Empire Petroleum Corporation — Form 10-K Summary
Business context and reporting period
This Form 10-K covers the fiscal year ended December 31, 2017. Empire Petroleum is an oil and gas exploration and development company traded on the OTCQB under “EMPR.” The company had no employees, no producing wells, and no petroleum revenue during 2017.
Empire held a 50% interest in Masterson West II, LLC, an entity formed to acquire Texas oil and gas properties. The proposed transaction did not close after the unexpected February 2017 death of Masterson West’s majority owner. The agreement remained in effect as of the filing date, but either party could terminate it.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Petroleum revenue | $0 | $0 | No change |
| General and administrative expense | $757,069 | $196,603 | +$560,466 |
| Lease option impairment | $0 | $181,475 | Decreased $181,475 |
| Interest expense | $72,998 | $3,837 | +$69,161 |
| Net loss | $830,067 | $381,915 | Loss increased $448,152 |
| Basic and diluted loss per share | $0.08 | $0.04 | Loss per share doubled |
| Net cash used in operating activities | $235,963 | $81,862 | Use increased $154,101 |
| Cash at year-end | $77,780 | $68,743 | +$9,037 |
| Accumulated deficit | $16,111,215 | $15,281,148 | Increased $830,067 |
Operating margin and net margin were not meaningful because the company generated no revenue. The company reported a $757,069 operating loss and a $830,067 net loss. The effective income tax rate was 0%, reflecting a full valuation allowance against deferred tax assets.
Total assets were $377,780 at December 31, 2017, including $77,780 of cash and a $300,000 investment in Masterson West II. Total liabilities were approximately $249,586, consisting primarily of convertible notes and accrued liabilities. Convertible notes had a face amount of $260,000 and a net carrying amount of $184,622, including $137,256 classified as current and $47,366 as long term.
Material changes versus the prior comparable period
- General and administrative expense rose substantially, primarily because of $472,700 of warrant-based compensation issued to management and directors and higher consulting and marketing expenses.
- Interest expense increased materially because of additional convertible notes and amortization of debt issuance costs and conversion features.
- The 2016 impairment of South Dakota and North Dakota lease options did not recur in 2017. Those options expired in April 2017 and had been reduced to zero carrying value.
- Operating cash use increased to $235,963 from $81,862, although financing proceeds of $245,000 resulted in a year-end cash increase of $9,037.
- The company issued $127,500 of convertible notes during 2017, $117,500 of stock proceeds, 93,333 common shares for services, and substantial warrants to management, directors, investors, and service providers.
- Outstanding options and warrants increased significantly. The filing reports 8,775,167 options and warrants outstanding at December 31, 2017 that were excluded from diluted loss per share because they were anti-dilutive.
Liquidity, outlook, risks, and unusual items
Management reported only $77,780 of cash at year-end and expects general administrative and other expenses of approximately $25,000 per month. The company stated that it will need to raise additional capital to fund operations and future investments. The independent auditor included an explicit going-concern uncertainty, citing recurring losses, dependence on financing, and the need to discover and develop economically recoverable reserves.
Management’s principal strategic objective was to complete the Masterson West II transaction. The proposed contribution would involve Texas properties reportedly producing approximately 1,000 barrels of oil equivalent per day, approximately 8,000 net acres, and identified drilling opportunities. Empire would need to contribute between $9 million and $18 million in cash and would receive an estimated 25% to 50% interest, depending on the amount funded. The transaction had not closed as of the filing date, and Masterson West II had no operations during 2017.
The company has no formal operating guidance or production forecast. Its outlook is contingent on raising capital, completing the Masterson West II transaction or another investment, and achieving commercially viable production. Key risks include limited liquidity, inability to obtain financing, volatility in oil and gas prices, drilling and operating hazards, environmental and regulatory liabilities, competition from substantially larger companies, dilution from convertible securities and warrants, and dependence on a small management team.
At December 31, 2017, Empire had approximately $9.8 million of federal net operating loss carryforwards, some of which begin to expire in 2018. The related deferred tax asset was fully offset by a valuation allowance. Subsequent to year-end, the company received $120,000 for subscriptions for 1,200,000 shares and warrants to purchase an additional 1,200,000 shares.
Corporate governance was limited: the company had no audit, compensation, or nominating committees, and the full board performed those functions. Management concluded that disclosure controls and internal control over financial reporting were effective; the auditor did not provide an attestation report on internal controls because one was not required for the company.
Most important facts for investors to verify
- Whether the Masterson West II agreement was subsequently terminated, amended, or completed, and whether any Texas properties were ultimately acquired.
- Whether Empire obtained sufficient financing to fund operations and the proposed $9 million to $18 million transaction.
- The maturity, conversion, and settlement status of the $260,000 face amount of convertible notes, including the portions due in 2018 and 2019.
- The potential dilution from 8,775,167 outstanding options and warrants, convertible notes, subscribed shares, and additional post-year-end issuances.
- Whether the company developed producing assets or generated revenue after December 31, 2017, given its zero revenue and no producing wells during the reporting period.
- The company’s ability to continue as a going concern in light of $77,780 of cash, expected monthly spending of approximately $25,000, recurring losses, and the auditor’s substantial-doubt conclusion.
- The accuracy and timing of the filing’s signature dates, which appear inconsistent with the fiscal year and audit report dates shown in the filing.