UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________ to _________________
Commission file number 001-16653
EMPIRE PETROLEUM CORPORATION
(Name of small business issuer in its charter)
Delaware 73-1238709
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
8801 S. Yale, Suite 120, Tulsa, OK 74137-3575
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (918) 488-8068
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB [ X ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act.
Yes [ ] No [X]
The issuer's gross revenues for the most recent fiscal year were $102,476.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates, based upon the average bid and asked prices of the Common
Stock on March 1, 2007 was $5,547,869.
The number of shares outstanding of the issuer's Common Stock, as of March 1,
2007 was 50,080,190.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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EMPIRE PETROLEUM CORPORATION
FORM 10-KSB
TABLE OF CONTENTS
ITEM NUMBER AND CAPTION PAGE NUMBER
PART I
Item 1. Description of Business 4-6
Item 2. Description of Property 6-7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters and Small Business Issuer Purchases of Equity
Securities 8
Item 6. Management's Discussion and Analysis 8-17
Item 7. Financial Statements F-1 through F-14
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 17
Item 8A. Controls and Procedures 17
Item 8B. Other Information 17
PART III
Item 9. Directors, Executive Officers, Promoters, Control
Persons and Corporate Governance; Compliance with
Section 16(a) of the Exchange Act 17-19
Item 10. Executive Compensation 19
Item 11. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 20-22
Item 12. Certain Relationships and Related Transactions,
and Director Independence 22
Item 13. Exhibits 22-23
Item 14. Principal Accountant Fees and Services 23-24
Signatures 25
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Background
Empire Petroleum Corporation, a Delaware corporation (the "Company"),
was incorporated in the state of Utah in August 1983 under the name
Chambers Energy Corporation and domesticated in Delaware in March
1985 under the name Americomm Corporation. The Company's name was
changed to Americomm Resources Corporation in July 1995. On May 29,
2001, Americomm Resources Corporation acquired Empire Petroleum
Corporation, which became a wholly owned subsidiary of Americomm
Resources Corporation. On August 15, 2001, Americomm Resources
Corporation and Empire Petroleum Corporation merged and the Company's
name was changed to Empire Petroleum Corporation. Since August 15, 2001,
the Company has not had any subsidiaries. The Company operates from
leased office space at 8801 S. Yale, Suite 120, Tulsa, OK 74137-3575,
and its telephone number is (918) 488-8068.
During the past three fiscal years, the Company has focused on developing
the Cheyenne River and Gabbs Valley Prospects as further described below.
Cheyenne River Prospect
The Company owns a working interest in approximately 33,485 acres of oil and
gas leases located in Niobrara County, Wyoming (the "Cheyenne River
Prospect") and an overriding royalty interest of between 1.5% and 2% in
40,758 acres of oil and gas leases located in or near the Cheyenne River
Prospect. On March 31, 2004, a third party paid approximately $52,128 of the
Company's lease rentals on 32,643 acres in the Cheyenne River Prospect in
exchange for an option to drill a test well in order to earn an interest in
the farmout block, which option was subject to the third party first
completing a seismic survey covering 16 square miles in the Cheyenne River
Prospect. This survey was completed in September of 2003. The processing
and interpreting of the data from such survey was completed September 30,
2003, and earned the third party a 25% interest in the prospect acreage
and well that had previously been drilled on the prospect, the Timber Draw
#1-AH. This third party commenced a test well in the NW/4NE/4 Section 15,
Twp 39N, Rge 66W, Niobrara County, Wyoming, known as the Empire Hooligan Draw
Unit #1-AH, on August 6, 2004. The well was drilled horizontally to a
measured drilling depth of 9,332 feet. As a result, the Company's working
interest in the Hooligan Draw #1-AH well and prospect acreage was reduced to
26.785% and its working interest in the Timber Draw #1-AH well was reduced to
17.5%. The Company and the operator are currently considering alternative
means of developing this prospect, including entering into a farmout pursuant
to which a third party could earn an interest in this prospect for a drilling
commitment. Additionally, the Company has also continued to explore
opportunities to sell or farmout its interest in the Cheyenne River Prospect.
The Company recorded an impairment charge of $188,507 in 2005 for its interest
in the Cheyenne River Prospect.
The Cheyenne River Prospect is located near a mature producing area
with an established pipeline and service network.
Gabbs Valley Prospect
The Company owns a working interest in oil and gas leases in Nye and Mineral
Counties, Nevada (the "Gabbs Valley Prospect"). Initially, the Company's
working interest was 10% and the Gabbs Valley Prospect consisted of 44,604
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acres.
In November 2005, the Company received the results of a 19-mile 2-D swath
seismograph survey conducted on the prospect and, based on the results of the
survey, the Company and its partners determined that a test well should be
drilled on the prospect. The Company also elected to increase its interest in
the prospect by taking a farm-in from Cortez Exploration LLC (formerly O. F.
Duffield). Empire agreed to pay Cortez $675,000 in lease costs plus 45% of
the costs associated with the drilling of a test well to earn an additional 30%
working interest which made its total working interest 40%. The lease block
of 44,604 acres was increased to 75,521 acres by the acquisition of an
additional 30,917 acres from the Department of the Interior (Bureau of
Land Management) in June 2006.
A 28,783 acre federal drilling unit on the Gabbs Valley Prospect, the Cobble
Cuesta Unit, was approved by the Bureau of Land Management and expanded to
44,964 acres on April 28, 2006. In 2006, a test well, the Empire Cobble
Cuesta 1-12-12N-34E, Nye County, Nevada was drilled to a depth of 5,195 feet.
The well encountered a Volcanic formation at 1,760 feet and scattered
oil shows from 2,000 feet to total depth.
After reaching 5,195 feet, the Company and its partners elected to suspend
operations on the well, release the drilling rig, and associated equipment
and personnel to evaluate the drilling and logging data. After the study was
completed, Empire and its partners decided to conduct a thorough testing
program on the well. The Company plans to begin the testing, subject to
financing and equipment availability, in March or April of 2007.
Other than a 5,000 barrel-per-day refinery located approximately 115
miles from the Gabbs Valley Prospect, there are no pipelines or service
networks located near the prospect.
Competition
The oil and gas business is extremely competitive. The Company must compete
with many long-established companies with greater financial resources and
technical capabilities. The Company is not a significant participant in the
oil and gas industry.
Markets; Price Volatility
The market price of oil and gas is volatile, subject to speculative movement
and depends upon numerous factors beyond the control of the Company,
including expectations regarding inflation, global and regional demand,
political and economic conditions and production costs. Future profitability,
if any, will depend substantially upon the prevailing prices for oil and gas.
If the market price for oil and gas is significantly depressed in the future,
it could have a material adverse effect on the Company's ability to raise
additional capital necessary to finance operations and to explore the
Cheyenne River and Gabbs Valley Prospects. Lower oil and gas prices may also
reduce the amount of oil and gas, if any, that can be produced economically
from the Company's properties. Although the prices of oil and gas remain
volatile, the oil and gas industry has recently experienced historically high
prices for oil and gas. The Company does not anticipate that the prices of
oil and gas will decline substantially in the near future.
Regulation
The oil and gas industry is subject to extensive federal, state and local
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laws and regulations governing the production, transportation and sale of
hydrocarbons as well as the taxation of income resulting therefrom.
Legislation affecting the oil and gas industry is constantly changing.
Numerous federal and state departments and agencies have issued rules and
regulations applicable to the oil and gas industry. In general, these
rules and regulations regulate, among other things, the extent to which
acreage may be acquired or relinquished; spacing of wells; measures required
for preventing waste of oil and gas resources; and, in some cases, rates of
production. The heavy and increasing regulatory burdens on the oil and gas
industry increase the costs of doing business and, consequently, affect
profitability.
A substantial portion of the leases, which constitute the Cheyenne River
and Gabbs Valley Prospects are granted by the federal government and
administered by the Bureau of Land Management ("BLM") and the Minerals
Management Service ("MMS") of the U.S. Department of the Interior, both of
which are federal agencies. Such leases are issued through competitive
bidding, contain relatively standardized terms and require compliance with
detailed BLM and MMS regulations and orders (which are subject to change by
the BLM and the MMS). Leases are also accompanied by stipulations imposing
restrictions on surface use and operations. Operations to be conducted by
the Company on federal oil and gas leases must comply with numerous regulatory
restrictions, including various nondiscrimination statutes. Federal leases
also generally require a complete archaeology and environmental impact
assessment prior to the authorization of an exploration or development plan.
The Company's oil and gas properties and operations are also subject to
numerous federal, state and local laws and regulations relating to
environmental protection. These laws govern, among other things, the amounts
and types of substances and materials that may be released into the
environment, the issuance of permits in connection with exploration, drilling
and production activities, the reclamation and abandonment of wells and
facility sites and the remediation of contaminated sites. These laws and
regulations may impose substantial liabilities for the Company's failure to
comply with them or for any contamination resulting from the Company's
operations.
Employees
As of December 31, 2006, the Company had one employee, a full-time secretary.
Mr. Albert E. Whitehead, Chairman and Chief Executive Officer, devotes a
considerable amount of time to the affairs of the Company and receives no
compensation. For financial statement purposes, Mr. Whitehead's services have
been recorded as contributed capital and expense in the amount of
$50,000 for the year ended December 31, 2006.
ITEM 2. DESCRIPTION OF PROPERTY
Cheyenne River Prospect
As of December 31, 2006, the Cheyenne River Prospect consisted of
approximately 33,485 gross acres of federal and fee leases located in
Niobrara County, Wyoming, of which the Company owns a 26.785% working
interest. The land in the Cheyenne River Prospect consists of gently
rolling ranch land with a substantial network of ranch roads, which permit
easy access to most areas of the prospect. The prospect is located near a
mature producing area with an established pipeline and service network.
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Numerous wells were drilled within the prospect area in the 1950's through
the 1970's, with initial potential flowing rates in the range of 200 to 1,500
barrels of oil per day. Management believes that these wells may identify a
fractured reservoir with the potential for significant oil and gas
production, which would be most effectively exploited utilizing horizontal
drilling technology. In addition, the Company is exploring the possibility
of selling or farming-out its interests in the Cheyenne River Prospect. The
Company's Timber Draw #1-AH and the Hooligan Draw #1-AH wells were drilled on
the Prospect using horizontal drilling technology. The Company has retained
a 17.5% working interest in the Timber Draw #1-AH and a 26.875% interest in
the Hooligan Draw #1-AH wells.
The Company's leases in the Cheyenne River Prospect are predominately
federal leases with 10 year terms, most of which have one year
remaining. In connection with drilling the Timber Draw #1-AH well, the
Company formed the Timber Draw Unit. Since the Company did not commence
Drilling another well within the unit by August 12, 2002, the BLM informed
the Company the Timber Draw Unit had been terminated.
A new unit known as the Hooligan Draw Unit was formed in 2004 consisting of
leases covering 2,560 acres. The Hooligan Draw Unit #1-AH well was drilled
in this unit. Subsequent to the drilling of this well, it was determined the
unit was no longer needed and the unit was allowed to terminate. Unless
a new unit is formed, a well will need to be drilled on each federal and
fee lease in order to extend such lease for the life of its producing
capability.
For more information on the Cheyenne River Prospect, see "Cheyenne River
Prospect" under Item 1, Description of Business.
Gabbs Valley Prospect
As of December 31, 2006, the Gabbs Valley Prospect consisted of approximately
75,521.36 acres of federal leases located in Nye and Mineral Counties, Nevada,
of which the Company owns a 40% working interest.
As of December 31, 2006, one well, the Empire Cobble Cuesta 1-12 had been
drilled and was expected to be tested in March or April 2007. For more
information regarding the Gabbs Valley Prospect, see "Gabbs Valley Prospect"
under Item 1, Description of Business.
COMPANY UNDEVELOPED ACREAGE (LEASES)
AS OF DECEMBER 31, 2006
Undeveloped Acreage Productive Acreage Completed Oil Wells
Gross Net Gross Net
Prospect Acres Acres Acres Acres 2004 2005 2006
________ ________ _______ ________ _________ _____________________
Cheyenne
River 33,085.19 8,861.86 400 84.9 2 2 2
Gabbs
Valley 75,521.36 30,208.84 - - -0- -0- -0-
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2006, neither the Company nor its properties were
subject to any legal proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were not any matters submitted to a vote of the Company's Stockholders
during the fourth quarter of the fiscal year ended December 31, 2006.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information:
The Company's Common Stock is traded on the National Association of
Securities Dealers Automatic Quotation (NASDAQ) over-the-counter bulletin
board system under the symbol "EMPR."
The following table sets forth the high and low bid information for the
Company's common stock during the time periods indicated, as reported
by NASDAQ.
Year ending December 31, 2005:
Quarter High Low
03/31/05 .12 .07
06/30/05 .155 .055
09/30/05 .19 .09
12/31/05 .18 .10
Year ending December 31, 2006:
Quarter High Low
03/31/06 .25 .10
06/30/06 .22 .12
09/30/06 .30 .16
12/31/06 .27 .08
Quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not represent actual transactions.
Number of Holders of Common Stock
At December 31, 2006, there were approximately 179 stockholders of record of
the Company's Common Stock.
Dividends
The Company has never paid cash dividends on its Common Stock. The Company
intends to retain future earnings for use in its business and, therefore,
does not anticipate paying cash dividends on its Common Stock in the
foreseeable future.
Recent Sales of Unregistered Securities
During the quarter ended December 31, 2006, the Company did not sell any
securities of the Company that were not registered under the Securities
Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Cautionary Note Regarding Forward-Looking Statements
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All statements, other than statements of historical fact, contained in this
report are forward-looking statements. Forward-looking statements generally
are accompanied by words such as "anticipate," "believe," "estimate,"
"expect," "may," "might," "potential," "project" or similar statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, no assurance can be given that
such expectations will prove correct. Factors that could cause results to
differ materially from the results discussed in such forward-looking
statements include:
* the need for additional capital,
* the costs expected to be incurred in exploration and development,
* unforeseen engineering, mechanical or technological difficulties in
drilling wells,
* uncertainty of exploration results,
* operating hazards,
* competition from other natural resource companies,
* the fluctuations of prices for oil and gas,
* the effects of governmental and environmental regulation, and
* general economic conditions and other risks described in the Company's
filings with the Securities and Exchange Commission.
Information on these and other risk factors are discussed under "Factors That
May Affect Future Results" below. Accordingly, the actual results of
operations in the future may vary widely from the forward-looking statements
included herein, and all forward-looking statements in this Form 10-KSB are
expressly qualified in their entirety by the cautionary statements in this
paragraph.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis, judgment, belief and
expectations only as of the date hereof. The Company undertakes no obligation
to publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
Factors That May Affect Future Results
The Company does not have any significant on-going income producing oil and
gas properties and has limited financial resources.
For the past three fiscal years, the Company has financed its operations
primarily from sales of equity securities and advances made to the Company by
Albert E. Whitehead, the Company's Chief Executive Officer. There is no
assurance that the Company will be able to continue to finance its operations
through the sale of equity securities or loans or advances by third parties.
In addition, Mr. Whitehead has no obligation to advance the Company any
additional money, and there is no assurance that he will do so.
The report of the Company's independent auditor regarding the Company's
financial statements has been modified because of a going concern uncertainty.
The Company reported losses of $274,329 and $158,191 for the years
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ended December 31, 2006 and 2005, respectively. The Company also has an
accumulated deficit of $9,053,275 as of December 31, 2006. The Company can
provide no assurance that it will be profitable in the future and, if the
Company does not become profitable, it may have to suspend its operations. As
a result of the foregoing, the audit report of the Company's independent
auditors relating to the Company's financial statements has been modified
because of a going concern uncertainty. If the Company is able to raise the
funds necessary to continue its operations, its future performance will be
dependent on the successful drilling results of its inventory of unproved
locations in Wyoming and Nevada. The failure of drilling activities to
achieve sufficient quantities of economically attractive reserves and production
would have a material adverse effect on the Company's liquidity,
operations and financial results.
The Company could be adversely affected by fluctuations in oil and gas prices.
Even if the Company's drilling activities achieve commercial quantities of
economically attractive reserves and production revenue, the Company will
remain subject to prevailing prices for oil, natural gas and natural gas
liquids, which are dependent upon numerous factors such as weather, economic,
political and regulatory developments and competition from other sources of
energy. The volatile nature of the energy markets makes it particularly
difficult to estimate future prices of oil, natural gas and natural gas
liquids. Prices of oil, natural gas and natural gas liquids are subject to
wide fluctuations in response to relatively minor changes in circumstances,
and there can be no assurance that future prolonged decreases in such prices
will not occur. All of these factors are beyond the control of the Company.
Any significant decline in oil and gas prices could have a material adverse
effect on the Company's liquidity, operations and financial condition.
The Company could be adversely affected by increased costs of service
providers utilized by the Company.
In accordance with customary industry practice, the Company relies on
independent third party service providers to provide most of the services
necessary to drill new wells, including drilling rigs and related equipment
and services, horizontal drilling equipment and services, trucking services,
tubulars, fracing and completion services and production equipment. The
industry has experienced significant price increases for these services
during the last year and this trend is expected to continue into the future.
These cost increases could, in the future, significantly increase the
Company's development costs and decrease the return possible from drilling
and development activities, and possibly render the development of certain
proved undeveloped reserves uneconomical.
The Company is subject to numerous drilling and operating risks.
Oil and gas drilling activities are subject to numerous risks, many of which
are beyond the Company's control. The Company's operations may be curtailed,
delayed or canceled as a result of title problems, weather conditions,
compliance with governmental requirements, mechanical difficulties and
shortages or delays in the delivery of equipment. In addition, the Company's
properties may be susceptible to hydrocarbon drainage from production by other
operators on adjacent properties. Industry operating risks include the
risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formations and environmental hazards such as oil spills, gas leaks, ruptures
or discharges of toxic gases, the occurrence of any of which could result in
substantial losses to the Company due to injury or loss of life, severe
damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, clean-up responsibilities,
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regulatory investigation and penalties and suspension of operations.
The Company's insurance policies may not adequately protect the Company
against certain unforeseen risks.
In accordance with customary industry practice, the Company maintains
insurance against some, but not all, of the risks described herein. There can
be no assurance that any insurance will be adequate to cover the Company's
losses or liabilities. The Company cannot predict the continued availability
of insurance, or its availability at premium levels that justify its purchase.
The Company's activities are subject to extensive governmental regulation.
Oil and gas operations are subject to various federal, state and local
governmental regulations that may be changed from time to time in response to
economic or political conditions. From time to time, regulatory agencies have
imposed price controls and limitations on production in order to conserve
supplies of oil and gas. In addition, the production, handling, storage,
transportation and disposal of oil and gas, by-products thereof and other
substances and materials produced or used in connection with oil and gas
operations are subject to regulation under federal, state and local laws and
regulations primarily relating to protection of human health and the
environment. To date, expenditures related to complying with these laws and
for remediation of existing environmental contamination have not been
significant in relation to the operations of the Company. There
can be no assurance that the trend of more expansive and stricter
environmental legislation and regulations will not continue.
The Company is subject to various environmental risks, and governmental
regulation relating to environmental matters.
The Company is subject to a variety of federal, state and local governmental
laws and regulations related to the storage, use, discharge and disposal of
toxic, volatile or otherwise hazardous materials. These regulations subject
the Company to increased operating costs and potential liability associated
with the use and disposal of hazardous materials. Although these laws and
regulations have not had a material adverse effect on the Company's financial
condition or results of operations, there can be no assurance that the
Company will not be required to make material expenditures in the future.
Moreover, the Company anticipates that such laws and regulations will become
increasingly stringent in the future, which could lead to material costs for
environmental compliance and remediation by the Company. Any failure by the
Company to obtain required permits for, control the use of, or adequately
restrict the discharge of hazardous substances under present or future
regulations could subject the Company to substantial liability or could cause
its operations to be suspended. Such liability or suspension of operations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is subject to intense competition.
The Company operates in a highly competitive environment and competes with
major and independent oil and gas companies for the acquisition of desirable
oil and gas properties, as well as for the equipment and labor required to
develop and operate such properties. Many of these competitors have financial
and other resources substantially greater than those of the Company.
The Company currently depends on the Company's Chief Executive Officer.
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The Company is dependent on the experience, abilities and continued services
of its current Chief Executive Officer and President, Albert E. Whitehead. Mr.
Whitehead has played a significant role in the development and management
of the Company. The loss or reduction of services of Mr. Whitehead could have
a material adverse effect on the Company.
There has been a limited public trading market for the Company's Common Stock,
and there can be no assurance that an active trading market will be
sustained. There can be no assurance that the Common Stock will trade at or
above any particular price in the public market, if at all. The trading price
of the Common Stock could be subject to significant fluctuations in response
to variations in quarterly operating results or even mild expressions of
interest on a given day. Accordingly, the Common Stock should be expected to
experience substantial price changes in short periods of time. Even if the
Company is performing according to its plan and there is no legitimate
company-specific financial basis for this volatility, it must still be
expected that substantial percentage price swings will occur in the Company's
Common Stock for the foreseeable future.
Certain restricted shares of the Company will be eligible for sale in the
future which could affect the prevailing market price of the Company's Common
Stock.
Certain of the outstanding shares of the Company's Common Stock are
"restricted securities" under Rule 144 of the Securities Act, and (except for
shares purchased by "affiliates" of the Company's as such term is defined in
Rule 144) would be eligible for sale as the applicable holding periods
expire. In the future, these shares may be sold only pursuant to a
registration statement under the Securities Act or an applicable exemption,
including pursuant to Rule 144. Under Rule 144, a person who has owned common
stock for at least one year may, under certain circumstances, sell within any
three-month period a number of shares of common stock that does not exceed the
greater of 1% of the then outstanding shares of common stock or the
average weekly trading volume during the four calendar weeks prior to such
sale. A person who is not deemed to have been an affiliate of the Company at
any time during the three months preceding a sale, and who has beneficially
owned the restricted securities for the last two years is entitled to sell
all such shares without regard to the volume limitations, current public
information requirements, manner of sale provisions and notice requirements.
Sale or the expectation of sales of a substantial number of shares of Common
Stock in the public market by selling stockholders could adversely affect the
prevailing market price of the Common Stock, possibly having a depressive
effect on any trading market for the Common Stock, and may impair the
Company's ability to raise capital at that time through additional sales of
its equity securities. The Company has agreed to register shares from the
most recent offerings.
The Company does not expect to declare or pay any dividends in the foreseeable
future.
The Company has not declared or paid any dividends on its Common Stock. The
Company currently intends to retain future earnings to fund the development
and growth of its businesses, to repay indebtedness and for general corporate
purposes, and therefore, does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future.
The Company's Common Stock may be subject to secondary trading restrictions
related to penny stocks.
Certain transactions involving the purchase or sale of Common Stock of the
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Company may be affected by a SEC rule for "penny stocks" that imposes
additional sales practice burdens and requirements upon broker-dealers that
purchase or sell such securities. For transactions covered by this penny
stock rule, broker-dealers must make certain disclosures to purchasers prior
to purchase or sale. Consequently, the penny stock rule may impede the
ability of broker-dealers to purchase or sell the Company's securities for
their customers and the ability of persons now owning or subsequently
acquiring the Company's securities to resell such securities.
RESULTS OF OPERATIONS
GENERAL TO ALL PERIODS
The Company's primary business is the exploration and development of oil and
gas interests. The Company has incurred significant losses from operations,
and there is no assurance that it will achieve profitability or obtain funds
necessary to finance its operations. Sales revenues for all periods presented
are attributable to the production of oil from the Company's Timber Draw #1-AH
and Hooligan Draw #1-AH wells located in the Eastern Powder River Basin in
the State of Wyoming, otherwise known as the Cheyenne River Prospect.
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.
RESTATEMENT
On November 11, 2005, the Company filed a Form 8-K with the SEC disclosing that
it would restate its previously issued financial statements for the year ended
December 31, 2003, annual and quarterly financial statements for 2004, and
quarterly financial statements for the first two quarters of 2005 after
determining that it had erroneously accounted for its exit activities in
connection with its former office space in Canada.
In the third quarter of 2003, the Company recorded an expense for its
obligation under the lease for the period up to the balance sheet date. It
continued to record an expense of $13,200 per quarter through March 31, 2005
related to the lease.
After further review, the Company's management determined that it should have
accrued an obligation for the lease equal to total amounts owed from the "cease
use date" (the date in January 2003 on which the Company's subtenant moved out
of the office space) through the end of the lease term. Additionally, since
the lease obligation was in Canadian dollars, the Company should have recorded
a currency exchange gain or loss on its obligation in each quarter. Based on
this analysis, the Company and its Board of Directors concluded that its
previously issued financial statements for the year ended December 31, 2003,
annual and quarterly financial statements for 2004 and quarterly financial
statements for the first two quarters of 2005 required adjustments of the
amounts previously reported for accounts payable and accrued liabilities, and
general and administrative expenses. The effect of the restatement was to
decrease the previously reported net loss by $37,055 for the year ended
December 31, 2004 and to increase the previously reported net loss by $118,817
for the year ended December 31, 2003. The restatement did not affect the net
loss per share at December 31, 2005 or 2004.
-13-
All of the financial statements and financial information contained in the Form
10-KSB reflect the effect of the restatement.
TWELVE MONTH PERIOD ENDED DECEMBER 31, 2006, COMPARED TO TWELVE MONTH PERIOD
ENDED DECEMBER 31, 2005
For the twelve months ended December 31, 2006, sales revenue increased
$44,888 to $102,476, compared to $57,588 for the same period during 2005.
The increase in sales revenue was the result of escrowed oil sales from the
Cheyenne River Prospect, which were released upon completion of Division
Orders on the Timber Draw and Hooligan Draw wells.
Production and operating expenses increased $78,597 to $161,467 for the
twelve months ended December 31, 2006, from $82,870 for the same period in
2005. This increase was primarily attributable costs associated with the
additional lease rentals on the Company's Gabbs Valley Prospect.
General and administrative expenses increased by $87,859 to $252,353 for the
twelve months ended December 31, 2006, from $164,494 for the same period in
2005. The increase was primarily due to options granted and increases in
professional fees.
There was no depreciation expense attributable to the twelve months ended
December 31, 2006 or December 31, 2005, because the depreciable assets were
fully depreciated.
For the twelve months ended December 31, 2006, interest expense was $6,900
which is similar to the same period in 2005. Interest expense was accrued at
the same rate compared to the same period in 2005.
Interest and miscellaneous income decreased $4,219 to $212 in 2006.
For the reasons discussed above, net loss increased $(159,841) from (158,191)
for the twelve months ended December 31, 2005, to $(318,032) for the twelve
months ended December 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As of December 31, 2006, the Company had $60,786 of cash on hand. The
Company's cash on hand is not sufficient to fund its operations during the
next 12 months. The Company expects to incur costs of approximately $10,000
per month relating to general administrative, office and other expenses. In
addition, the Company's other material commitments in the next twelve months
will include the Company's portion of expenses relating to the testing and
possible completion of the Cobble Cuesta 1-12 in Nevada, which the Company
estimates will be $250,000 to $450,000 and obligations that could arise as
further described under "Note Payable" and "Advances from Related Party"
below. In order to sustain the Company's operations on a long term basis,
the Company intends to continue to look for merger opportunities and consider
public or private financings. To the extent that it is necessary, the Company
expects that management will support the Company financially for several
months to allow the Company to consummate a merger opportunity, or public or
private financing.
PRIVATE EQUITY PLACEMENTS
In June 2005, the Company completed a private placement of 5,000,000 shares
of its common stock along with warrants to purchase 1,250,000 shares of its
-14-
Common Stock for an aggregate purchase price of $500,000. Subject to certain
restrictions, the warrants may be exercised at an exercise price of $0.25 per
share. Proceeds of the private placement were allocated $67,875 to common
stock warrants and $432,125 to common stock and paid-in capital. These funds
were used for general corporate purposes and to pay the Company's share of the
costs associated with its initial 10% interest in the Gabbs Valley Oil
Prospect in Nevada. The original warrants, which expired in June 2006, have
been extended to expire in August 2007.
In September 2006, the Company raised an additional $1,450,000 in a private
placement of 7,250,000 shares of its common stock along with warrants to
purchase an additional 1,812,500 shares of its common stock for an aggregate
purchase price of $906,250. Subject to certain restrictions, the warrants may
be exercised for a period of one year at an exercise price of $.50 per share.
Proceeds of the private placement were allocated $144,675 to common stock
warrants and $1,305,325 to common stock and paid in capital. These funds were
used for general corporate purposes, to purchase an additional 30% interest
in the Gabbs Valley Oil Prospect in Nevada, and to pay the Company's share of
costs associated with drilling a test well in the Gabbs Valley Oil Prospect.
NOTE PAYABLE
In December 2001, the Company executed a note with Weatherford U.S.,
L.P. to satisfy outstanding indebtedness for services rendered in
connection with the drilling of the Timber Draw #1-AH well. The
principal amount of this note was $108,334 with interest payments at
10% per annum commencing on May 27, 2001, until all interest and
principal amounts were paid in full. Timely payments were made in
accordance with the terms of this note through March 2002. In April
2002, the payee of this note agreed to a revised payment schedule
extending final payment of $66,997 from April 10, 2002, until June 10,
2002. In connection with this payment schedule, an initial payment of
$10,000 was made in April 2002. However, since that time, no further
payments have been made. As of December 31, 2006, the Company has
accrued a liability of $106,121 in connection with this note.
ADVANCES FROM RELATED PARTY
Prior to the completion of the private placements in June 2005 and September
2006 as described above, the Company financed its operations primarily
through advances made to the Company by the Albert E. Whitehead Living Trust,
of which the Company's Chairman of the Board and Chief Executive Officer, Mr.
Whitehead, is the trustee. During the fiscal year ended December 31, 2005,
Mr. Whitehead advanced the Company an additional $60,190 to finance the
operating expenses of the Company. As of December 31, 2006, the Company owed
Mr. Whitehead $274,682 in connection with advances made to the Company.
Off-Balance Sheet Arrangements
None
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Because estimates and assumptions require
significant judgment, future actual results could differ from those estimates
-15-
and could have a significant impact on the Company's results of operations,
financial position and cash flows. The Company re-evaluates its estimates and
assumptions at least on a quarterly basis. The following policies may involve
a higher degree of estimation and assumption:
Successful Efforts Accounting - Under the successful efforts method of
accounting, the Company capitalizes all costs related to property acquisitions
and successful exploratory wells, all development costs and the costs of
support equipment and facilities. Certain costs of exploratory wells are
capitalized pending determination that proved reserves have been found.
Such determination is dependent upon the results of planned additional wells
and the cost of required capital expenditures to produce the reserves found.
All costs related to unsuccessful exploratory wells are expensed when such
wells are determined to be non-productive and other exploration costs,
including geological and geophysical costs, are expensed as incurred. The
application of the successful efforts method of accounting requires
management's judgment to determine the proper designation of wells as either
developmental or exploratory, which will ultimately determine the proper
accounting treatment of the costs incurred. The results from a drilling
operation can take considerable time to analyze, and the determination that
commercial reserves have been discovered requires both judgment and
application of industry experience. Wells may be completed that are assumed
to be productive and actually deliver oil and gas in quantities insufficient
to be economic, which may result in the abandonment of the wells at a later
date. The evaluation of oil and gas leasehold acquisition costs requires
management's judgment to estimate the fair value of exploratory costs related
to drilling activity in a given area.
Impairment of unproved oil and gas properties - Capitalized drilling costs
are reviewed periodically for impairment. Costs related to impaired prospects
or unsuccessful exploratory drilling are charged to expense. Management's
assessment of the results of exploration activities, commodity price outlooks,
planned future sales or expiration of all or a portion of such leaseholds
impact the amount and timing of impairment provisions. An impairment expense
could result if oil and gas prices decline in the future as it may not be
economic to develop some of these unproved properties. Estimates of future
dismantlement, restoration, and abandonment costs - through December 31, 2002,
the Company accounted for future abandonment costs of wells and related
facilities through its depreciation calculation in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 19,
"Financial Accounting and Reporting by Oil and Gas Producing Companies" and
industry practice. The accounting for future dismantlement and abandonment
costs changed on January 1, 2003, with the adoption of SFAS No. 143
"Accounting for Asset Retirement Obligations." Under both methods of
accounting, the accrual for future dismantlement and abandonment costs is
based on estimates of these costs for each of the Company's properties based
upon the type of production structure, reservoir characteristics, depth of
the reservoir, market demand for equipment, currently available procedures
and consultations with construction and engineering consultants. Because
these costs typically extend many years into the future, estimating these
future costs is difficult and requires management to make estimates and
judgments that are subject to future revisions based upon numerous factors,
including changing technology and the political and regulatory environment
and, beginning in 2003, estimates as to the proper discount rate to use and
timing of abandonment.
Income taxes - The Company accounts for income taxes in accordance with the
asset and liability method of accounting for income taxes set forth in SFAS
No. 109, "Accounting for Income Taxes." Under the asset and liability method
of SFAS 109, deferred tax assets and liabilities are recognized for the
-16-
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to the taxable income in the years in which those
temporary differences are expected to be recovered or settled. A valuation
allowance is established if it is more likely than not that some portion of
a deferred tax asset will not be realized.
Stock Options - Prior to 2006, the Company used the intrinsic value method of
accounting for stock based compensation in accordance with Accounting
Principles Board Opinion ("APB") No. 25 where no expense was recorded when
stock options were granted as long as the exercise price equaled or
exceeded the market price at date of grant.
In 2006, the Company adopted SFAS no. 123(R) "Share Based Payments" and
expenses the cost of options granted over the vesting period of the options
based on the grant-date fair value of the award.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are set forth on pages F-1 through
F-14 at the end of this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 8A. 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 Chief
Executive Officer (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 Chief
Executive Officer (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. During the period covered by
this report, there was no change in the Company's internal controls
over financial reporting that has materially affected or that is
reasonably likely to materially affect the Company's internal control
over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
The following lists the directors and executive officers of the Company:
Name Age Position
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Albert E. Whitehead 76 Director; Chairman & C.E.O
John C. Kinard 72 Director
Montague H. Hackett, Jr. 74 Director
____________________________
Directors hold office until their successors are elected by the
shareholders of the Company and qualified. Executive Officers serve at
the pleasure of the Board of Directors.
Albert E. Whitehead.
Mr. Whitehead has been a member of the Company's Board of Directors since
1991 and served as Chairman of the Board and Chief Executive Officer
from March 1998 to May 2001, when John P. McGrain assumed such role. Mr.
Whitehead again assumed the role of Chairman and Chief Executive Officer on
April 16, 2002 upon the resignation of Mr. McGrain. Mr. Whitehead is also
currently serving as the Non-Executive Chairman of Coastal Energy Company
(formerly PetroWorld Corp.), a company that is traded on the London Stock
Exchange's Alternative Investment Market and the TSE Venture Exchange in
Canada. Mr. Whitehead served as the Chairman and Chief Executive Officer of
Seven Seas Petroleum Inc., a publicly held company, engaged in international
oil and gas exploration from February 1995 to May 1997. From April 1987
through January 1995, Mr. Whitehead served as Chairman and Chief Executive
Officer of Garnet Resources Corporation, a publicly held oil and gas
exploration and development company.
John C. Kinard.
Mr. Kinard has served as a Director of the Company since June 1998 and is
currently a Partner in Silver Run Investments, LLC, an oil and gas investment
firm. Mr. Kinard served as President of the Remuda Corporation, a private oil
and gas exploration company, from 1967 until 2002. From 1990 through
December 1995, Mr. Kinard served as President of Glen Petroleum, Inc., a
private oil and gas exploration company. From 1990 through 2002, Mr. Kinard
also served as the Chairman of Envirosolutions UK Ltd., a private industrial
wastewater treatment company.
Montague H. Hackett Jr.
Montague H. Hackett, Jr., a graduate of Princeton University and Harvard Law
School, joined the Empire Board as a director in June 2006. Over the years
Mr. Hackett has been associated with various natural resource companies both
as a director and as an officer. For the past five years he has been
Co-Chairman and a director of Victory Ventures LLC, a New York venture
capital company and International Energy Services, Inc., a Houston based
oilfield service company with operations in Russia and Kazakstan.
IDENTIFICATION OF THE AUDIT COMMITTEE; AUDIT COMMITTEE FINANCIAL EXPERT:
As of December 31, 2006, the Company had not established any committees
(including an audit committee) because of the small size of its Board of
Directors. As such, the Company does not have an audit committee or an audit
committee financial expert serving on such committee. As of December 31,
2006, the entire Board of Directors (Messrs. Whitehead, Kinard and Hackett)
essentially serve as the Company's audit committee.
CODE OF ETHICS:
The Company has adopted a Code of Ethics that applies to all of the
Company's directors and employees, including the Company's principal
executive officer, principal financial officer and principal accounting
-18-
officer or persons performing similar functions. The Company
undertakes to provide any person without charge, upon request, a copy
of the Code of Ethics. Requests may be directed to Empire Petroleum
Corporation, 8801 S. Yale, Suite 120, Tulsa, Oklahoma 74137, or by
calling (918) 488-8068.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE:
Section 16(a) of the Security Exchange Act of 1934 requires the Company's
directors, executive officers, and persons who beneficially own more than 10
percent of a registered class of the Company's equity securities, to file with
the Securities and Exchange Commission (the "SEC") initial reports of
ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and greater than ten
percent stockholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such reports furnished to the Company
and any written representations that in other reports were required during
the year ended December 31, 2006, to the Company's knowledge, all Section 16(a)
filing requirements applicable to its officers, directors and greater
than 10% beneficial owners during the year ended December 31, 2006 were
complied with on a timely basis.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
During the last two completed fiscal years, no executive officer received a
salary or any other benefits as a part of executive compensation. The
Company's only named executive officer, Albert E. Whitehead, does not hold
any stock options and has not received any other award under an equity
incentive plan.
DIRECTORS COMPENSATION
Montague H. Hackett, Jr. was the only director that received compensation from
the registrant during its last completed fiscal year.
DIRECTOR COMPENSATION TABLE
Change
in Pension
Value and
Non-
qualified
Fees Non-Equity Deferred All
Earned Incentive Compen- Other
Or Paid Stock Option Plan sation Compen-
in Cash Awards Awards Compensation Earnings sation Total
Name ($) ($) ($) ($) ($) ($) ($)
_________ _______ ______ _______ ____________ __________ _______ _______
Montague
H. Hackett,
Jr. N/A N/A 26,925 N/A N/A N/A 26,925
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
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Securities Authorized for Issuance under Equity Compensation Plans
As of December 31, 2006, the Company had two equity incentive plans under
which equity securities were authorized for issuance to the Company's
directors, officers, employees and other persons who performed substantial
services for or on behalf of the Company. The "1995 Stock Option Plan",
which expired in May, 2005 remains only to the extent necessary to govern
outstanding options issued under the Plan. At the Company's 2006 Annual
Meeting of Stockholders, the stockholders approved the 2006 Stock Incentive
Plan, which authorized granting up to 5,000,000 options for up to
5,000,000 shares of the Company's common stock.
The following table provides certain information relating to the 1995 Stock
Option Plan and the 2006 Stock Incentive Plan as of December 31, 2006:
(a) (b) (c)
Number of securities
Remaining available
for future
Number of Securities issuance under
to be issued upon Weighted-average equity compensation
exercise of exercise price of plans, excluding
outstanding options, outstanding options, securities reflected
Plan Category warrants and rights warrants and rights in column(a)
Equity 755,000 $0.54 4,810,000
compensation plans
approved by
security holders
Equity N/A
Compensation plans
not approved by
security holders
_________ _________
TOTAL 755,000 4,810,000
_________ _________
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership
of our Common Stock as of March 1, 2007 for:
* each person who is known to own beneficially more than 5% of our
outstanding Common Stock;
* each of our executive officers and directors; and
* all executive officers and directors as a group.
The percentage of beneficial ownership for the following table is based on
50,080,190 shares of Common Stock outstanding as of March 1, 2007.
Unless otherwise indicated below, to the Company's knowledge, all persons and
entities listed below have sole voting and investment power over their shares
of Common Stock.
-20-
Amount and
nature of
beneficial Percent of
Name and address of beneficial owner ownership class (1)
Albert E. Whitehead, 14,803,125 (2) 29.56%
Chairman of the Board and
Chief Executive Officer
3214 E. 73rd Street
Tulsa, OK 74136-5927
John C. Kinard, 631,331 (3) 1.26%
Director
52 S. Roslyn Street
Denver, CO 80230
Montague H. Hackett, Jr. 2,011,210 (4) 4.01%
Director
550 Park Avenue
New York, NY 10021
George H. Plewes 2,670,000 (5) 5.33%
Former Director
P. O. Box HM 1431
Hamilton HMFX
Bermuda
All current directors and executive officers
as a group (3 persons) 17,445,666 (6) 34.83%
(1) The percentage ownership for each person is calculated in
accordance with the rules of the SEC, which provide that any shares a
person is deemed to beneficially own by virtue of having a right to acquire
shares upon the conversion of options or other rights are considered
outstanding solely for purposes of calculating such person's percentage
ownership.
(2) This number includes: (i) 11,842,842 shares directly owned by the Albert
E. Whitehead Living Trust, of which Mr. Whitehead is the trustee; and (ii)
125,000 shares Mr. Whitehead has the right to acquire pursuant to a warrant
and, (iii) 20,000 shares owned by Mr. Whitehead's grandchildren for which he
acts as custodian and, (iv) 2,815,283 shares directly owned by the Lacy E.
Whitehead Living Trust, of which Ms. Whitehead, Mr. Whitehead's wife, is
trustee. Mr. Whitehead disclaims any interest in the shares owned by the Lacy
E. Whitehead Living Trust and the shares owned by his grandchildren.
(3) This number includes: (i) 161,331 shares directly owned by Mr. Kinard;
(ii) 320,000 shares Mr. Kinard has the right to acquire pursuant to options
granted to him under the 1995 Stock Option Plan; and (iii) 150,000 shares
directly owned by Mr. Kinard's wife, of which Mr. Kinard disclaims any
interest.
(4) This number includes (i) 1,798,710 shares directly owned by Mr. Hackett
(ii) 150,000 shares Mr. Hackett has the right to acquire under the Company's
2006 Stock Option Plan and, (iii) 62,500 shares Mr. Hackett has the right
to acquire pursuant to a warrant.
(5) This number includes (i) 2,000,000 shares held directly by Mr. Plewes,
(ii) 500,000 shares Mr. Plewes has the right to acquire pursuant to a warrant,
and (iii) 170,000 shares issuable upon the exercise of options granted under
-21-
the Company's 1995 Stock Option Plan.
(6) This number includes 470,000 shares issuable upon the exercise of
options granted under the 1995 and 2006 Stock Option Plans.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time in the past, Mr. Whitehead, the Company's C.E.O., has
advanced the Company monies to finance its operating activities. There
were no such amounts advanced during the fiscal year ended December 31, 2006.
None of the amounts previously advanced by Mr. Whitehead were paid back
during the fiscal year ended December 31, 2006. No interest is being accrued
on the advanced amount. As of December 31, 2006, the Company owed Mr.
Whitehead $274,682 in connection with advances made to the Company.
DIRECTOR INDEPENDENCE
The Company has determined that each of Mr. Kinard and Mr. Hackett is
"independent" within the meaning of Rule 4200(a)(15) of the NASDAQ
listing standards. Because of the small size of the Company's Board of
Directors, the Company has not established any committees. Rather, the
entire Board acts as, and performs the same functions as, the audit
committee, compensation committee and nominating committee. Mr.
Whitehead is not considered "independent" within the meaning of Rule
4200(a)(15) of the NASDAQ listing standards.
ITEM 13. EXHIBITS
Exhibit Description
No.
3.1 Articles of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 of the Company's Form
10-QSB for the period ended September 30, 1995, which was filed
November 6, 1995)
3.2 Bylaws of the Company
(incorporated herein by reference to Exhibit 3.2 of the Company's Form
10-QSB for the period ended March 31, 1998, which was filed May 15
1998)
10.1 1995 Stock Option Plan
(incorporated herein by reference to Appendix A of the Company's
Form DEFS 14A dated June 13, 1995, which was filed June 14, 1995)
10.2 Form of Stock Option Agreement
(incorporated herein by reference to Exhibit 10(g) of the Company's
Form 10-KSB for the year ended December 31, 1995, which was filed
March 29, 1996)
10.3 Americomm Cheyenne River Development Prospect Agreement dated March
4, 1998 by and among the Company, Fred S. Jensen, Richard A. Bate,
A. R. Briggs and Thomas L. Thompson (incorporated herein by reference
to Exhibit 10(j) of the Company's Form 10-QSB for the period ended
June 30, 1998, which was filed August 12, 1998)
10.4 Farmout Agreement dated November 15, 2000 by and among the Company and
-22-
the other parties named therein (incorporated hereby reference to
Exhibit 10(e) of the Company's Form 10-KSB for the year ended
December 31, 2000, which was filed March 29, 2001)
10.5 Letter Agreement dated May 8, 2003 between the Company and O. F.
Duffield (incorporated herein by reference to Exhibit 10.6 of the
Company's Form 10-KSB for the year ended December 31, 2003, which was
filed March 30, 2004)
10.6 Farmout Agreement dated May 7, 2004 by and among the Company and
certain other parties named therein (incorporated herein by reference
to Exhibit 10 of the Company's Form 10-QSB for the period ended
June 30, 2004, which was filed on August 2, 2004).
10.7 Assignment and Novation dated September 1, 2004 relating to the
Farmout Agreement dated May 7, 2004. (incorporated herein by
Reference in the Company's Form 10-KSB for the year ended
December 31, 2004, which was filed March 31, 2005)
10.8 2006 Stock Incentive Plan (incorporated herein by reference to Exhibit
A to the Company's 2006 Proxy Statement on Schedule 14A dated May 10,
2006).
10.9 Form of Non-qualified Stock Option Agreement (incorporated herein by
reference to Exhibit 10.2 to the Company's Form 8-K dated June 5, 2006,
which was filed on June 9, 2006).
10.10 Form of Non-qualified Stock Option Agreement for Non-employee Directors
(incorporated herein by reference to Exhibit 10.3 to the Company's Form
8-K dated June 5, 2006, which was filed on June 9, 2006).
10.11 Form of Restricted Stock Award Agreement (incorporated herein by
reference to Exhibit 10.4 to the Company's Form 8-K dated June 5, 2006,
which was filed on June 9, 2006).
10.12 Form of Securities Purchase Agreement entered into between Empire
Petroleum Corporation and certain accredited investors in connection
with 2006 private placement (incorporated herein by reference to Exhibit
10.1 to the Company's Form 10-QSB for the period ended June 30, 2006,
which was filed on August 23, 2006).
31 Certification of Chief Executive Officer (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-B, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (submitted herewith)
32 Certification of Chief Executive Officer (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)
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees billed or to be billed to the Company
by Tullius Taylor Sartain & Sartian LLP, the Company's independent
registered public accounting firm, for professional Services rendered for the
fiscal years ended December 31, 2006 and December 31, 2005:
Fee Category Fiscal 2006 Fees Fiscal 2005 Fees
-23-
Audit Fees (1) $ 26,630 $22,625
Audit-Related Fees (2) -0- -0-
Tax Fees -0- -0-
All Other Fees (3) -0- -0-
Total Fees $ 26,630 $22,625
(1) Audit Fees consist of aggregate fees billed for professional services
rendered for the audit of the Company's annual financial statements and
review of the interim financial statements included in quarterly reports or
services that are normally provided by the independent registered
public accounting firm in connection with statutory and regulatory filings or
engagements for the fiscal years ended December 31, 2006 and December 31,
2005, respectively.
(2) Audit-Related fees consist of aggregate fees billed for assurance and
related services that are reasonably related to the performance of the audit
or review of our financial statements and are not reported under "Audit Fees."
(3) All Other Fees consist of aggregate fees billed for products and
services provided by Tullius Taylor Sartain & Sartain LLP, other than those
disclosed above.
The entire Board of Directors of the Company is responsible for the
appointment, compensation and oversight of the work of the independent
registered public accounting firm and approves in advance any
services to be performed by the independent registered public
accounting firm, whether audit-related or not. The entire Board of Directors
reviews each proposed engagement to determine whether the provision of
services is compatible with maintaining the independence of the independent
registered public accounting firm. All of the fees shown above were
pre-approved by the entire Board of Directors.
-24-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Empire Petroleum Corporation
(Registrant)
Date: April 2, 2007 By: /s/Albert E. Whitehead
Albert E. Whitehead
Chief Executive Officer
(principal executive officer,
principal financial officer
and principal accounting
officer)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/Albert E. Whitehead Chairman, Chief Executive Officer April 2, 2007
Albert E. Whitehead
/s/John C. Kinard Director April 2, 2007
John C. Kinard
/s/Montague H. Hackett, Jr. Director April 2, 2007
Montague H. Hackett, Jr.
-25-
EMPIRE PETROLEUM CORPORATION
FINANCIAL STATEMENTS
CONTENTS
Page No.
Balance Sheet at December 31, 2006 F-2
Statements of Operations for the years ended
December 31, 2006 and December 31, 2005 F-3
Statements of Changes in Stockholders' Equity
for the years ended December 31, 2006 and
December 31, 2005 F-4
Statements of Cash Flows for the years ended
December 31, 2006 and December 31, 2005 F-5
Notes to Financial Statements F-6 through F-14
EMPIRE PETROLEUM CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 2006
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Empire Petroleum Corporation
We have audited the accompanying balance sheet of Empire Petroleum Corporation
as of December 31, 2006, and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 2006 and
2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Empire Petroleum Corporation
as of December 31, 2006, and the results of its operations and its cash flows
for the years ended December 31, 2006 and 2005 in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 6 to the financial statements the Company adopted
Statement of Financial Accounting Standards No. 123 (R), "Share-Based
Payment".
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has been incurring significant losses and
has a significant working capital deficiency at December 31, 2006. The ultimate
recoverability of the Company's investment in its oil and gas interests is
dependent upon the existence, discovery and development of economically
recoverable oil and gas reserves and the ability of the Company to obtain
necessary financing to carry out its exploration and development program.
This condition raises substantial doubt about the Company's ability to
continue as a going concern. Management's plan concerning this matter is also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ TULLIUS TAYLOR SARTAIN & SARTAIN LLP
Tulsa, Oklahoma
April 2, 2007
F-1
BALANCE SHEET
ASSETS December 31,
2006
___________
Current assets:
Cash $ 60,786
Accounts receivable (net of allowance
of $3,750) 90,145
___________
Total current assets 150,931
___________
Property & equipment, net of accumulated
depreciation and depletion 1,799,672
___________
$ 1,950,603
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 111,522
Accounts payable to related party 274,682
Note payable 106,121
___________
Total current liabilities 492,325
Long term liabilities:
Asset retirement obligation 18,000
___________
Total liabilities 510,325
___________
Stockholders' equity
Common stock-$.001 par value, authorized 50,080
100,000,000 shares, issued 50,080,190 shares
Additional paid in capital 10,487,176
Accumulated deficit (9,096,978)
___________
Total stockholders' equity 1,440,278
___________
$ 1,950,603
===========
See accompanying notes to financial statements.
F-2
EMPIRE PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
Years ended December 31, 2006 and 2005
2006 2005
___________ ___________
Revenue:
Petroleum sales $ 102,476 $ 57,588
Costs and expenses:
Operating expenses 161,467 82,870
General and administrative 252,353 164,494
Reversal of accrued lease obligation 0 (222,561)
Leasehold impairment 0 188,507
___________ ___________
413,820 213,310
___________ ___________
Operating loss (311,344) (155,722)
Other (income) and expense:
Interest expense 6,900 6,900
Interest income ( 148) 0
Miscellaneous ( 64) (4,431)
___________ __________
Total other (income) and expense 6,688 2,469
___________ __________
Net loss $ (318,032) (158,191)
___________ __________
Net loss per common share $ (.01) $ (.00)
___________ __________
Weighted average number of
common shares outstanding -
Basic and diluted 45,810,272 40,701,069
___________ __________
See accompanying notes to financial statements
F-3
EMPIRE PETROLEUM CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2006 and 2005
Additional
Par Paid in Accumulated
Shares Value Capital deficit Total
___________ _______ ___________ ____________ ___________
Balances January 1, 2005
37,830,190 $37,830 $8,418,135 $(8,620,755) $( 164,790)
Net loss - - - ( 158,191) ( 158,191)
Value of services
Contributed by
Employee - - 50,000 - 50,000
Issuance of Common Stock
5,000,000 5,000 427,125 - 432,125
Stock Purchase Warrant
67,875 67,875
__________ _______ __________ ___________ ___________
Balances December 31, 2005
42,830,190 42,830 8,963,135 (8,778,946) 227,019
Net loss - - - ( 318,032) (318,032)
Value of services
contributed by
Employee - - 50,000 - 50,000
Issuance of Stock Options 31,291 31,291
Issuance of Common Stock
7,250,000 7,250 1,298,075 - 1,305,325
Stock Purchase Warrants
144,675 144,675
__________ _______ _________ __________ ___________
Balances December 31, 2006
50,080,190 $50,080 $10,487,176 $(9,096,978) $1,440,278
See accompanying notes to financial statements
F-4
EMPIRE PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
Years ended December 31, 2006 and 2005
2006 2005
___________ ___________
Cash flows from operating activities:
Net loss $ (318,032) $ (158,191)
Adjustments to reconcile net loss to
net cash used in operating activities:
Reversal of accrued lease obligation 0 (222,561)
Leasehold impairment 18,000 188,507
Value of services contributed by
Employee 50,000 50,000
Stock Option Plan expense 31,291 0
Change in operating assets and
liabilities:
Accounts receivable (51,293) (29,643)
Accounts payable and accrued
liabilities (27,402) (22,416)
___________ ___________
Net cash used in operating activities (297,436) (194,304)
___________ ___________
Cash flows from financing activities:
Advances from related party 0 60,190
Proceeds from private equity placement 1,450,000 500,000
____________ ___________
Net cash provided by financing
activities 1,450,000 560,190
____________ ___________
Cash flows from investing activities:
Lease interest acquisition-Gabbs Valley (675,000) 0
Well equipment & drilling costs (786,070) 0
____________ ___________
Net cash provided by investing
activities (1,461,070) 0
____________ ___________
Net increase (decrease) in cash (308,506) 365,886
Cash - Beginning 369,292 3,406
____________ ___________
Cash - Ending $ 60,786 $ 369,292
____________ ___________
See accompanying notes to financial statements
F-5
EMPIRE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 and 2005
General:
On July 20, 2001, Americomm Resources Corporation merged with its wholly-
owned subsidiary, Empire Petroleum Corporation, and simultaneously changed
the name of the corporation to Empire Petroleum Corporation (the "Company").
Both the merger and name change were effective as of August 15, 2001.
Americomm Resources Corporation was originally incorporated in the State of
Utah on the 22nd day of August 1983, as Chambers Energy Corporation. On the
7th day of March 1985, the state of incorporation was changed to Delaware by
means of a merger with Americomm Corporation, a Delaware corporation formed
for the purpose of effecting the said change. In July 1995, the Company
changed its name to Americomm Resources Corporation. On August 15, 2001,
Americomm Resources and the company merged, and the Company's name was
changed to Empire Petroleum Corporation. The Company is involved in oil and
gas exploration.
1. Continuing operations:
The ultimate recoverability of the Company's investment in its oil and gas
interests is dependent upon the existence and discovery of economically
recoverable oil and gas reserves, the ability of the Company to obtain
necessary financing to further develop the interests, and upon the ability to
attain future profitable production. The Company has been incurring
significant losses in recent years and has a significant working capital
deficiency as of December 31, 2006.
Virtually all of the Company's assets are invested in the Gabbs Valley and
Cheyenne River Prospects, both of which are unproved, that is, they have not
been evaluated as being capable of producing economical quantities of
reserves. The Company acquired additional leasehold interests in and drilled
a test well on its Gabbs Valley Prospect in 2006. Completion of the test well
was suspended pending evaluation of the geologic information and the securing
of additional capital to continue the evaluation and possibly to complete the
well. These efforts are continuing. In addition, the Company is evaluating
the viability of the Cheyenne River Prospect.
The continuation of the Company is dependent upon the ability of the Company
to attain future profitable operations. 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 the carrying value of assets and
liabilities, reported expenses and the balance sheet classifications used.
2. Significant accounting policies:
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
F-6
estimates.
(a) Capital assets:
The Company uses the successful efforts method of accounting for its oil and
gas activities. Costs incurred are deferred until exploration and completion
results are evaluated. At such time, costs of activities with economically
recoverable reserves are capitalized as proven properties, and costs of
unsuccessful or uneconomical activities are expensed.
Capitalized drilling costs are reviewed periodically for impairment. Costs
related to impaired prospects or unsuccessful exploratory drilling are charged
to expense. Management's assessment of the results of exploration
activities, commodity price outlooks, planned future sales or expiration of
all or a portion of such leaseholds impact the amount and timing of
impairment provisions. An impairment expense could result if oil and gas
prices decline in the future as it may not be economic to develop some of
these unproved properties.
(b) Per share amounts:
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" requires presentation of basic earnings per share ("Basic EPS") and
diluted earnings per share ("Diluted EPS"). The computation of basic earnings
per share is computed by dividing earnings available to common stockholders
by the weighted average number of outstanding common shares during the period.
Diluted 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.
(c) Income taxes:
The Company accounts for income taxes in accordance with the asset and
liability method of accounting for income taxes set forth in SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to the
taxable income in the years in which those temporary differences are expected
to be recovered or settled. A valuation allowance is established if it is more
likely than not that some portion of a deferred tax asset will not be
realized.
(d) Financial instruments:
The carrying value of current assets and current liabilities approximate their
fair value due to the relatively short period to maturity of the instruments.
(e) Stock option plan:
In 2006 the Company adopted SFAS No. 123 (R) Share Based Payment and
expenses options granted over the vesting period based on the grant date
fair value of the award.
(f) Obligations associated with the retirement of assets
F-7
The Company has adopted the provisions of SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 amended SFAS No. 19,
"Financial Accounting and Reporting by Oil and Gas Producing Companies," and,
among other matters, addresses financial accounting and reporting for legal
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred, with the associated asset retirement cost
capitalized as part of the related asset and allocated to expense over the
asset's useful life.
This is a change from the approach taken under SFAS No. 19, whereby an amount
for an asset retirement obligation was recognized using a cost-accumulation
measurement approach. Under that approach, the obligation was reported as a
contra-asset recognized as part of depletion and depreciation over the life
of the asset without discounting. The Company applies its analysis to
producing wells. The Company has accrued $18,000 at December 31, 2006, which
was recorded as an expense since the well costs have been fully impaired.
(g) Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") periodically issues new
accounting standards in a continuing effort to improve standards of financial
accounting and reporting. The Company has reviewed the recently issued
pronouncements and concluded that the following new accounting standards are
applicable.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (SFAS 123R) that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange
for either equity instruments of the enterprise or liabilities that are based
on the fair value of the enterprise's equity instruments or that may be
settled by the issuance of such equity instruments. The statement eliminates
the ability to account for share-based compensation transactions using the
intrinsic value method as prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and generally requires that such transactions be
accounted for using a fair-value-based method and recognized as expenses in
our statement of operations. Under the adoption options, prior periods may be
restated either as of the beginning of the year of adoption or for all periods
presented ("the retroactive method"). The prospective method requires
that compensation expense be recorded for all unvested stock options and
restricted stock at the beginning of the first quarter of adoption of FAS
123R, while the retroactive methods would record compensation expense for all
unvested stock options and restricted stock beginning with the first period
restated. The effective date of the new standard for our financial statements
is the quarter ended March 31, 2006. The Company adopted SFAS 123R in 2006
(Note 6).
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" which replaces APB Opinion No. 20, "Accounting Changes" and SFAS
No. 3, "Reporting Accounting Changes In Interim Financial Statements." This
statement changes the requirements for the accounting for and reporting of a
change in accounting principle. This statement applies to all voluntary
changes in accounting principles. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does
not include specific transition provisions. This statement requires
voluntary changes in accounting principles be recognized retrospectively to
prior periods' financial statements, rather than recognition in the net
income of the current period. Retrospective application requires
restatements of prior period financial statements as if that accounting
F-8
principle had always been used. This statement carries forward without
change the guidance contained in Opinion 20 for reporting the correction of
an error in previously issued financial statements and a change in accounting
estimate. The provisions of SFAS No. 154 are effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. The adoption of SFAS No. 154 did not have a material effect on the
Company's financial position or results of operations.
In February 2006, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 155 "Accounting for Certain Hybrid Financial Instruments"
amending SFAS No. 133 and SFAS No. 140. SFAS No. 155 eliminates the
exemption from applying SFAS No. 133 to securitized financial assets. The
provisions of SFAS No. 155 are to be applied to financial instruments issued
or acquired during fiscal periods beginning after September 15, 2006. The
adoption of SFAS No. 155 is not expected to have a material impact on the
Company's financial position or results of operations.
FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" was
issued in June, 2006. It clarifies recognition and derecognition criteria
for tax positions taken in a return that may be subject to challenge upon
audit. If it is "more likely than not", the benefit is to be recognized in
the financial statements. Conversely, if the position is less likely than
not to be sustained, the benefit should not be recognized. The recognition/
derecognition decision should be reflected in the first interim period when
the status changes and not deferred to a future settlement upon audit. Tax
reserves to cover aggressive positions taken in filed returns are no longer
allowable. Each issue must be judged on its own merits and a
recognition/derecognition decision recorded in the financial statements. The
interpretation is effective for fiscal years beginning after December 15,
2006. This interpretation is not expected to have a material effect on the
Company's financial position or results of operations in future periods.
In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements"
which amends and puts in one place guidance on the use of fair value
measurements which had previously been included in various APB Opinions and
FASB Standards. No extensions of the use of fair value measurements are
contained in this new pronouncement and with some special industry exceptions
(e.g., broker-dealers) no significant changes in practice should ensue. The
standard is to be applied to financial statements beginning after November
15, 2007. The adoption of SFAS No. 157 is not expected to have a material
impact on Empire's financial position or results of operations.
Also in September 2006, the FASB issued SFAS No. 158 "Employers' Accounting
for Defined Benefit Pension Plans and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106 and 132(R)". This standard
requires recognition in the balance sheet of the funded status of pension
plans, rather than footnote disclosure which has been current practice.
Publicly traded companies are to reflect the new standard in financial
statements ending after December 15, 2006 and non-public companies are to
apply it in statements ending after June 15, 2007. Because Empire does not
maintain a defined benefit pension plan and has no plans to do so, this
standard should not have any impact on the Company's financial position or
results of operations.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities". This standard permits entities to choose to measure many
financial instruments and certain other items at fair value, and establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar
F-9
types of assets and liabilities. It is effective for fiscal years beginning
after November 15, 2007. The Company does not expect the adoption of the
standard to have a material effect on its financial statements and related
disclosures.
3. Property and equipment:
In 2002, the Company's management determined that an impairment allowance of
$6,496,614 was necessary to properly value the Company's oil and gas
properties bringing the net book value of the oil and gas properties to
$594,915. The basis for the impairment was the determination by the United
States Bureau of Land Management ("BLM") that it does not consider the Timber
Draw #1-AH well economic. In other words, under the BLM's criteria for
economic determination, the well will not pay out the cost incurred to drill
and complete the well. However, by authority of the BLM, for the period from
April to November 2003, the well was tested for production using production
periods of ten days per month. The BLM also advised the Company that since it
did not commence another test well prior to August 12, 2002, the Timber Draw
Unit had been terminated. Furthermore, a bottom hole pressure survey
conducted in April 2002 indicated a limited reservoir for the well. The basis
of the impairment described above was calculated using an estimated $10 per
acre market price for the leases multiplied by the Company's working
interest. During 2003, the Company recorded impairment charges of $266,778
based on working interest percentages granted to a third party for
performance of certain activities and management's assessment of certain
undeveloped lease values. During 2004, pursuant to the Farmout Agreement, a
third party conducted a seismic survey and drilled a test well in the
Cheyenne River Prospect. As a result of the reduction in the Company's
working interest, a further impairment charge of $188,507 was recorded in
2005. The net book value of the Company's interest in the Cheyenne River
Prospect at December 31, 2006 is $139,630.
In 2003, the Company acquired a 10% interest in the Gabbs Valley Prospect of
Western Nevada by issuing 2,000,000 shares of Company stock. The Company has
recorded its investment at $200,000. In 2005, the Company conducted a seismic
survey of the Gabbs Valley Prospect based on the results of the seismic
survey, during 2006, the Company entered into an agreement to increase its
working interest in the prospect to 40% by paying $675,000 plus 55% of the
drilling costs through completion. The Company contracted a drilling rig,
which commenced drilling the Empire Cobble Cuesta 1-12-12N-34E, Nye County,
Nevada in September 2006. After reaching a depth of 5,195 feet the Company
ceased drilling operations, ran electronic logs, installed a wellhead, and
conditioned the hole so that it might be re-entered or deepened at a later
date. The Company has conducted an extensive review of the data obtained
from the drilling and logging operation and plans to resume testing in 2007.
The total gross acres of this prospect was increased to 75,721 acres by the
acquisition of 30,917 acres from the U. S. Department of Interior in June,
2006 at a cost of $36,689. The Company's portion of well equipment and
intangible drilling costs to date amounts to $786,070. The total cost of the
Company's investment in the Gabbs Valley Prospect at December 31, 2006 is
$1,661,070.
The Company's other property and equipment, totaling $2,561 at December 31,
2006, consists entirely of office furniture, fixtures and equipment, which
are fully depreciated.
4. NOTES PAYABLE:
In December 2001, the Company executed a note with Weatherford
U.S., L.P. to satisfy an outstanding indebtedness for service in
F-10
the drilling of the Timber Draw #1-AH well. The principal amount
of this note was $108,334 with interest payments at 10% per annum
commencing on May 27, 2001, until all interest and principal amounts
are paid in full. Timely payments were made in accordance with
the terms of this note through March 2002. In April 2002, the "payee"
of this note agreed to a revised payment schedule extending final payment
of $66,997 from April 10, 2002, until June 10, 2002. In connection
with this payment schedule, an initial payment of $10,000 was made in
April 2002, however, since that time, no further payments have been made.
At December 31, 2006, the Company has accrued a liability of $106,121
in connection with this note.
5. Capital Stock:
In 2005, the Company raised $500,000 of net proceeds by selling 5,000,000
shares of newly issued common stock along with warrants to purchase 1,250,000
shares of common stock which, subject to certain restrictions, may be
exercised for a period of one year at an exercise price of $0.25. Proceeds
of the original placement were allocated $67,875 to common stock warrants and
$432,125 to common stock and paid in capital. The value assigned to the
warrants was determined using the Black-Scholes option valuation method
with the following assumptions: no dividend yield, expected volatility of
154%, risk free interest rate of 3.28% and expected life of one year. In
2006, the warrants were extended twice; the extensions reduced the value of
the warrants to $18,250. Assumptions used for the extensions were: no
dividend yield, expected volatility of 153%, risk free interest rate of 4.86%
and expected life of 6 months. Subsequent to December 31, 2006 the warrants
were extended to August 2007.
In 2006, the Company raised an additional $1,450,000 of net proceeds by
selling 7,250,000 shares of newly issued stock along with warrants to
purchase 1,812,500 shares of common stock, which, subject to certain
restrictions, may be exercised for a period of one year at an exercise
price of $0.50. Proceeds of the placement were allocated $144,675 to
common stock warrants and $1,305,325 to common stock and paid in capital.
The value assigned to the warrants was determined using the Black-Scholes
option valuation method with the following assumptions: no dividend yield,
expected volatility of 148% risk-free interest rate of 5.09% and an
expected life of one year.
6. Stock options:
Under a stock option plan adopted in 1995, the Company had the discretion
to grant options for up to 1,600,000 shares of common stock until May 15,
2005 at which time the plan terminated except to the extent necessary to
govern outstanding options. Stock options granted under the plan expire ten
years from the date of grant plus 30 days. The exercise price of the options
is the fair market value on the date of grant.
At the Company's 2006 Annual Meeting of Stockholders, the stockholders
approved the 2006 Stock Incentive Plan ("the Plan"). The Plan permits the
issuance of stock options, restricted stock awards, and performance shares
to employees, officers, directors, and consultants of the Company. Initally,
and until such time as the Board creates a Compensation Committee, the Board
of Directors will administer the Plan. The total number of shares of common
stock that may be issued pursuant to awards under the Plan is 5,000,000.
Under the Plan, no participant may receive awards of stock options that cover
in the aggregate more than 500,000 shares of common stock in any fiscal year.
Unless terminated by the Board, or upon the granting of awards covering all
F-11
of the shares subject to the Plan. The Plan shall terminate on June 5, 2016.
The Company has adopted SFAS No. 123(R) "Share-Based Payment" in the first
quarter of 2006 and expenses the cost of options granted over the vesting
period of the option based on the grant-date fair value of the award. For
the year ended December 31, 2006, the Company recognized an expense of $31,291
related to Options granted under the Plan.
Fair values were estimated at the date of grant of the options, using the
Black-Scholes option valuation model with the following weighted average
assumptions: risk-free interest rate of 5.07%, volatility factor of the
expected market price of the Company's common stock of 144%, no dividend
yield on the Company's common stock, and a weighted average expected life
of the options of 9.62 years. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options, which
have no vesting restrictions and are fully transferable. For purposes of
determining the expected life of the options, the Company utilizes the
Simplified Method as defined in Staff Accounting Bulletin No. 107 issued by
the Securities and Exchange Commission.
In addition options valuation models require the input of highly subjective
assumptions including stock price volatility.
As of December 31, 2006, there was no unrecognized compensation expense
related to nonvested share-based compensation arrangements under the Plan.
A summary of the Company's Incentive Plan as of December 31, 2005 and changes
during the year is presented below:
Weighted Average
Shares Exercise Price
_________ _________________
Outstanding at Beginning of Year 2006 575,000 .65
Granted 190,000 .22
Cancelled or Exercised (10,000) .53
__________
Outstanding at End of Year 2006 755,000 .54
========== =======
During the year ended December 31, 2006 the Company granted options of
190,000 shares of common stock at an average exercise price of $0.22.
The following table summarizes information about stock options outstanding at
December 31, 2006:
Options Outstanding Options Exercisable
_________________________________________________________________
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/06 Life Price at 12/31/06 Price
____________________________________________________________________________
$0.10-$1.375 755,000 5.21 Years $0.54 755,000 $0.54
F-12
No options were granted in 2005.
7. Income taxes:
The provision for income taxes differs from the amount obtained by applying
the Federal income tax rate of 34% to income before income taxes. The
difference relates to the following items:
2006 2005
Statutory tax rate 34% 34%
___________ __________
Expected tax benefit $(102,000) $ (54,000)
Benefit of losses not recognized 102,000 54,000
___________ ___________
Tax provision (benefit) as reported $ - $ -
___________ ___________
The components of deferred income taxes at December 31, 2006 are as follows:
Deferred tax assets:
Loss carry-forwards $ 1,017,000
Valuation allowance (500,000)
___________
517,000
Deferred tax liabilities:
Property and equipment 517,000
___________
Net deferred taxes $ -
___________
At December 31, 2006, the Company had net operating loss carryforwards of
approximately $2,996,000 which expire beginning in 2011.
Utilization of the Company's loss carryforwards is dependent on realizing
taxable income. Deferred tax assets for these carryforwards have been reduced
by a valuation allowance.
8. Oil Sale Revenue
The Company currently records revenue from petroleum sales when received from
the operator of the well. Oil Sale Revenue is reported net of working
interest and overriding royalty amounts due. Prior to 2006, the Company was
responsible for distributing allocable portions of oil sale revenue to
working interest and royalty owners for production in the Cheyenne River
Prospect. Accordingly, a liability for estimated royalty payments was
recorded when oil sale proceeds were received since a division order had not
been completed, certain amounts were credited to royalties payable until the
division order issue was resolved.
In 2006, Division Orders were completed on the Timber Draw and Hooligan Draw
Units. Based on those Division Orders, the current operator disbursed royalty
payments to overriding royalty interest owners which were approximately
$49,000 lower Than the undistributed and previously accrued amounts, and this
amount is credited to petroleum sales.
9. Related party transactions:
During 2005, the Company's Chief Executive Officer advanced an additional
F-13
$60,190 for operating expenses which the Company has recorded in accounts
payable to related party in the accompanying balance sheet.
Coastal Energy Company Nevada (formerly PetroWorld Nevada Corp.) is a
participant in the Gabbs Valley Prospect with a seismic option under which it
has elected to drill a well and earn a 30% interest from Cortez Exploration,
LLC. The Company's Chief Executive Officer is a member of the Board of
Directors of its parent company Coastal Energy Company (formerly PetroWorld
Corporation) and owns approximately 1.63(%) percent of the parent Company
which is traded on the AIM Exchange in London and the Toronto Venture
Exchange in Toronto. Accounts receivable from Coastal totaled $56,165 at
December 31, 2006. Such Amount was paid as of February 13, 2007.
10. Operating lease:
The Company leases office space under a month to month operating lease
agreement with an unrelated party. Monthly lease payments are $994 per
month.
Rent expense for each of the years ended December 31, 2006 and 2005,
respectively, was $11,930 and $11,930.
11. Contingencies:
The Company's former management (Messrs. McGrain and Jacobsen) entered
into a lease agreement for office space in Canada. This office was closed
after Messrs. McGrain and Jacobsen resigned as officers of the Company.
This lease agreement called for monthly lease and tax payments of
approximately $6,834 (Canadian) through April of 2006. The Company
accrued its obligation under the lease through the first quarter of 2005.
During the second quarter of 2005, the Company determined that the statute
of limitations had expired with respect to its obligation under the lease.
Accordingly, in 2005 the Company reversed expenses of $222,561 previously
recorded for the lease.
F-14
EXHIBIT 31
CERTIFICATION
I, Albert E. Whitehead, Chief Executive Officer (and principal financial
officer) of Empire Petroleum Corporation, certify that:
1. I have reviewed this annual report on Form 10-KSB 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 small
business issuer as of, and for, the periods presented in this report;
4. The small business issuer'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)) for
the small business issuer 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 small business
issuer, 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) Evaluated the effectiveness of the small business issuer'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
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's fourth fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the small
business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of small business issuer'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 small business issuer'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 small business
issuer's internal control over financial reporting.
April 2, 2007 /s/ Albert E. Whitehead
Albert E. Whitehead, Chief Executive
Officer (and principal financial officer)
EXHIBIT 32
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 annual report of Empire Petroleum Corporation (the
"Company") on Form 10-KSB for the period ending December 31, 2006, as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Albert E. Whitehead, Chief Executive Officer (and 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.
April 2, 2007 /s/ Albert E. Whitehead
Albert E. Whitehead, Chief Executive Officer
(and 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.