Empire Petroleum Corporation — Form 10-Q Summary
Business Context and Reporting Period
Empire Petroleum Corporation explores and develops oil and gas interests. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, with comparative periods ended June 30, 2017. The company had no employees and owned no oil and gas properties or equipment as of June 30, 2018. Common shares outstanding were 11,328,942.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Petroleum sales | $0 in 2018 and 2017 | $0 in 2018 and 2017 |
| General and administrative expense | $210,402 vs. $26,926 | $437,079 vs. $113,010 |
| Interest expense | $19,845 vs. $16,628 | $39,473 vs. $34,914 |
| Net loss | $(230,247) vs. $(43,554) | $(476,552) vs. $(147,924) |
| Basic and diluted loss per share | $(0.02) vs. $(0.01) | $(0.04) vs. $(0.02) |
Operating and net margins are not meaningful because the company generated no revenue. Six-month net cash used in operating activities was $208,545, compared with $109,413 in the prior-year period. Financing activities provided $135,000 from stock issuance; no convertible-note proceeds were received during the period. Cash declined to $4,235 from $77,780 at December 31, 2017.
Total assets were $304,235, including a $300,000 investment in Masterson West II. Current liabilities were $348,720, including $164,447 of net current convertible notes. Long-term convertible notes, net, were $51,805, for total net convertible debt of $216,252 against gross notes of $260,000. Stockholders’ equity was a deficit of $96,290, compared with positive equity of $128,194 at year-end 2017.
Material Changes Versus the Prior Comparable Period
- Six-month general and administrative expense increased $324,069, primarily from warrant grants, professional fees and costs associated with potential asset purchases.
- Six-month net loss increased $328,628, reflecting higher operating expenses and interest expense.
- Cash used in operations increased by $99,132 year over year, while ending cash fell by $17,595 versus June 30, 2017.
- Shares outstanding increased during the first six months by 2,525,000, and additional paid-in capital increased to $16.5 million.
- Warrants valued at $117,068 were issued in June 2018 for business assistance and recorded as compensation expense.
Outlook, Risks, Contingencies and Unusual Items
Management states that substantial recurring losses and limited cash create a going-concern risk. Continued operations depend on achieving profitable operations and obtaining additional debt or equity financing. The company is considering additional equity financing and other public or private financings.
The Masterson West II transaction had not closed by June 30, 2018. The agreement remained in effect because neither party had terminated it, but the company stated that it expected the contribution and related LLC agreements to be amended, replaced or terminated during 2018. Completion would require substantial funding of $9 million to $18 million from Empire, and there is no assurance that the required funds can be obtained.
After quarter-end, Empire Louisiana, LLC agreed to acquire Louisiana oil and gas assets for $950,000 from Exodus Energy and $323,000 from Cardinal Exploration and Production Company, with closings scheduled by August 31, 2018. The assets were described as including approximately 1,500 gross acres and wells producing about 135 BOE per day in the Exodus transaction, plus four wells producing approximately 35 BOE per day in the Cardinal transaction. Financing for these acquisitions was not clearly provided in the filing. The company also issued a $10,000 demand note to a director at 8% interest and raised $10,000 through a July stock and warrant issuance.
Key risks include inability to secure financing, failure to achieve profitable production, uncertainty regarding the recoverability of the Masterson West II investment, commodity and market conditions, competition, environmental regulation and execution of planned acquisitions. No legal proceedings were reported, and management concluded that disclosure controls were effective as of June 30, 2018.
Important Facts for Investors to Verify
- Whether the company obtained sufficient financing to fund operations and the announced Louisiana acquisitions.
- Whether the Exodus and Cardinal purchase agreements closed and whether the stated production levels and working interests were realized.
- The maturity, conversion and dilution implications of the $260,000 gross convertible notes and outstanding warrants.
- The status, valuation and ultimate recoverability of the $300,000 Masterson West II investment.
- Whether the company can continue as a going concern given $4,235 of cash, negative working capital and no revenue.
- Whether future acquisitions generate revenue and cash flow, since the filing reports no petroleum sales through June 30, 2018.