UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
___________________________________________________
or
[ ] TRANSITION REPORT PURSUANT TO 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
____________________________
(Exact name of registrant as specified in its charter)
Delaware 73-1238709
__________________________________ _________________________________
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
4444 E. 66th Street, Lower Annex, Tulsa, OK 74316-4207
_____________________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (918) 488-8068
__________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
Registered
NONE N/A
__________________________________ _________________________________
Securities registered pursuant to 12(g) of the Act:
Common Stock, $0.001 par value
_____________________________________________________________________________
(Title of class)
_____________________________________________________________________________
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
[] Yes [X] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
[] Yes [X] No
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [] No
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(Section 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).
[ ] Yes [] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge,
indefinitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
[X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [] Accelerated filer []
Non-accelerated filer [] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). [] Yes [X] No
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
registrant's Common Stock on the last business day of the registrant's most
recently completed second fiscal quarter was $9,606,836.
The number of shares outstanding of the registrant's Common Stock, as of
March 30, 2011, was 83,129,235.
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EMPIRE PETROLEUM CORPORATION
FORM 10-K
TABLE OF CONTENTS
ITEM NUMBER AND CAPTION PAGE NUMBER
PART I
Item 1. Business 4-7
Item 2. Properties 7-8
Item 3. Legal Proceedings 8
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 8-9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-17
Item 8. Financial Statements and Supplementary Data F-1 through F-13
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17
Item 9A Controls and Procedures 17-18
Item 9B. Other Information 18
PART III
Item 10. Directors, Executive Officers and Corporate
Governance 18-19
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 20-22
Item 13. Certain Relationships and Related Transactions,
and Director Independence 22
Item 14. Principal Accounting Fees and Services 22-23
PART IV
Item 15. Exhibits, Financial Statement Schedules 23-25
Signatures 25
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PART I
ITEM 1. 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. The Company operates
from leased office space at 4444 E. 66th Street, Lower Annex, Tulsa, OK
74136-42017, and its telephone number is (918) 488-8068.
During the past three fiscal years, the Company has focused on developing
the Gabbs Valley and South Okie Prospects as further described below.
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
acres.
As of December 31, 2005, there had been no wells drilled on the Gabbs
Valley Prospect. However, 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. The block was reduced to 75,201 acres due
to the expiration of one 320 acre lease during 2007. In 2008 and 2009, the
Company acquired leases on 17,624 additional acres through federal lease
sales.
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 re-entered the well on April 17, 2007 and
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conducted a series of drill stem tests and recovered only drilling
mud. It was then determined after considerable study that the formation
is likely very sensitive to mud and water used in drilling which may have
caused clays in the formation to swell preventing any oil that might be
present to flow into the wellbore. During 2007, the Company increased its
interest in the prospect leases to 57% when one of the joint participants
elected to surrender its 30% share of the prospect. The Company and its joint
owners assumed liabilities of approximately $68,000 to acquire this interest.
Other than a 5,000 barrel-per-day refinery located approximately 200
miles from the Gabbs Valley Prospect, there are no pipelines or service
networks located near the prospect. A small refinery located about 115 miles
from the prospect has now shut down.
In 2008, the Company and its partners engaged W. L. Gore and Associates to
carryout an Amplified Geochemical Imaging Survey which covered approximately
sixteen square miles. The survey was concentrated along the apex of the large
Cobble Cuesta structure which included the areas around the Empire Cobble
Cuesta 1-12 exploratory test and the other test well drilled in the immediate
area. Both of these tests encountered oil shows and the geochemical survey
indicated potential hydrocarbons beyond the two well bores.
During 2010, the Company had a new Federal Drilling Unit named the "Paradise
Unit" formed and approved by the Bureau of Land Management ("BLM"). The
Paradise Unit consisted of 40,073.39 acres. This unit was formed according to
the Company's plans to drill a second test well on the prospect to be known as
the Empire Paradise Unit 2-12. This test well was to be drilled pursuant to
the terms of the Paradise Unit to 6,000 feet, or 500 feet into the Triassic
formation or into a zone that establishes commercial production at a lesser
depth. Drilling operations were commenced July 19, 2010 and ceased on
November 5, 2010. During the drilling phase the Company had several zones
where oil shows were observed. During its test from 3,698' to 3,786' a small
amount of oil was recovered. Drilling continued to 4,248', encountering
additional oil shows and the decision was made to set 7" production casing to
4,225'. A further attempt to deepen the hole failed when a heavy water flow
was encountered at 4,248'. One further test through the pipe at 4,140' to
4,167' tested water. It was then decided to test the area between 3,700' to
3,782'. Oil was recovered from this interval and was swabbed at the rate of
three (3) to five (5) barrels of oil per day. The recovered oil contained a
significant amount of paraffin, which could have restricted the oil
production. The Company then made the decision to plug the well, considering
it to be non-commercial. One of the parties which had farmed out their
interest to Empire for drilling the 2-12 test well asked for an assignment of
the lease on which the well was drilled. Empire agreed to this subject to
such party's assumption of the plugging liabilities of both the 1-12 and 2-12
wells, plus the reclaiming and seeding of the two well sites and replacing
Empire's $25,000 drilling bond. The acquiring party is planning to do
additional testing of the well and is expected to commence the operations in
2011. The Company is offering the well data it has obtained to encourage the
further testing. Although the Company is not optimistic that further testing
will improve this well, it is encouraged in that it has proven there is
producible oil in the very large Cobble Cuesta Structure which is located 150
miles from the nearest oil production. Because of this the Company is
conducting additional geological studies with the expectation it will likely
participate in the drilling of another test on the prospect. The Company's
leasehold has been reduced from 92,825 acres to 48,541 acres due to lease
expirations. The Company's ownership is now 50%.
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South Okie Prospect
On August 4, 2009, the Company purchased, for $25,000 and payment of lease
rentals of $4,680, a nine month option to purchase 2,630 net acres of oil and
gas leases known as the South Okie Prospect in Natrona County, Wyoming.
The option allowed the Company to purchase the leasehold interests for
$35,000. The Tensleep Sand at depths from 3,300 feet to 4,500 feet is the
primary target. The Tensleep is an excellent oil reservoir with the potential
of 700 barrels of oil per acre foot recovery. As of December 31, 2009, the
Company acquired 11 miles of seismic data and studies of this data were
completed in early January 2010. An additional geological study was also
completed early January 2010. Based on these studies, the Company exercised
its option in 2010. Further engineering studies have estimated the reserve
potential of this prospect at between 1,000,000 to 4,000,000 barrels of oil.
The Company plans to drill or cause to be drilled a test well in 2011.
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
Gabbs Valley and South Okie 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. While 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 anticipates that the prices of oil and
gas will fluctuate somewhat in the near future.
Regulation
The oil and gas industry is subject to extensive federal, state and local
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 Company's cost of doing business and, consequently,
affect profitability.
A substantial portion of the leases, which constitute the South Okie
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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 if the Company fails to
comply or if any contamination results from the Company's operations.
Employees
As of December 31, 2010, 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 years ended December 31, 2010 and 2009.
ITEM 2. PROPERTIES.
Gabbs Valley Prospect
As of December 31, 2010, the Gabbs Valley Prospect consisted of approximately
48,541 acres of federal leases located in Nye and Mineral Counties, Nevada,
of which the Company owns a 50% working interest.
As of December 31, 2010, two wells, the Empire Cobble Cuesta 1-12 and the
Empire Paradise 2-12, had been drilled and tested on this prospect, but the
wells were not completed. For more information regarding the Gabbs Valley
Prospect, see "Gabbs Valley Prospect" under Item 1. Business.
COMPANY UNDEVELOPED ACREAGE (LEASES)
AS OF DECEMBER 31, 2010
Undeveloped Acreage Productive Acreage Completed Oil Wells
Gross Net Gross Net
Prospect Acres Acres Acres Acres 2008 2009 2010
________ ________ _______ ________ _________ _____________________
Gabbs
Valley 48,541 24,271 - - -0- -0- -0-
South
Okie 3,120 2,630 - - -0- -0- -0-
ITEM 3. LEGAL PROCEEDINGS.
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As of December 31, 2010, neither the Company nor its properties were
subject to any legal proceedings.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
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, 2009:
Quarter High Low
03/31/09 .075 .01
06/30/09 .095 .03
09/30/09 .05 .02
12/31/09 .10 .03
Year ending December 31, 2010:
Quarter High Low
03/31/10 .25 .065
06/30/10 .19 .05
09/30/10 .245 .01
12/31/10 .21 .00
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, 2010, there were approximately 202 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
On or about February 24, 2011, the Company settled an outstanding invoice of a
third party service provider in the net amount of $54,900 by paying $25,000 in
cash and issuing 60,000 shares of Common Stock.
The offer and sale related to the shares described above were not registered
under the Securities Act of 1933, as amended, in reliance upon the exemption
from the registration requirements of that act provided by Section 4(2)
thereof and Regulation D promulgated by the SEC thereunder. The third party
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service provider is a sophisticated investor with the experience and expertise
necessary to evaluate the merits and risks of an investment in the Company's
stock and the financial means to bear the risks of such an investment.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Cautionary Note Regarding Forward-Looking Statements
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 to be 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 (the "SEC").
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-K 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.
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For the past three fiscal years, the Company has financed its operations
primarily from sales of its equity securities. In prior years advances were
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 its equity securities, or through
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 Company reported losses of $2,627,902 and $215,909 for the years
ended December 31, 2010 and 2009, respectively. The Company also had an
accumulated deficit of $13,759,121 as of December 31, 2010. 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
registered public accounting firm 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 fluctuations for these services
during the last year and this trend is expected to continue into the future.
These cost uncertainties 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
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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,
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.
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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.
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 could 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 of the outstanding shares of the Company's Common Stock are
"restricted securities" under Rule 144 of the Securities Act of 1933, as
amended, and (except for shares purchased by "affiliates" of the Company 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 of 1933, as amended, 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 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
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and growth of its business, 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
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.
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.
TWELVE MONTH PERIOD ENDED DECEMBER 31, 2010, COMPARED TO TWELVE MONTH PERIOD
ENDED DECEMBER 31, 2009
For the twelve months ended December 31, 2010, sales revenue decreased
$9,794 to $0, compared to $9,794 for the same period during 2009.
The decrease in sales revenue was the result of the sale of the Company's
interest in the Cheyenne River Prospect in 2009.
Production and operating expenses increased $57,922 to $178,223 for the
twelve months ended December 31, 2010, from $120,251 for the same period in
2009. This increase was primarily due to costs associated with the Company's
higher share of the Gabbs Valley lease rentals due to the increased working
interest.
General and administrative expenses increased by $32,322 to $241,947 for the
twelve months ended December 31, 2010, from $209,674 for the same period in
2009. The increase was primarily due to stock options issued in 2010. In
2009, the Company's legal costs were higher due to the costs associated with
the Company's private placement of Common Stock.
Well abandonment expense increased by $2,221,293 for the twelve months ended
December 31, 2010 from $-0- in 2009 due to the Company's assignment of the
Paradise Unit 1-12 well to another leaseholder in 2010.
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There was no depreciation expense attributable to the twelve months ended
December 31, 2010 or December 31, 2009 because the depreciable assets were
fully depreciated.
For the reasons discussed above, net loss increased $(2,411,993) from
$(215,909) for the twelve months ended December 31, 2009, to $(2,627,902)
for the twelve months ended December 31, 2010.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As of December 31, 2010, the Company had $68,689 of cash on hand. The
Company's cash on hand will not be 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 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 (See subsequent events).
PRIVATE EQUITY PLACEMENTS
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, could have been
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. In 2006, the warrants were
extended twice; the extensions reduced the value of the warrants to $18,250.
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. 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. These warrants have expired.
In September 2006, the Company raised $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. The warrants have expired.
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.
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.
In April 2007, the Company completed a private placement of 5,000,000 shares
of its common stock along with warrants to acquire up to 1,250,000 shares of
its common stock for an aggregate purchase price of $1,000,000. The warrants
had an exercise price of $.50 per share. The warrants have expired. Proceeds
of the placement were allocated $80,000 to common stock warrants, and $920,000
to common stock and paid in capital. Approximately $337,000 of the funds were
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used to pay for the Company's costs associated with the re-entry and testing
of the Cobble Cuesta 1-12 well in the Gabbs Valley Prospect in Nevada and the
remaining funds have been or will be used for general corporate purposes. The
value assigned to the warrants was determined by using the Black-Scholes
option valuation method with the following assumptions: no dividend yield,
expected volatility of 136%, risk free interest rate of 4.94% and an expected
useful life of one year.
In a private placement concluded on January 26, 2010, the Company received
subscriptions for 21,431,661 shares of its common stock, par value $0.001 per
share, with the aggregate offering price of such shares being $1,500,216. The
material terms and conditions applicable to the purchase and sale of the
securities in the private placement are set forth in the form of the
Securities Purchase Agreement included as an exhibit to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 2009.
Subsequent to this private placement, the Company determined that it needed to
enter into the farm-in agreement (See Note 4) and raise additional funds in
order to successfully drill a new test well on the Gabbs Valley Prospect.
In July 2010, the Company completed the private placement offering by issuing
2,500,002 additional shares of common stock, and 1,250,001 additional warrants
to purchase shares of common stock at a price of $.50, which expire in June
and July, 2011, as applicable, with an aggregate purchase price of $225,000.
Proceeds from this private placement was utilized for the Company's share
of costs to drill a new well on the Gabbs Valley Prospect (See Note 2). Any
remaining funds were used for general working capital purposes.
Proceeds of the July 2010 private placement were allocated $57,500 to
common stock warrants and $167,500 to common stock and paid in capital. The
value of the warrants was estimated using the Black-Scholes Valuation Model
with the following weighted average assumptions: risk free interest rate of
..30%, no dividend yield, volatility factor of the expected market price of the
Company's common stock of 155% to 157% (depending on the date of sale), and a
weighted average expected life of the warrants of one year.
SALE OF WORKING INTEREST
In October 2010, the Company sold 7% of its working interest in the Gabbs
Valley Prospect leases for $700,000. In connection with such sale, the
purchasers were granted a working interest in the Paradise Unit 2-12 well,
unit leases and an option to participate in the farmin of the non-unit
leases, which option has expired.
ADVANCE FROM RELATED PARTY
On February 1, 2011 the Albert E. Whitehead Living Trust, under the terms of
a convertible note advanced $100,000 to the Company. The note has a term of
One (1) year and accrues interest at the rate of four (4) percent per annum.
The principal and interest owed under the note may be converted by the holder
into Common Stock at the rate of $0.10 per share.
OFF-BALANCE SHEET ARRANGEMENTS
None
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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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
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 -
the Company accounts for future abandonment costs of wells and related
facilities in accordance with the provisions of Financial Accounting
Standards Board("FASB") Accounting for Asset Retirement Obligations. Under
this method 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
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political and regulatory environment and, estimates as to the proper discount
rate to use and timing of abandonment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company are set forth on pages F-1 through
F-13 at the end of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure 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.
Management's Annual Report on Internal Control Over Financial Reporting
The Company's Chief Executive Officer (and principal financial officer) is
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended. The Company's internal controls
were designed to provide reasonable assurance as to the reliability of the
Company's financial reporting and the preparation of the financial statements
for external purposes in accordance with generally accepted accounting
principles in the United States.
Due to inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
control effectiveness to future periods are subject to the risk that the
controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may deteriorate.
The Company's Chief Executive Officer (and principal financial officer) made
an assessment of the effectiveness of the Company's internal control over
financial reporting as of December 31, 2010. In making this assessment, the
Company's Chief Executive Officer (and principal financial officer) used the
criteria established in Internal Control- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, the Company's Chief Executive Officer (and principal
financial officer) believes that as of December 31, 2010, the Company's
internal control over financial reporting is effective based on those
criteria.
This annual report does not include an attestation report of the Company's
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by
-17-
the Company's independent registered public accounting firm pursuant to
temporary rules of the SEC, which only require management's report in this
annual report.
Changes on Internal Control over Financial Reporting
During the period covered by this report, there was no change in the
Company's internal control over financial reporting that has materially
affected or that is reasonably likely to materially affect the Company's
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following lists the directors and executive officers of the Company:
Name Age Position
Albert E. Whitehead 80 Director, Chairman & Chief Executive
Officer
John C. Kinard 77 Director
Montague H. Hackett, Jr. 78 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. Until February 5, 2008
Mr. Whitehead also served 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 serves as a Managing Partner of Remuda Resources LLC, a
private oil and gas exploration company. 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.
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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. In 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, 2010, 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,
2010, 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
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, 4444 E. 66th Street, Lower Annex, Tulsa, Oklahoma 74136-4207, or
by calling (918) 488-8068.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, 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 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, 2010, 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, 2010 were
complied with on a timely basis.
ITEM 11. 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.
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DIRECTORS COMPENSATION
No director received compensation or any other benefits from the registrant
during its last completed fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
Securities Authorized for Issuance under Equity Compensation Plans
As of December 31, 2010, 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 authorizes 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, 2010:
(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 1,095,000 $0.147 4,105,000
compensation plans
approved by
security holders
Equity N/A
compensation plans
not approved by
security holders
_________ _________
TOTAL 1,095,000 4,105,000
_________ _________
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 30, 2011 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.
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The percentage of beneficial ownership for the following table is based on
83,129,235 shares of Common Stock outstanding as of March 30, 2011.
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.
Amount and
nature of
beneficial Percent of
Name and address of beneficial owner ownership class (1)
Albert E. Whitehead, 19,391,439 shares (2) 23.33%
Chairman of the Board and
Chief Executive Officer
3214 E. 73rd Street
Tulsa, OK 74136-5927
John C. Kinard, 781,331 shares (3) 0.94%
Director
52 S. Roslyn Street
Denver, CO 80230
Montague H. Hackett, Jr. 15,176,083 shares (4) 18.08%
Director
550 Park Avenue
New York, NY 10065
All current directors and executive officers
as a group (3 persons) 35,348,853 shares (5) 41.98%
(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) 16,268,378 shares directly owned by the Albert
E. Whitehead Living Trust, of which Mr. Whitehead is the trustee; (ii)
277,778 shares Mr. Whitehead has the right to acquire pursuant to a warrant;
(iii) 30,000 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) 220,000 shares Mr. Kinard has the right to acquire pursuant to options
granted to him under the 1995 Stock Option Plan; (iii) 250,000 shares
Mr. Kinard has the right to acquire pursuant to options granted to him under
the Company's 2006 Stock Incentive Plan; and (iv) 150,000 shares directly
owned by Mr. Kinard's wife, of which Mr. Kinard disclaims any interest.
(4) This number includes (i) 9,600,288 shares directly owned by Mr. Hackett
(ii) 400,000 shares Mr. Hackett has the right to acquire under the Company's
2006 Stock Incentive Plan; (iii) 138,889 shares Mr. Hackett has the right
to acquire pursuant to a warrant; (iv) 2,206,350 shares directly owned by the
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Trust F/B/O Melinda Hackett and 138,889 shares the same trust has the right
to acquire pursuant to a warrant, of which Mr. Hackett disclaims any interest;
(v) 1,945,635 shares directly owned by the Trust F/B/O Montague H. Hackett,
III and 138,889 shares the same trust has the right to acquire pursuant to a
warrant, of which Mr. Hackett disclaims any interest; and (vi) 607,143 shares
directly owned by Mayme M. Hackett, Mr. Hackett's wife, of which Mr. Hackett
disclaims any interest.
(5) This number is based on the numbers listed in footnotes 2 through 4
above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Messrs.Whitehead and Hackett participated in the Company's 2009-2010
private placements on the same terms and conditions as the other investors in
the private placement. For more information regarding such private placements,
see "Private Equity Placements" under Item 7 of this Form 10-K.
Subsequent to December 31, 2010, Mr. Whitehead advanced $100,000 to the
Company through a Convertible Note from the Company. For more information
regarding the Convertible Note, see "Advance from Related Party" under Item 7
of this Form 10-K.
In October 2010, Messrs. Whitehead and Hackett participated in the sale of
working interests by the Company on the same terms and conditions as the other
purchasers of the working interest. For more information regarding such
transaction, see "Sale of Working Interest" under Item 7 of this From 10-K.
DIRECTOR INDEPENDENCE
The Company has determined that both Mr. Kinard and Mr. Hackett are
"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 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following is a summary of the fees billed or to be billed to the Company
by HoganTaylor LLP the Company's independent registered public accounting
firm, for professional services rendered for the fiscal years ended December
31, 2010 and December 31, 2009:
Fee Category Fiscal 2010 Fees Fiscal 2009 Fees
Audit Fees (1) $ 35,000 $ 35,000
Audit-Related Fees (2) -0- -0-
Tax Fees -0- -0-
All Other Fees (3) -0- -0-
Total Fees $ 35,000 $ 35,000
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(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, 2010 and December 31,
2009, 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 HoganTaylor 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.
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
The financial statements under this item are included in Item 8
of Part II.
(2) Schedules
NONE
(3) 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).
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10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 Form of Securities Purchase Agreement entered into between Empire
Petroleum Corporation and certain accredited investors in connection
with 2007 private placement (incorporated herein by reference to Exhibit
10.1 to the Company's Form 8-K dated April 4, 2007, which was filed on
April 10, 2007).
10.10 Form of Securities Purchase Agreement entered into between Empire
Petroleum Corporation and certain accredited investors in connection
with the 2009 private placement (incorporated herein by reference to
Exhibit 10.1 to the Company's Form 10-Q for the period ended September
30, 2009, which was filed on November 16, 2009).
10.11 Form of securities purchase agreement entered into between
Empire Petroleum Corporation and certain accredited
Investors in connection with the June-July 2010 private
Placement (incorporated herein by reference to Exhibit 10.1
to the Company's Form 10-Q for the period ended June 30,
2010, which was filed on August 13, 2010).
10.12 Form of common share warrant certificate issued by Empire
Petroleum Corporation in favor of certain accredited
investors in connection with the June-July 2010 private
placement (incorporated herein by reference to Exhibit 10.2
to the Company's Form 10-Q for the period ended June 30,
2010, which was filed on August 13, 2010).
10.13 Convertible Note Due February 1, 2012 (incorporated herein
by reference to Exhibit 10.1 to the Company's Form 8-K dated
February 1, 2011, which was filed on February 7, 2011).
31 Certification of Chief Executive Officer (and principal financial
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officer) pursuant to Rules 13a - 14 (a) and 15(d) - 14(a) promulgated
under the Securities Exchange Act of 1934, as amended, and Item 601(1)
(31) of Regulation S-K, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (submitted herewith).
32 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).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Empire Petroleum Corporation
Date: March 23, 2011 By: /s/Albert E. Whitehead
Albert E. Whitehead
Chief Executive Officer
(principal executive officer,
principal financial officer
and principal accounting
officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, 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 and Chief Executive
Albert E. Whitehead Officer March 23, 2011
/s/John C. Kinard Director March 23, 2011
John C. Kinard
/s/Montague H. Hackett, Jr. Director March 23, 2011
Montague H. Hackett, Jr.
-25-
EMPIRE PETROLEUM CORPORATION
FINANCIAL STATEMENTS
CONTENTS
Page No.
Balance Sheets as of December 31, 2010
and 2009 F-2
Statements of Operations for the years ended
December 31, 2010 and 2009 F-3
Statements of Changes in Stockholders' Equity
for the years ended December 31, 2010 and
2009 F-4
Statements of Cash Flows for the years ended
December 31, 2010 and 2009 F-5
Notes to Financial Statements F-6 through F-13
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Empire Petroleum Corporation
We have audited the accompanying balance sheets of Empire Petroleum Corporation
as of December 31, 2010 and 2009, and the related statements of operations,
changes in stockholders' equity and cash flows for the years then ended.
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, 2010 and 2009, and the results of its operations and its
cash flows for the years then ended in conformity with U.S. generally accepted
accounting principles.
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 since
inception. The ultimate recoverability of the Company's investment in its oil
and gas interests is dependent upon the existence and 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.
We were not engaged to examine management's assertion about the effectiveness
of Empire Petroleum Corporation's internal control over financial reporting
as of December 31, 2010, included in the accompanying Management's Annual
Report on Internal Controls and, accordingly, we do not express an opinion
thereon.
/s/ HOGANTAYLOR LLP
Tulsa, Oklahoma
March 23, 2011
F-1
EMPIRE PETROLEUM CORPORATION
BALANCE SHEETS
December 31, 2010 and 2009
ASSETS 2010 2009
___________ ____________
Current assets:
Cash $ 68,689 $ 1,171,565
Accounts receivable (net of allowance
of $3,750) 45,915 45,915
Prepaid expenses 7,336 0
___________ ___________
Total current assets 121,940 1,217,480
___________ ___________
Property & equipment, net of accumulated
depreciation and depletion 255,215 920,215
___________ ___________
$ 377,155 $ 2,137,695
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 149,065 10,583
___________ ___________
Total current liabilities 149,065 10,583
Long term liabilities:
Asset retirement obligation -0- 34,200
___________ ___________
Total liabilities 149,065 44,783
___________ ___________
Stockholders' equity
Common stock-$.001 par value, authorized 83,069 74,553
100,000,000 shares, issued 83,069,235 and
74,553,361 shares, respectively
Additional paid in capital 13,904,142 13,149,578
Accumulated deficit (13,759,121) (11,131,219)
___________ ___________
Total stockholders' equity 228,090 2,092,912
___________ ___________
$ 377,155 $ 2,137,695
=========== ===========
See accompanying notes to financial statements.
F-2
EMPIRE PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
Years Ended December 31, 2010 and 2009
2010 2009
_____________ ____________
Revenue:
Petroleum sales $ 0 $ 9,794
_____________ ____________
0 9,794
_____________ ____________
Costs and expenses:
Well abandonment expense 2,221,293 0
Production & operating 178,174 120,251
General & administrative 231,996 209,674
_____________ ____________
2,631,463 329,925
_____________ ____________
Operating income (loss) (2,631,463) ( 320,131)
_____________ ____________
Other (income) and expense:
Gain on Sale of Asset 0 ( 102,707)
Miscellaneous (income) expense 0
Interest income ( 3,561) ( 1,515)
_____________ ____________
Total other (income)
expense ( 3,561) ( 104,222)
_____________ ____________
Net loss applicable to common stock $ (2,627,902) ( 215,909)
_____________ ____________
Net loss
per common share basic & diluted $ (.03) $ (.00)
_____________ ____________
Weighted average number of
common shares
outstanding, basic & diluted 80,487,318 59,722,307
_____________ ____________
See accompanying notes to financial statements.
F-3
EMPIRE PETROLEUM CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2010 and 2009
Additional
Par Paid in Accumulated
Shares Value Capital Deficit Total
___________ _______ ___________ ____________ ___________
Balances December 31, 2008
57,193,128 57,193 11,901,722 (10,915,310) 1,043,605
Net loss - - - (215,909) (215,909)
Value of services
contributed by
Employee - - 50,000 - 50,000
Issuance of Common Stock
17,360,233 17,360 1,197,856 - 1,215,216
__________ _______ __________ ___________ ___________
Balances December 31, 2009
74,553,361 74,553 13,149,578 (11,131,219) 2,092,912
Net loss - - - ( 2,627,902) (2,627,902)
Value of services
contributed by
Employee - - 50,000 - 50,000
Issuance of Stock Options - 28,080 - 28,080
Issuance of Common Stock
8,515,874 8,516 676,484 - 685,000
__________ _______ _________ __________ ___________
Balances December 31, 2010
83,069,235 83,069 13,904,142 (13,759,121) 228,090
See accompanying notes to financial statements.
F-4
EMPIRE PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
Years ended December 31, 2010 and 2009
2010 2009
___________ ___________
Cash flows from operating activities:
Net loss $(2,627,902) (215,909)
Adjustments to reconcile net loss to
net cash used in operating activities:
Value of services contributed by
Employee 50,000 50,000
Stock Option Plan expense 28,080 0
Well abandonment expense 2,221,293 0
Gain on sale of Cheyenne River Prospect 0 (102,707)
Change in operating assets and
liabilities:
Accounts receivable 0 (33,757)
Prepaid expenses (7,336) 9,075
Accounts payable and accrued
liabilities 138,482 (8,809)
___________ ___________
Net cash used in operating activities (197,383) (302,107)
___________ ___________
Cash flows from investing activities:
Sale of working interest 700,000 0
Sale of Cheyenne River Interest 0 166,525
Acquisition of lease acres 0 ( 7,191)
Purchase of option on South Okie Prospect (35,000) (25,000)
Well equipment and drilling costs (2,255,493) 0
____________ ___________
Net cash provided by (used in) investing
activities (1,590,493) 134,334
____________ ___________
Cash flows from financing activities:
Proceeds from private equity placement 685,000 1,215,216
____________ ___________
Net cash provided by financing
activities 685,000 1,215,216
____________ ___________
Net increase (decrease) in cash (1,102,876) 1,047,443
Cash - Beginning of year 1,171,565 124,122
____________ ___________
Cash - End of year $ 68,689 $ 1,171,565
____________ ___________
See accompanying notes to financial statements.
F-5
EMPIRE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
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.
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.
Virtually all of the Company's assets are invested in the Gabbs Valley and
South Okie Prospects, both of which are unproven, 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. The Company drilled a test well on the Prospect in 2010 which recovered
oil, however the oil contained paraffin which prevented it from producing at
economic rates. The Company continues to believe that the Prospect contains
economical reserve quantities and is actively conducting additional studies
and will be pursuing potential funding and/or partners to continue evaluation
and exploration.
The Company plans to supplement current studies of the South Okie Prospect
with a seismograph evaluation to verify the potential of the prospect. The
Company has acquired 11 miles of seismic and studies of this data was
completed in early January 2010 and an additional geological study was also
completed early January 2010. The option allows the Company to purchase the
leasehold interests for $35,000. Based on these studies, the Company expects
to exercise its option.
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
F-6
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
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:
The Company calculates and discloses 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. As a result, if there is a loss from continuing operations,
Diluted EPS is computed in the same manner as Basic EPS is computed. At
December 31, 2010 the Company had 1,095,000 and 2,222,226 options and warrants
outstanding, respectively, that were not included in the calculation of
diluted earnings per share. Such financial instruments may become dilutive
and would then need to be included in future calculations of Diluted EPS.
(c) Income taxes:
The Company accounts for income taxes in accordance with the asset and
liability method of accounting for income taxes. Under the asset and
liability method, 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 management determines it is more likely than not that some
portion of a deferred tax asset will not be realized.
F-7
(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:
The Company 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:
The Company follows Financial Accounting Standards Board (FASB) guidance on
accounting for asset retirement obligations, which 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. This guidance 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. The
Company applies its analysis to producing wells. The Company accrued $0 and
$34,200, respectively at December 31, 2010 and 2009 as an asset retirement
obligation for wells in Nevada, 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 January 2010, the FASB issued Accounting Standards Update (ASU) No.
2010-03, "Oil and Gas Reserve Estimation and Disclosures." This ASU amends
the FASB's Accounting Standards Codification (ASC) Topic 932, "Extractive
Activities-Oil and Gas" to align the accounting requirements of Topic 932
with the Securities and Exchange Commission's final rule, "Modernization of
the Oil and Gas Reporting Requirements" issued on December 31, 2008. In sum,
the revisions in ASU 2010-3 modernize the disclosure rules to better align
with current industry practices and expand the disclosure requirements for
equity method investments so that more useful information is provided. More
specifically, the main provisions include the following:
An expanded definition of oil and gas producing activities to include
nontraditional resources such as bitumen extracted from oil sands.
The use of an average of the first-day-of-the-month price for the
12-month period, rather than a year-end price for determining whether
reserves can be produced economically.
Amended definitions of key terms such as "reliable technology" and
"reasonable certainty" which are used in estimating proved oil and gas
reserve quantities.
F-8
A requirement for disclosing separate information about reserve
quantities and financial statement amounts for geographical areas
representing 15 percent or more of proved reserves.
Clarification that an entity's equity investments must be considered in
determining whether it has significant oil and gas activities and a
requirement to disclose equity method investments in the same level of
detail as is required for consolidated investments.
This ASU is effective for annual reporting periods ended on or after
December 31, 2009, and it requires (1) the effect of the adoption to be
included within each of the dollar amounts and quantities disclosed,
(2) qualitative and quantitative disclosure of the estimated effect of
adoption on each of the dollar amounts and quantities disclosed, if
significant and practical to estimate and (3) the effect of adoption on the
financial statements, if significant and practical to estimate. The adoption
of this standard will not have a material effect on our financial statements
until such time as the Company has reportable oil and gas reserves.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06,
"Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures
about Fair Value Measurements." This Update requires new disclosures regarding
the amount of transfers in or out of Levels 1 and 2 along with the reason for
such transfers and also requires a greater level of disaggregation when
disclosing valuation techniques and inputs used in estimating Level 2 and
Level 3 fair value measurements. This Update also includes conforming
amendments to the guidance on employers' disclosures about postretirement
benefit plan assets. The disclosures will be required for reporting beginning
in the first quarter 2010. Also, beginning with the first quarter 2011, the
Standard requires additional categorization of items included in the
rollforward of activity for Level 3 inputs on a gross basis. Adoption of this
standard will not have a material effect on the financial statements.
3. Property and equipment:
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. In April 2007, the Company re-entered the well and based on the
results of drill stem tests, determined that the formation was very sensitive
to the mud and water used in drilling the test well, causing clogs in the
formation to swell which prevented any oil which might be present to flow
into the well bore. The total gross acres of this prospect was increased to
92,826 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 acquisition of 9,943.91
acres in September, 2008 at a cost of $13,025 and the acquisition of 7,680
acres in September, 2009 at a cost of $12,615. The Company increased its
interest to 57% in the prospect leases in 2007 when one of the joint
participants elected to surrender its 30% interest. The Company and the
remaining joint owners assumed liabilities of approximately $68,000 to
F-9
acquire the interest.
In 2010, the Company drilled a test well in the Paradise Unit of the Gabbs
Valley Prospect to a depth of 4,250 feet. The well produced small amounts of
oil containing paraffin which may have restricted oil flow. A co-owner of the
lease elected to take over the lease and well, including remediation of the
site, as of December 31, 2010 the Company had expensed $2,255,493 of
intangible drilling costs related to the Paradise Unit test well. Also in
2010, the Company sold a 7% working interest in the Gabbs Valley Prospect for
$700,000. As of December 31, 2010, the Gabbs Valley Prospect consisted of
approximately 48,541 acres of federal leases located in Nye and Mineral
Counties, Nevada, of which the Company owns a 50% working interest.
The Company's other property and equipment, totaling $2,561 at December 31,
2010, consists entirely of office furniture, fixtures and equipment, which
are fully depreciated.
4. 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, could have been
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. In 2006, the warrants were
extended twice; the extensions reduced the value of the warrants to $18,250.
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. 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. The warrants expired on November 15, 2010 with
none being exercised.
In 2006, the Company raised $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, could have been
exercised on or before March 15, 2009 (subsequently extended to November 15,
2010-See Note 10) 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. The warrants expired November 15, 2010 with
none being exercised.
In 2007, the Company raised $1,000,000 of net proceeds by selling 5,000,000
shares of newly issued stock, along with warrants to purchase 1,250,000 shares
of common stock, which subject to certain restrictions, could have been
exercised until March 15, 2009 (subsequently extended to November 15, 2010 (See
Note 10)) at an exercise price of $0.50 per share. Proceeds of the placement
were allocated $80,000 to common stock warrants and $920,000 to common stock
and paid in capital. The value assigned to the warrants was determined by
using the Black-Scholes option valuation methods with the following
assumptions: no dividend yield, expected volatility of 136%, risk free
interest rate of 4.94%, and an expected useful life of one year. The warrants
expired November 15, 2010 with none being exercised.
F-10
In 2009, the Company raised $1,215,216 of net proceeds by selling 17,360,233
shares of newly issued common stock. Proceeds were utilized for the Company's
share of costs to drill a new well on the Gabbs Valley Prospect (See Note 1).
In 2010, the Company raised $685,000 of net proceeds by selling 8,515,874
shares of newly issued stock, along with warrants to purchase 2,222,226 shares
of Common Stock, which subject to certain restrictions, can be exercised
until June 16, 2011 at an exercise price of $0.50 per share. Proceeds of the
placements were allocated $101,250 to Common Stock Warrants and $583,750 to
Common Stock and paid in capital. The value assigned to the warrants was
determined by using the Black-Scholes option valuation methods with the
following assumptions: no dividend yield, expected volatility of 155%, risk
free interest rate of .3% and an expected useful life of one year.
5. 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 vest on
grant date and 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. Initially,
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
of the shares subject to the Plan, the Plan shall terminate on June 5, 2016.
The Company expenses the cost of options granted over the vesting
period of the option based on the grant-date fair value of the award. No
options were granted in 2009. For the year ended December 31, 2010, the
Company recognized an expense of $28,080 related to options granted under
the Plan.
Fair values were estimated at the date of grants of the options, using the
Black-Scholes option valuation model with the following weighted average
assumptions: risk-free interest rate of 3.65% and 2.77%, volatility factor
of the expected market price of the Company's common stock of 162% and 142%, no
dividend yield on the Company's common stock, and a weighted average expected
life of the options of 5 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, 2010, there was no unrecognized compensation expense
related to nonvested share-based compensation arrangements under the Plan.
F-11
A summary of the Company's Incentive Plan as of December 31, 2010 and changes
during the year is presented below:
Weighted Average
Shares Exercise Price
_________ _________________
Outstanding at Beginning of Year 2009 1,140,000 .18
Granted 0 .00
Cancelled or Exercised 70,000 .44
Outstanding at ending of Year 2009 1,070,000 .162
Granted 120,000 .25
Cancelled or Exercised 95,000 .44
__________ _________________
Outstanding at End of Year 2010 1,095,000 .148
========== =================
The following table summarizes information about stock options outstanding at
December 31, 2010:
Options Outstanding Options Exercisable
_________________________________________________________________
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/10 Life Price at 12/31/10 Price
____________________________________________________________________________
$0.10-$0.26 1,095,000 6.41 Years $0.148 1,095,000 $0.148
No options were granted in 2009.
6. 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:
2010 2009
Statutory tax rate 34% 34%
___________ __________
Expected tax benefit $ (890,000) $ (70,000)
Benefit of losses not recognized 890,000 70,000
___________ __________
Tax provision (benefit) as reported $ - $ -
___________ ___________
The components of deferred income taxes at December 31, 2010 are as follows:
2010 2009
____________ ____________
Deferred tax assets:
Loss carry-forwards $ 2,650,000 $ 1,750,000
F-12
Valuation allowance (2,125,000) (1,250,000)
___________ ____________
525 500,000
Deferred tax liabilities:
Property and equipment 525 500,000
___________ ____________
Net deferred taxes $ - $ -
___________ ____________
At December 31, 2010, the Company had net operating loss carryforwards of
approximately $2,578,000 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 up to an amount equal to estimated deferred tax
liability.
7. 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.
8. Operating lease:
The Company leases office space under an operating lease agreement with an
unrelated party which expires in June 2012. Monthly lease payments are
$1,100.
Rent expense for each of the years ended December 31, 2010 and 2009,
was $12,649 and $12,487, respectively.
9. Subsequent Events
On February 1, 2011 the Company and its Chief Executive Officer entered into
an agreement where the Company received $100,000 in exchange for entering
into a Convertible Note agreement. The note accrues interest of 4% and
matures February 1, 2012. The note may be converted into Common Stock of the
Company by the holder at a conversion price of $.10 per share.
F-13
EXHIBIT 31
CERTIFICATION
I, Albert E. Whitehead, certify that:
1. I have reviewed this annual report on Form 10-K of Empire Petroleum
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d -
15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
March 23, 2011 /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-K for the period ending December 31, 2010, 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.
March 23, 2011 /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.