UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Amendment No. 2 to Form 10-KSB)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________ to _________________
Commission file number 001-16653
EMPIRE PETROLEUM CORPORATION
(Name of small business issuer in its charter)
Delaware 73-1238709
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
8801 S. Yale, Suite 120, Tulsa, OK 74137-3575
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (918) 488-8068
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB [ X ]
The issuer's gross revenues for the most recent fiscal year were $82,140.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates, based upon the average bid and asked prices of the Common
Stock on March 15, 2005 was $2,366,217.
The number of shares outstanding of the issuer's Common Stock, as of March 15,
2005 was 37,830,190.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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EMPIRE PETROLEUM CORPORATION
FORM 10-KSB/A
TABLE OF CONTENTS
ITEM NUMBER AND CAPTION PAGE NUMBER
PART II
Item 6. Management's Discussion and Analysis 4-12
Item 7. Financial Statements F-1 through F-14
Item 8A. Controls and Procedures 12-13
PART III
Item 13. Exhibits 13-14
Signatures 14
Explanatory Note
This Form 10-KSB/A is being filed by Empire Petroleum Corporation (the
"Company"), as Amendment No. 2 (this "Amendment" or "Form 10-KSB/A"),
to the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2004, as amended by the Company's Annual Report on Form
10-KSB/A filed with the Securities and Exchange Commission on April 11,
2005 (as amended, the "Prior Form 10-KSB"), for the purpose of
amending Items 6, 7 and 8A of Part II and Item 13 of Part III of the
Prior Form 10-KSB.
As previously reported in the Company's Current Report on Form 8-K
filed on November 21, 2005, the Board of Directors of the Company
concluded on November 16, 2005 that its previously issued annual and
quarterly financial statements for fiscal years 2003 and 2004 and
quarterly financial statements for the first two quarters of 2005
should not be relied upon because of errors in those financial
statements and that the Company would restate its previously issued
annual financial statements for fiscal year 2003, annual and quarterly
financial statements for fiscal year 2004 and quarterly financial
statements for the first two quarters of 2005 to make the necessary
accounting adjustments. The restatement pertains to the Company's
accounting for exit activities in connection with its office space in
Canada, which was leased by the former management of the Company,
abandoned upon the resignation of such management and subleased by a
third party for a period of time thereafter.
This Amendment is being filed in connection with the restatement
described above. Although this Amendment amends and restates each of
Items 6, 7 and 8A of Part II and Item 13 of Part III of the Prior Form
10-KSB in its entirety, the information contained herein has not been
updated to reflect events or developments that may have occurred
subsequent to December 31, 2004, except to the limited extent as
specifically described in Items 6 and 8A of Part II below.
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PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 correct. Factors that could cause results to
differ materially from the results discussed in such forward-looking
statements include:
* the need for additional capital,
* the costs expected to be incurred in exploration and development,
* unforeseen engineering, mechanical or technological difficulties in
drilling wells,
* uncertainty of exploration results,
* operating hazards,
* competition from other natural resource companies,
* the fluctuations of prices for oil and gas,
* the effects of governmental and environmental regulation, and
* general economic conditions and other risks described in the Company's
filings with the Securities and Exchange Commission.
Information on these and other risk factors are discussed under "Factors That
May Affect Future Results" below. Accordingly, the actual results of
operations in the future may vary widely from the forward-looking statements
included herein, and all forward-looking statements in this Form 10-KSB are
expressly qualified in their entirety by the cautionary statements in this
paragraph.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis, judgment, belief and
expectations only as of the date hereof. The Company undertakes no obligation
to publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
Factors That May Affect Future Results
The Company does not have any significant on-going income producing oil and
gas properties and has limited financial resources.
For the past three fiscal years, the Company has financed its operations
primarily from advances made to the Company by Albert E. Whitehead, the
Company's Chief Executive Officer. Mr. Whitehead has no obligation to advance
the Company any additional money, and there is no assurance that he will do
so. The Company will not be able to continue operations unless it is able to
obtain funding from outside sources.
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The report of the Company's independent auditor regarding the Company's
financial statements has been modified because of a going concern uncertainty.
The Company reported losses of $191,689 and $676,909 for the years ending
December 31, 2004 and 2003, respectively. The Company also has an accumulated
deficit of $8,620,755 as of December 31, 2004. The Company can provide no
assurance that it will be profitable in the future and, if the Company does
not become profitable, it may have to suspend its operations. As a result of
the foregoing, the audit report of the Company's independent auditors relating
to the Company's financial statements has been modified because of a going
concern uncertainty.
If the Company is able to raise the funds necessary to continue its
operations, its future performance will be affected by the successful drilling
results of its inventory of unproved locations in Wyoming and Nevada. The
failure of drilling activities to achieve anticipated quantities of
economically attractive reserves and production would have a material adverse
effect on the Company's liquidity, operations and financial results.
The Company could be adversely affected by fluctuations in oil and gas prices.
Even if the Company's drilling activities achieve commercial quantities of
economically attractive reserves and production revenue, the Company will
remain subject to prevailing prices for oil, natural gas and natural gas
liquids, which are dependent upon numerous factors such as weather, economic,
political and regulatory developments and competition from other sources of
energy. The volatile nature of the energy markets makes it particularly
difficult to estimate future prices of oil, natural gas and natural gas
liquids. Prices of oil, natural gas and natural gas liquids are subject to
wide fluctuations in response to relatively minor changes in circumstances,
and there can be no assurance that future prolonged decreases in such prices
will not occur. All of these factors are beyond the control of the Company.
Any significant decline in oil and gas prices could have a material adverse
effect on the Company's liquidity, operations and financial condition.
The Company could be adversely affected by increased costs of service
providers utilized by the Company.
In accordance with customary industry practice, the Company relies on
independent third party service providers to provide most of the services
necessary to drill new wells, including drilling rigs and related equipment
and services, horizontal drilling equipment and services, trucking services,
tubulars, fracing and completion services and production equipment. The
industry has experienced significant price increases for these services
during the last year and this trend is expected to continue into the future.
These cost increases could, in the future, significantly increase the
Company's development costs and decrease the return possible from drilling
and development activities, and possibly render the development of certain
proved undeveloped reserves uneconomical.
The Company is subject to numerous drilling and operating risks.
Oil and gas drilling activities are subject to numerous risks, many of which
are beyond the Company's control. The Company's operations may be curtailed,
delayed or canceled as a result of title problems, weather conditions,
compliance with governmental requirements, mechanical difficulties and
shortages or delays in the delivery of equipment. In addition, the Company's
properties may be susceptible to hydrocarbon drainage from production by other
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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 anticipates that it will utilize
horizontal drilling techniques. The horizontal drilling activities involve
greater risk of mechanical problems than conventional vertical drilling
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 results of operations of the Company. There
can be no assurance that the trend of more expansive and stricter
environmental legislation and regulations will not continue.
The Company is subject to various environmental risks, and governmental
regulation relating to environmental matters.
The Company is subject to a variety of federal, state and local governmental
laws and regulations related to the storage, use, discharge and disposal of
toxic, volatile or otherwise hazardous materials. These regulations subject
the Company to increased operating costs and potential liability associated
with the use and disposal of hazardous materials. Although these laws and
regulations have not had a material adverse effect on the Company's financial
condition or results of operations, there can be no assurance that the
Company will not be required to make material expenditures in the future.
Moreover, the Company anticipates that such laws and regulations will become
increasingly stringent in the future, which could lead to material costs for
environmental compliance and remediation by the Company. Any failure by the
Company to obtain required permits for, control the use of, or adequately
restrict the discharge of hazardous substances under present or future
regulations could subject the Company to substantial liability or could cause
its operations to be suspended. Such liability or suspension of operations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is subject to intense competition.
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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.
The Company's stock trades in a limited public market, is subject to price
volatility, and there can be no assurance that an active trading market will
be sustained.
There has been a limited public trading market for the Company's Common Stock,
and there can be no assurance that an active trading market will be sustained.
There can be no assurance that the Common Stock will trade at or above any
particular price in the public market, if at all. The trading price of the
Common Stock could be subject to significant fluctuations in response to
variations in quarterly operating results or even mild expressions of interest
on a given day. Accordingly, the Common Stock should be expected to experience
substantial price changes in short periods of time. Even if the Company is
performing according to its plan and there is no legitimate company-specific
financial basis for this volatility, it must still be expected that
substantial percentage price swings will occur in the Company's Common Stock
for the foreseeable future.
Certain restricted shares of the Company will be eligible for sale in the
future which could affect the prevailing market price of the Company's Common
Stock.
Certain of the outstanding shares of the Company's Common Stock are
"restricted securities" under Rule 144 of the Securities Act, and (except for
shares purchased by "affiliates" of the Company's as such term is defined in
Rule 144) would be eligible for sale as the applicable holding periods
expire. In the future, these shares may be sold only pursuant to a
registration statement under the Securities Act or an applicable exemption,
including pursuant to Rule 144. Under Rule 144, a person who has owned common
stock for at least one year may, under certain circumstances, sell within any
three-month period a number of shares of common stock that does not exceed the
greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume during the four calendar weeks prior to such sale. A
person who is not deemed to have been an affiliate of the Company at any time
during the three months preceding a sale, and who has beneficially owned the
restricted securities for the last two years is entitled to sell all such
shares without regard to the volume limitations, current public information
requirements, manner of sale provisions and notice requirements. Sale or the
expectation of sales of a substantial number of shares of Common Stock in the
public market by selling stockholders could adversely affect the prevailing
market price of the Common Stock, possibly having a depressive effect on any
trading market for the Common Stock, and may impair the Company's ability to
raise capital at that time through additional sale of its equity securities.
The Company does not expect to declare or pay any dividends in the foreseeable
future.
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The Company has not declared or paid any dividends on its Common Stock. The
Company currently intends to retain future earnings to fund the development
and growth of its businesses, to repay indebtedness and for general corporate
purposes, and therefore, does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future.
The Company's Common Stock may be subject to secondary trading restrictions
related to penny stocks.
Certain transactions involving the purchase or sale of Common Stock of the
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.
The Company's principal shareholders own a significant amount of Common Stock.
Albert E. Whitehead and his wife beneficially own approximately 38% of the
Company's Common Stock. As a result, by coordinating with other shareholders,
such as the former management of the Company, Mr. and Mrs. Whitehead may be
able to control the outcome of shareholder votes, including votes concerning
the election of directors, the adoption or amendment of provisions in the
Company's certificate of incorporation or bylaws and the approval of merger
and other significant corporate transactions. This concentrated ownership
makes it unlikely that any other holder or group of holders of Common Stock
will be able to affect the way the Company is managed or the direction of its
business. These factors may also precipitate, delay or prevent a change in
the management or voting control of the Company.
RESULTS OF OPERATIONS
GENERAL TO ALL PERIODS
The Company's primary business is the exploration and development of oil and
gas interests. The Company has incurred significant losses from operations,
and there is no assurance that it will achieve profitability or obtain funds
necessary to finance its operations. Sales revenue for all periods presented
is attributable to the production of oil from the Company's Timber Draw #1-AH
well located in the Eastern Powder River Basin in the State of Wyoming,
otherwise known as the Cheyenne River Prospect.
For all periods presented, the Company's effective tax rate is 0%. The Company
has generated net operating losses since inception, which would normally
reflect a tax benefit in the statement of operations and a deferred asset on
the balance sheet. However, because of the current uncertainty as to the
Company's ability to achieve profitability, a valuation reserve has been
established that offsets the amount of any tax benefit available for each
period presented in the statements of operations.
RESTATEMENT
On November 11, 2005, the Company filed a Form 8-K with the SEC disclosing
that it would restate its previously issued financial statements for the year
ended December 31, 2003, annual and quarterly financial statements for 2004,
and quarterly financial statements for the first two quarters of 2005 after
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determining that it had erroneously accounted for its exit activities in
connection with its former office space in Canada.
In the third quarter of 2003, the Company recorded an expense for its
obligation under the lease for the period up to the balance sheet date. It
continued to record an expense of $13,200 per quarter through March 31, 2005
related to the lease (see Note 9 to the financial statements). After further
review, the Company's management determined that it should have accrued an
obligation for the lease equal to total amounts owed from the "cease use date"
(the date in January 2003 on which the Company's subtenant moved out of the
office space) through the end of the lease term. Additionally, since the lease
obligation was in Canadian dollars, the Company should have recorded a
currency exchange gain or loss on its obligation in each quarter. Based on
this analysis, the Company and its Board of Directors concluded that its
previously issued financial statements for the year ended December 31, 2003,
annual and quarterly financial statements for 2004 and quarterly financial
statements for the first two quarters of 2005 required adjustments of the
amounts previously reported for accounts payable and accrued liabilities, and
general and administrative expenses. The effect of the restatement was to
decrease the previously reported net loss by $37,055 for the year ended
December 31, 2004 and to increase the previously reported net loss by $118,817
for the year ended December 31, 2003. The restatement did not affect the net
loss per share at December 31, 2004 or 2003.
TWELVE MONTH PERIOD ENDED DECEMBER 31, 2004, COMPARED TO TWELVE MONTH PERIOD
ENDED DECEMBER 31, 2003
For the twelve months ended December 31, 2004, sales revenue decreased
$81,487 to $82,140, compared to $163,627 for the same period during 2003.
The decrease in sales revenue was the result of a decrease in production for
the Timber Draw #1-AH well, which is attributable to a limited reservoir. For
the twelve months ended December 31, 2004, sales volume decreased 4,278
barrels to 2,954 barrels, compared to 7,241 barrels for the same period in
2003. The average realized per barrel oil price increased 26.3% from $22.40
for the twelve months ended December 31, 2003 to $28.29 for the twelve months
ended December 31, 2004.
Production and operating expenses decreased $69,175 to $92,088 for the twelve
months ended December 31, 2004, from $161,263 for the same period in 2003.
This decrease was primarily attributable to lower production on the Company's
Timber Draw #1-AH well.
General and administrative expenses decreased by $198,321 to $159,262 for the
twelve months ended December 31, 2004, from $357,583 for the same period in
2003. The decrease was primarily related to the Company's accrual for the
Canadian office rent in 2003. The Company accrued $178,907 for its potential
liability related to the Canadian office lease in 2003.
Depreciation expense decreased by $1,028 to $0 for the twelve months ended
December 31, 2004, compared to the same period in 2003. There was no
depreciation expense attributable to the twelve months ended December 31,
2004, because the depreciable assets were fully depreciated.
During the twelve months ended December 31, 2003, the Company recorded a
leasehold impairment charge of $266,778 as a result of the assignment of the
leases on 42,237 acres in the Cheyenne River Prospect. There was no
comparable charge during the comparable period in 2004.
For the twelve months ended December 31, 2004, interest expense decreased
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$20,147 to $6,900 when compared to the same period in 2003. The decrease was
due to the accrual of prior interest expense on the Weatherford note in 2003.
The Company began accruing interest on the note in the third quarter of 2003,
and accrued 18 months of interest at December 31, 2003 compared to twelve
months in 2004.
For the reasons discussed above, net loss decreased $485,220 from $(676,909)
for the twelve months ended December 31, 2003, to $(191,689) for the twelve
months ended December 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As of December 31, 2004, the Company had $3,406 of cash on hand. The Company's
cash on hand will not be sufficient to fund its operations for any length of
time. During the next twelve months, the Company expects to incur costs of
approximately $10,000 per month relating to administrative, office and other
expenses. In addition, the Company's other material commitments in the next
twelve months could include payments to be made and obligations that could
arise as further described below.
The Company's former management (Messrs. McGrain and Jacobsen) entered into a
lease agreement for office space in Canada. This office was closed after
Messrs. McGrain and Jacobsen resigned as officers of the Company. This lease
agreement calls for monthly lease and tax payments of approximately $6,834
(Canadian) through April of 2006. No lease payment has been made subsequent
to December of 2002 and, in January of 2003, the Company was notified that
the lease had been terminated without prejudice to the landlord's right to
hold the Company liable for future damages related to lost rent. As of the
period ended December 31, 2004, the Company has recorded a liability of
$226,962 in its financial statements, including foreign exchange losses
relating to the lease.
As of December 31, 2004, the Company owes approximately $92,321 including
accrued interest to Weatherford U.S., L.P. for services rendered by
Weatherford.
ADVANCES FROM RELATED PARTY
The Company has had difficulty in obtaining financing from traditional
financing sources. Through December 31, 2004, the Company financed its
operations primarily through advances made to the Company by the Albert E.
Whitehead Living Trust, of which the Company's Chairman of the Board and
Chief Executive Officer, Mr. Whitehead, is the trustee. The Company believes
it is the intention of the Whitehead Trust to continue funding the Company's
basic expenses through June 30, 2005, or until such time as the Company
secures other sources of financing. However, there can be no assurance the
Whitehead Trust will continue to fund such expenses. In order to sustain the
Company's operations on a long term basis, management intends to continue to
look for merger opportunities and consider public or private financings.
During the twelve month period ended December 31, 2004, the Whitehead Trust
advanced $84,312 to the Company.
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; other exploration costs, including
geological and geophysical costs, are expensed as incurred. The application
of the successful efforts method of accounting requires management's judgment
to determine the proper designation of wells as either developmental or
exploratory, which will ultimately determine the proper accounting treatment
of the costs incurred. The results from a drilling operation can take
considerable time to analyze, and the determination that commercial reserves
have been discovered requires both judgment and application of industry
experience. Wells may be completed that are assumed to be productive and
actually deliver oil and gas in quantities insufficient to be economic, which
may result in the abandonment of the wells at a later date. The evaluation of
oil and gas leasehold acquisition costs requires management's judgment to
estimate the fair value of exploratory costs related to drilling activity in
a given area.
Impairment of unproved oil and gas properties - Capitalized drilling costs
are reviewed periodically for impairment. Costs related to impaired prospects
or unsuccessful exploratory drilling are charged to expense. Management's
assessment of the results of exploration activities, commodity price outlooks,
planned future sales or expiration of all or a portion of such leaseholds
impact the amount and timing of impairment provisions. An impairment expense
could result if oil and gas prices decline in the future as it may not be
economic to develop some of these unproved properties.
Estimates of future dismantlement, restoration, and abandonment costs -
through December 31, 2002, the Company had accounted for future abandonment
costs of wells and related facilities through its depreciation calculation in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 19, "Financial Accounting and Reporting by Oil and Gas Producing
Companies" and industry practice. The accounting for future dismantlement and
abandonment costs changed on January 1, 2003, with the adoption of SFAS No.
143 "Accounting for Asset Retirement Obligations." Under both methods of
accounting, the accrual for future dismantlement and abandonment costs is
based on estimates of these costs for each of the Company's properties based
upon the type of production structure, reservoir characteristics, depth of
the reservoir, market demand for equipment, currently available procedures
and consultations with construction and engineering consultants. Because
these costs typically extend many years into the future, estimating these
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future costs is difficult and requires management to make estimates and
judgments that are subject to future revisions based upon numerous factors,
including changing technology and the political and regulatory environment
and, beginning in 2003, estimates as to the proper discount rate to use and
timing of abandonment.
Income taxes - The Company accounts for income taxes in accordance with the
asset and liability method of accounting for income taxes set forth in SFAS
No. 109, "Accounting for Income Taxes." Under the asset and liability method
of SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to the taxable income in the years in which those
temporary differences are expected to be recovered or settled. A valuation
allowance is established if it is more likely than not that some portion of
a deferred tax asset will not be realized.
Stock options - The Company uses the intrinsic value method of accounting for
stock-based compensation in accordance with Accounting Principles Board
Opinion ("APB") No. 25. When stock options are granted, no compensation
expense is recorded. Consideration received on the exercise of the stock
options is credited to additional paid in capital. The Company applies APB
Opinion No. 25 and related interpretations in accounting for its Incentive
Plan described in footnote 4. Accordingly, no stock based employee
compensation is reflected in net earnings as all options granted had an
exercise price equal to the market value of the underlying common stock on
the date of grant.
The Company follows the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation", as amended by SFAS No. 148 "Accounting for
Stock Based Compensation - Transition and Disclosure, an Amendment of FASB
Statement No. 123." The fair value of options granted under the Incentive
Plan are estimated on the date of grant using the Black-Scholes option-
pricing model.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are set forth on pages F-1 through
F-14 at the end of this Form 10-KSB.
ITEM 8A. CONTROLS AND PROCEDURES
As of December 31, 2004, 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 the
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) concluded that the Company's disclosure controls and
procedures were effective at such time. However, prior to the date of
the filing of this Form 10-KSB/A and as a result of the Company's
decision to restate its financial statements as described under the
"Explanatory Note" in this Form 10-KSB/A above, the Company completed a
second 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 as of December 31, 2004. In connection with
this second evaluation and based upon the Company's decision to restate
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its financial statements for the fiscal year ended December 31, 2004,
the Company's Chief Executive Officer (and principal financial officer)
concluded that the Company's disclosure controls and procedures were
not effective as of December 31, 2004.
During the quarter ended December 31, 2004, there was no change in the
Company's internal controls over financial reporting that has
materially affected, or that is reasonably likely to materially affect,
the Company's internal control over financial reporting.
PART III
ITEM 13. EXHIBITS
Exhibit Description
No.
3.1 Articles of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 of the Company's Form
10-QSB for the period ended September 30, 1995, which was filed
November 6, 1995)
3.2 Bylaws of the Company
(incorporated herein by reference to Exhibit 3.2 of the Company's Form
10-QSB for the period ended March 31, 1998, which was filed May 15
1998)
10.1 1995 Stock Option Plan
(incorporated herein by reference to Appendix A of the Company's
Form DEFS 14A dated June 13, 1995, which was filed June 14, 1995)
10.2 Form of Stock Option Agreement
(incorporated herein by reference to Exhibit 10(g) of the Company's
Form 10-KSB for the year ended December 31, 1995, which was filed
March 29, 1996)
10.3 Americomm Cheyenne River Development Prospect Agreement dated March
4, 1998 by and among the Company, Fred S. Jensen, Richard A. Bate,
A. R. Briggs and Thomas L. Thompson (incorporated herein by reference
to Exhibit 10(j) of the Company's Form 10-QSB for the period ended
June 30, 1998, which was filed August 12, 1998)
10.4 Farmout Agreement dated November 15, 2000 by and among the Company and
the other parties named therein (incorporated hereby reference to
Exhibit 10(e) of the Company's Form 10-KSB for the year ended
December 31, 2000, which was filed March 29, 2001)
10.5 Share Exchange Agreement by and among Americomm Resources Corporation,
Empire Petroleum Corporation and each of the shareholders of Empire
Petroleum Corporation
(incorporated herein by reference to Exhibit 2.1 of the Company's Form
8-K dated May 29, 2001, which was filed June 5, 2001)
10.6 Promissory Note dated March 15, 2002 issued to the Albert E. Whitehead
Living Trust (incorporated herein by reference to Exhibit 10.1 of
the Company's Form 10-QSB for the period ended March 31, 2002, which
was filed May 15, 2002.
-13-
10.7 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)
10.8 Farmout Agreement dated May 7, 2004 by and among the Company and
certain other parties named therein (incorporated herein by reference
to Exhibit 10 of the Company's Form 10-QSB for the period ended
June 30, 2004, which was filed on August 2, 2004).
10.9 Assignment and Novation dated September 1, 2004 relating to the
Farmout Agreement dated May 7, 2004. (incorporated herein by
Reference in the Company's Form 10-KSB for the year ended
December 31, 2004, which was filed March 31, 2005)
31 Certification of Chief Executive Officer (and principal financial
officer) pursuant to Rules 13a - 14 (a) and 15(d) - 14(a) promulgated
under the Securities Exchange Act of 1934, as amended, and Item 601(1)
(31) of Regulation S-B, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (submitted herewith)
32 Certification of Chief Executive Officer (and principal financial
officer) pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(submitted herewith)
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Empire Petroleum Corporation
(Registrant)
Date: February 8, 2006 By: /s/Albert E. Whitehead
Albert E. Whitehead
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/Albert E. Whitehead Chairman, Chief Executive Officer February 8, 2006
Albert E. Whitehead
/s/John C. Kinard Director February 8, 2006
John C. Kinard
-14-
EMPIRE PETROLEUM CORPORATION
FINANCIAL STATEMENTS
CONTENTS
Page No.
Balance Sheet at December 31, 2004 F-2
Statements of Operations for the years ended
December 31, 2004 and December 31, 2003 F-3
Statements of Changes in Stockholders' Equity
for the years ended December 31, 2004 and
December 31, 2003 F-4
Statements of Cash Flows for the years ended
December 31, 2004 and December 31, 2003 F-5
Notes to Financial Statements F-6 through F-14
EMPIRE PETROLEUM CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 2004
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Empire Petroleum Corporation
We have audited the accompanying balance sheet of Empire Petroleum Corporation
as of December 31, 2004, and the related statements of operations, cash flows
and stockholders' equity for the years ended December 31, 2004 and 2003. 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, 2004, and the results of its operations and its cash flows
for the years ended December 31, 2004 and 2003 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has been incurring significant losses and
has a significant working capital deficiency at December 31, 2004. 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 and the ability of the Company to obtain necessary financing to
develop the interests. This condition raises substantial doubt about its
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.
As described in Note 9 to the financial statements, the 2004 and 2003
financial statements have been restated for an error in the application
of accounting principles.
/s/ TULLIUS TAYLOR SARTAIN & SARTAIN LLP
Tulsa, Oklahoma
March 22, 2005, except for Note 9,
as to which the date is
February 1, 2006
F-1
EMPIRE PETROLEUM CORPORATION
BALANCE SHEET
ASSETS December 31,
2004
Restated
___________
Current assets:
Cash $ 3,406
Accounts receivable (net of allowance
of $3,750) 9,209
___________
Total current assets 12,615
___________
Property & equipment, net of accumulated
depreciation and depletion 527,109
___________
$ 539,724
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities $ 397,701
Accounts payable to related party 214,492
Note payable 92,321
___________
Total current liabilities 704,514
___________
Total liabilities 704,514
___________
Stockholders' deficiency:
Common stock, par value $.001, 50,000,000
shares authorized, 37,830,190 shares
issued and outstanding 37,830
Additional paid in capital 8,418,135
Accumulated deficit (8,620,755)
___________
Total stockholders' deficiency (164,790)
___________
$ 539,724
===========
See accompanying notes to financial statements.
F-2
EMPIRE PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
Years ended December 31, 2004 and 2003
2004 2003
Restated Restated
___________ ___________
Revenue:
Petroleum sales $ 82,140 $ 163,627
___________ ___________
82,140 163,627
___________ ___________
Costs and expenses:
Operating expenses 92,088 161,263
General and administrative 159,262 357,583
Depreciation expense 0 1,028
Leasehold impairment 0 266,778
___________ ___________
251,350 786,652
___________ ___________
Operating loss (169,210) (623,025)
___________ ___________
Other (income) and expense:
Gain on sale of assets 0 (2,201)
Interest expense 6,900 27,047
Miscellaneous 15,579 29,038
___________ __________
Total other (income) and expense 22,479 53,884
___________ __________
Net loss before income taxes (191,689) (676,909)
Deferred tax benefit 0 0
___________ __________
Net loss $ (191,689) (676,909)
___________ __________
Net loss per common share $ (.01) $ (.02)
___________ __________
Weighted average number of
common shares outstanding -
Basic and diluted 37,830,190 34,462,942
___________ __________
See accompanying notes to financial statements
F-3
EMPIRE PETROLEUM CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2004 and 2003
Additional
Paid in Accumulated
Shares Amount Capital deficit Total
__________ _______ __________ ___________ ___________
Balances January
1, 2002 24,459,906 $24,460 $7,633,064 $(7,752,157) $( 94,633)
Net loss - - - ( 676,909) ( 676,909)
Value of services
Contributed by
Employee - - 50,000 - 50,000
Issuance of Common
Stock 13,370,284 13,370 685,071 - 698,441
__________ _______ __________ ___________ ___________
Balances December
31, 2003 37,830,190 $37,830 $8,368,135 $(8,429,066) $ (23,101)
Net loss - - - (191,689) (191,689)
Value of services
Contributed by
Employee - - 50,000 - 50,000
__________ _______ __________ ___________ ___________
Balances December
31, 2004 37,830,190 $37,830 $8,418,135 $(8,620,755) $ (164,790)
__________ _______ __________ ___________ ___________
See accompanying notes to financial statements
F-4
EMPIRE PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
Years ended December 31, 2004 and 2003
2004 2003
___________ ___________
Cash flows from operating activities:
Net loss $ (191,689) $ (676,909)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation 0 1,028
Leasehold impairment 0 266,778
Gain on sale of assets 0 (2,201)
Value of services contributed by
Employee 50,000 50,000
Change in operating assets and
liabilities:
Accounts receivable 11,853 (18,530)
Prepaid expenses 2,651 1,269
Accounts payable and accrued
liabilities 24,657 387,422
___________ ___________
Net cash provided by (used in)
operating activities (102,528) 8,857
___________ ___________
Cash flows from investing activities:
Proceeds from sale of property, plant
and equipment 0 7,311
___________ ___________
Net cash provided by investing
activities 0 7,311
___________ ___________
Cash flows from financing activities:
Proceeds of note payable-related party 84,312 0
____________ ___________
Net cash provided by financing
activities 84,312 0
____________ ___________
Net increase (decrease) in cash (18,216) 16,168
Cash - Beginning 21,622 5,454
____________ ___________
Cash - Ending $ 3,406 $ 21,622
____________ ___________
Supplemental cash flow information:
Cash paid for interest $ 0 $ 0
____________ ___________
Non-cash investing and financing
activities:
Common Stock issued for debt &
other payables $ 0 $ 498,441
Common Stock issued for leasehold
Interest $ 0 $ 200,000
____________ ___________
See accompanying notes to financial statements
F-5
EMPIRE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 and 2003
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. The Company is involved
in oil and gas exploration.
1. Continuing operations:
The continuation of the Company is dependent upon the ability of the Company
to attain future profitable operations. These financial statements have been
prepared on the basis of United States generally accepted accounting
principles applicable to a company with continuing operations, which assume
that the Company will continue in operation for the foreseeable future and
will be able to realize its assets and discharge its obligations in the
normal course of operations. Management believes the going concern assumption
to be appropriate for these financial statements. If the going concern
assumption were not appropriate for these financial statements, then
adjustments might be necessary to the carrying value of assets and
liabilities, reported expenses and the balance sheet classifications used.
The Company continues to explore and develop its oil and gas interests. 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, confirmation of the Company's interest in
the oil and gas interests, the ability of the Company to obtain necessary
financing to further develop the interests, and upon the ability to attain
future profitable production. The Company has been incurring significant
losses in recent years and has a significant working capital deficiency as of
December 31, 2004. The Company recognized an impairment charge of $266,778
in 2003 on its oil and gas property. See Note 8, Property and Equipment.
Management plans to continue to support the Company financially during the
next several months. A new exploratory well on farmed out acreage in which
the Company retained a 26.8% working interest was drilled by a third party
in the Cheyenne River Prospect during the third quarter of 2004. The well is
currently being tested and evaluated. The Company also intends to determine
the best approach to explore its Gabbs Valley Prospect in Nevada, look for
merger opportunities and consider public or private financings.
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.
F-6
(a) Capital assets:
The Company uses the successful efforts method of accounting for its oil and
gas activities. Costs incurred are deferred until exploration and completion
results are evaluated. At such time, costs of activities with economically
recoverable reserves are capitalized as proven properties, and costs of
unsuccessful or uneconomical activities are expensed.
Capitalized drilling costs are reviewed periodically for impairment. Costs
related to impaired prospects or unsuccessful exploratory drilling are charged
to expense. Management's assessment of the results of exploration activities,
commodity Price outlooks, planned future sales or expiration of all or a
portion of such Leaseholds impact the amount and timing of impairment
provisions. An impairment expense could result if oil and gas prices decline
in the future as it may not Be economic to develop some of these unproved
properties.
(b) Per share amounts:
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" requires presentation of basic earnings per share ("Basic EPS") and
diluted earnings per share ("Diluted EPS"). The computation of basic earnings
per share is computed by dividing earnings available to common stockholders
by the weighted average number of outstanding common shares during the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding
during the period. The computation of diluted EPS does not assume conversion,
exercise or contingent exercise of securities that would have an anti-dilutive
effect on losses.
(c) Income taxes:
The Company accounts for income taxes in accordance with the asset and
liability method of accounting for income taxes set forth in SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to the
taxable income in the years in which those temporary differences are expected
to be recovered or settled. A valuation allowance is established if it is more
likely than not that some portion of a deferred tax asset will not be
realized.
(d) Financial instruments:
The carrying value of current assets and current liabilities approximate their
fair value due to the relatively short period to maturity of the instruments.
(e) Stock option plan:
The Company has a stock option plan that is described in note 4 and uses the
intrinsic value method of accounting for stock-based compensation in
accordance with Accounting Principles Board Opinion ("APB") No. 25. When stock
options are granted, no compensation expense is recorded. Consideration
received on the exercise of the stock options is credited to additional paid
in capital.
F-7
The Company has adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation", as amended by SFAS No. 148
"Accounting for Stock Based Compensation - Transition and Disclosure, an
Amendment of FASB Statement No. 123."
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Incentive Plan described in footnote 4. Accordingly, no
stock based employee compensation is reflected in net earnings as all options
granted had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect
on net earnings and earnings per share if the Company had applied the fair
value recognition provisions of SFAS No. 123 to stock based employee
compensation.
2004 2003
Restated Restated
_________ ___________
Net Earnings - as reported $(191,689) $ (676,909)
Deduct: Total stock-based
compensation expense
determined under fair value
based methods for all awards,
net of related tax effects 0 (16,000)
Net Earnings - pro forma $(191,689) $ (692,909)
Earnings per share - as
reported $ (0.1) $ (0.02)
Earnings per share - pro
forma $ (0.1) $ (0.02)
The fair value of options was $.08 for options granted in 2003. No options
were granted in 2004. The fair value of options granted under the Incentive
Plan was estimated on the date of grant using the Black-Scholes option-pricing
model. The following assumptions were used for options granted in 2003: no
dividend yield, expected volatility of 209.0%, risk free interest rate of
4.25% and expected life of ten years.
(f) Obligations associated with the retirement of assets
The Company has adopted the provisions of SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 amended SFAS No. 19,
"Financial Accounting and Reporting by Oil and Gas Producing Companies," and,
among other matters, addresses financial accounting and reporting for legal
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred, with the associated asset retirement cost
capitalized as part of the related asset and allocated to expense over the
asset's useful life.
This is a change from the approach taken under SFAS No. 19, whereby an amount
for an asset retirement obligation was recognized using a cost-accumulation
measurement approach. Under that approach, the obligation was reported as a
contra-asset recognized as part of depletion and depreciation over the life of
the asset without discounting. Management has determined that adopting SFAS
No. 143 has had no significant effect on the Company's financial statements
since abandonment costs for which it is responsible are not material.
F-8
(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 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities", that provides guidance in determining when variable interest
entities should be consolidated in the financial statements of the primary
beneficiary. For the Company, the consolidation provisions of FIN 46, as
revised, are effective in fiscal years beginning after December 15, 2004. The
adoption of FIN 46 is not expected to have a material effect on the Company's
financial position or results of operations.
In December 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 153 "Exchanges of Nonmonetary Assets - An Amendment of APB
Opinion No. 29." SFAS No. 153 amends APB Opinion No. 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces
it with a general exception for exchanges of nonmonetary assets that do not
have commercial substance. SFAS No. 153 is to be applied prospectively for
nonmonetary exchanges occurring in fiscal periods beginning after June 15,
2005. The adoption of SFAS No. 153 is not expected to have a material impact
on The Company's financial position or results of operations.
Share based payments
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (FAS 123R) that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
either equity instruments of the enterprise or liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled
by the issuance of such equity instruments. The statement eliminates the
ability to account for share-based compensation transactions using the
intrinsic value method as prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and generally requires that such transactions be
accounted for using a fair-value-based method and recognized as expenses in
our statement of operations. Under the adoption options, prior periods may be
restated either as of the beginning of the year of adoption or for all periods
presented ("the retroactive method"). The prospective method requires that
compensation expense be recorded for all unvested stock options and restricted
stock at the beginning of the first quarter of adoption of FAS 123R, while the
retroactive methods would record compensation expense for all unvested stock
options and restricted stock beginning with the first period restated. The
effective date of the new standard for our financial statements is the quarter
ended March 31, 2006.
3. Conversion of notes and accounts payable:
In March, 2003, the Company converted a note payable to the Albert E.
Whitehead Living Trust of which the Company's Chief Executive Officer is
Trustee, in the amount of $170,000 plus interest due to 874,071 shares of
the Company's stock at a price of $.21 per share.
During 2003, the Albert E. Whitehead Living Trust accepted 7,966,244 shares of
the Company's common stock as payment for advances the trust had made to the
Company at the conversion rate of $.03 per share under terms of an offer made
to all creditors. The Lacy E. Whitehead Living Trust, of which the wife of the
Company's Chief Executive Officer is Trustee, and another creditor of the
F-9
Company also converted $59,045 and $16,854 in debt, respectively, to 1,968,172
and 561,797, respectively, shares of common stock as a part of the offer.
4. Stock options:
Under a stock option plan adopted in 1995, the Company may grant options for
up to 1,600,000 shares of common stock. The Board of Directors has sole
discretion for the granting of the options. Stock options granted under the
plan expire ten years from the date of grant plus 30 days. The exercise price
of the options is the fair market value on the date of grant.
A summary of the Company's Incentive Plan as of December 31, 2004 and changes
during the year is presented below:
Weighted Average
Shares Exercise Price
_________ _________________
Outstanding at Beginning of Year 2003 1,181,666 .75
Granted 0
Cancelled or Exercised (606,666) .85
__________
Outstanding at End of Year 2004 575,000 .65
========== =======
There were no options granted during the year ended December 31, 2004.
The following table summarizes information about stock options outstanding at
December 31, 2004:
Options Outstanding Options Exercisable
_________________________________________________________________
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/04 Life Price at 12/31/04 Price
____________________________________________________________________________
$0.10-$1.375 575,000 5.66 Years $0.65 575,000 $0.65
During the year ended December 31, 2003, the Company granted an option to an
employee of the Company to purchase 50,000 shares of the Company's common
stock and an option to Mr. Kinard, a member of the Board of Directors, to
purchase 150,000 shares of the Company's common stock, both of which have an
exercise price of $0.10 per share. During the year options to purchase
606,666 shares of Common Stock were relinquished.
5. 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:
F-10
Statutory tax rate 34%
___________
Expected recovery $ (78,000)
Benefit of losses not recognized 78,000
___________
Tax provision (benefit) as reported $ -
___________
The components of deferred income taxes at December 31, 2004 are as follows:
Deferred tax assets:
Loss carry-forwards $ 973,000
Valuation allowance (448,000)
___________
525,000
Deferred tax liabilities:
Property and equipment 525,000
___________
Net deferred taxes $ -
___________
At December 31, 2003, the Company had net operating loss carryforwards of
Approximately $2,860,000 which expire beginning in 2010.
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.
6. Related party transactions:
On March 15, 2002, the Albert E. Whitehead Living Trust, of which the
Company's Chief Executive Officer is Trustee, loaned the Company $170,000 in
the form of a convertible note. The note accrued interest at the rate of 10%
per year, had a one year term, and was convertible into shares of the
Company's Common Stock at the rate of $.21 per share. In February 2003, the
note was converted into common stock of the Company. During 2002, the Albert
E. Whitehead Living Trust also paid $245,181 of operating expenses on behalf
of the Company. The advance was repaid in the form of Common Stock in 2003 at
the rate of $.03 per share in an offer made to all creditors of the Company,
including the Lacy E. Whitehead Living Trust as further described in Note 4.
During 2004 and 2003, the Company's Chief Executive Officer advanced an
additional $84,312 and $130,180 respectively for operating expenses which the
Company has recorded in accounts payable to related party in the accompanying
balance sheet. See Note 3.
7. Operating lease:
The Company leases office space under operating lease agreements with
unrelated parties, which will expire in 2004 and 2006.
The future minimum lease payments under the operating leases are as follows:
2005 52,800
2006 17,600
________
$123,200
F-11
Rent expense for the years ended December 31, 2004 and 2003, respectively, was
$65,156 and $111,492.
Since December 2002, the Company has not paid the monthly lease and tax
payments of approximately $6,834 (Canadian) on the Canadian office lease
which expires in 2006. The Company has been notified that the lease has been
terminated without prejudice to the landlord's right to hold the Company
liable for future damages related to lost rent. The Company has accrued a
liability of $226,962, including foreign exchange losses, related to its
obligation under the lease terms.
The Company is in the process of negotiating renewal of its corporate office
lease in Tulsa, Oklahoma.
8. Property and equipment:
In 2002, the Company's management determined that an impairment allowance of
$6,496,614 was necessary to properly value the Company's oil and gas
properties bringing the net book value of the oil and gas properties to
$594,915. The basis for the impairment was the determination by the United
States Bureau of Land Management ("BLM") that it does not consider the Timber
Draw #1-AH well economic. In other words, under the BLM's criteria for
economic determination, the well will not pay out the cost incurred to drill
and complete the well. However, by authority of the BLM, for the period from
April to November 2003, the well was tested for production using production
periods of ten days per month. The BLM also advised the Company that since it
did not commence another test well prior to August 12, 2002, the Timber Draw
Unit had been terminated. Furthermore, a bottom hole pressure survey conducted
in April 2002 indicated a limited reservoir for the well. The basis of the
impairment described above was calculated using an estimated $10 per acre
market price for the leases multiplied by the Company's working interest.
During 2003, the Company recorded impairment charges of $266,778 based on
working interest percentages granted to a third party for performance of
certain activities and management's assessment of certain undeveloped lease
values. During 2004, pursuant to the Farmout Agreement, a third party
conducted a seismic survey and drilled a test well in the Cheyenne River
Prospect. The Company has not completed its evaluation of the test well as
of December 31, 2004.
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. The Company's other property and
equipment, totaling $20,086 at December 31, 2004, consists entirely of office
furniture, fixtures and equipment, which are fully depreciated.
9. Restatement
On November 11, 2005, the Company filed a Form 8-K with the SEC disclosing that
it would restate its previously issued financial statements for the year ended
December 31, 2003, annual and quarterly financial statements for 2004, and
quarterly financial statements for the first two quarters of 2005 after
determining that it had erroneously accounted for its exit activities in
connection with its former office space in Canada.
In the third quarter of 2003, the Company recorded an expense for its
obligation under the lease for the period up to the balance sheet date. It
continued to record an expense of $13,200 per quarter through March 31, 2005
related to the lease (see Note 7). After further review, the Company's
F-12
management determined that it should have accrued an obligation for the lease
equal to total amounts owed from the "cease use date" (the date in January
2003 on which the Company's subtenant moved out of the office space) through
the end of the lease term. Additionally, since the lease obligation was in
Canadian dollars, the Company should have recorded a currency exchange gain or
loss on its obligation in each quarter. Based on this analysis, the Company
and its Board of Directors concluded that its previously issued financial
statements for the year ended December 31, 2003, annual and quarterly
financial statements for 2004 and quarterly financial statements for the
first two quarters of 2005 required adjustments of the amounts previously
reported for accounts payable and accrued liabilities, and general and
administrative expenses. The following table summarizes the adjustments
required to previously reported amounts included in these financial statements.
Year Ended Year Ended
December 31, 2004 December 31, 2003
Previously As Previously As
Reported Restated Reported Restated
Petroleum sales 82,140 82,140 163,627 163,627
Cost & Expenses:
Production & Operation 92,088 92,088 161,263 161,263
General & Administrative 212,062 159,262 271,076 357,583
Depreciation Expense - - 1,028 1,028
Leasehold Impairment - - 266,778 266,778
__________ _______ _________ ________
304,150 251,350 700,145 786,652
__________ _______ _________ ________
Operating income (loss) (222,010) (169,210) (536,518) (623,025)
__________ _______ _________ ________
Other (income) expense:
Miscellaneous (166) 15,579 (3,272) 29,038
Gain on Sale of Assets - - (2,201) (2,201)
Interest Expense 6,900 6,900 27,047 27,047
__________ _______ _________ ________
6,734 22,479 21,574 53,884
__________ _______ _________ ________
Net loss (228,744) (191,689) (558,092) (676,909)
__________ _______ _________ ________
Net loss per share (.01) (.01) (.02) (.02)
__________ _______ _________ ________
December 31, 2004
Previously As
Reported Restated
ASSETS
Current Assets:
Cash 3,406 3,406
Accounts Receivable 9,209 9,209
_________ ________
Total Current Assets 12,615 12,615
Property, Plant & Equipment (net) 527,109 527,109
_________ ________
Total Assets 539,724 539,724
F-13
LIABILITIES & STOCKHOLDERS DEFICIENCY
Current Liabilities:
Accounts payable & accrued expenses 315,939 397,701
Accounts payable - related party 214,492 214,492
Note payable 92,321 92,321
_________ ________
Total current liabilities 622,752 704,514
_________ ________
Total liabilities 622,752 704,514
_________ ________
Stockholders' deficiency:
Common stock 37,830 37,830
Additional paid in capital 8,418,135 8,418,135
Accumulated deficit (8,538,993) (8,620,755)
_________ _________
Total stockholder's deficiency (83,028) (164,790)
_________ _________
Total liabilities and stockholders' deficiency 539,724 539,724
_________ _________
F-14
EXHIBIT 31
CERTIFICATION
I, Albert E. Whitehead, Chief Executive Officer (and principal financial
officer) of Empire Petroleum Corporation, certify that:
1. I have reviewed this annual report on Form 10-KSB of Empire Petroleum
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the small
business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the small business
issuer, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
(b) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's fourth fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the small business issuer's
internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's ability
to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial reporting.
February 8, 2006 /s/ Albert E. Whitehead
Albert E. Whitehead, Chief Executive Officer
and principal financial officer
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Empire Petroleum Corporation (the
"Company") on Form 10-KSB for the period ending December 31, 2004, 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.
February 8, 2006 /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.