10-Q 1 empire10q093003.txt ENDED 09-30-03 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2003 Commission File Number 1-10077 EMPIRE ENERGY CORPORATION -------------------------------------------- (Name of small business issuer in its charter) Utah 87-0401761 ------------------------------ -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification number) 7500 College Boulevard, Suite 507 Overland Park, KS 66210 -------------------------------------- -------- (Address of Principal Executive offices) (Zip Code) Issuer's telephone number: (913) 469-5615 Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock-Class A-50,000,000 shares authorized $.001 par value per share, 29,069,292 shares issued. Common Stock-Class B-6,750,000 shares authorized $.001 par value per share, 5,763,263 shares issued Check whether the issuer (1) has 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 ----- ----- There were 29,082,426 shares of Class A common stock $.001 par value outstanding as of November 3, 2003. There were also 1,278,102 shares of Class B common stock $.001 par value and 1,278,102 shares of paired convertible Exchangeco stock outstanding as of November 3, 2003. Documents incorporated by reference: None Transitional Small Business Format (check one); Yes ; No X ----- -----
PART I - FINANCIAL INFORMATION Item 1. Financial Statements. The Consolidated Financial Statements of the Company required to be filed with this 10-QSB Quarterly Report were prepared by management and commence on the following page, together with related Notes. In the opinion of management, the Consolidated Financial Statements present fairly the financial condition of the Company. September 30, EMPIRE ENERGY CORPORATION AND SUBSIDIARIES 2003 December 31, CONSOLIDATED BALANCE SHEET (Unaudited) 2002 --------------------------------------------------------------------------------- ASSETS Cash $ 2,814 $ 10,597 Accounts receivable 16 138 Marketable securities 1,265 1,457 ------------ ------------ Total current assets 4,095 12,192 ------------ ------------ Other Assets: Furniture and equipment, net of accumulated depreciation of $21,851 and $16,481 18,310 23,680 Deposits and other 4,176 34,176 ------------ ------------ Total other assets 22,486 57,856 ------------ ------------ Total assets $ 26,581 $ 70,048 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Liabilities: Accounts payable and accrued liabilities $ 213,019 $ 534,847 Account Payable - related party 42,064 -- Income taxes payable 72,861 72,861 Note payable 34,785 34,785 Notes payable - related party -- 100,895 ------------ ------------ Total current liabilities 362,729 743,388 ------------ ------------ Commitments and Contingencies Stockholders' Deficit Common stock, authorized 50,000,000 shares of $.001 par value, issued and outstanding 29,069,292, and 23,427,052 29,069 23,427 "Paired" convertible stock, issued and outstanding 1,291,236 and 1,378,016 units 1,292 1,378 Additional paid in capital 33,007,596 32,458,523 Accumulated other comprehensive loss ( 9,581) ( 9,389) Accumulated deficit (33,364,524) (33,147,279) ------------ ------------ Total stockholders' deficit ( 336,148) ( 673,340) ------------ ------------ Total liabilities and stockholders' deficit $ 26,581 $ 70,048 ============ ============
EMPIRE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) -------------------------------------------------------------------------------- For The Three Months Ended September 30, 2003 and 2002 -------------------------------------------------------------------------------- 2003 2002 ------------ ------------ Oil and gas sales $ -- $ 17,623 Expenses: Lease operating -- 11,171 Production and Ad Valorem taxes -- 2,067 Depreciation, depletion, amortization and impairment 1,508 52,313 Stock based compensation -- 172,500 General and administrative 67,763 65,730 Gain on the settlement of payables -- -- Gain on sale of properties -- -- ------------ ------------ Total expenses 69,271 303,781 ------------ ------------ Operating loss (69,271) (286,158) Other income (expense): Interest, net (1,687) (5,870) Other income -- 1,453 ------------ ------------ Net loss before taxes (70,958) (290,575) Provision for income taxes -- -- ------------ ------------ Net loss $ (70,958) $ (290,575) ============ ============ Basic and diluted loss per share $ (0.00) $ (0.01) ============ ============ Weighted average shares outstanding 29,024,730 22,166,976 ============ ============ EMPIRE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) -------------------------------------------------------------------------------- For The Nine Months Ended September 30, 2003 and 2002 -------------------------------------------------------------------------------- 2003 2002 ------------ ------------ Oil and gas sales $ -- $ 64,131 Expenses: Lease operating 10,000 51,454 Production and Ad Valorem taxes -- 4,521 Depreciation, depletion, amortization and impairment 5,371 7,885,164 Stock based compensation 83,500 204,474 General and administrative 177,932 311,000 Gain on the settlement of payables (46,757) -- Gain on sale of properties (23,814) -- ------------ ------------ Total expenses 206,232 8,456,613 ------------ ------------ Operating loss (206,232) (8,392,482) Other income (expense): Interest, net (11,013) (14,140) Other income -- 26,415 ------------ ------------ Net loss before taxes (217,245) (8,380,207) Provision for income taxes -- -- ------------ ------------ Net loss $ (217,245) $ (8,380,207) ============ ============ Basic and diluted loss per share $ (0.01) $ (0.39) ============ ============ Weighted average shares outstanding 25,457,409 21,303,636 ============ ============
EMPIRE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ---------------------------------------------------------------------------------- For The Nine Months Ended September 30, 2003 and 2002 ---------------------------------------------------------------------------------- 2003 2002 ----------- ----------- Cash Flows From Operating Activities: Net loss $ (217,245) $(8,380,207) Adjustments to reconcile net loss to net cash used in operating activities: Common stock issued for expenses 83,500 -- Treasury stock issued for services -- 172,500 Stock options issued for services -- 31,974 Depreciation, depletion, amortization and impairment 5,370 7,885,164 Gain on sale of properties (23,814) -- Gain on settlement of accounts payable (46,757) -- Changes in current assets and liabilities: Accounts receivable 122 (9,753) Accounts receivable - related parties -- (13,500) Accounts payable - related parties 42,064 -- Accounts payable and accrued liabilities 54,977 298 ----------- ----------- Net cash used in operating activities (101,783) (313,524) ----------- ----------- Cash flows from investing activities: Purchase of oil and gas properties -- (3,492) Sale of oil and gas properties 12,500 235,111 Decrease in deposits and other assets 30,000 11,968 ----------- ----------- Net cash provided by investing activities 42,500 243,587 ----------- ----------- Cash flows from financing activities: Proceeds from notes payable -- 38,981 Payments on notes payables -- (4,196) Payments on notes payable-related parties (20,000) -- Proceeds on notes payable-related parties 1,500 -- Proceeds from the issuance of common stock 70,000 14,000 ----------- ----------- Net cash provided by financing activities 51,500 48,785 ----------- ----------- Net increase (decrease) in cash (7,783) (21,152) Cash, beginning of period 10,597 24,973 ----------- ----------- Cash, end of period $ 2,814 $ 3,821 =========== =========== Supplemental Disclosure Of Non-Cash Investing And Financing Activities Accounts payable converted to notes payable $ -- $ 38,981 Stock issued for payables 111,000 -- Stock issued for payables-related parties 200,667 -- Stock issued for notes payable-related party and related accrued interest 89,428 -- Assets acquired for stock and accrued cost -- 2,400 Issuance of notes payable-related parties for payment of accounts payable -- 121,000
EMPIRE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 1. INTERIM REPORTING The consolidated financial statements of Empire Energy Corporation and Subsidiaries (the "Company") reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the interim periods presented. All adjustments to the consolidated financial statements were of a normal, recurring nature. The information included in this Quarterly Report on Form 10-QSB should be read in conjunction with Management's Discussion and Analysis and the consolidated financial statements with related notes included in the Company's Annual Report on Form 10-KSB/A for the year ended December 31, 2002. Basis of Presentation The consolidated financial statements include the accounts of Empire Energy Corporation and its wholly-owned subsidiaries Empire Exchangeco Ltd., Commonwealth Energy (USA), Blue Mountain Resources, and Alberta 638260. All significant intercompany balances and transactions have been eliminated in consolidation. Stock-Based Employee Compensation - The Company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB25) and related interpretations in accounting for its stock-based compensation awards. Under APB 25, no stock-based compensation expense was charged to earnings, as all options granted had an exercise price equal to or greater than the adjusted fair value of the underlying common stock on the grant date. Alternately, Statement on Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No.123), allows companies to recognize compensation expense over the related service period based on the grant date fair value of the stock option awards. The following table illustrates the effect on net income and basic income (loss) per common share if the Company had applied the fair value recognition provisions of SFAS No.123 to stock-based employee compensation: For the Three Months For the Nine Months Ended September 30, Ended September 30, ----------------------- --------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Net loss, as reported $(70,958) $(290,575) $(217,245) $(8,380,207) Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects - - (59,769) - ----------------------------------------------------------------------------------------- Pro Forma Net Loss $(70,958) $(290,575) $(277,014) $(8,380,207) Income (Loss) per Common Share Basic, as reported $ (0.00) $ (0.01) $ (0.01) $ (0.39) Basic, pro forma $ (0.00) $ (0.01) $ (0.01) $ (0.39) 2. STOCKHOLDERS' EQUITY During the quarter ended September 30, 2003, the Company entered into the following stock transactions: o 69,500 shares were issued to settle vendor accounts payable of $6,950 based on a stock price of $0.10 o 22,500 shares were issued to a related party for accrued interest of $2,500 based on a stock price of $0.10 o 46,914 shares of "paired" convertible stock were converted to common stock.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. During 2002, the Board of Directors approved a change in the Company's direction, because of significant operating losses, continued cash flow challenges, its depressed stock price, and the inability to raise either debt or equity capital. The Company adopted a plan to dispose of assets to reduce liabilities and merge with a company that would be beneficial to the stockholders. As of September 30, 2003, the Company has disposed of the major portion of the oil and gas properties and is currently in the process of disposing of the remainder. In order to resolve the remaining liabilities and provide the stockholders with an opportunity to participate in a potential major oil and gas exploration project the Board of Directors, on July 15, 2002, unanimously approved the terms and conditions for the acquisition of Great South Land Minerals, Ltd. (GSLM), as established in the Letter of Intent dated July 9, 2002 and amended on December 10, 2002, May 1, 2003, and October 16, 2003. GSLM is an oil & gas exploration firm headquartered in Hobart,Tasmania (Australia). The final closing of the transaction is subject to shareholder approval. The terms of the transaction include the implementation of a 1 for 10 reverse-split of the Corporation's stock prior to the closing. Prior to the merger and the reverse stock split Empire will have 31,000,000 total shares outstanding. Empire will acquire all of the issued and outstanding common stock of GSLM in exchange for 58.9 million shares of restricted common stock. Prior to closing, Empire will form a wholly-owned subsidiary and transfer all rights and ownership interest in Industria Oklahoma-Nicaragua, S.A., now held by the Corporation, to that subsidiary which will then be distributed to Empire shareholders. All other assets will either be sold prior to closing or will be assigned to Norman Peterson, the current CEO of Empire. Mr. Peterson has agreed to assume the remaining liabilities in exchange for 639,472 Empire shares prior to the reverse split. The current Board of Directors of the Corporation will tender their resignations and, pursuant to shareholder approval, be replaced by representatives of GSLM. In order to make the corporate structure changes required to complete the GSLM merger the Company filed a Preliminary Proxy Statement for shareholder approval with the SEC on January 14, 2003. The SEC reviewed the proxy and advised the Company that we need to revise the proxy to include additional information. The Company and GSLM are in the process of preparing the information requested by the SEC and upon SEC approval the proxy will be submitted to a vote by the stockholders. If the merger with GSLM is not completed, the Company will continue to pursue other merger candidates and business arrangements that will resolve the current liabilities and increase the value of the Company. No assurances can be given that the Company will be successful in implementing these plans or completing the merger with GSLM. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Results of Operations During the quarter ended September 30, 2003, the Company generated $0 in revenue from the sale of oil and gas from its wells and incurred $0 in lease operating expense and $0 of production and Ad Valorem taxes. The Company generated a loss from oil and gas activities of $69,271 after deducting $1,508 of depreciation expense and $67,763 in general operating expenses. General & administrative expenses include non-cash expenses of accrued salaries and other accruals of $31,442. During the quarter ended September 30, 2002 the Company generated $17,623 in revenue from the sale of oil and gas from its wells and incurred $11,171 in lease operating expense and $2,067 of production and Ad Valorem taxes related to these wells. The Company generated a loss from oil and gas activities of $286,158 after deducting $52,313 in depletion, depreciation and impairment expense from oil properties and $65,730 in general and administrative expenses and $172,500 of stock based compensation. Overall, the Company reported a net loss of $70,958 for the quarter ended September 30, 2003, and a net loss of $290,575 for the quarter ended September 30, 2002. Liquidity and Capital Resources On September 30, 2003, the Company had $4,095 in cash, accounts receivable and marketable securities and $362,729 in total liabilities. The liabilities include $34,785 of notes payable. Net cash used in operating activities for the nine months ended September 30, 2003 was $101,783 compared to $313,524 for the nine months ended September 30, 2002. Net cash provided by investing activities was $42,500 for the nine months ended September 30, 2003 and net cash provided by investing activities was $243,587 for the nine months ended September 30, 2002. Net cash provided by financing activities was $51,500 for the nine months ended September 30, 2003 compared to $48,785 for the nine months ended September 30, 2002. Since the Company has incurred significant operating losses, continued cash flow challenges, its depressed stock price, and the inability to raise either debt or equity capital the Board of Directors approved a change in the Company's direction during 2002. The Company adopted a plan to dispose of assets to reduce liabilities and merge with a company that would be beneficial to the stockholders. As of September 30, 2003, the Company has disposed of the major portion of the oil and gas properties and is currently in the process of disposing of the remainder. Even though the sales proceeds are used to reduce liabilities they will not be sufficient to dispose of all the liabilities In order to resolve the remaining liabilities and provide the stockholders with an opportunity to participate in a potential major oil and gas exploration project the Board of Directors, on July 15, 2002, unanimously approved the terms and conditions for the acquisition of Great South Land Minerals, Ltd. (GSLM), as established in the Letter of Intent dated July 9, 2002 and amended on December 10, 2002, May 1, 2003 and October 16, 2003. GSLM is an oil & gas exploration firm headquartered in Hobart, Tasmania (Australia). The final closing of the transaction is subject to shareholder approval. The terms of the transaction include the implementation of a 1 for 10 reverse-split of the Corporation's stock prior to the closing. Prior to the merger and the reverse-stock split Empire will have 31,000,000 total shares outstanding. Empire will acquire all of the issued and outstanding common stock of GSLM in exchange for 58.9 million shares of restricted common stock. Prior to closing, Empire will form a wholly-owned subsidiary and transfer all rights and ownership interest in Industria Oklahoma-Nicaragua, S.A., now held by the Corporation, to that subsidiary which will then be distributed to Empire shareholders. All other assets will either be sold prior to closing or will be assigned to Norman Peterson, the current CEO of Empire. Mr. Peterson has agreed to assume the remaining liabilities in exchange for 639,472 Empire shares prior to the reverse split. The current Board of Directors of the Corporation will tender their resignations and, pursuant to shareholder approval, be replaced by representatives of GSLM. In order to make the corporate structure changes required to complete the GSLM merger the Company filed a Preliminary Proxy Statement for shareholder approval with the SEC on January 14, 2003. The SEC reviewed the proxy and advised the Company that we need to revise the proxy to include additional information. The Company and GSLM are in the process of preparing the information requested by the SEC and upon SEC approval the proxy will be submitted to a vote by the stockholders. Although management believes the GSLM merger will be completed there is no guarantee that this transaction will close. If the merger with GSLM is not completed, the Company will continue to pursue other merger candidates and business arrangements that will resolve the current liabilities and increase the value of the Company. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Description of Property Wyoming: Converse and Weston Counties: The Company has an estimated 1,200 net acres of mineral leases in the Powder River Basin in Wyoming. The Company believes that this acreage holds oil production potential but has not been able to interest investors to participate in a drilling program. Nicaraguan Exploration Activities: The Company owns 50.5% of Industria Oklahoma-Nicaragua, S.A. ("ION"), a Nicaraguan subsidiary which has been pre-qualified in that country, allowing the right to participate in the bidding process for tracts of land to be used for oil and gas exploration. During the fourth quarter of 2002, the bidding process was initiated and the CEO of ION demanded that Empire fund the bidding cost for certain tracts and the cost to drill the first well. The Company requested copies of the bid package and other related information but did not receive the data. Without this information the Company does not believe it was required to make such funding under the terms of the agreement and as a result notified the ION CEO of our position. The ION CEO continued with the bidding process and was successful on certain tracts. The scheduled time to negotiate the actual drilling of wells with the Nicaraguan representatives will begin in the fall of 2003. A lawsuit was filed by Industria Oklahoma-Nicaragua, S.A. ("ION") alleging that the Company has not fulfilled their responsibilities related to this project and therefore does not have any ownership in ION. The Company has filed a counterclaim to obtain the stock certificates in ION. The Company believes that there is the possibility for commercial oil production in Nicaragua. Data suggests the presence of source rocks within the appropriate thermal window, vertical migration pathways and adequate host and cap rock structures, all necessary ingredients for an oil and gas pool. Further evidence includes the surface manifestation of this oil by virtue of the live oil seeps that Company geologists have observed on the surface in Nicaragua. Present Activities: The Company is currently completing the Amended Preliminary Proxy Statement that will facilitate the merger with GSLM. PART II - OTHER INFORMATION Item 1. Legal Proceedings. The Company is currently involved in litigation with Industria Oklahoma-Nicaragua, S.A., and Oklahoma Nicaragua, L.L.C. Refer to second quarter 2003 Form 10 QSB for additional information. The Company is also involved in litigation with Moylan Construction Company and the Parker County Texas Appraisal District. Refer to the 2002 Annual Report on Form 10-KSB/A for additional information. With the exception of the Industria Oklahoma-Nicaragua, S.A. claim, the Company's intent is to settle as many lawsuits as possible by issuing Empire stock. The Company is not certain that all claims can be settled with stock and does not have the resources to settle claims with other assets. The Company anticipates that remaining claims would be resolved under the terms of the GSLM merger. While the Company believes the GSLM merger will be completed there is no assurance that the merger will actually be completed. Item 3. Controls and Procedures The Company's Chief Executive Officer have concluded, based on an evaluation conducted within 90 days prior to the filing date of this Quarterly Report on Form 10-QSB, that the Company's disclosure controls and procedures have functioned effectively so as to provide those officers the information necessary whether: (i) this Quarterly Report on Form 10-QSB contains any untrue statement of a material fact or omits 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 Quarterly Report on Form 10-QSB, and (ii) the financial statements, and other financial information included in this Quarterly Report on Form 10- QSB, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Quarterly Report on Form 10-QSB. There have been no significant changes in the Company's internal controls or in other factors since the date of the Chief Executive Officer's evaluation that could significantly affect these internal controls, including any corrective actions with regards to significant deficiencies and material weaknesses. Item 5. Other Information On July 1, 2003 John Dixon resigned as director. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 99.1 Certification (b) Reports on Form 8-K: None 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 Energy Corporation By: /s/ Norman L. Peterson -------------------------------- Norman L. Peterson Chairman and Principal Executive Officer CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Norman Peterson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Empire Energy Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 10, 2003 By: /s/ Norman L. Peterson -------------------------------- Norman L. Peterson Chairman, CEO and Principal Financial Officer