ITEM 1. BUSINESS
Unless the context otherwise requires, all references in this report to “Nitro,” “our,” “us,” and “we” refer to Nitro Petroleum Incorporated.
Overview
Nitro is engaged in the acquisition and exploration of gas and oil properties. We were incorporated on October 27, 2003, under the name Ingenium Capital Corp. in the State of Nevada. We changed our name from Ingenium Capital Corp. to Nitro Petroleum Incorporated on February 27, 2006. Our principal offices are located at 624 W. Independence, Suite 101, Shawnee, OK 74804. Our telephone number is (405) 273-9119.
Strategy
Our business strategy is to acquire interests in the properties of, and working interests in the production owned by, established oil and gas production companies, whether public or private, in United States oil and gas producing areas. We believe such opportunities exist in the United States. We also believe that these opportunities have considerable future potential for the development of additional oil and gas reserves. Such new reserves might come from the development of existing but as yet undeveloped reserves as well as from future success in exploration.
When and if funding becomes available, we plan to acquire high-quality oil and gas properties, primarily “proved producing and proved undeveloped reserves.” We will also explore low-risk development drilling and work-over opportunities with experienced, well-established operators. We also seek to acquire and develop oil and gas properties, as the operator.
Oil and Natural Gas Reserves
The information below is derived from a reserve report prepared by Ramsey Property Management LLC (“Ramsey”). Copies of the summary reserve report are attached as Exhibit 99.1 to this Annual Report. Ramsey is a well-known petroleum engineering company with experience and knowledge in the oil and gas industry. We believe our controls around the reserve estimates are sufficient for estimates and reporting.
To determine our estimated proved reserves, and as required by the SEC, we used the 12-month unweighted arithmetic average of the first-day-of-the-month price for the months of February 2013 through January 2014, calculated to be $5.09 per Mcf of natural gas and $91.81 per Bbl of oil. These prices were held constant for the life of the properties and are net of adjustments for the appropriate market differentials.
As of January 31, 2014, our proved crude oil and natural gas reserves are presented below by reserve category. All of our proved reserves are located within the United States.
Increases in our proved developed reserves and our proved undeveloped reserves are attributable to drilling of new wells and recompletion of existing Company owned wells.
Proved Developed Non-Producing
These are wells that have reserves which are currently behind-pipe, and would require recompletion to begin production.
Net Production, Unit Prices and Costs
The following table presents certain information with respect to our oil and natural gas production and prices and costs attributable to all oil and natural gas properties owned by us for the periods shown.
Net Production, Unit Prices and Costs-Crown # 1
Net Production, Unit Prices and Costs-Quinlan # 2
Net Production, Unit Prices and Costs-Quinlan # 3
Drilling Activities
The Company drilled and completed the Branch #1 well in Garvin County, Oklahoma as a successful oil well in January 2013 and the Giant #1 and Giant #2 in Stephen County, Oklahoma as successful oil wells in 2013.
Producing Wells
The following table sets forth the number of productive wells in which we owned an interest as of January 31, 2014. Productive wells consist of producing wells and wells capable of production, including wells awaiting pipeline connections or connection to production facilities. Wells that we complete in more than one producing horizon are counted as one well.
Oil and Gas Acreage
The following table sets forth our developed and undeveloped gross and net leasehold acreage as of January 31, 2014:
Our undeveloped acreage includes leased acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas, regardless of whether or not such acreage is held by production or contains proved reserves. A gross acre is an acre in which we own an interest. A net acre is deemed to exist when the sum of fractional ownership interests in gross acres equals one. The number of net acres is the sum of the fractional interests owned in gross acres.
Participation in Barnett Shale
We entered into an Acreage Participation Agreement effective January 23, 2006, with REO Energy, Ltd. (“REO”) as a holder of approximately 2,000 acres of mineral leases in and around Montague County, Texas (the “Gross Area”). We purchased 50% of REO’s leasehold interest in the Gross Area (the “Assigned Acreage”) for $300,000. We are also entitled (i) to receive a 1% overriding royalty on the entire Gross Area, (ii) to participate in up to a 25% working interest in wells drilled in the Gross Area, and (iii) to receive an acreage fee of $500 per acre from all wells drilled on the Assigned Acreage.
Additionally, we acquired a 10% working interest in four wells (Inglish 4, Inglish 5, Inglish D1 and Inglish D2) and a 5% working interest in two wells (Craig Muncaster 6 and Craig Muncaster 7) drilled by REO on Barnett Shale formation leases.
Oklahoma Properties
Garvin County
On February 1, 2008, we purchased producing properties located in Garvin County and Pottawatomie County, Oklahoma in a transaction that resulted in the distribution of 13,061 shares in exchange for a 12.25% to a 29.44% gross working interest in producing wells and in undeveloped proved properties. The Sarah No. 1-4, Teresa No. 1, Thompson No. 1-18, Ward/McNeil and Mason-Burns wells are all located in Garvin County.
On September 1, 2010, we acquired a 25% working interest in a 7 well package located in Garvin County, Oklahoma. We acquired this interest by first purchasing the prospect and then selling off 55% of the ownership in the working interest to third party investors, giving a 20% carried working interest to the seller and retaining the balance of the working interest. During the year ended January 31, 2013, we purchased and sold some interests in the well package. Currently, we own a 24% working interest in these wells.
On September 29, 2010, we purchased a 20.83333% working interest in the Thompson No. 2-18 located in Garvin County, Oklahoma. We paid $10,417 for this working interest. On November 17, 2010, we sold a 13.46774% working interest, realizing $35,516. Currently, we own a 7.36559% working interest in this well.
In January 2013, we completed drilling the Branch #1 well. The Company holds a 79.25% net revenue interest and a 24% working interest in the Branch No. 1 well. The Company completed drilling the Giant #1 and Giant #2 in September 2013.
Pottawatomie County
We acquired the Crown No. 1, No. 2 and No. 3 and the Gloria salt water disposal (“SWD”) wells located in Pottawatomie County, Oklahoma, on February 1, 2008 and turnkeyed the rework of these wells to outside investors, retaining a 15% carried working interest and operations of the wells.
During 2008, we drilled the Quinlan No. 3 and the Quinlan No. 4, both located in Pottawatomie County, Oklahoma, retaining a 15% carried working interest in both wells. The Quinlan No. 4 was later converted into a saltwater disposal well. We also reworked the Quinlan No. 2, located in Pottawatomie County, Oklahoma, initially as a saltwater disposal well, but later converted it into a producing well.
Effective January 1, 2011, we negotiated purchase agreements in which certain owners of working interest in the Crown and Quinlan leases would sell all rights in said leases to us in exchange for shares of our common stock. Pursuant to the terms of the purchase agreements, we assumed $113,159 of joint interest billings and issued a total of 581,060 shares of common stock to the sellers in the Quinlan Nos. 1, 2, 3 and 4 and the Crown Nos. 1, 2 and 3 as the purchase price for the working interests. We recognized an aggregate cost of $694,219 for this transaction.
As a result of this transaction, our working interest in these leases increased as indicated in the following table.
During 2012, we sold a 30% ownership interest in each of the Quinlan No. 1, No. 2, and No. 3 wells. Our new ownership percentages of the Quinlan No. 1, No. 2, and No. 3 were 24%, 53.35%, and 47.5%, respectively.
Seminole County
On April 8, 2008, we acquired a 10% working interest in the Jessica No. 23, located in Seminole County, Oklahoma, which is still producing as of January 31, 2014.
Corporate Office
Our corporate office is located at 624 W. Independence, Suite 101, Shawnee, OK 74804. Our corporate office is approximately 1,235 square feet and our annual rent is $10,500. The Company also leases an office in Tulsa, OK. For the years ended January 31, 2013 and 2014, the rents were included in management fees paid to a related company, with no additional rent expense.
Competition
We operate in a highly competitive environment. We compete with major and independent oil and natural gas companies, many of which have financial and other resources substantially in excess of those available to us. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation.
Compliance with Government Regulation
The availability of a ready market for future oil and gas production from possible U.S. assets depends upon numerous factors beyond our control. These factors may include, amongst others, regulation of oil and natural gas production, regulations governing environmental quality and pollution control, and the effects of regulation on the amount of oil and natural gas available for sale, the availability of adequate pipeline and other transportation and processing facilities and the marketing of competitive fuels. These regulations generally are intended to prevent waste of oil and natural gas and control contamination of the environment.
We expect that our sales of crude oil and other hydrocarbon liquids from our future U.S.-based production will not be regulated and will be made at market prices. However, the price we would receive from the sale of these products may be affected by the cost of transporting the products to market via pipeline.
Environmental Regulations
Our assets, all of which are located in the U.S., are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit drilling activities on certain lands within wilderness, wetlands and other protected areas, require remedial measures to mitigate pollution from former operations, such as pit closure and plugging abandoned wells, and impose substantial liabilities for pollution resulting from production and drilling operations. Public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stricter environmental legislation and regulations applied to the oil and natural gas industry could continue, resulting in increased costs of doing business and consequently affecting profitability. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes more stringent and costly waste handling, disposal and cleanup requirements, our business and prospects could be adversely affected.
Operating Hazards and Insurance
The oil and natural gas business involves a variety of operating hazards and risks such as well blowouts, craterings, pipe failures, casing collapse, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures or spills, pollution, releases of toxic gas and other environmental hazards and risks. These hazards and risks could result in substantial losses to us from, among other things, injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations.
In accordance with customary industry practices, we expect to maintain insurance against some, but not all, of such risks and losses. There can be no assurance that any insurance we obtain would be adequate to cover any losses or liabilities. We cannot predict the continued availability of insurance or the availability of insurance at premium levels that justify its purchase. The occurrence of a significant event not fully insured or indemnified against could materially and adversely affect our financial condition and operations.
Pollution and environmental risks generally are not fully insurable. The occurrence of an event not fully covered by insurance could have a material adverse effect on our future financial condition. If we were unable to obtain adequate insurance, we could be forced to participate in all of our activities on a non-operated basis, which would limit our ability to control the risks associated with oil and natural gas operations.
Employees
At January 31, 2014 we had no full-time employees.
ITEM 1A.
ITEM 1A. RISK FACTORS
You should carefully consider the following risk factors, in addition to the other information set forth in this Report, in connection with any investment decision regarding shares of our common stock. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock. Some information in this Report may contain “forward-looking” statements that discuss future expectations of our financial condition and results of operation. The risk factors noted in this section and other factors could cause our actual results to differ materially from those contained in any forward-looking statements.
Fluctuations in oil and natural gas prices, which have been volatile at times, may adversely affect our revenues as well as our ability to borrow money, repay future indebtedness and obtain additional capital.
Our future financial condition, access to capital, cash flows and results of operations depend upon the prices we receive for our oil and natural gas. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control. Factors that affect the prices we receive for our oil and natural gas include:
●
the level of domestic production;
●
the availability of imported oil and natural gas;
●
political and economic conditions and events in foreign oil and natural gas producing nations, including embargoes, continued hostilities in the Middle East and other sustained military campaigns, and acts of terrorism or sabotage;
●
the ability of members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;
●
the cost and availability of transportation and pipeline systems with adequate capacity;
●
the cost and availability of other competitive fuels;
●
fluctuating and seasonal demand for oil, natural gas and refined products;
●
concerns about global warming or other conservation initiatives and the extent of governmental price controls and regulation of production;
●
weather;
●
foreign and domestic government relations; and
●
overall economic conditions, particularly the recent worldwide economic slowdown which has put downward pressure on oil and natural gas prices and demand.
In the past, prices of oil and natural gas have been extremely volatile, and we expect this volatility to continue. Our revenues, cash flow and profitability and our ability to borrow money, to repay future indebtedness and to obtain additional capital depend substantially upon oil and natural gas prices.
We face significant competition, and many of our competitors have resources in excess of our available resources.
The oil and gas industry is highly competitive. We encounter competition from other oil and gas companies in all areas of our operations, including the acquisition of producing properties and exploratory prospects and sale of crude oil, natural gas and natural gas liquids. Our competitors include major integrated oil and gas companies and numerous independent oil and gas companies, individuals and drilling and income programs. Many of our competitors are large, well established companies with substantially larger operating staffs and greater capital resources than us. Such companies may be able to pay more for productive oil and gas properties and exploratory prospects and to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. Our ability to acquire additional properties and to discover reserves in the future will depend upon our ability to evaluate and select suitable properties and to consummate transactions in this highly competitive environment.
Exploratory drilling is a speculative activity that may not result in commercially productive reserves and may require expenditures in excess of budgeted amounts.
Drilling activities are subject to many risks, including the risk that no commercially productive oil or gas reservoirs will be encountered. There can be no assurance that new wells drilled by us or in which we have an interest will be productive or that we will recover all or any portion of our investment. Drilling for oil and gas may involve unprofitable efforts, not only from dry wells, but also from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. The cost of drilling, completing and operating wells is often uncertain. Our drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, many of which are beyond our control, including economic conditions, mechanical problems, pressure or irregularities in formations, title problems, weather conditions, compliance with governmental requirements and shortages in or delays in the delivery of equipment and services. Such equipment shortages and delays sometimes involve drilling rigs where inclement weather prohibits the movement of land rigs causing a high demand for rigs by a large number of companies during a relatively short period of time. Our future drilling activities may not be successful. Lack of drilling success could have a material adverse effect on our financial condition and results of operations.
Our operations are also subject to all of the hazards and risks normally incident to the development, exploitation, production and transportation of, and the exploration for, oil and gas, including unusual or unexpected geologic formations, pressures, down hole fires, mechanical failures, blowouts, explosions, uncontrollable flows of oil, gas or well fluids and pollution and other environmental risks. These hazards could result in substantial losses to us due to injury and loss of life, severe damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations. Insurance for wells in which we participate is generally obtained, although there can be no assurances that such coverage will be sufficient to prevent a material adverse effect to us if any of the foregoing events occur.
We may not identify all risks associated with the acquisition of oil and natural gas properties, or existing wells, and any indemnifications we receive from sellers may be insufficient to protect us from such risks, which may result in unexpected liabilities and costs to us.
Our business strategy focuses on acquisitions of undeveloped oil and natural gas properties that we believe are capable of production. We may make additional acquisitions of undeveloped oil and gas properties from time to time, subject to available resources. Any future acquisitions will require an assessment of recoverable reserves, title, future oil and natural gas prices, operating costs, potential environmental hazards, potential tax and other liabilities and other factors. Generally, it is not feasible for us to review in detail every individual property involved in a potential acquisition. In making acquisitions, we generally focus most of our title and valuation efforts on the properties that we believe to be more significant, or of higher-value. Even a detailed review of properties and records may not reveal all existing or potential problems, nor would it permit us to become sufficiently familiar with the properties to assess fully their deficiencies and capabilities. In addition, we do not inspect in detail every well that we acquire. Potential problems, such as deficiencies in the mechanical integrity of equipment or environmental conditions that may require significant remedial expenditures, are not necessarily observable even when we perform a detailed inspection. Any unidentified problems could result in material liabilities and costs that negatively impact our financial condition and results of operations.
Even if we are able to identify problems with an acquisition, the seller may be unwilling or unable to provide effective contractual protection or indemnity against all or part of these problems. Even if a seller agrees to provide indemnity, the indemnity may not be fully enforceable or may be limited by floors and caps, and the financial wherewithal of such seller may significantly limit our ability to recover our costs and expenses. Any limitation on our ability to recover the costs related to any potential problem could materially impact our financial condition and results of operations.
We have a history of operating losses and we may not become profitable. If we are not able to achieve and maintain profitability in the future, we might not be able to access funds through debt or equity financings.
Historically, we have funded our operating losses, acquisitions and drilling costs primarily through private offerings of equity securities. Our success in obtaining the necessary capital resources to fund future costs associated with our operations and drilling plans is dependent upon our ability to: (i) increase revenues through acquisitions and recovery of our proved producing and proved developed non-producing oil and gas reserves; and (ii) obtain additional financing. However, even if we achieve some success with our plans, there can be no assurance that we will be able to generate sufficient revenues to achieve significant profitable operations or to fund our drilling plans.
We are subject to uncertainties in reserve estimates and future net cash flows.
This report contains estimates of our oil and gas reserves and the expected future net cash flows from those reserves, which have been prepared by an independent petroleum consultant. There are numerous uncertainties inherent in estimating quantities of reserves of oil and gas and in projecting future rates of production and the timing of development expenditures, including many factors beyond our control. The reserve estimates in this report are based on various assumptions, including, for example, constant oil and gas prices, operating expenses, capital expenditures and the availability of funds, and, therefore, are inherently imprecise indications of future net cash flows. Actual future production, cash flows, taxes, operating expenses, development expenditures and quantities of recoverable oil and gas reserves may vary substantially from those assumed in the estimates. Any significant variance in these assumptions could materially affect the estimated quantity and value of reserves set forth in this report. Additionally, our reserves may be subject to downward or upward revision based upon actual production performance, results of future development and exploration, prevailing oil and gas prices and other factors, many of which are beyond our control.
The present value of future net reserves discounted at 10% (the “PV-10”) of proved reserves referred to in this report should not be construed as the current market value of the estimated proved reserves of oil and gas attributable to our properties. In accordance with applicable requirements of the SEC, the estimated discounted future net cash flows from proved reserves are based on an average price of the first day of each month of the last 12 months and a differential of the price per barrel of oil or Mcf of gas received by us, and costs as of the date of the estimate, whereas actual future prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by: (i) the timing of both production and related expenses; (ii) changes in consumption levels; and (iii) governmental regulations or taxation. In addition, the calculation of the present value of the future net cash flows using a 10% discount as required by the SEC is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with our reserves or the oil and gas industry in general. Furthermore, our reserves may be subject to downward or upward revision based upon actual production, results of future development, supply and demand for oil and gas, prevailing oil and gas prices and other factors. See “Item 1. Business - Oil and Natural Gas Reserves.”
We are subject to various operating and other casualty risks that could result in liability exposure or the loss of production and revenues.
Our oil and gas business involves a variety of operating risks, including, but not limited to, unexpected formations or pressures, uncontrollable flows of oil, gas, brine or well fluids into the environment (including groundwater contamination), blowouts, fires, explosions, pollution and other risks, any of which could result in personal injuries, loss of life, damage to properties and substantial losses. Although we carry insurance at levels that we believe are reasonable, we are not fully insured against all risks. We do not carry business interruption insurance. Losses and liabilities arising from uninsured or under-insured events could have a material adverse effect on our financial condition and operations.
From time to time, due primarily to contract terms, pipeline interruptions or weather conditions, the producing wells in which we own an interest have been subject to production curtailments. The curtailments range from production being partially restricted to wells being completely shut-in. The duration of curtailments varies from a few days to several months. In most cases, we are provided only limited notice as to when production will be curtailed and the duration of such curtailments.
Our business may suffer if we lose key personnel.
We depend to a large extent on the services of James G. Borem, our President. The loss of the services of Mr. Borem would have a material adverse effect on our operations. We have not obtained key personnel life insurance on Mr. Borem.
Certain of our affiliates control a significant percentage of our outstanding common stock, which may affect other stockholders’ ability to influence matters submitted to a vote of stockholders.
As of January 31, 2014, our executive officers, directors and their affiliates and certain 5% stockholders hold approximately 28.2% of our outstanding shares of common stock. As a result, officers, directors and their affiliates and such stockholders have the ability to exert significant influence or control over our business affairs, including the ability to significantly affect the election of directors and results of voting on all matters requiring stockholder approval. This concentration of voting power may delay or prevent a potential change in control, even if that is in the best interests of shareholders.
Certain of our affiliates have engaged in business transactions with us, which may result in conflicts of interest.
Certain officers, directors and related parties, including entities controlled by Mr. Borem, our President, have engaged in business transactions with us which were not the result of arm’s length negotiations between independent parties. Our management believes that the terms of these transactions were as favorable to us as those that could have been obtained from unaffiliated parties under similar circumstances. All future transactions between us and our affiliates will be on terms no less favorable than could be obtained from unaffiliated third parties and will be approved by a majority of the independent members of our Board of Directors.
The liquidity, market price and volume of our stock are volatile.
Our common stock is not traded on any exchange, but is currently quoted on the U.S. OTC Markets. The liquidity of our common stock may be adversely affected, and purchasers of our common stock may have difficulty selling our common stock, particularly if our common stock does not continue to be quoted on the U.S. OTC Markets on another recognized quotation services or exchange.
The trading price of our common stock could be subject to wide fluctuations in response to quarter-to-quarter variations in our operating results, announcements of our drilling results and other events or factors. In addition, the U.S. stock markets have from time to time experienced extreme price and volume fluctuations that have affected the market price for many companies and which often have been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our securities.
Shares of our common stock that have not been registered under the Securities Act of 1933, as amended, regardless of whether such shares are restricted or unrestricted, are subject to resale restrictions imposed by Rule 144.
Any restricted securities we sell in the future or issue to consultants or employees, in consideration for services rendered or for any other purposes will have no liquidity until and unless such securities are registered with the SEC and/or until the requisite holding period has elapsed, and we have otherwise complied with the other requirements of Rule 144. As a result, it may be harder for us to fund our operations and pay our employees and consultants with our securities instead of cash. Furthermore, it will be harder for us to raise funding through the sale of debt or equity securities unless we agree to register such securities with the SEC, which could cause us to expend additional resources in the future. This could prevent us from raising additional funds, engaging employees and consultants, and using our securities to pay for any acquisitions, which could cause the value of our securities to decline in value or become worthless.
Our stock is categorized as a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations which may limit a stockholder’s ability to buy and sell our stock.
Our stock is categorized as a “penny stock”. The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
FINRA sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“FINRA”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
We may experience adverse consequences because of required indemnification of officers and directors.
Provisions of our Articles of Incorporation and Bylaws provide that we will indemnify any director and officer as to liabilities incurred in their capacity as a director or officer and on those terms and conditions set forth therein to the fullest extent of Nevada law. Further, we may purchase and maintain insurance on behalf of any such persons whether or not we would have the power to indemnify such person against the liability insured against. The foregoing could result in substantial expenditures by us and prevent any recovery from our officers, directors, agents and employees for losses incurred by us as a result of their actions.
Certain anti-takeover provisions may discourage a change in control.
Provisions of Nevada law and our Articles of Incorporation and Bylaws may have the effect of delaying or preventing a change in control or acquisition of the Company. Our Articles of Incorporation and Bylaws include “blank check” preferred stock (the terms of which may be fixed by our Board of Directors without stockholder approval), and certain procedural requirements governing stockholder meetings. These provisions could have the effect of delaying or preventing a change in control of the Company.
Our internal controls over financial reporting may not be effective, which could have a significant and adverse effect on our business.
Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, which we collectively refer to as “Section 404,” require us to evaluate our internal controls over financial reporting to allow management to report on those internal controls as of the end of each year. Effective internal controls are necessary for us to produce reliable financial reports and are important in our effort to prevent financial fraud. In the course of our Section 404 evaluations, we may identify conditions that may result in significant deficiencies or material weaknesses and we may conclude that enhancements, modifications or changes to our internal controls are necessary or desirable. Implementing any such matters would divert the attention of our management, could involve significant costs, and may negatively impact our results of operations.
We note that there are inherent limitations on the effectiveness of internal controls, as they cannot prevent collusion, management override or failure of human judgment. If we fail to maintain an effective system of internal controls or if management or our independent registered public accounting firm were to discover material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud, and it could harm our financial condition and results of operations, result in a loss of investor confidence and negatively impact our share price.
We may not have satisfactory title or rights to all of our current or future properties.
Prior to acquiring undeveloped properties, our contract land professionals review title records or other title review materials relating to substantially all of such properties. The title investigation performed by us prior to acquiring undeveloped properties is thorough, but less rigorous than that conducted prior to drilling, consistent with industry standards. Prior to drilling, we obtain a title opinion on the drill site prior to drilling. However, a title opinion does not necessarily ensure satisfactory title. We believe we have satisfactory title to our producing properties in accordance with standards generally accepted in the oil and gas industry. Our properties are subject to customary royalty interests, liens incident to operating agreements, liens for current taxes and other burdens, which we believe do not materially interfere with the use of or affect the value of such properties. In the normal course of our business, title defects and lease issues of varying degrees arise, and, if practicable, reasonable efforts are made to cure such defects and issues.
Governmental regulations could adversely affect our business.
Our business is subject to certain federal, state and local laws and regulations on taxation, the exploration for and development, production and marketing of oil and natural gas, and environmental and safety matters. Many laws and regulations require drilling permits and govern the spacing of wells, rates of production, prevention of waste and other matters. These laws and regulations have increased the costs of our operations. In addition, these laws and regulations, and any others that are passed by the jurisdictions where we have production, could limit the total number of wells drilled or the allowable production from successful wells, which could limit our revenues.
Laws and regulations relating to our business frequently change, and future laws and regulations, including changes to existing laws and regulations, could adversely affect our business.
In particular and without limiting the foregoing, various tax proposals currently under consideration could result in an increase and acceleration of the payment of federal income taxes assessed against independent oil and natural gas producers, for example by eliminating the ability to expense intangible drilling costs, removing the percentage depletion allowance and increasing the amortization period for geological and geophysical expenses. Any of these changes would increase our tax burden.
The State of Texas and Oklahoma and many other states require permits for drilling operations, drilling bonds and reports concerning operations and impose other requirements relating to the exploration for and production of oil and gas. Such states also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and gas properties, the establishment of maximum rates of production from wells and the regulation of spacing, plugging and abandonment of such wells. The statutes and regulations of these states limit the rate at which oil and gas can be produced from our properties. However, we do not believe we will be affected materially differently by these statutes and regulations than any other similarly situated oil and gas company.
Environmental liabilities could adversely affect our business.
In the event of a release of oil, natural gas or other pollutants from our operations into the environment, we could incur liability for any and all consequences of such release, including personal injuries, property damage, cleanup costs and governmental fines. We could potentially discharge these materials into the environment in several ways, including:
●
from a well or drilling equipment at a drill site;
●
leakage from gathering systems, pipelines, transportation facilities and storage tanks;
●
damage to oil and natural gas wells resulting from accidents during normal operations; and
●
blowouts, cratering and explosions.
In addition, because we may acquire interests in properties that have been operated in the past by others, we may be liable for environmental damage, including historical contamination, caused by such former operators. Additional liabilities could also arise from continuing violations or contamination that we have not yet discovered relating to the acquired properties or any of our other properties.
To the extent we incur any environmental liabilities, it could adversely affect our results of operations or financial condition.
Climate change legislation, regulation and litigation could materially adversely affect us.
There is an increased focus by local, state and national regulatory bodies on greenhouse gas (“GHG”) emissions and climate change. Various regulatory bodies have announced their intent to regulate GHG emissions, including the United States Environmental Protection Agency, which promulgated several GHG regulations in 2010 and late 2009. As these regulations are under development or are being challenged in the courts, we are unable to predict the total impact of these potential regulations upon our business, and it is possible that we could face increases in operating costs in order to comply with GHG emission legislation.
Passage of legislation or regulations that regulate or restrict emissions of GHG, or GHG-related litigation instituted against us, could result in direct costs to us and could also result in changes to the consumption and demand for natural gas and carbon dioxide produced from our oil and natural gas properties, any of which could have a material adverse effect on our business, financial position, results of operations and prospects.
Horizontal drilling activities could be subject to increased regulation and could expose us to environmental risks that could adversely affect us.
Legislation relating to horizontal drilling activities that could impose new permitting disclosure or other environmental restrictions or obligations on our operations is currently being considered at the federal level, and may in the future be considered at the state or local level. In particular, the U.S. Congress recently signaled a renewed interest in certain downhole injection activities, some of which we utilize in our operations. The focus may lead to new legislation or regulations that could affect our operations. Any additional requirements or restrictions on our operations could result in delays, increased operating costs or a requirement to change or eliminate certain drilling and injection activities in a manner that may materially adversely affect us. In addition, because horizontal drilling involves fracture stimulation through the injection of water, sand and chemicals under pressure into rock formations to stimulate natural gas production, it is also possible that our drilling and the fracturing process could adversely affect the environment, which could result in a requirement to perform investigations or clean-ups or in the incurrence of other unexpected material costs or liabilities.
We may be responsible for additional costs in connection with abandonment of properties.
We are responsible for payment of plugging and abandonment costs on our oil and gas properties pro rata to our working interest. There can be no assurance that we will be successful in avoiding additional expenses in connection with the abandonment of any of our properties. In addition, abandonment costs and their timing may change due to many factors, including actual production results, inflation rates and changes in environmental laws and regulations.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
A description of our properties is included in “Part I. Item 1. Business” and is incorporated herein by reference.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings and, to our knowledge; no such proceedings are threatened or contemplated.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for the Common Stock
Our common stock is traded on the QB Tier of the U.S. OTC Markets and is quoted under the symbol “NTRO.” The following quotations were obtained from Yahoo Finance and reflect interdealer prices, without retail markup, markdown, or commission, and may not represent actual transactions. There have been no reported transactions in our stock for certain of the trading days during the periods reported below. The following table sets forth the high and low bid prices for our common stock on the U.S. OTC Markets for the periods indicated (as adjusted for stock splits):
Holders of the Common Stock
At January 31, 2014, we had approximately 144 stockholders of record.
Dividends
Our dividend policy for holders of common stock is to retain earnings to support the expansion of operations through organic growth or by strategic acquisitions. We have not previously paid any cash dividends, and we do not intend to pay cash dividends in the near future. Any future cash dividends will depend on our future earnings, capital requirements, financial condition and other factors deemed relevant by the Board of Directors.
Equity Compensation Plan Information
No new shares were issued to officers, directors, or consultants during the year ending January 31, 2014. During the year ended January 31, 2013, the Company issued 2,015,000 common shares in exchange for past services. The value assigned to these shares was $298,970, granted to consultants, officers, and directors, with no formal incentive plan or stated terms.
The following table provides information for all equity compensation plans as of January 31, 2014, under which our equity securities were authorized for issuance:
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We intend to continue to acquire high quality oil and gas properties, primarily “proved producing and proved undeveloped reserves” in the United States. We see significant opportunities in acquiring properties with proved producing reserves and undeveloped acreage in fields that have a long history of production. We will also explore low-risk development drilling and work-over opportunities with experienced, strong operators, and we might act as an operator in the future. We will attempt to finance oil and gas operations through a combination of privately placed debt and/or equity, or through selling interests in wells in which we have an interest. There can be no assurance that we will be successful in finding financing, or even if financing is found, that we will be successful in acquiring oil and/or gas assets that result in profitable operations.
We are continuing our efforts to identify and assess investment opportunities in oil and natural gas properties, utilizing free labor of our directors and stockholders until such time as funding is sourced from the capital markets. It is anticipated that funding for the next twelve months will be required to maintain the Company. We have raised certain funds through private placements of our equity securities, and attempts are ongoing to raise additional funds through private placements, and said attempts will continue throughout 2014. We may also use various debt instruments to raise needed capital during 2014.
As oil and gas properties become available and appear attractive to our management, funds, when and if they become available, will be spent on due diligence and research to determine if said prospects could be purchased to provide income for the Company. Established oil companies continue to strive to reduce costs and debt. This causes significant market opportunities for us to possibly position ourself with sellers that wish to divest themselves of production or proved undeveloped properties in order to provide liquidity. Our management believes that current market conditions are creating situations that could result in the opportunity for such production acquisitions.
We may also hedge price risk by selling forward a portion of future production acquired under fixed-price contracts to minimize risk associated with commodity prices. In some cases the future value of such fixed-price contracts may be greater that the initial investments, thereby hedging the inherent acquisition risk, without limiting the upside available to stockholders and investors. There can be no assurance, however, that any of these methods of financing will be successful in helping fund the Company.
Our operating expenses will increase as we undertake our plan of operations. The increase will be attributable to the continuing geological exploration and acquisition programs and continued professional fees that will be incurred.
Financial Condition and Results of Operations
Revenues
The Company has three main revenue streams, including oil and gas production, production services, and sales of oil and gas properties.
Oil and gas production
For the fiscal year ended January 31, 2014, the Company’s revenues from oil and gas production were $498,330 an increase of $207,518, compared to oil and gas production of $290,812 for the fiscal year ended January 31, 2013. This increase was attributable to production of new wells, the Crown # 1, Branch #1 and Giant #1, and improved production from the Quinlan Properties, offset by a decrease in prices. Gross production for the fiscal year ended January 31, 2014, increased by 3,077 BOE (barrel of oil equivalent) from the fiscal year ended January 31, 2013. The increase in production contributed to an increase in revenues of $232,875. The increase in revenues was offset by a decrease in price of $25,357.
Production services
For the fiscal year ended January 31, 2014, production services increased as compared to fiscal year ended January 31, 2013, by $14,080, as a result in administrative charges for operator fees on the following new wells: the Branch # 1, Quinlan # 3, Thompson 2-18 and Giant #1.
Gain on sale of oil and gas properties
Revenues from sales of oil and gas properties increased for the fiscal year ended January 31, 2014, as compared to fiscal year ended January 31, 2013, by $365,619. During the fiscal year ended January 31, 2014, the Company sold working interests in the Giant #1 well and Giant #2 well as part of private offerings of common stock. The proceeds of the working interest sales constitute $683,834 of the revenues from sales of oil and gas properties for the 2013 period. The same period in the prior year included sales of working interests in the Quinlan lease totaling $318,215.
Lease operating expenses
For the fiscal year ended January 31, 2014, the Company’s lease operating expenses were $566,123, a decrease of $138,772 compared to fiscal year ended January 31, 2013 of $704,895. Lease operating expenses remained relatively unchanged, despite increased production from new wells.
General and administrative expenses
For the fiscal year ended January 31, 2014, the Company’s general and administrative expenses were $1,177,743. An increase of $721,766 as compared to the fiscal year ended January 31, 2013 of $455,977. The increase in general and administrative expenses is, in part, the result of increased management fees of $123,322, due to payments to related parties during the current period. Salary expense increased by $172,203; the Company did not have any employees during the prior period, thus no expense was incurred. Further the Company’s accounting and legal expenses have significantly increased with general expenses, in correlation with the increase in the Company’s development activities and drilling operations.
Liquidity and capital resources
As of January 31, 2014 and January 31, 2013, the Company’s cash balances were $190,827 and $160,460, respectively. This increase in cash as of January 31, 2014 relates primarily to capital raised through equity subscriptions and sales of well interests to fund the Company’s drilling operations, as well as an increase in accounts payable balance. Net cash used in the Company’s operating activities was $920,807 for the fiscal year ended January 31, 2014, compared to net cash used in operating activities of $718,692 during fiscal year ended January 31, 2013. This change was primarily attributable to the increase in accounts receivable and the Company’s gain on sale of well interest for the fiscal year ended January 31, 2014.
The net cash used in investing activities is primarily attributable to the purchase of oil and gas properties of $1,327,644 during the fiscal year ended January 31, 2014.
Cash generated from the Company’s financing activities was $1,599,711 for the fiscal year ended January 31, 2014, compared to $801,868 during fiscal year ended January 31, 2013. This increase was primarily attributable to proceeds from the sale of common stock of $1,484,046, compared to $769,560 in 2013, and the issuance of long-term debt of $175,000 in 2013, compared to $0 prior year. These increases were partially offset by an decrease in bank overdraft change of $37,842.
Going Concern
We have not attained profitable operations and are dependent upon obtaining financing to pursue any acquisitions and exploration activities. For these reasons, there is substantial doubt the Company will be able to continue as a going concern without further financing.
Future Financings
We expect to continue to rely on sales of our common shares and securities convertible into our common shares, in order to continue to fund our business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of such securities or arrange for debt or other financing to fund planned acquisitions and exploration activities.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See “Index to Financial Statements” immediately following the signature page of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures should be designed with the objective of ensuring that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission's rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officers (whom we refer to in this periodic report as our Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying Officers, the effectiveness of our disclosure controls and procedures as of January 31, 2014, pursuant to Rule 13a-15 under the Securities Exchange Act. Our Certifying Officer concluded that, as of January 31, 2014, our disclosure controls and procedures were not effective.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15 that was conducted during the fiscal year ended January 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company's our internal control over financial reporting other than as described below in Management's Annual Report on Internal Control over Financial Reporting.
Management's Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting should be designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. Our controls should be designed to provide reasonable assurance that our assets are protected from unauthorized use and that transactions are executed in accordance with established authorizations and properly recorded. Management used the framework set forth in the report entitled “Internal Control-Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission (referred to as “COSO”) to evaluate the effectiveness of our internal control over financial reporting as of January 31, 2014. Management has concluded that the design and operations of our internal controls over financial reporting at January 31, 2014 were not effective and did not provide reasonable assurance that the books and records accurately reflected our transactions. We are taking steps to remedy these deficiencies as quickly as possible. For example, we have contracted with an accounting firm in Oklahoma City that provides the company with monthly financials and prepares all accounts payable and revenue checks. Additionally, we have separated the accounts payable and accounts receivable departments, and any payables in excess of $10,000 require two signatures.
Despite the ineffectiveness of controls, management believes the audited financial statements included in this Annual Report fairly present in all material respects its financial position, results of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our Board of Directors is currently composed of four (4) persons. The term of each director is until the next annual meeting of shareholders or until he resigns or is succeeded by another qualified director who has been elected. The following is a list of our executive officers and the current members of our Board of Directors, including each member’s age, the year he became a director of the Company and his current positions with the Company:
Set forth below is a brief description of the background and business experience of our executive officers and directors.
James G. Borem
James G. Borem was appointed to the Board and as our President effective January 1, 2014. Mr. Borem has over 40 years of experience in the petroleum industry. He has vast experience in the areas of petroleum valuations, development, financing, budgeting, marketing, materials procurement and risk management. Mr. Borem currently serves, and has served for the past five years, as President of Premier Operating Inc. and Providian Reserves Inc., two Oklahoma oil and gas service and production companies that are affiliated with Nitro Petroleum Incorporated.
James C. Lanshe
Mr. Lanshe has been actively involved in law, investment management and oil & gas for over twenty-five years, and has served as the Company’s Chairman of the Board since January 1, 2014. Prior to that time, from 2009 until 2011 he served as the Executive Vice President and General Counsel of Baytree Capital Associates, LLC, an investment management firm in New York. Previously, for approximately the preceding five years, he was chief executive of a fund services company, MadisonGrey Fund Services, with offices in New York, Atlanta and Cayman, that provided administration and regulatory compliance services for several billion dollars in fund assets. He was also a partner with the law firm of O'Connor, Cavanagh, Anderson, Westover, Killingworth & Beshears in Phoenix, Arizona.
Mr. Lanshe has served as an assistant dean and faculty member at Seton Hall University School of Law. He currently holds an appointment as honorary research associate at Oxford Brookes University School of Social Sciences and Law, Oxford, England. Prior to teaching at Seton Hall, he was an adjunct faculty member at the University of Louisville's Brandeis School of Law.
Mr. Lanshe has previously held a gubernatorial appointment (with senate confirmation) to the Arizona Oil and Gas Conservation Commission, and served as that body’s representative to the Legal Affairs Committee of the Interstate Oil and Gas Compact Commission. His other governmental experience includes: (i) having served as an administrative aide to the former United States Senate Minority Leader, Hugh Scott; and (ii) having served as a captain in the United States Marine Corps Office of the Staff Judge Advocate, during which time he held a State Department appointment as a United States representative to the courts of Japan.
Mr. Lanshe has served on various business, civic and charitable boards, including, LaTex Resources (a publicly traded E&P company), Standard Management Corporation (the publicly traded holding company for Standard Life Insurance Company of Indiana), the Saint Thomas University School of Law, Sacred Heart Healthcare System, Muhlenberg College Board of Associates, the Jesse Owens Memorial Health Center and various YMCA organizations in Arizona and Pennsylvania.
Mr. Lanshe is a graduate of Georgetown University (B.A, with Distinction), Cornell University School of Law (JD), Harvard University (MPA), University of Hawaii (MBA), and Cardiff University (MPhil). He is admitted to practice law in the states of Arizona, New York, Pennsylvania, Texas and the District of Columbia, as well as various federal courts, including the Supreme Court of the United States
Larry Wise
Larry Wise was appointed as our President and Treasurer and appointed to the board of directors as of February 21, 2007. Mr. Wise resigned his positions as President and Treasurer effective October 1, 2009 but remains on as our Vice President and a Director. Mr. Wise has been involved in the oil & gas industry for 30 years. Mr. Wise started as a junior field engineer with Phillips 66 Petroleum Company in 1977. In 1979 he became the Completion Superintendent for Jerry Scott Company, overseeing 14 drilling rigs and over 300 producing properties up to the early 1980's. During the 1980's and 1990's Mr. Wise was the President and Chief Operating Officer for JOMC Oil Co; Texas United Petroleum and Pottawatomie County Energy. Over the past 7 years Mr. Wise has operated Wise Oil & Gas Company, LLC and served as an independent Engineering Consultant responsible for all operations of Morris E. Stewart Oil Company, OKC, OK; Kirrie Oil Company, OKC, OK; Hoko, Inc. Oil Company, Wichita Falls, TX; and Buccaneer Energy Corporation, Tampa Bay, FL.
Gunther Weisbrich
Gunther Weisbrich was appointed to our board of directors effective May 19, 2008. Mr. Weisbrich began his oil and gas career as a Production Geologist with Exxon Company, USA in Louisiana, then as a Frontier Exploration Geologist with Tenneco (Houston), Sr. Explorationist with North Central Oil Company (Houston) and finally as a Senior Exploration Geologist with Hunt Oil Company in Dallas, Texas working both internationally (Yemen and South America) and domestically (West Texas, Texas Gulf Coast, East Texas Basin, Mid-continent and Mississippi, Alabama and Florida). Over the years Mr. Weisbrich generated and participated in the discovery of many oil and gas fields. He additionally received the BEST POSTER AWARD at the 1994 Mexico City Joint AAPG/AMPG research conference.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than ten percent of our common stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. No filings under Section 16(a) of the Securities Exchange Act of 1934 were required.
Code of Ethics
Our code of ethics applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the Code of Ethics was filed as an exhibit to our 2006 Annual Report and is incorporated by reference herein. We will provide to any person, without charge, a copy of our Code of Ethics upon receipt of a written request addressed to Nitro Petroleum Incorporated, Attn: Corporate
Secretary, 624 W. Independence, Suite 101, Shawnee, OK 74804.
Corporate Governance
We do not presently have any committees of our board of directors, including an audit committee, because our size makes it impractical to implement board committees at this point.
Leadership Structure of the Board
The chairman of our Board of Directors has the power to preside at all meetings of the Board. James Lanshe, our Chairman, serves as the chairman of our Board of Directors. Although our Board believes that the separation of the chairman and chief executive officer positions is appropriate for our company in the current circumstances, there is no corporate policy requiring those positions to be held by different persons.
Our President is appointed by the Board to manage our daily affairs and operations. We believe that Mr. Borem’s extensive industry experience and direct involvement in our operations make him best suited to serve as president in order to (i) lead the Board in productive, strategic planning, (ii) determine necessary and appropriate agenda items for meetings of the Board with input from both our independent directors and management, and (iii) determine and manage the amount of time and information devoted to discussion and analysis of agenda items and other matters that may come before the Board.
Risk Oversight
The Board considers oversight of our risk management efforts to be a responsibility of the entire Board. The Board’s role in risk oversight includes receiving regular reports from members of senior management on areas of material risk to us, including operational, financial, personnel, information technology, environmental, legal and regulatory, strategic and reputational risks. The full Board receives these reports from the appropriate members of management to enable the Board to understand our risk identification, risk management, and risk mitigation strategies.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The table below summarizes the total compensation paid to our named executive officers for the last two fiscal years.
(1)
The amounts in the “Stock Awards” column reflect the grant date fair value computed in accordance with FASB ASC Topic 718 of restricted stock awards.
(2)
Amounts were for management services performed for Nitro Petroleum Incorporated, services were provided by entities controlled by respective officers.
Outstanding Equity Awards at January 31, 2014
We had no outstanding equity awards as of January 31, 2014.
Director Compensation for the Year Ended January 31, 2014
During year ending 2014, no grants of common shares to directors were made.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
As of January 31, 2014, based upon ownership filings with the SEC, we have shareholders that beneficially own more than 5% of our outstanding shares of common stock. The following table sets forth the number of shares of our common stock beneficially owned as of January 31, 2014, by each director, the named executive officers and all of our directors and executive officers as a group, and the percentage represented by such shares of the total common stock outstanding on that date.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Director Independence
The Board of Directors has determined that Gunther Weisbrich is an independent director under the definition found in Nasdaq Rule 5605(a)(2).
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANTING FEES AND SERVICES
The following table sets forth information regarding the amount billed to us by our independent auditors, Montgomery Coscia Greilich, LLP for the fiscal years ended January 31, 2014 and 2013:
(1)
Audit Fees are the aggregate fees billed by the independent auditor for the audit of the annual financial statements, reviews of interim financial statements, and attestation services that are provided in connection with statutory and regulatory filings or engagements.
Generally, the board of directors approves in advance audit and non-audit services to be provided by our independent auditors. In other cases, in accordance with Rule 2-01(c)(7) of Securities and Exchange Commission Regulation S-X, the board of directors has delegated preapproval authority to our Chief Executive Officer for matters that arise or otherwise require approval between regularly scheduled meetings of the board of directors, provided that such approvals are reported to the board of directors at its next regularly scheduled meeting.
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit
No.
Description of Exhibit
3.1
Articles of Incorporation (filed as Exhibit 3.1 to our Form SB-2 Registration Statement filed on April 21, 2004 and incorporated by reference herein)
3.2
Bylaws (filed as Exhibit 3.2 to our Form SB-2 Registration Statement filed on April 21, 2004 and incorporated by reference herein)
3.3
Amendment to the Articles of Incorporation changing the name to Nitro Petroleum Incorporated (filed as Exhibit 3.3 to our Form 10-KSB filed on May 15, 2006 and incorporated by reference herein)
3.4
Certificate of Change to the Articles of Incorporation of the Company (filed as Exhibit 3.1 to our Form 8-K filed on October 29, 2012)
10.1
Nitro Petroleum Incorporated 2008 Stock Incentive Plan (filed as Exhibit 10.1 to our Form 8-K filed on July 16, 2008)
10.2
Nitro Petroleum Incorporated 2009 Stock Incentive Plan (filed as Exhibit 4.01 to our Registration Statement on Form S-8 filed on August 25, 2009)
10.3
Nitro Petroleum Incorporated 2010 Stock Incentive Plan (filed as Exhibit 99 to our Registration Statement on Form S-8 filed on July 30, 2010)
Code of Ethics (filed as Exhibit 14.1 to our Form 10-KSB filed on May 15, 2006 and incorporated by reference herein)
23.1
Consent of Independent Registered Public Accounting Firm
23.2
Consent of Independent Petroleum Engineers
31.1
Rule 13a-14 Certification of Chief Executive Officer and Interim Chief Financial Officer
32.1
Section 1350 Certification of Chief Executive Officer and Interim Chief Financial Officer
99.1
Report of Ramsey Property Management LLC
101.INS
XBRL Instance Document *
101.SCH
XBRL Taxonomy Extension Schema Document *
101.CAL
XBRL Taxonomy Extension Calculation Linkbase *
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB
XBRL Taxonomy Extension Label Linkbase Document *
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document *
* Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and otherwise are not subject to liability under those sections.
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.
NITRO PETROLEUM INCORPORATED
By: /s/ James G. Borem
James G. Borem
President
Date: May 16, 2014
Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ James G. Borem
Director/President
May 16, 2014
/s/ James C. Lanshe
Chairman of the Board
May 16, 2014
/s/ Larry Wise
Director/Vice President
May 16, 2014
/s/ Gunther Weisbrich
Director
May 16, 2014
PART I - FINANCIAL INFORMATION
NITRO PETROLEUM INCORPORATED
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Nitro Petroleum Incorporated
We have audited the accompanying balance sheets of Nitro Petroleum Incorporated as of January 31, 2014 and 2013, and the related statements of operations, stockholders’ equity, and cash flows for the fiscal years then ended. Nitro Petroleum Incorporated’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nitro Petroleum Incorporated as of January 31, 2014 and 2013, and the results of its operations and its cash flows for the fiscal years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has generated revenues from operations but has substantial accumulated deficit and working capital deficiency and this raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Montgomery Coscia Greilich, LLP
Montgomery Coscia Greilich, LLP
Plano, Texas
May 16, 2014
NITRO PETROLEUM INCORPORATED
BALANCE SHEETS
See accompanying notes to financial statements.
NITRO PETROLEUM INCORPORATED
STATEMENTS OF OPERATIONS
For the Fiscal Years Ended
See accompanying notes to financial statements.
NITRO PETROLEUM INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Fiscal Years Ended January 31, 2014 and 2013
See accompanying notes to financial statements.
NITRO PETROLEUM INCORPORATED
STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended
See accompanying notes to financial statements.
NITRO PETROLEUM INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
January 31, 2014 and 2013
Note 1 Nature and Continuance of Operations
Nitro Petroleum Incorporated (the “Company”) was incorporated in October 2003 in the State of Nevada and has established its corporate offices in Shawnee, Oklahoma. The Company is engaged primarily in the acquisition, development, production, exploration for, and the sale of oil, gas and natural gas liquids, and producing properties. All business activities are conducted in Texas and Oklahoma and the Company sells its oil and gas to a limited number of domestic purchasers.
These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year. Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classifications of assets and liabilities should the Company be unable to continue as a going concern. At January 31, 2014, the Company had not yet achieved profitable operations, has accumulated losses of $6,917,496 since its inception, has a working capital deficiency of $300,371 and expects to incur further losses in the development of its business, all of which casts substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management has no formal plan in place to address this concern but considers that the Company will be able to obtain additional funds by equity financing and/or related party advances, however there is no assurance of additional funding being available.
Note 2 Summary of Significant Accounting Policies
The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America. Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates, which have been made using careful judgment. Actual results may vary from these estimates.
The financial statements have, in management’s opinion, been properly prepared within the framework of the significant accounting policies summarized below:
Cash and Cash Equivalents
The Company considers cash and cash equivalents to be all highly liquid debt instruments with a maturity when purchased of three months or less. The Company had no cash equivalents as of January 31, 2014 and 2013.
The Company maintains its cash balances in two financial institutions in Shawnee and Tulsa, Oklahoma. As of January 31, 2014 and 2013, the balances at these institutions do not exceed the Federal Deposit Insurance Corporation (FDIC) insured limits.
Allowance for doubtful accounts
Accounts receivable are stated at the amount management expects to collect from balances outstanding at year end. Management provides for probable uncollectible amounts through a charge to earnings and a credit to an allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance. Changes in the allowance have not been material to the financial statements.
Note 2 Summary of Significant Accounting Policies (Continued)
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising expense for the fiscal years ended January 31, 2014 and 2013 were $3,323 and $1,869, respectively.
Property and equipment
Equipment is recorded at cost, less accumulated depreciation, and consists of office furniture, computers and a vehicle. Depreciation is provided using the straight-line method over the estimated useful life of the assets, typically 5 to 7 years. Land is not depreciated.
Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas operations whereby all costs of exploring for and developing oil and gas reserves are initially capitalized on an aggregate (one cost center) basis. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling and overhead charges directly related to acquisition and exploration activities.
Costs capitalized, together with the costs of production equipment, are depleted and amortized on the unit-of-production method based on the estimated net proved reserves. Petroleum products and reserves are converted to a common unit of measure, using six (6) MCF of natural gas to one barrel of oil.
Costs of acquiring and evaluating unproved properties are initially excluded from depletion calculations. These unevaluated properties are assessed annually to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion calculations.
Oil and gas properties are reviewed at cost annually for impairment. Future net cash flows from proved reserves using average monthly prices, non-escalated and net of future operating and development costs are discounted to present value and compared to the carrying value of oil and gas properties.
Proceeds from a sale of petroleum and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the rate of depletion by more than twenty-five percent (25%).
Assets Retirement Obligations
The Company recognizes the fair value of a liability for an asset retirement obligation in the year in which it is incurred, when a reasonable estimate of fair value can be made. The carrying amount of the related long-lived asset is increased by the same amount as the liability.
Changes in the liability for an asset retirement obligation due to the passage of time will be measured by applying an interest method of allocation. The amount will be recognized as an increase in the liability and an accretion expense in the statement of operations. Changes resulting from revisions to the timing or the amount of the original estimate of undiscounted cash flows are recognized as an increase or a decrease in the carrying amount of the liability for an asset retirement obligation and the related asset retirement cost capitalized as part of the carrying amount of the related long-lived asset. At January 31, 2014 and 2013, the Company’s asset retirement obligation liability was $31,203 and $49,843, respectively.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Oil and gas properties accounted for using the full cost method of accounting, a method utilized by the Company, are excluded from this requirement, but will continue to be subject to the ceiling test limitations. For the year ended January 31, 2014, the Company recognized an impairment charge in the amount of $99,356. For the year ended January 31, 2013, the Company did not recognize an impairment charge related to long-lived assets or to the ceiling test limitations.
Income Taxes
Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. At January 31, 2014 and 2013, the Company believed it was more likely than not that future tax benefits from net operating loss carry-forwards and other deferred tax assets would not be realizable through generation of future taxable income and accordingly deferred tax assets are fully reserved.
Federal returns for fiscal tax years ending January 31, 2011 and after remain open to examination as of the balance sheet date. The statute of limitations differ from state to state; however, generally fiscal tax years ending January 31, 2011 and after remain open to state examination as of the balance sheet date.
Basic and Diluted Loss Per Share
Basic earnings per share (“EPS”) is computed by dividing reported earnings available to common stockholders by the weighted average common shares outstanding. Diluted earnings per share give effect to dilutive potential common shares. At January 31, 2014 and 2013, warrants exercisable into shares of common stock, were not included in the computation of diluted EPS because the exercisable price was greater than the average market price of the common shares during the year.
Reverse Stock Split
Effective as of October 31, 2012, the Company effected a 1-for-100 reverse split (“Reverse Split”) of the Company’s common stock. Pursuant to the Reverse Split, the common stock was combined and reclassified based on a ratio of 100 shares of issued and outstanding common stock being combined and reclassified into one share of common stock. Fractional shares were rounded up to the next whole share. All share and per share amounts for common stock have been restated to reflect the Reverse Split on a retro-active basis.
Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and due to or from related party balances approximates their fair value because of the short maturity of these instruments. Management believes that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. Debt balances reflect fair value of arrangements because they bear interest that is similar to those in the common market.
Revenue Recognition
Revenue from the sale of the oil and gas production is recognized when title passes from the operator of the oil and gas properties to purchasers. Revenues from services are recognized when earned and realizable. Gains or losses from sale of oil and gas properties are recognized when arrangements are executed.
Note 3 Oil and Gas Properties
At January 31, 2014 and 2013, the producing and undeveloped oil and gas properties were as follows:
Depletion expense for the fiscal years ended January 31, 2014 and 2013, was $124,911 and $53,315, respectively.
Note 4 Property and Equipment
The following is a summary of property and equipment at January 31, 2014 and 2013:
Depreciation expense for the fiscal years ended January 31, 2014 and 2013 was $6,050 and $8,082, respectively.
Note 5 Note Payable
On May 9, 2013, the Company issued a promissory note in the principal amount of $175,000. The promissory note bears interest at 9% on the outstanding balance, with interest payable semi-annually. No principal payments are required until the maturity date of June 30, 2016, at which time the term note is payable in full. The promissory note also contains a conversion feature, which allows the lender, at any time prior to maturity, on a one-time basis, to convert all or a portion of the principal amount of the note into common stock at a price per share of $0.55. At issuance, no value was assigned to this conversion feature. At January 31, 2014, the outstanding balance on the promissory note was $175,000.
Interest expense for the fiscal years ended January 31, 2014 and 2013 was $13,182 and $0, respectively.
Note 6 Income Taxes
At January 31, 2014, the Company has accumulated net operating loss carry forwards totaling $5,385,092, which may be applied against future years’ taxable income and begin to expire in 2025.
Significant components of the Company’s future tax assets and liabilities as of January 31, 2014 and 2013, after applying enacted corporate income tax rates, are as follows:
The Company recorded no income tax expense for the fiscal years ended January 31, 2014 and 2013, as a result of the net loss recognized in each of these years. Further, an income tax benefit was not recognized in either years due to the uncertainty of the Company’s ability to realize the future tax benefits. As such, the net value of the deferred tax assets has been reduced to zero by a valuation allowance.
The benefit for income taxes for fiscal years ended January 31, 2014 and 2013 is different from the amount computed by applying the U.S. statutory corporate federal income tax rate to pre-tax loss as follows:
Note 7 Capital Stock
On December 31, 2013, the Company issued an aggregate of 2,015,000 shares of the Company’s common stock to certain consultants, officers and directors of the Company valued at $398,970 for past services to the Company. On November 21, 2013, the Company issued an aggregate of 150,000 shares of the Company’s common stock to certain consultants of the Company. Shares were valued at $73,500 for services to the Company.
On December 27, 2012 and January 23, 2013, the Company issued an aggregate of 1,399,200 shares of the Company's common stock for aggregate consideration of approximately $769,560. In connection with such issuances, the Company also issued warrants expiring on December 31, 2014 that are exercisable into an aggregate of 2,798,400 shares of Common Stock, half of which have an exercise price of $0.90 and half of which have an exercise price of $1.50. The Company issued these shares of stock and associated warrants to raise capital to complete drilling on the Branch #1 well. During the fiscal year ended January 31, 2014, the Company issued an aggregate of 130,381 shares of the Company’s common stock for aggregate consideration of approximately $71,710. In connection with such issuances, the Company also issued warrants expiring on December 31, 2014 that are exercisable into an aggregate of 260,762 shares of Common Stock, half of which have an exercise price of $0.90 and half of which have an exercise price of $1.50. The Company issued these shares of stock and associated warrants to raise capital to complete drilling on the Branch #1 well.
During the fiscal year ended January 31, 2014, the Company issued an aggregate of 1,478,884 shares of the Company’s common stock for aggregate consideration of approximately $1,330,996. In connection with such issuances, the Company also issued warrants expiring on March 31, 2015 that are exercisable into an aggregate of 1,478,884 shares of Common Stock, which have an exercise price of $1.25. The Company issued these shares of stock and associated warrants to raise capital to complete drilling on the Giant #1 well and Giant #2 well.
2008 Stock Incentive Plan
On July 10, 2008, the Board of Directors adopted the Nitro Petroleum Incorporated 2008 Stock Incentive Plan (the “2008 Stock Incentive Plan”), expiring July 10, 2018. The 2008 Stock Incentive Plan authorizes the Board of Directors to issue up to 25,000 restricted stock or non-incentive stock options. All officers, employees, directors and individual consultants of the Corporation are eligible to receive awards under the plan.
As of January 31, 2012, 18,000 shares of restricted stock and no stock options have been granted under the 2008 Stock Incentive Plan, all of which are fully vested as of January 31, 2012. 7,000 shares of restricted stock or non-incentive stock options remain available for grant under the 2008 Stock Incentive Plan. No activity has occurred for the fiscal years ended January 31, 2014 or 2013.
2009 Stock Incentive Plan
On August 25, 2009, the Board of Directors adopted the Nitro Petroleum Incorporated 2009 Stock Incentive Plan (the “2009 Stock Incentive Plan”), expiring August 25, 2019. The 2009 Stock Incentive Plan authorizes the Board of Directors to issue up to 100,000 restricted stock or non-incentive stock options. All officers, employees, directors and individual consultants of the Corporation are eligible to receive awards under the plan.
As of January 31, 2012, all 100,000 shares of restricted stock and no stock options have been granted under the 2009 Stock Incentive Plan, all of which are fully vested as of January 31, 2012. No shares of restricted stock or non-incentive stock options remain available for grant under the 2009 Stock Incentive Plan. No activity has occurred for the fiscal years ended January 31, 2014 or 2013.
2010 Stock Incentive Plan
On July 30, 2010, the Board of Directors adopted the Nitro Petroleum Incorporated 2010 Stock Incentive Plan (the “2010 Stock Incentive Plan”), expiring July 30, 2020. The 2010 Stock Incentive Plan authorizes the Board of Directors to issue up to 175,000 restricted stock or non-incentive stock options. All officers, employees, directors and individual consultants of the Corporation are eligible to receive awards under the plan.
As of January 31, 2012, 125,750 shares of restricted stock and no stock options have been granted under the 2010 Stock Incentive Plan, all of which are fully vested as of January 31, 2012. 49,250 shares of restricted stock or non-incentive stock options remain available for grant under the 2010 Stock Incentive Plan. No activity has occurred for the fiscal years ended January 31, 2014 or 2013.
Note 8 Common Stock Subscriptions
The Company received net proceeds of $41,400 from the sale of 86,250 shares of common stock, which shares were sold in a private offering of units consisting of working interests in the Giant #2 Well and common stock. The Company has not issued these shares as of January 31, 2014, and has recorded these proceeds as common stock, subscribed, with the applicable amount in additional paid in capital.
Note 9 Related Party Transactions
The Company paid management fees to a company under the control of an Officer totaling $203,552 and $80,230, for the fiscal years ended January 31, 2014 and 2013, respectively. These management fees are included in general and administrative expenses.
At January 31, 2014, the Company had a related party payable of $55,128 due to a company under control of an Officer. The Company also had a related party payable and expense of $6,000 and $24,000, repectively, for a company providing consulting services during the fiscal year ended January 31, 2014.
Note 10 Subsequent Events
There were no significant or material subsequent events as of the evaluation date May 16, 2014, which is the date the financial statements were available to be issued.
Note 11 Supplemental Oil and Gas Information (Unaudited)
Reserve Information
The following estimates of proved developed and undeveloped reserve quantities and related standardized measure of discounted net cash flow are estimates only, and do not purport to reflect realizable values or fair market values of the Company’s reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. All of the Company’s reserves are located in the United States.
Proved reserves are estimated reserves of crude oil (including condensate and natural gas liquids) and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment, and operating methods.
Reserve Information, continued
The following is a summary of a standardized measure of discounted net cash flows related to the Company’s proved oil and natural gas reserves. For these calculations, estimated future cash flows from estimated future production of proved reserves for the year ended January 31, 2014 are computed using benchmark prices based on the unweighted arithmetic average of the first-day-of-the-month prices for oil and natural gas during each month of such fiscal years, as required by SEC Release No. 33-8995, “Modernization of Oil and Gas Reporting,” effective December 31, 2009. Future expenditures to be incurred in developing and producing the proved reserves were estimated assuming that existing conditions would continue over the economic lives of the individual leases and costs were not escalated for the future. Estimated future income tax expenses were calculated by applying future statutory tax rates (based on the current tax law adjusted for permanent differences and tax credits) to the estimated future pretax net cash flows related to proved oil and natural gas reserves, less the tax basis of the properties involved. The estimated future net cash flows are then discounted using a rate of 10 percent a year to reflect the estimated timing of the future cash flows.