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EX-32 - EX 32.2 CERTIFICATIONS - EMPIRE ENERGY CORPempire10q093009ex322.htm
EX-31 - EX 31.2 CERTIFICATIONS - EMPIRE ENERGY CORPempire10q093009ex312.htm
EX-32 - EX 32.1 CERTIFICATIONS - EMPIRE ENERGY CORPempire10q093009ex321.htm
EX-31 - EX 31.1 CERTIFICATIONS - EMPIRE ENERGY CORPempire10q093009ex311.htm

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________

 

FORM 10-Q

_________________________________________

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES AND EXCHANGE ACT OF 1934


For the quarterly period ended: September 30, 2009


Commission File Number: 1-10077

___________________________________________

 

EMPIRE ENERGY CORPORATION INTERNATIONAL

(Exact name of small business issuer as specified in its charter)


  

Nevada

 

87-0401761

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification number)

 

 

 

 

4500 College Blvd, Suite 240, Leawood, KS

 

66211

(Address of Principal Executive offices)

 

(Zip Code)


Issuer’s telephone number: (913) 663-2310

_________________________________________________

 

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  ¨


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨

  

Accelerated filer  ¨

Non-accelerated filer  ¨

  

Smaller reporting company  x


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x


The issuer had 278,543,190 shares of its Class A Common Stock issued and outstanding, 100,607 shares of its Class B Common Stock issued and outstanding, and 100,607 shares of paired convertible Exchange shares issued and outstanding as of November 15, 2009, the latest practicable date before the filing of this report.


Transitional Small Business Format (check one);    Yes  ¨    No  x

 

 



1




PART I—FINANCIAL INFORMATION


Forward-Looking Statements


This report on Form 10-Q contains forward-looking statements that concern our business. Such statements are not guarantees of future performance and actual results or developments could differ materially from those expressed or implied in such statements as a result of certain factors, including those factors set forth in Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report. All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect, believe, intend or anticipate will or may occur in the future, including the Company’s ability to successfully maintain its existence while it identifies potential business opportunities, are forward looking statements.


These statements are based on certain assumptions and analyses made by us in light of our experience and our product research. Such statements are subject to a number of assumptions including the following:


 

 

 

ability to obtain financing on favorable conditions;

 

 

 

the likelihood of success of the business opportunity that we are pursuing;

 

 

 

risks and uncertainties;

 

 

 

general economic and business conditions; and

 

 

 

changes in laws or regulations and other factors, many of which are beyond our control.


The cautionary statements contained or referred to in this report should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.



2



Item 1.

Financial Statements.


EMPIRE ENERGY CORPORATION INTERNATIONAL

(an exploration stage company)

CONSOLIDATED BALANCE SHEETS

 (UNAUDITED)

 

 

  

September 30,

 

 

December 31,

 

 

  

2009

 

 

2008

 

ASSETS

  

 

 

 

 

 

 

 

CURRENT ASSETS

  

 

 

 

 

 

 

 

Cash and cash equivalents

  

$

1,227

 

 

$

53,885

 

Receivables

  

 

2,239

 

 

 

12,785

 

Prepayments and other current assets

  

 

17,252

 

 

 

2,123,416

 

 

  

 

 

 

 

 

 

 

TOTAL CURRENT ASSETS

  

 

20,718

 

 

 

2,190,086

 

 

  

 

 

 

 

 

 

 

MARKETABLE SECURITIES

  

 

—  

 

 

 

1,152,638

 

NOTE RECEIVABLE

 

 

—  

 

 

 

523,821

 

OIL AND GAS PROPERTIES UNDER DEVELOPMENT

 

 

9,352,851

 

 

 

4,441,716

 

PROPERTY AND EQUIPMENT, NET

  

 

92,973

 

 

 

170,427

 

DEPOSITS

 

 

65,468

 

 

 

—  

 

 

  

 

 

 

 

 

 

 

TOTAL ASSETS

  

$

9,532,010

 

 

$

8,478,688

 

 

  

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

  

 

 

 

 

 

 

 

CURRENT LIABILITIES

  

 

 

 

 

 

 

 

Trade and other payables

  

$

4,501,665

 

 

$

2,348,354

 

Trade and other payables—related party

 

 

1,013,080

 

 

 

570,419

 

Short term debt

  

 

3,633,658

 

 

 

44,437

 

Short term debt—related party

 

 

1,036,300

 

 

 

2,305,502

 

Accrued interest payable

  

 

315,000

 

 

 

247,500

 

 

  

 

 

 

 

 

 

 

TOTAL CURRENT LIABILITIES

  

 

10,499, 703

 

 

 

5,516,212

 

 

  

 

 

 

 

 

 

 

NOTES PAYABLE

  

 

1,160,199

 

 

 

4,183,910

 

 

  

 

 

 

 

 

 

 

TOTAL LIABILITIES

  

 

11,659,902

 

 

 

9,700,122

 

 

  

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

  

 

—  

 

 

 

—  

 

 

  

 

 

 

 

 

 

 

STOCKHOLDERS’ DEFICIT

  

 

 

 

 

 

 

 

Class A Common stock, (599,000,000 authorized) issued with a par value of $0.001, 278,543,190 and 267,215,423 shares issued and outstanding respectively

  

 

278,543

 

 

 

267,215

 

Class B Common stock, (1,000,000 authorized) issued with a par value of $0.001, 100,607 and 100,874 shares issued and outstanding respectively

  

 

101

 

 

 

101

 

Additional paid-in capital

  

 

34,378,321

 

 

 

33,108,372

 

Deficit accumulated during the exploration stage

  

 

(37,229,610)

 

 

 

(33,015,864)

 

Accumulated other comprehensive income (loss)

  

 

444,753

 

 

 

(1,581,258)

 

 

 

 

 

 

 

 

 

 

TOTAL STOCKHOLDERS’ DEFICIT

  

 

(2,127,892)

 

 

 

(1,221,434)

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

  

$

9,532,010

 

 

$

8,478,688

 

 

  

 

 

 

 

 

 

 

See summary of significant accounting policies and notes to consolidated financial statements

 



3



EMPIRE ENERGY CORPORATION INTERNATIONAL

(an exploration stage company)

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended September 30, 2009 and 2008

(UNAUDITED)

 

 

  

Three Months Ended
September 30, 2009

 

 

Three Months Ended
September 30, 2008

(Restated)

 

 

 

 

TOTAL REVENUES

  

$

—  

 

 

$

—  

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES

  

 

 

 

 

 

 

 

 

 

 

 

Selling, general & administrative

  

 

688,898

 

 

 

759,797

 

 

 

 

 

Exploration costs

  

 

7,639

 

 

 

59,859

 

 

 

 

 

TOTAL COSTS AND EXPENSES

  

 

696,537

 

 

 

819,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

  

 

(696,537)

 

 

 

(819,656)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

  

 

 

 

 

 

 

 

 

 

 

 

Foreign currency transaction gains (losses)

 

 

(291,978)

 

 

 

—  

 

 

 

 

 

Other income

  

 

93,543

 

 

 

—  

 

 

 

 

 

Interest (expense)

  

 

(119,379)

 

 

 

(80,408)

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

LOSS BEFORE INCOME TAXES

  

 

(1,014,351)

 

 

 

(900,064)

 

 

 

 

 

INCOME TAXES

  

 

—  

 

 

 

—  

 

 

 

 

 

NET LOSS FROM CONTINUING OPERATIONS

  

 

(1,014,351)

 

 

 

(900,064)

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES

 

 

—  

 

 

 

1,017

 

 

 

 

 

NET LOSS

 

$

(1,014,351)

 

 

$

(899,047)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS PER COMMON SHARE:

  

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share from continuing operations

  

$

(0.00)

 

 

$

(0.00)

 

 

 

 

 

Basic and diluted loss per share from discontinued operations

 

 

(0.00)

 

 

 

(0.00)

 

 

 

 

 

Basic and diluted loss per share

 

$

(0.00)

 

 

$

(0.00)

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:

  

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

  

 

278,543,190

 

 

 

233,170,150

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

See summary of significant accounting policies and notes to consolidated financial statements

 



4



EMPIRE ENERGY CORPORATION INTERNATIONAL

(an exploration stage company)

CONSOLIDATED STATEMENTS OF OPERATIONS

Nine Months Ended September 30, 2009 and 2008 and from March 15, 1995 (Inception) to September 30, 2009

(Unaudited)

 

 

  

Nine Months Ended
September 30, 2009

 

Nine Months Ended
September 30, 2008

(Restated)

 

March 15, 1995
(Inception) to
September 30, 2009

TOTAL REVENUES

  

$

—  

 

$

—  

 

$

—  

 

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

Selling, general & administrative

  

 

2,490,960

 

 

4,254,672

 

 

23,544,476

Exploration costs

  

 

32,261

 

 

101,070

 

 

9,295,307

TOTAL COSTS AND EXPENSES

  

 

2,523,221

 

 

4,355,742

 

 

32,839,783

 

 

 

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

  

 

(2,523,221)

 

 

(4,355,742)

 

 

(32,839,783)

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

  

 

 

 

 

 

 

 

 

Realized gain on marketable securities and note receivable

  

 

1,443,403

 

 

—  

 

 

1,496,459

Impairment loss on marketable securities

  

 

(1,276,667)

 

 

—  

 

 

(1,277,336)

Foreign currency transaction gains (losses)

 

 

(794,925)

 

 

—  

 

 

131,679

Loss on extinguishments of debt

 

 

(610,326)

 

 

—  

 

 

(610,326)

Loss on equity investment

 

 

(100,000)

 

 

—  

 

 

(829,000)

Other income

  

 

205,553

 

 

—  

 

 

362,360

Interest (expense)

  

 

(557,563)

 

 

(488,382)

 

 

(3,643,181)

 

  

 

 

 

 

 

 

 

 

LOSS BEFORE INCOME TAXES

  

 

(4,213,746)

 

 

(4,844,124)

 

 

(37,209,128)

INCOME TAXES

  

 

—  

 

 

—  

 

 

—  

NET LOSS FROM CONTINUING OPERATIONS

 

 

(4,213,746)

 

 

(4,844,124)

 

 

(37,209,128)

GAIN (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES

 

 

—  

 

 

73,476

 

 

(20,476)

 

 

 

 

 

 

 

 

 

 

NET LOSS

  

$

(4,213,746)

 

$

(4,770,648)

 

$

(37,229,604)

 

  

 

 

 

 

 

 

 

 

NET LOSS PER COMMON SHARE:

  

 

 

 

 

 

 

 

 

       Basic and diluted loss per share from continuing   operations

  

$

(0.02)

 

$

(0.02)

 

 

 

       Basic and diluted loss per share from discontinued  operations

 

 

(0.00)

 

 

(0.00)

 

 

 

       Basic and diluted loss per share

 

$

(0.02)

 

$

(0.02)

 

 

 

 

  

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:

  

 

 

 

 

 

 

 

 

       Basic and diluted

  

 

276,082,421

 

 

218,810,543

 

 

 

 

  

 

 

 

 

 

 

 

 

See summary of significant accounting policies and notes to consolidated financial statements

 




5



EMPIRE ENERGY CORPORATION INTERNATIONAL

(an exploration stage company)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Period From March 1995 (Inception) Through September 30, 2009

(UNAUDITED)

 

 

  

Common

  

Stock - A

  

Common

  

Stock - B

  

Additional
Paid-In
Capital

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Deficit
Accumulated
during the
Exploration
Stage

 

 

Total
Stockholders’
Equity (Deficit)

 

 

  

No

  

$

  

No

  

$

  

$

 

 

$

 

 

$

 

 

$

 

Balance at March 15, 1995

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

—  

 

 

—  

 

 

—  

 

Reverse Acquisition of GSLM

  

8,747,012

  

8,747

  

105,857

  

106

  

(8,853)

 

 

—  

 

 

—  

 

 

—  

 

Issuance of common stock: cash

  

1,000

  

1

  

—  

  

—  

  

745

 

 

—  

 

 

—  

 

 

746

 

Net loss

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

—  

 

 

—  

 

 

—  

 

 

  

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 1996

  

8,748,012

  

8,748

  

105,857

  

106

  

(8,108)

 

 

—  

 

 

—  

 

 

746

 

Issuance of common stock: cash

  

59,000

  

59

  

—  

  

—  

  

53,977

 

 

—  

 

 

—  

 

 

54,036

 

Issuance of common stock: share premium

  

—  

  

—  

  

—  

  

—  

  

391,761

 

 

—  

 

 

—  

 

 

391,761

 

Net loss

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

—  

 

 

(477,078)

 

 

(477,078)

 

Foreign currency translations

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

24,122

 

 

—  

 

 

24,122

 

 

  

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 1997

  

8,807,012

  

8,807

  

105,857

  

106

  

437,630

 

 

24,122

 

 

(477,078)

 

 

(6,413)

 

Issuance of common stock: cash

  

138,688

  

139

  

—  

  

—  

  

86,318

 

 

—  

 

 

—  

 

 

86,457

 

Issuance of common stock: share premium

  

—  

  

—  

  

—  

  

—  

  

857,737

 

 

—  

 

 

—  

 

 

857,737

 

Net loss

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

—  

 

 

(1,247,314)

 

 

(1,247,314)

 

Foreign currency translations

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

185,864

 

 

—  

 

 

185,864

 

 

  

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 1998

  

8,945,700

  

8,946

  

105,857

  

106

  

1,381,685

 

 

209,986

 

 

(1,724,392)

 

 

(123,669)

 

Issuance of common stock: cash

  

69,581

  

70

  

—  

  

—  

  

328,899

 

 

—  

 

 

—  

 

 

328,969

 

Net loss

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

—  

 

 

(267,403)

 

 

(267,403)

 

Foreign currency translations

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

(106,064)

 

 

—  

 

 

(106,064)

 

 

  

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 1999

  

9,015,281

  

9,016

  

105,857

  

106

  

1,710,584

 

 

103,922

 

 

(1,991,795)

 

 

(168,167)

 

Issuance of common stock: cash

  

35,971

  

36

  

—  

  

—  

  

137,205

 

 

—  

 

 

—  

 

 

137,241

 

Issuance of common stock: services

  

23,214

  

23

  

—  

  

—  

  

151,099

 

 

—  

 

 

—  

 

 

151,122

 

Net loss

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

—  

 

 

(186,666)

 

 

(186,666)

 

Foreign currency translations

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

22,585

 

 

—  

 

 

22,585

 

 

  

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2000

  

9,074,466

  

9,075

  

105,857

  

106

  

1,998,888

 

 

126,507

 

 

(2,178,461)

 

 

(43,885)

 

See summary of significant accounting policies and notes to consolidated financial statements

 



6



EMPIRE ENERGY CORPORATION INTERNATIONAL

(an exploration stage company)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Period From March 1995 (Inception) Through September 30, 2009

(UNAUDITED)

 

 

  

Common

  

Stock - A

  

Common

  

Stock - B

  

Additional
Paid-In
Capital

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Deficit
Accumulated
during the
Exploration
Stage

 

 

Total
Stockholders’
Equity (Deficit)

 

 

  

No

  

$

  

No

  

$

  

$

 

 

$

 

 

$

 

 

$

 

Balance at July 1, 2000

  

9,074,466

  

9,075

  

105,857

  

106

  

1,998,888

 

 

126,507

 

 

(2,178,461)

 

 

(43,885)

 

Issuance of common stock: cash

  

348,214

  

348

  

—  

  

—  

  

1,174,477

 

 

—  

 

 

—  

 

 

1,174,825

 

Issuance of common stock: services

  

23,317

  

23

  

—  

  

—  

  

67,863

 

 

—  

 

 

—  

 

 

67,886

 

Issuance of common stock: bonus issue

  

51,911,055

  

51,911

  

—  

  

—  

  

(51,911)

 

 

—  

 

 

—  

 

 

—  

 

Net loss

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

—  

 

 

(1,767,759)

 

 

(1,767,759)

 

Foreign currency translations

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

73,133

 

 

—  

 

 

73,133

 

 

  

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2001

  

61,357,052

  

61,357

  

105,857

  

106

  

3,189,317

 

 

199,640

 

 

(3,946,220)

 

 

(495,800)

 

Issuance of common stock: cash

  

609,000

  

609

  

—  

  

—  

  

590,642

 

 

—  

 

 

—  

 

 

591,251

 

Issuance of common stock: services

  

3,955,125

  

3,955

  

—  

  

—  

  

530,778

 

 

—  

 

 

—  

 

 

534,733

 

Stock issuance costs

  

—  

  

—  

  

—  

  

—  

  

(44,109)

 

 

—  

 

 

—  

 

 

(44,109)

 

Net loss

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

—  

 

 

(1,382,217)

 

 

(1,382,217)

 

Foreign currency translations

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

(83,949)

 

 

—  

 

 

(83,949)

 

 

  

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2002

  

65,921,177

  

65,921

  

105,857

  

106

  

4,266,628

 

 

115,691

 

 

(5,328,437)

 

 

(880,091)

 

Issuance of common stock: cash

  

1,028,764

  

1,029

  

—  

  

—  

  

607,613

 

 

—  

 

 

—  

 

 

608,642

 

Issuance of common stock: services

  

3,955,125

  

3,955

  

—  

  

—  

  

2,119,156

 

 

—  

 

 

—  

 

 

2,123,111

 

Stock issuance costs

  

—  

  

—  

  

—  

  

—  

  

(286,040)

 

 

—  

 

 

—  

 

 

(286,040)

 

Net loss

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

—  

 

 

(2,901,629)

 

 

(2,901,629)

 

Foreign currency translations

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

(233,528)

 

 

—  

 

 

(233,528)

 

 

  

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2003

  

70,905,066

  

70,905

  

105,857

  

106

  

6,707,357

 

 

(117,837)

 

 

(8,230,066)

 

 

(1,569,535)

 

Issuance of common stock: cash

  

246,800

  

247

  

—  

  

—  

  

159,926

 

 

—  

 

 

—  

 

 

160,173

 

Issuance of common stock: services

  

21,928

  

22

  

—  

  

—  

  

16,238

 

 

—  

 

 

—  

 

 

16,260

 

Stock issuance costs

  

—  

  

—  

  

—  

  

—  

  

2,007

 

 

—  

 

 

—  

 

 

2,007

 

Net loss

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

—  

 

 

(599,870)

 

 

(599,870)

 

Foreign currency translations

  

—  

  

—  

  

—  

  

—  

  

—  

 

 

(24,630)

 

 

—  

 

 

(24,630)

 

 

  

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2004

  

71,173,794

  

71,174

  

105,857

  

106

  

6,885,528

 

 

(142,467)

 

 

(8,829,936)

 

 

(2,015,595)

 

See summary of significant accounting policies and notes to consolidated financial statements

 



7



EMPIRE ENERGY CORPORATION INTERNATIONAL

(an exploration stage company)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Period From March 1995 (Inception) Through September 30, 2009

(UNAUDITED)

 

 

  

Common

  

Stock - A

  

Common

 

 

Stock - B

 

 

Additional
Paid-In
Capital

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Deficit
Accumulated
during the
Exploration
Stage

 

 

Total
Stockholders’
Equity (Deficit)

 

 

  

No

  

$

  

No

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Balance at July 1, 2004

  

71,173,794

  

71,174

  

105,857

 

 

106

 

 

6,885,528

 

 

(142,467)

 

 

(8,829,936)

 

 

(2,015,595)

 

Net loss for six months

  

—  

  

—  

  

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(188,615)

 

 

(188,615)

 

Foreign currency translations for six months

  

—  

  

—  

  

—  

 

 

—  

 

 

—  

 

 

(274,088)

 

 

—  

 

 

(274,088)

 

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2004

  

71,173,794

  

71,174

  

105,857

 

 

106

 

 

6,885,528

 

 

(416,555)

 

 

(9,018,551)

 

 

(2,478,298)

 

Issuance of common stock: debt

  

29,458

  

29

  

—  

 

 

—  

 

 

(29)

 

 

—  

 

 

—  

 

 

—  

 

Issuance of common stock: services

  

2,634,319

  

2,634

  

—  

 

 

—  

 

 

(2,634)

 

 

—  

 

 

—  

 

 

—  

 

Conversion of Class B stock into Class A

  

2,471

  

3

  

(2,471)

 

 

(3)

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Reverse Acquisition of GSLM

  

—  

  

—  

  

—  

 

 

—  

 

 

(213,249)

 

 

—  

 

 

—  

 

 

(213,249)

 

Issuance of common stock: contingency

  

2,490,000

  

2,490

  

—  

 

 

—  

 

 

(2,490 )

 

 

—  

 

 

—  

 

 

—  

 

Issuance of common stock: Acquisition of Cyber Finance

  

37,500,000

  

37,500

  

—  

 

 

—  

 

 

5,962,500

 

 

—  

 

 

—  

 

 

6,000,000

 

Issuance of common stock: services

  

830,000

  

830

  

—  

 

 

—  

 

 

98,770

 

 

—  

 

 

—  

 

 

99,600

 

Net loss for year

  

—  

  

—  

  

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(1,897,847)

 

 

(1,897,847)

 

Foreign currency translations

  

—  

  

—  

  

—  

 

 

—  

 

 

—  

 

 

159,086

 

 

—  

 

 

159,086

 

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2005

  

114,660,042

  

114,660

  

103,386

 

 

103

 

 

12,728,396

 

 

(257,469)

 

 

(10,916,398)

 

 

1,669,292

 

Issuance of common stock: HEM convertible debenture

  

6,222,675

  

6,223

  

—  

 

 

—  

 

 

498,500

 

 

—  

 

 

—  

 

 

504,723

 

Issuance of common stock: services

  

21,185,493

  

21,186

  

—  

 

 

—  

 

 

2,398,121

 

 

—  

 

 

—  

 

 

2,419,307

 

Conversion of Class B stock into Class A

  

1,604

  

1

  

(1,604)

 

 

(1)

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Issuance of common stock: Exchange for debt

  

19,360,774

  

19,361

  

—  

 

 

—  

 

 

1,895,665

 

 

—  

 

 

—  

 

 

1,915,026

 

See summary of significant accounting policies and notes to consolidated financial statements

 




8



EMPIRE ENERGY CORPORATION INTERNATIONAL

(an exploration stage company)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Period From March 1995 (Inception) Through September 30, 2009

(UNAUDITED)

 

 

  

Common

 

 

Stock – A

 

 

Common

 

 

Stock – B

 

 

Additional
Paid-In
Capital

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Deficit
Accumulated
During the
Exploration
Stage

 

 

Total
Stockholders’
Equity (Deficit)

 

 

  

No

 

 

$

 

 

No

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Issuance of common stock: Cash

  

17,933,333

 

 

17,933

 

 

—  

 

 

—  

 

 

2,013,067

 

 

—  

 

 

—  

 

 

2,031,000

 

Issuance of common stock: Libertas, less stock fees of $359,400

  

4,065,000

 

 

4,065

 

 

—  

 

 

—  

 

 

205,935

 

 

—  

 

 

—  

 

 

210,000

 

Issuance of common stock: exercise of options

  

450,000

 

 

450

 

 

—  

 

 

—  

 

 

2,835

 

 

—  

 

 

—  

 

 

3,285

 

Issuance of common stock: License

  

15,000,000

 

 

15,000

 

 

—  

 

 

—  

 

 

2,985,000

 

 

—  

 

 

—  

 

 

3,000,000

 

Beneficial conversion feature, convertible debenture

  

—  

 

 

—  

 

 

—  

 

 

—  

 

 

837,173

 

 

—  

 

 

—  

 

 

837,173

 

Vesting of Common Stock Options

  

—  

 

 

—  

 

 

—  

 

 

—  

 

 

323,640

 

 

—  

 

 

—  

 

 

323,640

 

Warrants Issued: Wind City Note discount

  

—  

 

 

—  

 

 

—  

 

 

—  

 

 

250,000

 

 

—  

 

 

—  

 

 

250,000

 

Net loss for period

  

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(9,030,480)

 

 

(9,030480)

 

Marketable securities, unrealized loss

  

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(15,006)

 

 

—  

 

 

(15,006)

 

Foreign currency translations

  

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(201,086)

 

 

—  

 

 

(201,086)

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2006

  

198,878,921

 

 

198,879

 

 

101,782

 

 

102

 

 

24,138,332

 

 

(473,561)

 

 

(19,946,878)

 

 

3,916,874

 

Conversion of Class B stock into Class A

  

865

 

 

1

 

 

(865)

 

 

(1)

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Restricted shares issued in exchange for services

  

14,666,670

 

 

14,667

 

 

—  

 

 

—  

 

 

1,845,333

 

 

—  

 

 

—  

 

 

1,860,000

 

Stock options issued in exchange for services

  

—  

 

 

—  

 

 

—  

 

 

—  

 

 

456,506

 

 

—  

 

 

—  

 

 

456,506

 

Return of shares in rescission of license agreement

  

(15,000,000)

 

 

(15,000)

 

 

—  

 

 

—  

 

 

(2,052,500)

 

 

—  

 

 

—  

 

 

(2,067,500)

 

See summary of significant accounting policies and notes to consolidated financial statements



9



EMPIRE ENERGY CORPORATION INTERNATIONAL

(an exploration stage company)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Period From March 1995 (Inception) Through September 30, 2009

(UNAUDITED)

 

  

Common

  

Stock – A

  

Common

 

 

Stock B

 

 

Additional
Paid-In
Capital

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Deficit
Accumulated
During the
Exploration
Stage

 

 

Total
Stockholders’
Equity (Deficit)

 

 

 

No

 

$

 

No

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Foreign currency translations

  

—  

 

—  

 

—  

 

 

—  

 

 

—  

 

 

386,399

 

 

—  

 

 

386,399

 

Marketable securities, unrealized loss

  

—  

  

—  

  

—  

 

 

—  

 

 

—  

 

 

29,364

 

 

—  

 

 

29,364

 

Net loss for the year

 

—  

 

—  

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(8,162,062)

 

 

(8,162,062)

 

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2007

 

198,546,456

 

198,546

 

100,917

 

 

101

 

 

24,387,671

 

 

(116,526)

 

 

(28,108,940)

 

 

(3,639,148)

 

Conversion of Class B stock into Class A

  

43

  

—  

 

(43)

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Restricted shares issued in exchange for services

  

38,395,800

  

38,396

  

—  

 

 

—  

 

 

5,050,200

 

 

—  

 

 

—  

 

 

5,088,596

 

Restricted shares issued in exchange for debt

 

6,998,732

 

6,999

 

—  

 

 

—  

 

 

835,811

 

 

—  

 

 

—  

 

 

842,810

 

Restricted shares issued in exchange for marketable security

 

8,511,111

 

8,511

 

—  

 

 

—  

 

 

1,268,156

 

 

—  

 

 

—  

 

 

1,276,667

 

Release of shares in sale of Pacific Rim

 

7,500,000

 

7,500

 

—  

 

 

—  

 

 

1,117,500

 

 

—  

 

 

—  

 

 

1,125,000

 

Restricted shares issued in exchange for cash

 

7,263,281

 

7,263

 

—  

 

 

—  

 

 

554,500

 

 

—  

 

 

—  

 

 

561,763

 

Unrealized change in foreign currency exchange rates

  

—  

  

—  

  

—  

 

 

—  

 

 

—  

 

 

(850,365)

 

 

—  

 

 

(850,365)

 

Value of stock options vested

 

—  

 

—  

 

—  

 

 

—  

 

 

(105,466)

 

 

—  

 

 

—  

 

 

(105,466)

 

Marketable securities, unrealized loss

  

—  

  

—  

  

—  

 

 

—  

 

 

—  

 

 

(614,367)

 

 

—  

 

 

(614,367)

 

Net loss for the period ended December 31, 2008

  

—  

  

—  

  

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(4,906,924)

 

 

(4,906,924)

 

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2008

 

267,215,423

 

267,215

 

100,874

 

 

101

 

 

33,108,372

 

 

(1,581,258)

 

 

(33,015,864)

 

 

(1,221,434)

 

Conversion of Class B stock into Class A

 

267

 

 

 

(267)

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Restricted shares issued in exchange for services

 

8,827,500

 

8,828

 

—  

 

 

—  

 

 

469,270

 

 

—  

 

 

—  

 

 

478,098

 

Restricted shares issued in exchange for the acquisition of Grand Monarch Holdings

 

2,500,000

 

2,500

 

—  

 

 

—  

 

 

122,500

 

 

—  

 

 

—  

 

 

125,000

 

Unrealized change in foreign currency exchange rates

 

—  

  

—  

 

—  

 

 

—  

 

 

—  

 

 

1,367,267

 

 

 

 

 

1,367,267

 

Warrants issued with debt

 

—  

  

—  

 

—  

 

 

—  

 

 

678,179

 

 

—  

 

 

—  

 

 

678,179

 

Marketable securities, unrealized loss

 

—  

  

—  

 

—  

 

 

—  

 

 

—  

 

 

658,744

 

 

—  

 

 

658,744

 

Net loss for the period ended September 30, 2009

 

—  

  

—  

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(4,213,746)

 

 

(4,213,746)

 

Balance at September 30, 2009

 

278,543,190

 

278,543

 

100,607

 

 

101

 

 

34,378,321

 

 

444,753

 

 

(37,229,610)

 

 

(2,127,892)

 

Comprehensive loss September 30, 2008 (Restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,235,380)

 

 

 

 

 

 

 

Comprehensive loss September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,187,735)

 

 

 

 

 

 

 

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See summary of significant accounting policies and notes to consolidated financial statements

 



10



EMPIRE ENERGY CORPORATION INTERNATIONAL

(an exploration stage company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2009 and 2008 and from March 15, 1995 (Inception) to September 30, 2009

(Unaudited)

 

 

  

 

  

2009

 

 

2008

(Restated)

 

 

March 15, 1995
(Inception) to
September 30,
2009

 

 

  

 

  

$

 

 

$

 

 

$

 

CASH FLOWS FROM OPERATING ACTIVITIES

  

 

  

 

 

 

 

 

 

 

 

Net loss

  

 

  

(4,213,746)

 

 

(4,770,648)

 

 

(37,229,610)

 

Adjustments to reconcile net loss to net cash used in operating activities:

  

 

  

 

 

 

 

 

 

 

 

Share based payments

  

 

  

478,100

 

 

1,970,050

 

 

9,838,715

 

Discontinued operations

 

 

 

—  

 

 

(73,476)

 

 

20,476

 

Depreciation

  

 

  

50,727

 

 

69,000

 

 

202,191

 

Amortization of debt discount

 

 

 

181,378

 

 

—  

 

 

181,378

 

Stock options vested (forfeited)

 

 

 

—  

 

 

(105,466)

 

 

674,680

 

Loss on disposal of fixed assets

  

 

  

—  

 

 

—  

 

 

207

 

Loss on equity investment

  

 

  

100,000

 

 

—  

 

 

829,000

 

Loss on extinguishments of debt

  

 

  

610,326

 

 

—  

 

 

610,326

 

Realized gain on marketable securities and note receivable

 

 

 

(1,443,403)

 

 

—  

 

 

(1,496,459)

 

Impairment loss on marketable securities

 

 

 

1,276,667

 

 

—  

 

 

1,277,336

 

Foreign currency transaction loss (gain)

 

 

 

794,925

 

 

—  

 

 

(131,679)

 

Changes in operating assets and liabilities:

  

 

  

 

 

 

 

 

 

 

 

Receivables

  

 

  

10,546

 

 

(106,163)

 

 

(2,239)

 

Prepaid expenses and other assets

  

 

  

438,133

 

 

(649,410)

 

 

(17,252)

 

Trade payables and accrued expenses

  

 

  

1,110,292

 

 

(173,093)

 

 

7,767,478

 

NET CASH USED IN OPERATING ACTIVITIES

  

 

  

(606,055)

 

 

(3,839,206)

 

 

(17,475,452)

 

 

  

 

  

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

  

 

  

 

 

 

 

 

 

 

 

Proceeds from sale of equity investments

  

 

  

—  

 

 

—  

 

 

7,519,084

 

Investment in brands

  

 

  

—  

 

 

—  

 

 

(80,000)

 

Purchase of property and equipment

  

 

  

(2,398)

 

 

(29,122)

 

 

(2,034,622)

 

Proceeds from sale of property and equipment

  

 

  

29,126 

 

 

—  

 

 

1,771,093

 

Oil and gas properties under development

 

 

 

(1,622,794)

 

 

(1,931,902)

 

 

(6,064,510)

 

Proceeds (cost) of marketable securities

  

 

  

154,837

 

 

(8,978)

 

 

(33,199)

 

Proceeds from collection of note receivable

 

 

 

—  

 

 

—  

 

 

320,178

 

Deconsolidation of subsidiary, net of proceeds

 

 

 

25,000 

 

 

—  

 

 

(10,603)

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

  

 

  

(1,416,230 )

 

 

(1,970,002)

 

 

1,387,421

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

  

 

  

 

 

 

 

 

 

 

 

Proceeds from issuance of notes payable

  

 

  

644,642

 

 

5,049,208

 

 

12,196,252

 

Proceeds from issuance of common shares, net of $328,142 of direct issuance costs

  

 

  

—  

 

 

—  

 

 

6,656,459

 

Principal payments on notes payable

  

 

  

(42,282)

 

 

(20,788)

 

 

(4,348,947)

 

Proceeds from the sale of non-controlling interests

  

 

  

—  

 

 

300,000

 

 

1,140,741

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

  

 

  

602,360

 

 

5,328,420

 

 

15,644,505

 

 

  

 

  

 

 

 

 

 

 

 

 



11




EFFECT OF EXCHANGE RATE CHANGES ON CASH

  

 

  

1,367,267

 

 

630,410

 

 

444,753

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  

 

  

(52,658)

 

 

(944,754)

 

 

1,227

 

CASH AND CASH EQUIVALENTS – beginning of period

  

 

  

53,885

 

 

1,228,903

 

 

—  

 

 

  

 

  

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS – end of period

  

 

  

1,227

 

 

284,149

 

 

1,227

 

 

  

 

  

 

 

 

 

 

 

 

 

CASH PAID FOR:

  

 

  

 

 

 

 

 

 

 

 

Taxes

  

 

  

—  

 

 

—  

 

 

—  

 

Interest

  

 

  

9,509

 

 

19,755

 

 

524,501

 

 

  

 

  

 

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING TRANSACTIONS

  

 

  

 

 

 

 

 

 

 

 

Prepaid expense paid with Empire stock

 

 

 

—  

 

 

2,550,000

 

 

 

 

Acquisition of marketable securities with Empire stock

 

 

 

—  

 

 

1,276,667

 

 

 

 

Debt settled with Empire stock

  

 

  

—  

 

 

842,810

 

 

 

 

Issuance of stock for acquisition of Grand Monarch Holdings

 

 

 

125,000

 

 

—  

 

 

 

 

Debt settled with marketable securities

 

 

 

1,945,555

 

 

—  

 

 

 

 

Accrued capitalized exploration costs

 

 

 

1,606,127

 

 

—  

 

 

 

 

Fair value of warrants issued with debt

 

 

 

428,557

 

 

—  

 

 

 

 

 

  

 

  

 

 

 

 

 

 

 

 

See summary of significant accounting policies and notes to consolidated financial statements

 



12




EMPIRE ENERGY CORPORATION INTERNATIONAL

(an exploration stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009 and 2008

(UNAUDITED)


NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES


Basis of Presentation: The accompanying unaudited interim financial statements of Empire Energy Corporation International (“EEGC” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in Empire’s Annual Report filed with the SEC on Form 10-K for the year ended December 31, 2008. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for 2008 as reported in the Form 10-K have been omitted.  All balances are stated in United States dollars unless otherwise noted.


Principles of Consolidation: The consolidated financial statements include the accounts of EEGC (the “Parent” entity) and its wholly owned or controlled subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. We currently have four wholly-owned subsidiaries, Great South Land Minerals Limited, Cyber Finance Group Limited, Bob Owen & Co., and Expedia International.  


Since March 2006, we held a substantial and consolidated interest in Pacific Rim Foods Limited, a China based food processing concern. In December 2008, we completed the sale of this Subsidiary to Mach One Corporation, a publicly traded health research company.  The accompanying consolidated financial statements have been retroactively restated to reflect the former investment in Pacific Rim as discontinued operations.


Going Concern and Liquidity: EEGC is in the exploration and development stage, devoting substantially all of its efforts to exploration and raising financing. EEGC has substantially funded its operations with proceeds from the issuance of common stock and convertible debt.  In the course of its exploration activities, EEGC has sustained operating losses and expects such losses to continue for the foreseeable future. EEGC will finance its operations primarily through cash and cash equivalents on hand, future financing from the issuance of debt or equity instruments and through the generation of revenues once commercial operations get underway. However, the Company has yet to generate any revenues and has no assurance of future revenues. To management’s knowledge, no company has yet successfully developed sub-surface hydrocarbons in commercial quantities in Tasmania. Even if development efforts are successful, substantial time may pass before revenues are realized.

The financial statements are prepared on a going concern basis. However, significant uncertainties exist in relation to conditions that raise substantial doubt about the Company’s ability to continue as a going concern. These are:


 

 

Substantial losses incurred through supporting the ongoing exploration expenditures during the period since the inception of the Company.

 

 

 

 

 

 

Uncertainties in terms of the ability to generate cash flows in the future considering that production operations have not yet commenced.

 

 

 

 

 

 

Extensive commitments for expenditures under the Company’s key mineral exploration lease.

 

 

 

 

 

 

The Company’s key mineral exploration lease expired September 30, 2009.  Renewals of key lease applications have been lodged but have not yet been awarded.

 

 

 

 

 

 

Current liabilities of $10,499,703 exceed current assets of $20,718 including cash or cash equivalents of $1,227 at September 30, 2009.


There can be no assurance that the Company will be able to obtain financing on commercially reasonable terms. The continuing viability and its ability to continue as a going concern and to meet its obligations as they fall due is dependent on the Company being successful in raising additional funds. The Company’s inability to raise capital  or renew its leases may have a material adverse affect on its financial condition, ability to meet its obligations and operating needs and results of operations.



13



The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts nor to the amounts and classification of liabilities that might be necessary should the Company not continue as a going concern.


The Company has either planned the following activities or completed the following activities exist to address the above going concern issues.


 

 

Obtain approval to increase authorized shares to allow additional acquisitions and capital

 

 

 

Seek acquisitions that will provide capital and cash flow

 

 

 

Refinance opportunities and use additional shares to pursue development activities.


NOTE 2 – TAXATION


In assessing the realizability of deferred tax assets, the Company applies SFAS No. 109 to determine whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As a result, the Company’s valuation allowance at September 30, 2008 and 2009 reduces the net deferred tax assets to $0.


NOTE 3 – RELATED PARTY TRANSACTIONS


In January 2009, in conjunction with the resignation of a director (Phil Simpson), the Company paid certain employment entitlements to the director (Phil Simpson) by issuing 2.5 million shares of the Company’s common stock valued at approximately $150,000  which was recognized as compensation expense in the consolidated statement of operations for the period ended  September 30, 2009. Additionally, the Company made payment of approximately $18,000 to settle outstanding amounts owed to a company (Terralinna) controlled by the former director (Phil Simpson). Shares were valued at quoted market price on the date of the agreement.


In January 2009, in conjunction with the aforementioned resignation, a company (Terralinna) controlled by the former director (Phil Simpson) provided new funding in the form of a demand note payable by the Company in the amount of approximately $349,000 (AU$400,000) earning interest at an annual rate of 10% per annum. In conjunction with the note payable, the Company issued a warrant to allow for the purchase of 7 million Empire common shares for a period of five years at a price of $.07 per share.  The fair value of the warrant was determined to be $92,622 using the Black Scholes option pricing model with expected volatility of 101%, no expected dividends, an expected term of three years and risk-free interest rate of 0.5%.  Since the note is due on demand, the value of the warrant, which represented a debt discount, was recognized as interest expense in the consolidated statement of operations for the period ended September 30, 2009.  Additionally, the Company, via the principal shareholder, issued 2 million common shares of Zeehan Zinc Limited (ZZL.L), an AIM listed company which had a fair value of approximately $24,000, which represented a debt discount, was recognized as interest expense in the consolidated statement of operations for the period ended September 30, 2009 and a related party payable in the consolidated balance sheet at September 30, 2009.  


In January 2009, in conjunction with the aforementioned resignation, the Company, repaid loans made to the Company by a company (Terralinna) controlled by the former director (Phil Simpson) in the principal amount of $1,430,000 plus accrued interest approximating $265,000. Consideration paid by the Company included 4,506,000 shares of marketable securities of Mach One valued at approximately $1,125,000 and a convertible note receivable owed to the Company by Mach One valued at approximately $1,050,000,  net of approximately $155,000 in cash received and forgiveness of approximately $5,000 of amounts owed by the Company.  The Company recognized a combined net loss of approximately $320,000 representing the difference between the fair value of the net consideration issued in the settlement transaction and the carrying value of the amounts due. The Company evaluated the classification of this loss and determined that the loss does not meet the criteria for classification as an extraordinary item. As a result, the loss has been included as “Loss on extinguishments of debt” under “Other income (expense)” within income from continuing operations in the accompanying Consolidated Statement of Operations for the period ended September 30, 2009.




14



In February 2009, the Company repaid loans made to the Company by a director (John Garrison) in the principal amount of $210,000 plus accrued interest approximating $5,000. Consideration paid by the Company included 1,810,000 shares of marketable securities valued at approximately $344,000 and an option to convert the remaining amounts owed of approximately $10,000 into the Company’s common stock at an exercise price of $0.07 per share for a period of up to 5 years; the fair value of the option was determined to be approximately $5,000 using the Black Scholes model with expected volatility of 101%, no expected dividends, an expected term of five years and risk-free interest rate of 0.5%.  The Company recognized a loss of approximately $134,000 representing the difference between the fair value of the net consideration issued in the settlement transaction and the carrying value of the amounts due. The Company evaluated the classification of this loss and determined that the loss does not meet the criteria for classification as an extraordinary item. As a result, the loss has been included as “Loss on extinguishments of debt” under “Other income (expense)” within income from continuing operations in the accompanying Consolidated Statement of Operations for the period ended September 30, 2009.


We issued 10,177,500 common shares to establish a borrowing facility of $500,000 in April 2009 with, a non-affiliated party, Trafalgar Capital Advisors, Ltd. The borrowing facility has no stated repayment terms or maturity date and no stated interest rate but is secured by 8,850,000 of the Company’s common stock and guaranteed by our CEO.  These shares are contingently returnable to the Company once the amounts borrowed have been repaid. As a result of the shares being contingently returnable, they have not been recognized as issued in the consolidated financial statements.  The remainder of the shares issued, 1,327,500, were issued to enable the arrangement, were valued at current market and the Company recognized a current expense in the amount of $92,925 in the consolidated statement of operations.  At September 30, 2009, the Company had been advanced $200,000 from the borrowing facility; the lender has discretion to loan up to $500,000 to the Company. The Company utilized the $200,000 for working capital during the nine months ended September 30, 2009.


NOTE 4—LONG-TERM DEBT


Long-term debt consists of the following:  

 

 

 

 

 

 

 

 

  

September 30, 2009

 

 

December 31, 2008

 

 

  

$

 

 

$

 

RAB Loan

  

1,500,000

 

 

1,500,000

 

RAB Loan discount

 

(339,801)

 

 

—  

 

Terralinna Loan (related party)

  

349,164

 

 

1,695,489

 

Bendall Trust Loan (related party)

  

400,013

 

 

400,013

 

Trafalgar Loan

 

200,000

 

 

 

Other Loans (related party)

 

287,123

 

 

210,000

 

SmartWin Loan

 

3,391,939

 

 

2,683,910

 

Asset Purchase Loan

  

41,719

 

 

44,437

 

 

  

 

 

 

 

 

 

  

5,830,157

 

 

6,533,849

 

Less: current portion

  

(4,669,958)

 

 

(2,349,939)

 

 

  

 

 

 

 

 

Long term debt

  

1,160,199

 

 

4,183,910

 


The maturities of the Company’s long-term debts consist of the following: 


Twelve Month Period Ending September 30,

  

 

 

  

$

2010

  

4,669,958

2011

  

1,160,199

2012

  

—  

 

  

 

 

  

5,830,157




15



In March 2009, the 6% convertible debenture agreement with RAB Special Situations (Master) Fund Limited in the face amount of $1,500,000 was extended to mature March 21, 2011 and the conversion price was reduced to $.07 per share.  In conjunction with this extension, the expiration dates on the expiring Class A and Class B warrants were extended to March 21, 2014 and the Company issued to RAB a Class C warrant to purchase 7.5 million additional Empire shares for a period of five years.  The adjusted exercise price of the Class A and Class B warrants was reset to $.07 per share. The Company evaluated the modification under EITF 96-19 and concluded that this modification was an extinguishment of the original debt.   The convertible debenture has been discounted by $428,557 to record the fair value of the convertible note as extended.  The fair value of the new warrant, the extended warrants and the convertible feature of the note was determined to be $585,640 using the Black Scholes option pricing model with expected volatility of 101%, no expected dividends, an expected term of three years and risk-free interest rate of 0.5%.  The discount value of the warrant will be amortized to interest expense over the two year term of the debenture.  The value of the warrants and conversion feature was recorded as an addition to paid in capital. The Company recognized a loss of approximately $157,000 representing the difference between the fair value of the net consideration issued of $1,657,000 ($1,071,000 fair value of the extended debt plus the fair value of the new warrant, the extended warrants and the convertible feature of the note of $586,000) in the settlement transaction and the carrying value of the amounts due of $1,500,000. The Company evaluated the classification of this loss and determined that the loss does not meet the criteria for classification as an extraordinary item. As a result, the loss has been included as “Loss on extinguishments of debt” under “Other income (expense)” within income from continuing operations in the accompanying Consolidated Statement of Operations for the period ended September 30, 2009. As of September 30, 2009, no shares of common stock had been issued in conversion of the debenture and no warrants had been exercised. The discount will be amortized over the term of the debenture.  


 

  

2009

 

 

2008

 

 

  

 

 

 

 

 

Notes payable:

  

 

 

 

 

 

Carrying value of original note

$  

1,500,000

 

 $

1,500,000

 

Less: adjustment to fair value (as if converted)

  

(428,557)

 

 

(1,047,172)

 

Add: fair value of stock converted for debt

  

—  

 

 

—  

 

Add: amortization discounts

  

88,756 

 

 

1,047,172

 

 

  

 

 

 

 

 

Carrying value of note on September 30, 2009 and December 31, 2008

$

1,160,199

 

 $

1,500,000

 


The terms and exercise prices of the warrants are set out in the table below.

 

Number of shares

  

Exercise price

  

Warrant expiration date

8,550,000

  

$0.07

  

March 2014

5,000,000

  

$0.07

  

March 2014

7,500,000

 

$0.07

 

March 2014


Each warrant may be exercised in whole or in part at any time to purchase shares of common stock at the respective exercise price, subject to adjustment from time to time upon the occurrence of certain events.


NOTE 5 – SHAREHOLDERS EQUITY


The Company has outstanding at September 30, 2009, 278,543,190 shares of class A common stock and 100,607 shares of Class B common stock.  All share transactions use Class A common stock.  Class B common stock can be transacted only by conversion first to Class A shares.


In February 2009, the Company entered into consulting and promotion arrangements with two parties at a cost of 5 million common shares reported at a value of $275,000.  Shares were valued at quoted market prices on the date of the agreement.


In April 2009 we acquired a 100% ownership interest in Grand Monarch Holdings, Ltd., a publicly reporting company at a cost of 2.5 million Empire shares valued at $125,000 on the date of issuance.  This company was acquired to facilitate an acquisition that was subsequently not completed.  It remained inactive, recorded no revenue, nominal expense, had no substantial assets or liabilities and was sold in June 2009.  The acquisition has been recorded in accordance with Statements of Financial Accounting Standards (SFAS) 141(R),: “Business Combinations” which became effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. There were no significant acquisition-related costs incurred. Additional disclosures required by SFAS 141(R) are not presented as the acquired entity’s financial position, results of operations or cash flows would not materially impact either the historical consolidated financial statements or the supplemental pro forma information for the Company.  Since the planned acquisition was not completed, there was no business purpose to hold and maintain the inactive wholly owned subsidiary.  It was sold in June 2009 for a cash price of $25,000, resulting in a loss on sale of $100,000 and was deconsolidated on the date of disposal.



16



NOTE 6 — WARRANTS


The following table summarizes the movements in warrants for the year ended December 31, 2008 and the nine month period ended September 30, 2009:


 

 

For the Nine Months

 

For the Year Ending

 

  

September 30, 2009

  

December 31, 2008

 

  

Shares

 

 

Weighted
Average
Exercise Price

  

Shares

 

 

Weighted
Average
Exercise Price

Warrants outstanding:

  

 

 

 

 

 

  

 

 

 

 

 

Beginning of period

  

14,300,000

 

 

$

0.09

  

15,800,000

 

 

$

0.15

Warrants granted

  

14,500,000

 

 

 

0.07

  

—  

 

 

 

—  

Warrants exercised

  

—  

 

 

 

—  

  

—  

 

 

 

—  

Warrants expired

  

—  

 

 

 

—  

  

(1,500,000)

 

 

 

0.10

 

  

 

 

 

 

 

  

 

 

 

 

 

End of period

  

28,800,000

 

 

$

0.08

  

14,300,000

 

 

$

0.09

 

  

 

 

 

 

 

  

 

 

 

 

 

Warrants exercisable

  

28,800,000

 

 

$

0.08

  

14,300,000

 

 

$

0.09


The warrants have a weighted average remaining contractual life of 4.4 years, are fully vested and have a weighted average exercise price of $0.07 per share.   Warrants have no aggregate intrinsic value at September 30, 2009 or at December 31, 2008.


The following table summarizes information about warrants outstanding at September 30, 2009:  

 

 

 

 

 

 

 

 

 

  

Exercise
Prices

  

Number
outstanding

  

Average
remaining
life in years

 

 

 

 

 

 

 

 

Avalor Capital LLC and Frank W Bachinsky, III Common Stock, rights expiring October 10, 2009

 

 

0.50

 

750,000

 

0.1

RAB Special Situations (Master) Fund Limited

Common Stock, rights expiring March 2014

  

 

0.07

  

8,550,000

  

4.5

RAB Special Situations (Master) Fund Limited

Common Stock, rights expiring March 2014

 

 

0.07

 

5,000,000

 

4.5

RAB Special Situations (Master) Fund Limited

Common Stock, rights expiring March 2014

 

 

0.07

 

7,500,000

 

4.5

 Terralinna pty Ltd., rights expiring January 2014

  

 

0.07

  

7,000,000

  

4.3

 

  

 

 

  

 

  

 

 

  

 

 

  

28,800,000

  

 




17



NOTE 7 — COMMITMENTS AND CONTINGENCIES


On March 31, 2009 our wholly-owned subsidiary, Great Southland Minerals Ltd., was served with a Form 509H, Creditor’s Statutory Demand relating to a claim by Hunt Energy & Mineral Company -- Australia Ltd. PTY for payment of approximately AU$441,000 (US$309,000) claimed due pursuant to our drilling contract with Hunt.  The statutory demand notice has been filed with the Tasmanian District Court.  The company was provided 21 days to respond to the Statutory Demand notice. Should fail to respond or should the court determined in favor of Hunt and the demand is not paid, the procedure for Statutory Demand could result in the court ordering the business of Great Southland Minerals to be wound up.  Management believes that it has substantial defenses to the claim including the defense that the contract provides for all disputes to be submitted to the dispute resolution process contained in the contract and that substantial sums have been paid to the claimant, which sums exceed the amount being claimed.  The Company negotiated an ongoing arrangement with Hunt that has deferred any action and withdrawn the statutory claim and is allowing work to proceed on the exploratory drilling. In July 2009, GSLM was served by Hunt Energy with a Statutory Demand claiming balance due of AU$173,678 of the original debt and a separate additional Statutory Demand in an amount of AU$1,509,200.00.  The Company believes it has significant defenses and has subsequently negotiated an agreement  with Hunt Energy that will allow appropriate payments to be made over an eighteen month  period of time and that will allow Hunt to return to work when funding is available.


An additional Creditor’s Statutory Demand claim was presented in April 2009 from D&M Drilling in the amount of AU$55, 000 (US$38,000).  Action on the claim has been deferred and payment terms are being negotiated. We are currently not aware of any other legal proceedings or claims that we believe will have, individually, or in the aggregate, a material adverse affect on our business, financial condition or operating results.


Great South Land Minerals Limited’s principal asset is its exploration license in Tasmania, 15,035 km 2 (37.2 million acres) Special Exploration License 13/98. The terms of the Great South Land Minerals Limited Special Exploration License 13/98 have been contractually agreed with Mineral Resources Tasmania, the local authority under the Department of Industry, Energy and Resources of Tasmania. The Company has expenditure obligations under the license conditions. The conditions require scheduled reported expenditure of AUD $21.5 million (US $16.69 million), by September 2009. The company has accumulated expenditures to date of AUD $50.8 million (US $43.7 million).


By its terms, Special Exploration License 13/98 expired September 30, 2009.  The Company, with and through its subsidiary, Great South Land Minerals, LTD lodged an application for an Exploration License covering the significant identified prospective areas included in the SEL 13/98 effort and lodged an additional application for a Special Exploration License for additional land and offshore areas of Tasmania.  These license applications have not yet been formally awarded by Mineral Resources Tasmania.  The Company believes Special Exploration License 13/98 provides a right to the award of the exploration license over selected areas covered by that license and continues to work for and plan for the reissuance.  Award of the Special Exploration License is at the discretion of the Minister but the Company believes  its performance over past years support the issuance of the new license.


NOTE 8 — IMPAIRMENT LOSS ON MARKETABLE SECURITIES


The Company’s investments consist primarily of 7,660,000 shares in common stock of a company in the investment banking industry (Libertas Capital). The severity and duration of the impairment correlate with the inability of the issuer to meet the listing requirements for its shares. The Company evaluated the near-term prospects of the issuer in relation to the severity and duration of the impairment. Based on that evaluation and the Company’s ability and intent to hold those investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company considers those investments to be other-than-temporarily impaired at September 30, 2009 and has recognized an impairment loss of $1,276,667 for the nine months ended September 30, 2009.


NOTE 9 -  CORRECTION OF AN ERROR


The Company will restate issued balance sheets, statements of operations and statements of cash flows contained in the financial statements referred to above for matters related to the following errors: (i) an overstatement of exploration costs that were expensed at March 31 and June 30, 2008, and September 30, 2008 (ii) an understatement of capitalized exploration costs at March 31 and June 30, 2008 and September 30, 2008.


Following is a description of the errors related to the misstatement of exploration costs at March 31 and June 30, 2008, and September 30, 2008.  The Company did not capitalize its exploratory drilling costs on its unassessed oil and gas properties in accordance with the successful efforts method of accounting for costs associated with oil and gas properties.



18




The effects on the Company’s previously issued consolidated financial statements for the three and nine month periods ended September 30, 2008, of the aforementioned errors are summarized as follows:       

 

 

 

As Previously

 

 

As

 

 

Increase

 

 

 

Reported

 

 

Restated

 

 

(Decrease)

 

 September 30, 2008

 

 

 

 

 

 

 

 

 

Oil and Gas Properties

 

$

1,931,902

 

 

$

3,026,278

 

 

$

1,094,376

 

Total assets

 

 

7,364,357

 

 

 

8,458,733

 

 

 

 1,094,376

 

 For the Nine Month Period Ended September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

Exploration costs

 

 

1,195,446

 

 

 

 101,070

 

 

 

 (1,094,376)

 

Net loss  

 

 

(5,865,024)

 

 

 

(4,770,648)

 

 

 

(1,094,376)

 

 For the Three Month Period Ended September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

Exploration costs

 

 

305,997

 

 

 

59,859

 

 

 

 (246,138)

 

Net loss  

 

 

(1,145,184)

 

 

 

(899,047)

 

 

 

(246,138)

 



19



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.


Our twelve-month plan of operation:


Our primary focus is the discovery and exploitation of oil and gas and we intend to apply all resources to that purpose. We currently have four wholly-owned subsidiaries: Great South Land Minerals Limited, Bob Owen Company, Cyber Finance Limited and Expedia Limited.  Our primary endeavor is the exploration for and development of oil and natural gas in the state of Tasmania, Australia undertaken by GSLM and our resources are being focused on that activity


Great South Land Minerals Limited’s principal asset is its exploration license in Tasmania, 15,035 km 2 (37.2 million acres) Special Exploration License 13/98. The terms of the Great South Land Minerals Limited Special Exploration License 13/98 have been contractually agreed with Mineral Resources Tasmania, the local authority under the Department of Industry, Energy and Resources of Tasmania. The Company has expenditure obligations under the license conditions. The conditions require scheduled reported expenditure of AUD $21.5 million (US $16.69 million), by September 2009. The company has accumulated expenditure to date of AUD $50.8 million (US $43.7 million).


Terrex Seismic performed on our behalf a AUD $4.4 million (US $3.0 million) 2007 seismic survey which was additional to the approximately AUD $2.23 million (US $1.54 million) 2006 program and the 660 line kilometers of survey that we acquired from 2001.  A total of 1149 line kilometers have been acquired. These surveys have indicated the presence of over 14 structures which have the potential to have trapped oil and gas. Our two largest structures the Bellevue Dome (anticline) and the Thunderbolt Dome (anticline) are structures over 1000 sq km (2.47 million acres) in area and have the potential to contain substantial volumes of oil and gas.


The seismic program commenced on a 58.76 kilometer survey area in Tasmania around the township of Zeehan in March 2007, finished that survey and commenced the program on Special Exploration License 13/98 in April 2007. The information obtained from this activity on an outside area assisted with the interpretation of the seismic signature of deeper rock sequences under the Tasmania Basin which we have classified as being within the Larapintine petroleum system. It is one of three petroleum systems currently identified as prospective onshore Tasmania and the Gondwana Land System which outcrops at the surface (commonly known as the Tasmania Basin) is analogous to the Cooper Basin (in central Australia) which was discovered in the early 1960’s.


With our consultants, we reviewed the geology and geophysics of the Central Highlands of Tasmania, using data acquired from the 2001, 2006 and 2007 seismic surveys and previous extensive regional ground gravity and aerial magnetic surveys acquired during the last 20 years.  This work assisted in further defining drilling targets and will form the basis of well location, design and engineering. He also coordinated a more detailed prospect definition gravity survey to assist with the interpretation and analysis of the seismic results. The gravity data was acquired by independent contractor Solo Geophysics.


In the fourth quarter 2007, we performed additional seismic surveys in certain areas identified by the prior 2D survey as the apex of potential targets that have potential oil and gas traps and then engaged in 3D surveys to supplement and expand earlier data with the view of assisting in the management of an extraction plan should our exploration wells be successful in discovering reserves which can be produced.


In 2008 international geoscience consulting company RPS Energy prepared an updated Competent Person’s Report on GSLM’s tenement and Beacon Equity prepared a research report on Empire Energy that covered GSLM’s activities.  During early 2008, final site selection was carried out for drilling exploratory wells using previously acquired geological, geophysical and geochemical data.  Extensive environmental, forestry, heritage, archaeological, acoustic, hydrogeological and engineering studies were carried out on the Bellevue and Thunderbolt structures and sites at Bellevue and Thunderbolt were selected.  A management system audit of Hunt Energy and GSLM was carried out in August 2008, drilling plans for Bellevue#1 and Thunderbolt#1 were submitted to Mineral Resources Tasmania and approval to drill both exploratory wells was obtained. Preliminary investigations were also carried out at the Lonnavale #1 well site.  Extensive site work began at Bellevue#1 in the July and August 2008.


In July 2008, with the financial guarantee of our Chief Executive Officer, we obtained a secured loan in the amount of AU$5 million (US$ 3.45 million) to pursue the drilling program on SEL 13/98. Initial draw on this loan of approximately AU$2.7 million  (US$1.86 million) allowed mobilization of the drilling contractor, prepaid initial drilling cost and provided working capital to the Company. Additional drawing under this note was expected to fund the drilling program and complete at least the first well. In conjunction with this note, we agreed to a memorandum of understanding that could bring up to AU$45 million (US$31.1 million) to the drilling program in exchange for up to a 50% interest in the license property.



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During August and September 2008 we commenced drilling on the Bellevue # 1 site and completed the pre collar hole to 272 meters.  The initial rig was removed to make way for the deep drilling Hunt Energy rig to move on site to finish the well.  Onsite inspection was conducted by MODUSPEC whose report on the condition of the rig was received on the 30th December 2008.  The continued drilling has not commenced, as we have been unable to raise the necessary funds to progress.   This includes the failure of SmartWin to advance the remaining AUD$1.1 million (USD $759,770) due under the AU$5 million (USD $3.45 million) Note as well as the effects of the global financial crisis and the apparent refusal of creditors to advance funds on new projects and the failure of historic sources of those funding exploration ventures.   Management remains confident that this shortage of operating capital will ease but there can be no guaranty that we will be able to finance the balance of our project at this juncture, which could cause the failure of our business.  We have incurred significant standby charges and continue to incur costs at a rate over $ 10,000 per day.  At September 30, 2009 we have accrued a balance of $1,606,127 in charges owed to Hunt Energy.


In December 2008, Pacific Rim was sold to Mach One Corporation (www.machonecorp.com). Mach One is publicly traded. The sale reduced our ownership percentage and increased the liquidity of the investment. Accordingly, our financial statements have been retroactively restated to report the investment in Pacific Rim as discontinued operations. We were able to use the increased liquidity and value for this investment to pay expenses and reduce company debt in 2009.


In April 2009, we issued 10,177,500 common shares to establish a borrowing facility. We received an immediate advance of $200,000 from this arrangement for working capital. Future funding will depend on market conditions.


In April 2009, we filed applications for two additional tenement licenses in Tasmania. One application for the coal-bed methane horizons of the existing SEL 13/98 tenement which would be tested commencing with the Bellevue #1 exploratory well. The second application for a further 12,040 sq kilometers of tenement on the Eastern seaboard of Tasmania, which includes approximately 5,000 sq kilometers of offshore area, where 7 kilometers of onshore and 256 kilometers seismic operations were previously carried out. Mineral Resources Tasmania declined to grant these applications.  We have lodged additional applications in conjunction with the September 30, 2009 expiration of Special Exploration License 13/98.


By its terms, Special Exploration License 13/98 expired September 30, 2009.  The Company, with and through its subsidiary, Great South Land Minerals, LTD lodged an application for an Exploration License covering the significant identified prospective areas included in the SEL 13/98 effort and lodged an additional application for a Special Exploration License for additional land and offshore areas of Tasmania.  These license applications have not yet been formally awarded by Mineral Resources Tasmania.  The Company believes Special Exploration License 13/98 provides a right to the award of the exploration license over selected areas covered by that license and continues to work for and plan for the reissuance.  Award of the Special Exploration License is at the discretion of the Minister but the Company believes  its performance over past years support the issuance of the new license.


We have analyzed the data collected over the past thirty years, have selected prospective sites, arranged a drilling contractor, arranged interim funding and are aggressively pursuing additional funding to drill wells on these sites as well as continue to expand the seismic and other technical knowledge on this license area.

Results of operations


Since the inception of our current business plan following our merger with GSLM in 2005, our operations have consisted primarily of various exploration and start-up activities relating to our license property and our current business, including acquiring and analyzing seismic data, seeking institutional investors, locating joint venture partners, engaging firms to comply with leasehold conditions, incurring strategic investments and developing our long term business strategies.


During the quarter ended September 30, 2009, the Company generated no oil and gas revenue. The Company generated a loss from operations of $697,000 primarily by incurring GSLM exploration expenses of $12,000 and general & administrative expenses of $688,000, including legal, accounting, auditing and consulting expenses required to maintain the corporate existence and pursue funding and GSLM exploration activities. During the quarter ended September 30, 2008, the Company also generated no revenue. The Company generated a loss from operations of $820,000 primarily by incurring exploration expenses of $60,000 and general and administrative expenses of $760,000, primarily legal, accounting, auditing and consulting expenses required to maintain the corporate existence and pursue funding for exploration.


In anticipation of the drilling program, the Company leased living quarters for workers near the lease site.  With the delay in the drilling program, the Company is operating the facility and generating income from the facility.  Total income earned of $107,000 and offset by operating expenses, is reported as $84,000 included in other income in the financial statements.  



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During the nine months ended September 30, 2009, the Company generated no revenue. The Company generated an operating loss of $2,523,000 primarily by incurring GSLM seismic and exploration expenses of $32,000 and general & administrative expenses of $2,490,000, primarily personnel, consulting and legal required to pursue funding and planning for GSLM exploration activities and oversee the seismic and gravity evaluation work. During the nine months ended September 30, 2008, the Company also generated no revenue. The Company generated an operating loss of $4,356,000 primarily by incurring exploration expenses of $101,000 and general and administrative expenses of $4,255,000, primarily legal, accounting, auditing and consulting expenses required to maintain the corporate existence and pursue funding for and planning for the exploration and drilling program.  


Total income earned for the nine months ended September 30, 2009 for the leased living quarters near the drilling lease site is $320,000, offset by operating expenses, and is reported as $206,000 of other income in the financial statements.


The Company sold its investment in Mach One Corporation and its Note Receivable from Mach One in January to reduce debt and generate working capital.  The Mach One investment was received in exchange for the longer term investment in Pacific Rim Foods and was not deemed a key asset.  Appreciation in the Mach One shares allowed us to record a gain of $1,443,000 on the sale of the shares and debt settlement.  Due to a lack of liquidity and uncertainty, we recorded a permanent impairment in the value of our investment in the common stock of Libertas Capital.  We hold 7,660,000 shares that we received in 2008 in exchange for Empire shares.  We presently report no asset value for marketable securities.In April 2009 we acquired a 100% ownership interest in Grand Monarch Holdings, Ltd., a publicly reporting company at a cost of 2.5 million Empire shares valued at $125,000 on the date of issuance. This company was acquired to facilitate an acquisition that was subsequently not completed. It remained inactive, recorded no revenue, nominal expense, had no substantial assets or liabilities and was sold in June 2009. Since the planned acquisition was not completed, there was no business purpose to hold and maintain the inactive wholly owned subsidiary. It was sold in June 2009 for a cash price of $25,000, resulting in a loss on sale of $100,000 and was deconsolidated on the date of disposal.


In September 2009 we filed applications for two additional tenement licenses in Tasmania.  One application is an exploration license covering key prospective areas  identified of the existing SEL 13/98 tenement including areas which would be tested commencing with the Bellevue #1 exploratory well.  The second application is for a further 12,040 sq. kilometers of tenement on the Eastern seaboard of Tasmania, which includes approximately 5,000 sq. kilometers of offshore area, where 7 kilometers of onshore and 256 kilometers seismic operations were previously carried out.   These license applications have not yet been formally awarded by Mineral Resources Tasmania.  The Company believes Special Exploration License 13/98 provides a right to the award of the exploration license over selected areas covered by that license and continues to work for and plan for the reissuance.  Award of the Special Exploration License is at the discretion of the Minister but the Company believes  its performance over past years support the issuance of the new license.

Liquidity and Capital Resources


On September 30, 2009, the Company had $1,200 in cash, $17,000 in prepayments of expenses, $2,200 in receivables and $10,500,000 in current liabilities including trade payables, accrued liabilities, and current maturities of debt. Additional liabilities include approximately $1,160,000 in long-term debt. Approximately $2 million of debt includes provisions by which the holder may convert the debt to common equity. Net cash used by operating activities for the nine months ended September 30, 2009 was $606,000 compared to cash used of  $3,839,000 for the nine months ended September 30, 2008. Cash used by investing activities was $1,416,000 during the nine months ended September 30, 2009. Cash used in investing activities during the nine months ended September 30, 2008 was $1,970,000. Net cash provided by financing activities during the nine months ended September 30, 2009 was $602,000. Net cash provided by financing activities was $5,328,000, primarily convertible loans from a director and Smart Win Limited during the nine months ended September 30, 2008. Additional financing will be needed during 2009 to continue to develop the license property and pursue the company’s business plan.


Matters  affecting liquidity during 2009.


In January 2009, the Company settled loans provided in 2008 by Directors of the Company in the original amounts of $1.5 million and raised an additional $200,000 by selling marketable securities and a note receivable.


The Company has incurred additional contracted standby charges while it seeks adequate funding and is preparing for its well drilling program and continues to incur such costs in excess of $10,000 per day. At September 30, 2009 we had accrued a balance of $1.7 million in charges owed to Hunt Energy and negotiated an agreement to pay those costs over a period of approximately eighteen months. 


In February 2009, the Company entered into consulting and promotion arrangements with two parties at a cost of five million common shares. Expense of $275,000 was recorded based on the market value of the shares when issued.



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In March 2009, the 6% convertible debenture due to RAB Special Situations Fund was extended to mature March 2011 and the conversion price was adjusted to $.07 per share. In conjunction with this extension, we issued to RAB an additional warrant to purchase 7.5 million Empire shares for a period of five years, extended the existing warrants for a period of five years and adjusted the exercise price of all warrants to $.07 per share.


In April 2009 we acquired a 100% ownership interest in Grand Monarch Holdings, Ltd., a publicly reporting company at a cost of 2.5 million Empire shares valued at $125,000 on the date of issuance.  This company was acquired to facilitate an acquisition that was subsequently not completed.  It remained inactive, recorded no revenue, nominal expense, had no substantial assets or liabilities and was sold in June 2009.  The acquisition has been recorded in accordance with Statements of Financial Accounting Standards (SFAS) 141(R),: “Business Combinations” which became effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. There were no significant acquisition-related costs incurred. Additional disclosures required by SFAS 141(R) are not presented as the acquired entity’s financial position, results of operations or cash flows would not materially impact either the historical consolidated financial statements or the supplemental pro forma information for the Company. Since the planned acquisition was not completed, there was no business purpose to hold and maintain the inactive wholly owned subsidiary.  It was sold in June 2009 for a cash price of $25,000, resulting in a loss on sale of $100,000 and was deconsolidated on the date of disposal.


In April 2009, we filed applications for two additional tenement licenses in Tasmania. One application is for the coal-bed methane horizons of the existing SEL 13/98 tenement which would be tested commencing with the Bellevue #1 exploratory well. The second application is for a further 12,040 sq. kilometers of tenement on the Eastern seaboard of Tasmania, which includes approximately 5,000 sq. kilometers of offshore area, where 7 kilometers of onshore and 256 kilometers seismic operations were previously carried out.


In April 2009, we issued 10,177,500 common shares to establish a borrowing facility in April 2009; the borrowing facility has no stated repayment terms or maturity date and no stated interest rate but is secured by 8,850,000 of the Company’s common stock and guaranteed by our CEO.  These shares are contingently returnable to the Company once the amounts borrowed have been repaid. As a result of the shares being contingently returnable, they have not been recognized as issued in the consolidated financial statements.  The remainder of the shares issued, 1,327,500, were issued to enable the arrangement, were valued at current market and the Company recognized a current expense in the amount of $92,925 in the consolidated statement of operations.  At June 30, 2009, the Company had been advanced $200,000 from the borrowing facility; the lender has discretion to loan up to $500,000 to the Company. The Company utilized the $200,000 for working capital during the three months ended June 30, 2009. Future funding will depend on market conditions.


EEGC is in the development stage, devoting substantially all of its efforts to exploration of its oil and gas license in Tasmania and raising capital to finance its exploration of its oil and gas license. EEGC has substantially funded its operations with proceeds from the issuance of common stock. In the course of its exploration activities, EEGC has sustained operating losses and expects such losses to continue for the foreseeable future. EEGC will finance its operations primarily through cash and cash equivalents on hand, future financing from the issuance of debt or equity instruments and through the generation of revenues if commercial operations get underway.  The Company has yet to generate any oil or gas revenues and has no assurance of future oil or gas revenues. To management’s knowledge, no company has yet successfully developed sub-surface hydrocarbons in commercial quantities in Tasmania. Even if development efforts are successful, substantial time may pass before revenues are realized.


The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has a working capital deficiency, has incurred net losses in recent years, and has a significant accumulated deficit. Those conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to those matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Off Balance Sheet Arrangements


We do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses except as noted hereinafter.  We are a party to operating leases and license agreements that represent commitments for future payments (described in the financial statements).   In addition, we have issued purchase orders in the ordinary course of business that represent commitments to future payments for goods and services.


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Item 3.

Quantitative and Qualitative Disclosures About Market Risk.


Not required by smaller reporting companies.

 

Item 4.

Controls and Procedures.

 

Item 4T.

Controls and Procedures.


(a) Evaluation of Disclosure Controls and Procedures. The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in reports that it files under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.


In connection with the preparation of this Quarterly Report on Form 10-Q, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the CEO and CFO, as of September 30, 2009 of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon this evaluation, management concluded that, as of September 30, 2009, the Company’s disclosure controls and procedures were not effective as of September 30, 2009.  As reported on Form 10K filed for the year ended December 31, 2008, disclosure controls have been determined to be ineffective due to a lack of segregation of duties in the corporate office, a lack of specific anti-fraud controls and lack of a whistle-blower policy and procedure..  The company has not added personnel or procedures to alleviate these material weaknesses but compensates through additional reconciliation of material accounts, oversight, independent review and officer involvement.  


(b) Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal controls over financial reporting known to the Chief Executive Officer or the Chief Financial Officer that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

 

Item 1.

Legal Proceedings.


On March 31, 2009 our wholly-owned subsidiary, Great Southland Minerals Ltd., was served with a Form 509H, Creditor’s Statutory Demand relating to a claim by Hunt Energy & Mineral Company -- Australia Ltd. PTY for payment of approximately AU$441,000 (US$309,000) claimed due pursuant to our drilling contract with Hunt.  The statutory demand notice has been filed with the Tasmanian District Court.  The company was provided 21 days to respond to the Statutory Demand notice. Should fail to respond or should the court determined in favor of Hunt and the demand is not paid, the procedure for Statutory Demand could result in the court ordering the business of Great Southland Minerals to be wound up.  Management believes that it has substantial defenses to the claim including the defense that the contract provides for all disputes to be submitted to the dispute resolution process contained in the contract and that substantial sums have been paid to the claimant, which sums exceed the amount being claimed.  The Company negotiated an ongoing arrangement with Hunt that has deferred any action and withdrawn the statutory claim and is allowing work to proceed on the exploratory drilling. In July 2009, GSLM was served by Hunt Energy with a Statutory Demand claiming balance due of AU$173,678 of the original debt and a separate additional Statutory Demand in an amount of AU$1,509,200.00.  The Company believes it has significant defenses and has subsequently negotiated an agreement  with Hunt Energy that will allow appropriate payments to be made over an eighteen month  period of time and that will allow Hunt to return to work when funding is available.  


An additional Creditor’s Statutory Demand claim was presented in April 2009 from D&M Drilling in the amount of AU$55, 000 (US$38,000).  Action on the claim has been deferred and payment terms are being negotiated. We are currently not aware of any other legal proceedings or claims that we believe will have, individually, or in the aggregate, a material adverse affect on our business, financial condition or operating results.


Item 1A.

Risk Factors.


Risk factors have not changed materially from those listed in the annual report Form 10-K filed April 16, 2009 for the year ended December 31, 2008.

 



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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.


During the three months ended September 30, 2009, we issued no common shares.  

 

Item 3.

Defaults Upon Senior Securities.


None

 

Item 4.

Submission of Matters to a Vote of Security Holders.


None

 

Item 5.

Other Information.


None

 

Item 6.

Exhibits


(a) The following exhibits are furnished as part of this report:

 

 

 

 

31.1

 

Certification required by Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2

 

Certification required by Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.1

 

Certification required by Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

32.2

 

Certification required by Section 906 of the Sarbanes-Oxley Act of 2002.

 



SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

 

Empire Energy Corporation International

 

 

 

November 20, 2009

 

By:

 

/s/ Malcolm Bendall

 

 

 

 

Malcolm Bendall

Chief Executive Officer

 

 

 

November 20, 2009

 

By:

 

/s/ John Garrison

 

 

 

 

John Garrison

Chief Financial Officer

 






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