Empire Petroleum Corp 10-Q for FY2020 Q2
Empire Petroleum Corp (EP)
About this 10-Q
Empire Petroleum Corp filed this 10-Q on August 14, 2020, covering the quarter ended June 30, 2020 (FY2020 Q2).
Headline figures
Quarter ended June 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $592.16K
- down 76.3% from $2.5M a year earlier
- Net loss
- $2.97M
- compared with a net loss of $2.01M a year earlier
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
_________________
| (Mark One) |
| ☑ | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) For the quarterly period ended: June 30, 2020 |
or
| ☐ | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) For the transition period from: ____________to ____________ |
_____________________
EMPIRE PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
_____________________
| DELAWARE | 001-16653 | 73-1238709 |
(State or Other Jurisdiction of Incorporation or Organization) |
(Commission File Number) |
(I.R.S. Employer Identification No.)
|
1203 East 33rd Street, Suite 250 Tulsa, OK 74105 | ||
| (Address of principal executive offices)(Zip Code) | ||
(539) 444-8002
(Registrant’s telephone number, including area code)
(Former name or former address and former fiscal year, if changed since last report)
_________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| None | EMPR | None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Non-accelerated filer ☒ | Smaller reporting company ☒ | |
| Emerging growth company ☐ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the registrant's common stock, $0.001 par value, outstanding as of June 30, 2020 was 21,392,277.
-2-
EMPIRE PETROLEUM CORPORATION
INDEX TO FORM 10-Q
| PART I. | FINANCIAL INFORMATION | Page No. |
| Item 1. | Financial Statements | |
Consolidated Balance Sheets at June 30, 2020 (Unaudited) and December 31, 2019 |
4 | |
| Consolidated Statements of Operations – For the three and six months ended June, 2020 and 2019 (Unaudited) | 5 | |
Consolidated Statements of Changes in Stockholders' Deficit (Unaudited) – For the six months ended June 30, 2020 and 2019 (Unaudited) |
6 | |
| Consolidated Statements of Cash Flows – For the six months ended June 30, 2020 and 2019 (Unaudited) | 7 | |
| Notes to Consolidated Financial Statements | 8 - 16 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 17-21 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 21 |
| Item 4. | Controls and Procedures | 21 |
| PART II. | OTHER INFORMATION | |
| Item 1. | Legal Proceedings | 22 |
| Item 1A. | Risk Factors | 22 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 22 |
| Item 3. | Defaults Upon Senior Securities | 22 |
| Item 4. | Mine Safety Disclosures | 22 |
| Item 5. | Other Information | 22 |
| Item 6. | Exhibits | 22 |
| Signatures | 23 | |
-3-
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
EMPIRE PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
| June 30, 2020 | December 31, 2019 | |||||||
| (UNAUDITED) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 285,813 | $ | — | ||||
| Accounts Receivable | 928,152 | 982,814 | ||||||
| Unrealized Gain on Derivative Instruments | 850,674 | — | ||||||
| Inventory | 567,478 | 476,305 | ||||||
| Prepaids | 83,247 | 129,541 | ||||||
| Total Current Assets | 2,715,364 | 1,588,660 | ||||||
| Property and equipment: | ||||||||
| Oil and Natural Gas Properties, Successful Efforts | 24,702,866 | 12,660,457 | ||||||
| Less: Accumulated Depreciation, Depletion and Impairment | (4,918,808 | ) | (3,365,340 | ) | ||||
| 19,784,058 | 9,295,117 | |||||||
| Other Property and Equipment, net of $3,399 and $1,830 Accumulated Depreciation, respectively | 11,056 | 12,626 | ||||||
| Total Property and Equipment, net | 19,795,114 | 9,307,743 | ||||||
| Utility and other deposits | 487,811 | 118,177 | ||||||
| Acquisition deposit, net of allowance of $725,000 and $-0-, respectively (see Note 4) | 125,000 | — | ||||||
| Total Assets | $ | 23,123,289 | $ | 11,014,580 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable | $ | 1,040,036 | $ | 1,025,585 | ||||
| Accrued Expenses | 2,356,024 | 1,103,916 | ||||||
| Unrealized Loss on Derivative Instruments | — | 11,861 | ||||||
| Current Portion of Long-term Notes Payable | 8,731,494 | 96,704 | ||||||
| Total Current Liabilities | 12,127,554 | 2,238,066 | ||||||
| Long Term Portion of Unrealized Loss on Derivative Instruments | 11,529 | 211,771 | ||||||
| Long-Term Notes Payable | 160,700 | 7,715,118 | ||||||
| Contingent Payments (see Note 5) | 985,820 | — | ||||||
| Asset Retirement Obligations | 15,652,761 | 5,788,280 | ||||||
| Total Liabilities | 28,938,364 | 15,953,235 | ||||||
| Stockholders' Deficit: | ||||||||
| Common Stock - $.001 Par Value 150,000,000 Shares Authorized, | ||||||||
| 21,392,277 and 20,367,277 Shares Issued and Outstanding, Respectively | 21,392 | 20,367 | ||||||
| Additional Paid-in Capital | 19,331,651 | 18,823,926 | ||||||
| Accumulated Deficit | (25,168,118 | ) | (23,782,948 | ) | ||||
| Total Stockholders' Deficit | (5,815,075 | ) | (4,938,655 | ) | ||||
| Total Liabilities and Stockholders' Deficit | $ | 23,123,289 | $ | 11,014,580 | ||||
See accompanying notes to unaudited consolidated financial statements
-4-
EMPIRE PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenue: | ||||||||||||||||
| Oil and Gas Sales | $ | 994,529 | $ | 1,996,758 | $ | 2,308,929 | $ | 2,320,968 | ||||||||
| Net realized and unrealized Gain (Loss) on Derivatives | (402,374 | ) | 500,728 | 2,106,671 | 432,369 | |||||||||||
| Total Revenue | 592,155 | 2,497,486 | 4,415,600 | 2,753,337 | ||||||||||||
| Costs and Expenses: | ||||||||||||||||
| Operating | 723,535 | 1,241,384 | 2,189,490 | 1,393,871 | ||||||||||||
| Taxes - Production | 60,569 | 129,824 | 144,528 | 149,473 | ||||||||||||
| Depletion, Depreciation & Amortization | 486,568 | 862,120 | 754,585 | 880,206 | ||||||||||||
| Impairment of Oil and Natural Gas Properties | — | — | 800,452 | — | ||||||||||||
| Accretion of Asset Retirement Obligation | 257,043 | 63,228 | 355,997 | 69,827 | ||||||||||||
| General and Administrative | 1,914,406 | 2,044,022 | 2,443,390 | 2,656,611 | ||||||||||||
| Total Cost and Expenses | 3,442,121 | 4,340,578 | 6,688,442 | 5,149,988 | ||||||||||||
| Operating Loss | (2,849,966 | ) | (1,843,092 | ) | (2,272,842 | ) | (2,396,651 | ) | ||||||||
| Other Income and (Expense): | ||||||||||||||||
| Gain on Sale of Assets | — | — | 1,143,760 | — | ||||||||||||
| Interest Expense | (123,219 | ) | (162,968 | ) | (256,088 | ) | (196,911 | ) | ||||||||
| Net Loss | $ | (2,973,185 | ) | $ | (2,006,060 | ) | $ | (1,385,170 | ) | $ | (2,593,562 | ) | ||||
| Net Loss per Common Share, Basic & Diluted | $ | (0.14 | ) | $ | (0.10 | ) | $ | (0.07 | ) | $ | (0.14 | ) | ||||
| Weighted Average Number of Common Shares Outstanding, | ||||||||||||||||
| Basic & Diluted | 21,392,277 | 19,358,110 | 21,222,387 | 18,587,304 | ||||||||||||
See accompanying notes to unaudited consolidated financial statements
-5-
EMPIRE PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the six months ended June 30, 2020 and 2019
(UNAUDITED)
| Additional | ||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | ||||||||||||||||||
| Shares | Par Value | Capital | Deficit | Total | ||||||||||||||||
| Balances, December 31, 2019 | 20,367,277 | $ | 20,367 | $ | 18,823,926 | $ | (23,782,948 | ) | $ | (4,938,655 | ) | |||||||||
| Net Income | — | — | — | 1,588,015 | 1,588,015 | |||||||||||||||
| Shares, Options, Warrants | ||||||||||||||||||||
| and Conversion Features Issued | 1,025,000 | 1,025 | 101,475 | — | 102,500 | |||||||||||||||
| Balances, March 31, 2020 | 21,392,277 | $ | 21,392 | $ | 18,925,401 | $ | (22,194,933 | ) | $ | (3,248,140 | ) | |||||||||
| Net Loss | — | — | — | (2,973,185 | ) | (2,973,185 | ) | |||||||||||||
| Shares, Options, Warrants | ||||||||||||||||||||
| and Conversion Features Issued | — | — | 406,250 | — | 406,250 | |||||||||||||||
| Balances, June 30, 2020 | 21,392,277 | $ | 21,392 | $ | 19,331,651 | $ | (25,168,118 | ) | $ | (5,815,075 | ) | |||||||||
| Additional | ||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | ||||||||||||||||||
| Shares | Par Value | Capital | Deficit | Total | ||||||||||||||||
| Balances, December 31, 2018 | 17,345,609 | $ | 17,345 | $ | 16,960,818 | $ | (17,128,346 | ) | $ | (150,183 | ) | |||||||||
| Net Loss | — | — | — | (587,502 | ) | (587,502 | ) | |||||||||||||
| Shares, Options, Warrants | ||||||||||||||||||||
| and Conversion Features Issued | 1,446,668 | 1,447 | 215,553 | — | 217,000 | |||||||||||||||
| Balances, March 31, 2019 | 18,792,277 | $ | 18,792 | $ | 17,176,371 | $ | (17,715,848 | ) | $ | (520,685 | ) | |||||||||
| Net Loss | — | — | — | (2,006,060 | ) | (2,006,060 | ) | |||||||||||||
| Shares, Options, Warrants | ||||||||||||||||||||
| and Conversion Features Issued | 1,075,000 | 1,075 | 1,598,055 | — | 1,599,130 | |||||||||||||||
| Balances, June 30, 2019 | 19,867,277 | $ | 19,867 | $ | 18,774,426 | $ | (19,721,908 | ) | $ | (927,615 | ) | |||||||||
See accompanying notes to unaudited consolidated financial statements
-6-
EMPIRE PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Six Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net Loss | $ | (1,385,170 | ) | $ | (2,593,562 | ) | ||
| Adjustments to Reconcile Net Loss to Net Cash | ||||||||
| Provided by (used in) Operating Activities: | ||||||||
| Gain on Sales of Assets | (1,143,760 | ) | — | |||||
| Value of warrants and options granted | 406,250 | 1,491,630 | ||||||
| Amortization of Warrant Value and Conversion Feature on | ||||||||
| Convertible Notes | — | 2,998 | ||||||
| Amortization of Loan Issue Costs | 29,172 | 14,486 | ||||||
| Depreciation, Depletion and Amortization | 754,585 | 880,206 | ||||||
| Impairment of Oil and Natural Gas Properties | 800,452 | — | ||||||
| Accretion of Asset Retirement Obligation | 355,997 | 69,827 | ||||||
| Allowance for loss relating to purchase deposit | 725,000 | |||||||
| Change in Operating Assets and Liabilities: | ||||||||
| Accounts Receivable | 54,662 | (662,165 | ) | |||||
| Unrealized Gain on Derivative Instruments | (1,062,775 | ) | (334,155 | ) | ||||
| Inventory | 56,124 | (33,703 | ) | |||||
| Prepaids | 46,294 | (56,819 | ) | |||||
| Utility and other deposits | 8,366 | — | ||||||
| Accounts Payable | (6,005 | ) | 121,794 | |||||
| Accrued Expenses | 66,521 | 1,154,074 | ||||||
| Net Cash Provided by (used in) Operating Activities | (294,287 | ) | 54,611 | |||||
| Cash Flows from Investing Activities: | ||||||||
| Acquisition of Oil and Natural Gas Properties | (506,000 | ) | (5,706,531 | ) | ||||
| Purchase of other fixed assets | — | (14,455 | ) | |||||
| Proceeds From Sale of Oil and Natural Gas Properties | 1,160,400 | — | ||||||
| Deposit for Purchase of Oil and Natural Gas Properties | (850,000 | ) | — | |||||
| Net Cash Used in Investing Activities | (195,600 | ) | (5,720,986 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from Debt Issued | 925,700 | 6,479,744 | ||||||
| Principal Payments of Debt | (150,000 | ) | (1,065,000 | ) | ||||
| Proceeds from Stock and Warrant Issuance | — | 167,000 | ||||||
| Net Cash Provided by Financing Activities | 775,700 | 5,581,744 | ||||||
| Net Change in Cash | 285,813 | (84,631 | ) | |||||
| Cash - Beginning of Period | — | 84,631 | ||||||
| Cash - End of Period | $ | 285,813 | $ | — | ||||
| Supplemental Cash Flow Information: | ||||||||
| Cash Paid for Interest | $ | 306,333 | $ | 160,088 | ||||
| Non-cash Investing and Financing Activities: | ||||||||
| Non-cash Additions to Asset Retirement Obligations | $ | 9,508,484 | $ | 3,400,770 | ||||
| Common Stock Issued in Exchange for Outstanding Notes Payable | $ | — | $ | 157,500 | ||||
| Purchases of oil and natural gas properties in accounts payable | $ | — | $ | 291,420 | ||||
| Purchases of oil and natural gas properties and deposits in accounts and notes payable, royalty suspense, and contingent payable to seller | $ | 2,569,863 | $ | — | ||||
See accompanying notes to unaudited consolidated financial statements
-7-
EMPIRE PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Empire Petroleum Corporation ("Empire" or the "Company") have been prepared in accordance with United States generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company's financial position, the results of operations, and the cash flows for the interim period are included. All adjustments are of a normal, recurring nature. Operating results for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
The information contained in this Form 10-Q should be read in conjunction with the audited financial statements and related notes for the year ended December 31, 2019 which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 30, 2020.
The Company has incurred significant losses in recent years. The continuation of the Company as a going concern is dependent upon the ability of the Company to attain future profitable operations and/or additional debt or equity financing until profitable operations are achieved. These financial statements have been prepared on the basis of United States generally accepted accounting principles applicable to a company with continuing operations, which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its obligations in the normal course of operations. Management believes the going concern assumption to be appropriate for these financial statements. If the going concern assumption were not appropriate for these financial statements, then adjustments might be necessary to adjust the carrying value of assets and liabilities and reported expenses.
The Company’s impairment assessment of proved and unproved mineral properties is based on several factors including oil and gas spot market prices and estimated futures prices that existed at June 30, 2020. In 2020, crude oil prices in both the spot market and futures market experienced significant volatility. For the six months ended June 30, 2020 the Company recorded an impairment expense of $800,452 as a result of the decline in oil prices (See Note 3). Further, the effect of lower crude oil prices on the Company’s future financial position or results of operations is not currently determinable due to broader economic and industry uncertainties, including the impact to the operators and other working interest owners of the properties in which the Company owns mineral interests.
In the event crude oil or natural gas prices remain low, there is the risk that, among other things:
| · | the Company’s revenues, cash flows and profitability may decline substantially, which could also indirectly impact expected production by reducing the amount of funds available to acquire future mineral interests; |
| · | reserves relating to the Company’s proved properties may become uneconomic to produce resulting in impairment of proved properties; and |
| · | operators and other working interest owners are unable to execute their drilling and exploration programs resulting in lower production or inability to prove reserves on unproved properties |
The occurrence of certain of these events may have a material adverse effect on the Company's business, results of operations and financial condition.
In early March 2020, there was a global outbreak of COVID-19 that continued into the second quarter and has resulted in changes in global supply and demand of certain mineral and energy products. These changes, including the magnitude and length of the economic downturn and any potential resulting direct and indirect negative impact to the Company cannot be determined, but they could have a prospective material impact to the Company’s acquisition and project development activities, and cash flows and liquidity.
-8-
Reclassification of prior year presentation. Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been made to the Consolidated Balance Sheet for the year ended December 31, 2019 to reclassify certain utility and other deposits in the amount of $118,177 which had previously been included in prepaids.
The continuation of the Company is dependent upon the ability of the Company to raise capital and attain future profitable operations. The ultimate recoverability of the Company's investment in oil and natural gas interests is dependent upon the existence and discovery of economically recoverable oil and natural gas reserves, the ability of the Company to obtain necessary financing to further develop the interests, and the ability of the Company to attain future profitable production.
As of June 30, 2020, the Company had $285,813 of cash and working capital deficit of $9,412,190, which includes the net balance of the Senior Revolver Loan Agreement of $8,397,253 which matures March 27, 2021. The Company has proved reserves which have been acquired within the last two years. The Company plans to continue to look for oil and natural gas investments and will use a combination of debt and equity financing to fund the acquisitions. The Company expects to also incur costs related to evaluating and acquiring oil and natural gas acquisitions for the foreseeable future. It is expected that management will attempt to raise additional capital for future investment and working capital opportunities.
Compensation of Officers and Employees
As of June 30, 2020, the Company had three employees. No independent Board members received compensation from the Company in the first six months of 2020 or 2019. For the six months ended June 30, 2020, the Company paid Mr. Morrisett and Mr. Pritchard $116,000 each for services rendered. For the six months ended June 30, 2019, the Company paid Mr. Morrisett $127,450 and Mr. Pritchard $131,450 for services rendered excluding the value of options. In addition, as of June 30, 2020 Mr. Pritchard has outstanding advances of $26,017.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries, Empire Louisiana, LLC ("Empire Louisiana"), Empire North Dakota, LLC ("Empire North Dakota"), and Empire Texas, LLC (“Empire Texas”). All material intercompany balances and transactions have been eliminated.
Use of estimates in the preparation of financial statements. Preparation of financial statements in conformity with generally accepted accounting principles in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Depletion of oil and natural gas properties is determined using estimates of proved oil and natural gas reserves. There are numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and natural gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves, commodity price outlooks and prevailing market rates of other sources of income and costs. Other significant estimates include, but are not limited to, asset retirement obligations, fair value of assets purchased in acquisitions, and taxes.
Interim financial statements. The accompanying consolidated financial statements of the Company have not been audited by the Company's independent registered public accounting firm. In preparing the accompanying consolidated financial statements, management has made certain estimates and assumptions that affect reported amounts in the consolidated financial statements and disclosures of contingencies. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results.
Certain disclosures have been condensed in or omitted from these consolidated financial statements. Accordingly, these condensed notes to the consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
Inventory. Inventory consists of oil in tanks which has not been delivered and is valued at the contract price to the buyer and pipe which has not yet been put into production.
Revenue recognition. The Company recognizes revenues from the sales of oil and natural gas to its customers and presents them aggregated on the Company's consolidated statements of operations. The Company enters into contracts with customers to sell its oil and natural gas production. Revenue on these contracts is recognized in accordance with the five-step revenue recognition model prescribed in ASC 606. Specifically, revenue is recognized when the Company's performance obligations under these contracts are satisfied, which generally occurs with the transfer of control of the oil and natural gas to the purchaser. Control is generally considered transferred when the following criteria are met: (i) transfer of physical custody, (ii) transfer of title, (iii) transfer of risk of loss and (iv) relinquishment of any repurchase rights or other similar rights. Given the nature of the products sold, revenue is recognized at a point in time based on the amount of consideration the Company expects to receive in accordance with the price specified in the contract. Consideration under the oil and natural gas marketing contracts is typically received from the purchaser one to two months after production. At June 30, 2020, the Company had receivables related to contracts with customers of approximately $590,000.
-9-
Fair value measurements. The Financial Accounting Standards Board ("FASB") fair value measurement standards define fair value, establish a consistent framework for measuring fair value and establish a fair value hierarchy based on the observability of inputs used to measure fair value.
Convertible debt - The carrying value of the convertible debt approximate fair value as of December 31, 2019. As of June 30, 2020 all of the convertible debt had been converted to shares of the Company’s common stock. Management's estimates are based on the assessment of qualitative factors that are considered Level 3 measurements in the fair value hierarchy as required by FASB ASC 820.
Oil and natural gas properties - The fair value of proved and unproved oil and natural gas properties was measured using valuation techniques that convert the future cash flows to a single discounted amount. Significant inputs to the valuation of proved and unproved oil and natural gas properties include estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average costs of capital. The Company utilized a combination of the New York Mercantile Exchange ("NYMEX") strip pricing and consensus pricing to value the reserves, then applied various discount rates depending on the classification of reserves and other risk characteristics. For significant purchases, management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired.
The fair value of asset retirement obligations is included in proved oil and natural gas properties with a corresponding liability in the table above. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate and timing associated with the incurrence of these costs.
The inputs used to value oil and natural gas properties for impairments and asset retirement obligations require significant judgment and estimates made by management and represent Level 3 inputs.
Financial instruments and other- The fair values determined for accounts receivable, accrued expenses and other current liabilities were equivalent to the carrying value due to their short-term nature.
3. PROPERTY AND EQUIPMENT
In March 2019, the Company, through its subsidiary, Empire North Dakota, LLC, purchased oil and natural gas properties in Montana and North Dakota (See Note 7).
On January 27, 2020, the Company, through its wholly owned subsidiary, Empire North Dakota, LLC, entered into a Bill of Sale and Assignment to purchase lease interests in approximately 4,936 acres in Montana for $500,000.
On February 10, 2020, the Company, through its wholly owned subsidiary, Empire North Dakota, LLC, sold overriding royalty interests for leases it owned in Montana for $325,000 to a consultant of the Company. As of June 30, 2020 $200,000 of the sales price had been received with the balance pending completion of title work.
On February 17, 2020 the Company, through its wholly owned subsidiary, Empire North Dakota, LLC, sold all of its interest in leases of approximately 337 acres in Montana for $1,010,400.
On April 6, 2020 the Company, through its wholly owned subsidiary, Empire Texas, LLC, purchased oil and natural gas properties in Texas (see Note 5).
During the six months ended June 30, 2020, NYMEX strip prices experienced significant volatility, resulting in a significant decrease in value of the Company’s economically recoverable proved oil and natural gas reserves. As such, the carrying amount of the Company’s proved oil and natural gas properties exceeded the expected undiscounted future net cash flows for certain leases, resulting in impairment charges against earnings of $800,452. These impairment charges are included in impairments of long-lived assets on the consolidated statement of operations for the six months ended June 30, 2020. The Company did not recognize an impairment of proved oil and natural gas properties during the six months ended June 30, 2019.
-10-
The aggregate capitalized costs of oil and natural gas properties as of June 30, 2020, are as follows:
| Proved producing wells | $ | 5,284,041 | ||
| Proved undeveloped | 2,232,458 | |||
| Lease, well and gathering equipment | 1,705,092 | |||
| Asset retirement obligation | 14,988,534 | |||
| Unproved leasehold costs | 492,741 | |||
| Gross capitalized costs | 24,702,866 | |||
| Less: accumulated depreciation, depletion and impairment | (4,918,808 | ) | ||
| $ | 19,784,058 |
Other property and equipment consists of office furniture and equipment.
| Oher property and equipment, at cost | $ | 14,456 | ||
| Less: accumulated depreciation | (3,400 | ) | ||
| Oher property and equipment, net | $ | 11,056 |
4. ACQUISITION OF OVINTIV OIL AND NATURAL GAS PROPERTIES
On March 3, 2020 the Company, through its wholly owned subsidiary, Empire North Dakota, LLC, entered into a Purchase and Sale Agreement (“the Agreement”) with Ovintiv USA, Inc. and several related companies to purchase certain oil and natural gas properties in Montana and North Dakota comprising 26,600 net acres with 94 active wells. The purchase price is $8,500,000, subject to adjustments with an effective date of January 1, 2020 and a closing date of April 30, 2020.
The Company has made an $850,000 deposit relating to the purchase which is recorded as a deposit on its balance sheet. Due to the COVID pandemic, and governmental state of emergency orders related thereto, the Company was unable to meet with and obtain financing to complete the purchase from its lenders. As of June 30, 2020 the Agreement has been terminated. The Company is currently in communication with the Seller for return of the deposit. The Company may not be successful in obtaining return of the entire deposit and has recorded an allowance of $725,000 based on its assessment of the negotiations.
5. ACQUISITION OF PARDUS OIL AND NATURAL GAS PROPERTIES
On April 6, 2020 the Company, through its wholly owned subsidiary, Empire Texas, LLC, entered into a Purchase and Sale Agreement (“the Agreement”) with Pardus Oil & Gas, LLC and Pardus Oil & Gas Operating GP, LLC (collectively “the Seller”) to purchase certain oil and natural gas properties in Texas comprising 139 gross wells and approximately 30,000 net acres, 77.3 miles of gathering lines and pipelines and related facilities and equipment, and all general and limited partner interest in Pardus Oil & Gas Operating, LP. The purchase price included the assumption of certain obligations and a contingent payment not to exceed $2,000,000 reduced by certain revenue suspense amounts. The contingent payment is based on monthly oil production in excess of a specified level from the purchased properties and an average monthly realized oil price of $40 or more per barrel of oil through December 31, 2022. The transaction closed on April 7, 2020.
The following table sets forth the Company's purchase price allocation:
| Fair Value of Assets Acquired | ||||
| Oil and natural gas properties | $ | 1,935,366 | ||
| Inventory of oil in tanks | 147,297 | |||
| Deposits | 378,000 | |||
| Equipment and gathering lines | 109,200 | |||
| Asset retirement obligation asset | 9,508,484 | |||
| Total Assets Acquired | $ | 12,078,347 | ||
| Fair Value of Liabilities Assumed | ||||
| Accounts payable, net | $ | 20,456 | ||
| Note payable – current | 378,000 | |||
| Royalty suspense | 1,185,587 | |||
| Asset retirement obligations | 9,508,484 | |||
| Total liabilities assumed | $ | 11,092,527 | ||
| Total consideration | $ | 985,820 | ||
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The fair values of assets acquired and liabilities assumed were based on the following key inputs:
Oil and natural gas properties
The fair value of proved oil and natural gas properties was measured using valuation techniques that convert the future cash flows to a single discounted amount. Significant inputs to the valuation of proved oil and natural gas properties include estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average costs of capital. The Company utilized a combination of the New York Mercantile Exchange ("NYMEX") strip pricing and consensus pricing to value the reserves, then applied various discount rates depending on the classification of reserves and other risk characteristics. Management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired.
The fair value of asset retirement obligations totaled $9,508,484 and is included with a corresponding liability in the table above. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate and timing associated with the incurrence of these costs.
The total consideration consists of a contingent payment to the seller which is due based on monthly production of oil and natural gas through December 31, 2022 and a monthly average price of $40 or higher per barrel.
The inputs used to value oil and natural gas properties and asset retirement obligations require significant judgment and estimates made by management and represent Level 3 inputs.
Financial instruments and other
The fair values determined for accounts payable - trade were equivalent to the carrying value due to their short-term nature.
Accounts payable - trade includes $20,456 of liabilities primarily related to well activity prior to close.
6. ACQUISITION OF WARHORSE OIL AND NATURAL GAS PROPERTIES
On June 10, 2019, the Company received a process verbal and related sheriff's deed dated as of May 29, 2019 (the "Sheriff's Deed") pertaining to two wells in St. Landry Parish purchased from Business First Bancshares, Inc. d/b/a Business First Bank ("Business First").
Pursuant to the Sheriff's Deed, the Company acquired certain oil and natural gas properties located in St. Landry Parish, Louisiana, including operated working interest in two producing wells. The Company purchased Business First's position as the superior lienholder and seizing creditor of such oil and natural gas properties, which were owned by Warhorse Oil & Gas, LLC, for $450,000 plus $16,993 sheriff fees. The payment was paid from loan proceeds under the loan agreement with CrossFirst Bank (see Note 9).
The Company treated the acquisition as an asset purchase. An amount equal to $73,968 was allocated to lease and well equipment and $378,110 was allocated to producing properties. An asset retirement obligation of $19,732 was recorded in conjunction with the purchase.
7. ACQUISITION OF ENERGYQUEST II ASSETS
On March 28, 2019, the Company purchased oil producing properties from EnergyQuest II, LLC ("EnergyQuest") for a purchase price of $5,600,000. The effective date of the transaction was January 1, 2019. After certain adjustments related to the effective date, the total proceeds paid to EnergyQuest were $5,646,126. Such proceeds were paid from borrowing on notes payable and sales of unregistered securities of the Company.
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The following table sets forth the Company's purchase price allocation:
| Fair Value of Assets Acquired | ||||
| Accounts receivable | $ | 1,308,748 | ||
| Inventory of oil in tanks | 438,321 | |||
| Oil properties | 10,878,429 | |||
| Total Assets Acquired | $ | 12,625,498 | ||
| Fair Value of Liabilities Assumed | ||||
| Accounts payable – trade | $ | 1,861,433 | ||
| Asset retirement obligations | 5,117,939 | |||
| Total liabilities assumed | $ | 6,979,372 | ||
| Total consideration paid | $ | 5,646,126 | ||
The fair values of assets acquired and liabilities assumed were based on the following key inputs:
Oil and natural gas properties
The fair value of proved oil and natural gas properties was measured using valuation techniques that convert the future cash flows to a single discounted amount. Significant inputs to the valuation of proved oil and natural gas properties include estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average costs of capital. The Company utilized a combination of the New York Mercantile Exchange ("NYMEX") strip pricing and consensus pricing to value the reserves, then applied various discount rates depending on the classification of reserves and other risk characteristics. Management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired.
The fair value of asset retirement obligations totaled $5,117,939 and is included in proved oil and natural gas properties with a corresponding liability in the table above. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate and timing associated with the incurrence of these costs.
The inputs used to value oil and natural gas properties and asset retirement obligations require significant judgment and estimates made by management and represent Level 3 inputs.
Financial instruments and other
The fair values determined for accounts receivable and accounts payable - trade were equivalent to the carrying value due to their short-term nature.
Accounts payable - trade includes $1,861,433 of liabilities primarily related to well activity prior to close.
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to manage its exposure to commodity price fluctuations. Commodity derivative instruments are used to reduce the effect of volatility of price changes on the oil and natural gas the Company produces and sells. The Company’s derivative financial instruments consist of oil and natural gas swaps.
The Company does not enter into derivative financial instruments for speculative or trading purposes.
The Company does not designate its derivative instruments to qualify for hedge accounting. Accordingly, the Company reflects changes in the fair value of its derivative instruments in its consolidated statements of operations as they occur. Unrealized gains and losses related to the swap contracts are recognized and recorded as an asset or liability on the Company’s balance sheet.
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The following table summarizes the net realized and unrealized amounts reported in earnings related to the commodity derivative instruments for the three and six months ended June 30, 2020 and 2019:
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Gain (loss) on derivatives: | ||||||||||||||||
| Oil derivatives | $ | (402,374 | ) | $ | 492,548 | $ | 2,106,671 | $ | 424,952 | |||||||
| Natural gas derivatives | — | 8,180 | — | 7,417 | ||||||||||||
| Total | $ | (402,374 | ) | $ | 500,728 | $ | 2,106,671 | $ | 432,369 | |||||||
The following represents the Company’s net cash receipts from derivatives for the three and six months ended June 30, 2020 and 2019:
| Three months ended June 30, | Nine months ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net cash received from payments on derivatives | ||||||||||||||||
| Oil derivatives | $ | 510,609 | $ | 74,154 | $ | 1,043,894 | $ | 93,503 | ||||||||
| Natural gas derivatives | — | 4,305 | — | 4,711 | ||||||||||||
| Total | $ | 510,609 | $ | 78,459 | $ | 1,043,894 | $ | 98,214 | ||||||||
The following table sets forth the Company’s outstanding derivative contracts at June 30, 2020. The Company has no outstanding natural gas derivatives. All of the Company’s derivatives are expected to settle by October 2021:
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
| 2020 | ||||||||||||||||
| Oil Swaps: | ||||||||||||||||
| Volume (MBbl) | — | — | 16.02 | 15.78 | ||||||||||||
| Price per Bbl | — | — | $ | 58.39 | $ | 55.18 | ||||||||||
| 2021 | ||||||||||||||||
| Oil Swaps: | ||||||||||||||||
| Volume (MBbl) | 15.26 | 15.18 | 5.20 | — | ||||||||||||
| Price per Bbl | $ | 49.40 | $ | 50.87 | $ | 38.25 | — | |||||||||
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9. NOTES PAYABLE
In February 2019, the Company entered into five unsecured promissory note agreements with accredited investors totaling $90,000. The notes were due May 1, 2019, and accrued interest at 8%. One of the notes, in the amount of $15,000 was issued to Michael R. Morrisett, the Company's President. These notes and the related interest were paid in May 2019.
On September 20, 2018 the Company entered into a Senior Revolver Loan Agreement (“the Agreement”) with CrossFirst Bank (“CrossFirst”). The Agreement was amended March 27, 2019 (the “Amended Agreement”). The Amended Agreement commitment amount is $9,000,000 which is reduced by $150,000 per calendar quarter ($8,400,000 at June 30, 2020) and the maximum amount that can be advanced under the Agreement is $20,000,000 and includes interest at Wall Street Journal Prime plus 150 basis points (4.75% as of June 30, 2020). The Agreement matures on March 27, 2021. Collateral for the loan is a lien on all of the assets of the Company’s wholly owned subsidiaries, Empire Louisiana and Empire North Dakota, and a first priority mortgage lien, pledge of and security interest in not less than 80% of Empire Louisiana’s and Empire North Dakota’s producing oil, gas and other leasehold and mineral interests. The Agreement requires Empire Louisiana, beginning December 31, 2018 to maintain certain covenants including an EBITDAX to interest expense of at least 3:1 and funded debt to EBITDAX of 4:1 on a trailing twelve month basis. The Company is not in compliance with the funded debt to EBITDAX covenant of the Agreement at June 30, 2020. As of June 30, 2020, the Company has an outstanding loan balance of $8,397,253 under the Agreement.
In January 2020 three of the Senior Unsecured Promissory Note investors exercised the conversion feature and converted their $102,500 notes for 1,025,000 shares of the Company's common stock. All of the Senior Unsecured Promissory Notes have been converted to common stock of the Company as of March 31, 2020.
On April 1, 2020, in conjunction with the purchase of assets from Pardus Oil & Gas, LLC (see Note 5), the Company entered into a unsecured promissory note agreement with the seller in the amount of $378,000. The note is payable in one installment on April 1, 2021 and bears interest at the one-year LIBOR rate (1% as of June 30, 2020).
On May 5, 2020, the Company, through its wholly owned subsidiary, Pardus Oil & Gas Operating, LP, received an SBA Payroll Protection Plan (“PPP”) loan for $160,700. The loan matures on May 5, 2022 and has an interest rate of 1%. There are no payments due until November 5, 2020 at which time the payment amount will be determined based on the portion of the loan which has not been forgiven under criteria established by the SBA, using an eighteen-month amortization. The Company expects that the majority of the loan amount will be forgiven based on currently published guidelines of the United States Small Business Administration.
10. EQUITY
Diluted Earnings per Share ("EPS") gives effect to all dilutive potential common shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on losses. As a result, if there is a loss from continuing operations, Diluted EPS is computed in the same manner as Basic EPS. At March 31, 2020 and 2019, the Company had 5,004,167 and 4,167 respectively, options outstanding that were not included in the calculation of earnings per share for the periods then ended. Such financial instruments may become dilutive and would then need to be included in future calculations of Diluted EPS. At June 30, 2020 and 2019, the outstanding options were considered anti-dilutive since the strike prices were above the market price and since the Company has incurred losses year to date.
In March 2019, 1,446,668 outstanding $0.15 warrants were converted to shares of common stock of the Company. Proceeds received from the conversion was $217,000 including $50,000 of notes payable conversion by Mr. Kamin, a board member.
During May 2019, the Company issued warrants to purchase 300,000 shares of its common stock for $0.17 per share which expire on December 31, 2021 to a former employee for business assistance provided. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 217%, risk free interest rate of 1.92% and an expected useful life of 31 months. The fair value of the warrants of $58,380 was recorded as compensation expense and allocated to Paid in Capital.
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On April 3, 2019, the Board of Directors of the Company adopted the Empire Petroleum Corporation 2019 Stock Option Plan (the "Stock Option Plan"). The total number of shares of common stock that may be issued pursuant to stock options under the Stock Option Plan is 10,000,000. Further, on April 3, 2019 the Company granted Mr. Pritchard and Mr. Morrissett each, options to purchase 2,500,000 shares of common stock of the Company at an exercise price of $0.33 per share. The options vest in three installments with 1,250,000 vesting immediately and 625,000 vesting each in April 2020 and April 2021. All of the options expire in April, 2029. The value allocated to the vested options was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 213%, risk free interest rate of 2.32% and an expected useful life of 5.375 years. The fair value of the vested options of $812,500 was recorded as compensation expense and allocated to Paid in Capital in 2019. In 2020, the fair value of the options which vested in April 2020 of $406,250 was recorded as compensation expense and allocated to Paid in Capital. The fair of the remaining unvested options is $406,250 as of June 30, 2020.
On April 3, 2019 the Board of Directors of the Company amended certain warrant certificates which had been issued to Mr. Kamin covering 3,000,000 warrants to purchase common stock of the Company. The original warrants expired on December 31, 2021 and had exercise prices of $0.15 and $0.25 for 500,000 and 2,500,000 shares, respectively. The warrants were extended to expire on April 2, 2029. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 213%, risk free interest rate of 2.32% and an expected useful life of 5 years. The fair value of the warrants of $620,750 was recorded as compensation expense and allocated to Paid in Capital.
11. SUBSEQUENT EVENTS
On August 6, 2020 the Company, through its wholly owned subsidiary, Empire Texas, LLC, entered into a joint development agreement (the “Agreement”) with Petroleum & Independent Exploration, LLC and related entities (“PIE”) dated August 1, 2020. Under the terms of the Agreement, PIE will perform recompletion and workover on specified wells owned by Empire. To fund the work, PIE entered into a term loan agreement with Empire dated August 1, 2020, whereby PIE will loan up to $2,000,000, at an interest rate of 6% per annum, maturing August 7, 2024 unless terminated earlier by PIE. On August 7, 2020, $150,000 was advanced to Empire from the loan. As part of the Agreement, Empire will assign to PIE a combined 85% working and revenue interest in the affected wells. Of the assigned interest, 70% will be used to repay the obligations under the term loan agreement. Once the term loan is repaid, PIE will assign a 35% working and revenue interest to Empire and retain a 50% working and revenue interest. In addition, PIE and Empire entered into a Securities Purchase Agreement (“Securities Agreement”) whereby PIE has agreed to purchase for $525,000 (a) 3,500,000 shares of Empire common stock, (b) warrants to purchase 2,625,000 shares of Empire common stock at an exercise price of $0.20 per share, (c) warrants to purchase 1,800,000 shares of Empire common stock at an exercise price of $0.25 per share, (d) warrants to purchase 8,136,518 shares of Empire common stock at an exercise price of $0.10 per share, and (e) warrants to purchase up to 11,066,667 shares of Empire common stock at an exercise price of $0.141 per share. PIE is obligated to exercise the $0.20 warrants within 45 days of when 3 month trailing average production from the Empire Texas properties have increased by 20% over the trailing 3 month trailing average production as of July 2020. PIE can only exercise the $0.25 warrants once all existing non-PIE outstanding warrants to purchase Empire common stock have been exercised or lapsed. For the $0.141 warrants, PIE may initially acquire 7,533,333 shares of Empire common stock, however the amount may be increased if any existing non-PIE warrants are exercised prior to December 31, 2020.
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| Item 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
GENERAL TO ALL PERIODS
RESULTS OF OPERATIONS
The Company's primary business is the exploration and development of oil and natural gas interests. The Company has incurred significant losses from operations, and there is no assurance that it will achieve profitability or obtain the funds necessary to finance its operations. For all periods presented, the Company's effective tax rate is 0%. The Company has generated net operating losses since inception, which would normally reflect a tax benefit in the statement of operations and a deferred asset on the balance sheet. However, because of the current uncertainty as to the Company's ability to achieve profitability, a valuation reserve has been established that offsets the amount of any tax benefit available for each period presented in the statements of operations.
The following table sets forth a summary of our production and operating data for the three and six month periods ended June 30, 2020. Because of normal production declines, increased or decreased drilling activities, fluctuations in commodity prices and the effects of acquisitions or divestitures, the historical information presented below should not be interpreted as being indicative of future results.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Production and operating data: | ||||||||||||||||
| Net Production volumes: | ||||||||||||||||
| Oil (Bbl) (a) | 38,176 | 37,583 | 74,060 | 42,621 | ||||||||||||
| Natural gas (Mcf) (b) | 45,423 | 11,822 | 57,863 | 22,560 | ||||||||||||
| Total (Boe) (c) | 45,747 | 39,553 | 83,704 | 46,381 | ||||||||||||
| Average price per unit: | ||||||||||||||||
| Oil (Bbl) (a) | 36.63 | 53.94 | 43.45 | 54.65 | ||||||||||||
| Natural gas (Mcf) (b) | 1.95 | 3.08 | 1.84 | 2.96 | ||||||||||||
| Total (Boe) (c) | 32.51 | 52.17 | 39.72 | 51.66 | ||||||||||||
| (a) | Bbl - One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in reference to oil, condensate or natural gas liquids. |
| (b) | Mcf – One thousand cubic feet of natural gas. |
| (c) | Boe - One barrel of oil equivalent, a standard convention used to express oil and natural gas volumes on a comparable oil equivalent basis. Natural gas equivalents are determined under the relative energy content method by using the ratio of 6.0 Mcf of natural gas to 1.0 Bbl of oil or condensate. |
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Operating costs and expenses per Boe: | ||||||||||||||||
| Oil and natural gas production | $ | 15.82 | $ | 31.39 | $ | 26.16 | $ | 30.05 | ||||||||
| Production taxes | $ | 1.32 | $ | 3.28 | $ | 1.73 | $ | 3.22 | ||||||||
| Depreciation, depletion, amortization and accretion | $ | 16.26 | $ | 23.39 | $ | 13.27 | $ | 20.48 | ||||||||
| Impairment of oil and natural gas properties | $ | — | $ | — | $ | 9.56 | $ | — | ||||||||
| General and administrative | $ | 41.85 | $ | 51.68 | $ | 29.19 | $ | 57.28 | ||||||||
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THREE-MONTH PERIOD ENDED JUNE 30, 2020 COMPARED TO THREE-MONTH PERIOD ENDED JUNE 30, 2019.
For the three months ended June 30, 2020 and 2019, revenues from oil and natural gas sales were $ 994,529 and $1,996,758 respectively. In 2020, due to COVID and other economic factors, prices of oil and natural gas declined, resulting in the Company reducing volumes produced.
Operating expenses, production taxes, depreciation and depletion and amortization and accretion decreased to $1,527,715 cumulatively for the three months ended June 30, 2020 from $2,296,556 for the same period in 2019. The decrease was due to a decrease in costs associated with oil and natural gas production, which was constrained during the period due to management’s reduction of production in response to lower prices.
Net realized and unrealized gain (loss) on derivatives decreased to $(402,374) for the three months ended June 30, 2020, from $500,728 in the same period 2019 due primarily to increases in oil prices since March 31,2020 and increases in oil prices during the same period in 2019, respectively, for those contracts in existence at that date.
General and administrative expenses decreased by $129,616 to $1,914,406 for the three months ended June 30, 2020, from $2,044,022 for the same period in 2019. The decrease was primarily due to options and warrants granted in 2019 as well as professional fees and travel related to the acquisition of oil and natural gas properties in 2019. In 2020, expenses included the $725,000 allowance for the acquisition deposit on the Ovintiv properties.
Interest expense was $123,219 and $162,968 for the three months ended June 30, 2020 and 2019, respectively. The decrease in interest expense of $39,749 resulted primarily from lower interest rates in 2020.
For the reasons discussed above, the previous period net loss increased by $967,125 from $(2,006,060) for the three months ended June 30, 2019 to net loss of $(2,973,185) for the three months ended June 30, 2020.
SIX-MONTH PERIOD ENDED JUNE 30, 2020 COMPARED TO SIX-MONTH PERIOD ENDED JUNE 30, 2019
For the six months ended June 30, 2020 and 2019, revenues from oil and natural gas sales were $ 2,308,929 and $2,320,968 respectively. The Company purchased significant oil and natural gas properties in the second quarter of 2019 which were not included in 2019 revenues. In the second quarter of 2020, due to COVID and other economic factors, prices of oil and natural gas declined, resulting in the Company reducing volumes produced.
Operating expenses, production taxes, depreciation and depletion and amortization and accretion increased to $3,444,600 cumulatively for the six months ended June 30, 2020 from $2,493,377 for the same period in 2019. The increase was due primarily to only a partial period of production in 2019 because of the EnergyQuest acquisition March 2019.
Impairment of oil and natural gas properties expense increased to $800,452 for the six months ended June 30, 2020 from $0 for the same period in 2019. The increase was due to the change in market prices for oil and natural gas in 2020.
Gain on derivatives, net increased to $2,106,671 for the six months ended June 30, 2020, from $432,369 in the same period 2019 due to decrease in oil prices since the agreements were entered into or since December 31, 2020 and 2019 respectively, for those contracts in existence at that date, to the date of maturity or the balance sheet date.
General and administrative expenses decreased by $213,221 to $2,443,390 for the six months ended June 30, 2020, from $2,656,611 for the same period in 2019. The decrease was primarily due to options and warrants issued in 2019 and professional fees and travel related to the acquisition of oil and natural gas properties in 2019. In 2020, expenses included the $725,000 allowance for the acquisition deposit on the Ovintiv properties.
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Interest expense was $256,088 and $196,911 for the six months ended June 30, 2020 and 2019, respectively. The increase in interest expense of $59,177 resulted primarily from the debt issued to acquire oil and natural gas properties in the second quarter of 2019.
For the reasons discussed above, the previous period net loss decreased by $1,208,392 from $(2,593,562) for the six months ended June 30, 2019 to net loss of $(1,385,170) for the six months ended June 30, 2020
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As of June 30, 2020, the Company had $285,813 of cash. The Company expects to incur costs related to future oil and natural gas acquisitions for the foreseeable future. It is expected that management will attempt to raise additional capital for future investment and working capital opportunities.
OUTLOOK
See Notes 3 through 7 to the financial statements for information regarding the purchase agreements the Company entered into in 2019 and 2020 to purchase existing oil and natural gas properties and mineral interests. The Company is also actively pursuing the acquisition of other operated and non-operated oil and natural gas properties. It is anticipated that such acquisitions will be financed through equity or debt transactions.
Lower oil and natural gas prices present challenges to our industry and our Company. During the first and second quarters of 2020, the economic impact of the COVID-19 pandemic have caused oil price volatility in 2020. In the first two quarters of 2020, gains on settled derivatives offset a large portion of the impact of the recent decline in prices and slower production, and we currently have derivative positions in place for a substantial amount of our expected remaining 2020 production. There can be no assurance that we will be able to add derivative positions to cover the remainder of our expected production at favorable prices.
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The Impact of COVID-19 on Our Business
During the first two quarters of 2020, we did not experience any material impact to our ability to operate or market our production due to the direct or indirect impacts of the COVID-19 pandemic. The Cybersecurity and Infrastructure Security Agency in the U.S. Department of Homeland Security classifies individuals engaged in and supporting exploration for and production of natural gas, oil and NGLs as “essential critical infrastructure workforce,” and to date, state and local governments where our wells are located have followed this guidance and exempted these activities from business closures. Should this situation change, our access to supplies or workers to drill, complete and operate wells could be materially and adversely affected.
However, as decreased transportation, manufacturing and general economic activity levels prompted by COVID-19 and related governmental and societal actions have reduced the demand for oil-based products such as gasoline, jet fuel and other refined products, space to store oil and condensate production is reaching or may reach capacity in some areas, which is prompting purchasers of oil and condensate to reduce future purchase levels and, in some cases, to claim force majeure for purchases already contracted. These situations may lead to production greater than storage capacity later in the year, depending on weather and other seasonal factors. In addition, commodity pricing challenges may cause our production costs to exceed the revenues associated with such production. To the extent that this decreased demand for our commodities continues and our margins are not at acceptable levels or storage for our production is not available, we may have to reduce production from or completely shut in portions of our currently producing wells. The inability to sell our production or the decision to potentially reduce or shut in our production could materially and adversely affect our operating results and our ability to comply with the financial covenants under our credit facility.
There is uncertainty around the extent and duration of the disruption. The degree to which the COVID-19 pandemic or any other public health crisis adversely impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, its impact on the economy and market conditions, and how quickly and to what extent normal economic and operating conditions can resume. Therefore, while we expect this matter will likely disrupt our operations, the degree of the adverse financial impact cannot be reasonably estimated at this time.
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FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q, including this section, includes certain statements that may be deemed "forward-looking statements" within the meaning of federal securities laws. All statements, other than statements of historical facts, that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future, including future sources of financing and other possible business developments, are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties and could be affected by a number of different factors, including the Company's failure to secure short and long-term financing necessary to sustain and grow its operations, increased competition, changes in the markets in which the Company participates and the technology utilized by the Company and new legislation regarding environmental matters. These risks and other risks that could affect the Company's business are more fully described in reports the Company files with the SEC, including its Form 10-K for the year ended December 31, 2019. Actual results may vary materially from the forward-looking statements.
The Company undertakes no duty to update any of the forward-looking statements in this Form 10-Q.
MATERIAL RISKS
The Company has incurred significant losses from operations and there is no assurance that it will achieve profitability or obtain the funds necessary to finance continued operations. For other material risks, see the Company's Form 10-K for the year ended December 31, 2019, which was filed on March 30, 2020.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an evaluation under the supervision of the Company's President (and principal financial officer) of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Securities Exchange Act Rules 13a - 15(e) and 15d - 15(e). Based on this evaluation, the Company's President (and principal financial officer) has concluded that the disclosure controls and procedures as of the end of the period covered by this report are effective.
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PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings |
None.
| Item 1A. | Risk Factors |
Not applicable.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Mine Safety Disclosures |
Not applicable.
| Item 5. | Other Information |
None.
| Item 6. | Exhibits |
| 31.1 | Certification of Thomas Pritchard, Chief Executive Officer, pursuant to Rules 13a - 14 (a) and 15(d) - 14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(1) (31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (submitted herewith).
|
| 31.2 | Certification of Michael R. Morrisett, President and principal financial officer, pursuant to Rules 13a - 14 (a) and 15(d) - 14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(1) (31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (submitted herewith). |
| 32.1 | Certification of Thomas Pritchard, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (submitted herewith).
|
| 32.2 | Certification of Michael R. Morrisett, President and principal financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (submitted herewith).
|
| 101 | Financial Statements for XBRL format (submitted herewith). |
-22-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Empire Petroleum Corporation
|
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| Date: August 14, 2020 | By: | /s/ Michael R. Morrisett | |
| Michael R. Morrisett | |||
| President | |||
| (principal financial officer) | |||
| Date: August 14, 2020 | By: | /s/ Thomas Pritchard | |
| Thomas Pritchard | |||
| Chief Executive Officer | |||
-23-
EXHIBIT INDEX
NO. DESCRIPTION
-24-
Exhibit 31.1
CERTIFICATION
I, Thomas Pritchard, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Empire Petroleum Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| August 14, 2020 | /s/ Thomas Pritchard | |
| Thomas
Pritchard Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Michael R. Morrisett, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Empire Petroleum Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| August 14, 2020 | /s/ Michael R. Morrisett | |
Michael R. Morrisett President (principal financial officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Empire Petroleum Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas Pritchard, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| August 14, 2020 | /s/ Thomas Pritchard | |
| Thomas
Pritchard Chief Executive Officer |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Report and shall not be considered filed as part of the Report.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Empire Petroleum Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael R. Morrisett, President (principal financial officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| August 14, 2020 | /s/ Michael R. Morrisett | |
Michael R. Morrisett President (principal financial officer) |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Report and shall not be considered filed as part of the Report.