating losses and zero petroleum revenue.
- Whether the proposed 2013 South Okie drilling program will proceed and how it will be financed.