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EXCEL - IDEA: XBRL DOCUMENT - SUPERNOVA ENERGY, INC.Financial_Report.xls
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EX-32.2 - EXHIBIT 32.2 - SUPERNOVA ENERGY, INC.exhibit32-2.htm
EX-32.1 - EXHIBIT 32.1 - SUPERNOVA ENERGY, INC.exhibit32-1.htm
EX-31.2 - EXHIBIT 31.2 - SUPERNOVA ENERGY, INC.exhibit31-2.htm
EX-31.1 - EXHIBIT 31.1 - SUPERNOVA ENERGY, INC.exhibit31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2013

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission file number: 000-53284

 

SUPERNOVA ENERGY, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 98-0628594

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)
   

153 W. Lake Mead Pkwy

Ste 2240,

 
Henderson, NV 89015
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (702) 335-0356

 

Securities registered under Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
None   N/A

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock
(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Rule 13 or Section 15(d) of the Act Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant Rule 405 of Regulation S-T (§220.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.

Yes [  ] No [  ] Not applicable.

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

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

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer   [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]

 

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

 

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

 

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 31,726,585 common shares and 809,400 preferred shares issued and outstanding as of March 27, 2014.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). Not applicable.

 

1
 

 

TABLE OF CONTENTS

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 3
   
GLOSSARY OF EXPLORATION TERMS 4
   
PART I 8
Item 1. Business. 8
Item 1A Risk Factors 14
Item 1B. Unresolved Staff Comments. 14
Item 2 Properties. 14
Item 3. Legal Proceedings. 16
Item 4. (Removed and Reserved). 16
PART II 17
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 17
Item 6. Selected Financial Data. 18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 21
Item 8. Financial Statements and Supplementary Data. 21
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 23
Item 9A(T). Controls and Procedures. 23
Item 9B. Other Information. 24
PART III 24
Item 10. Directors, Executive Officers and Corporate Governance. 24
Item 11. Executive Compensation. 27
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 29
Item 13. Certain Relationships and Related Transactions, and Director Independence. 30
Item 14. Principal Accounting Fees and Services. 30
PART IV 31
Item 15. Exhibits, Financial Statement Schedules. 31
SIGNATURES 32

 

 

 

2
 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report contains forward-looking statements. These statements relate to future events or our future financial performance. Forward-looking statements are often identified by words like: “believe”, “expect”, “estimate”, “anticipate”, “intend”, “project” and similar expressions or words which, by their nature, refer to future events. In some cases, you can also identify forward-looking statements by terminology such as “may”, “should”, “plan”, “predict”, “potential” or “continue” or the negative of these terms or other comparable terminology. Examples of forward-looking statements made in this annual report on Form 10-K include statements about:

 

  Our future exploration programs and results,

 

  Our future capital expenditures, and

 

  Our future investments in and acquisitions of mineral resource properties.

 

These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including

 

  risks and uncertainties relating to the interpretation of sampling results, the geology, grade and continuity of mineral deposits;

 

  risks and uncertainties that results of initial sampling and mapping will not be consistent with our expectations;

 

  mining and development risks, including risks related to accidents, equipment breakdowns, labor disputes or other unanticipated difficulties with or interruptions in production;

 

  the potential for delays in exploration activities;

 

  risks related to the inherent uncertainty of cost estimates and the potential for unexpected costs and expenses;

 

  risks related to commodity price fluctuations;

 

  the uncertainty of profitability based upon our limited history;

 

  risks related to failure to obtain adequate financing on a timely basis and on acceptable terms for our planned exploration project;

 

  risks related to environmental regulation and liability;

 

  risks that the amounts reserved or allocated for environmental compliance, reclamation, post-closure control measures, monitoring and on-going maintenance may not be sufficient to cover such costs;

 

  risks related to tax assessments;

 

  political and regulatory risks associated with mining development and exploration; and

 

  the risks in the section entitled “Risk Factors”,

 

any of which may cause our company’s or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

3
 

 

Our financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles. References to common shares refer to common shares in our capital stock.

 

As used in this annual report, the terms “we”, “us”, “our” and “Supernova” mean Supernova Energy, Inc. unless otherwise indicated.

 

GLOSSARY OF EXPLORATION TERMS

 

The following terms, when used in this report, have the respective meanings specified below:

 

Amortization - The gradual and systematic writing off of a balance in an account over an appropriate period.

 

Amphibolite - A gneiss or schist largely made up of amphibole and plagioclase minerals.

 

Anomaly - Any departure from the norm which may indicate the presence of mineralization in the underlying bedrock.

 

Assay - A chemical test performed on a sample of ores or minerals to determine the amount of valuable metals contained.

 

Assessment work - The amount of work, specified by mining law, that must be performed each year in order to retain legal control of mining claims.

 

Base metal - Any non-precious metal (e.g. copper, lead, zinc, nickel, etc.).

 

Bedding - The arrangement of sedimentary rocks in layers.

 

Biotite - A platy magnesium-iron mica, common in igneous rocks.

 

Chalcopyrite - A sulphide mineral of copper and iron; the most important ore mineral of copper.

 

Chip sample - A method of sampling a rock exposure whereby a regular series of small chips of rock is broken off along a line across the face.

 

Claim - A portion of land held either by a prospector or a mining company. In Canada, the common size is 1,320 ft. (about 400 m) square, or 40 acres (about 16 ha).

 

Clay - A fine-grained material composed of hydrous aluminum silicates.

 

Cleavage - The tendency of a mineral to split along crystallographic planes.

 

Contact - A geological term used to describe the line or plane along which two different rock formations meet.

 

Contact metamorphism - Metamorphism of country rocks adjacent to an intrusion, caused by heat from the intrusion.

 

Country rock - Loosely used to describe the general mass of rock adjacent to an orebody. Also known as the host rock.

 

Crosscut - A horizontal opening driven from a shaft and (or near) right angles to the strike of a vein or other orebody.

 

Development - Underground work carried out for the purpose of opening up a mineral deposit. Includes shaft sinking, crosscutting, drifting and raising.

 

4
 

Diorite - An intrusive igneous rock composed chiefly of sodic plagioclase, hornblende, biotite or pyroxene.

 

Drift - A horizontal underground opening that follows along the length of a vein or rock formation as opposed to a crosscut which crosses the rock formation.

 

Exploration - Prospecting, sampling, mapping, diamond drilling and other work involved in searching for ore.

 

Face - The end of a drift, crosscut or stope in which work is taking place.

 

Felsic - Term used to describe light-colored rocks containing feldspar, feldspathoids and silica.

 

Fracture - A break in the rock, the opening of which allows mineral-bearing solutions to enter. A "cross-fracture" is a minor break extending at more-or-less right angles to the direction of the principal fractures.

 

Geochemistry - The study of the chemical properties of rocks.

 

Geology - The science concerned with the study of the rocks which compose the Earth.

 

Gneiss - A layered or banded crystalline metamorphic rock, the grains of which are aligned or elongated into a roughly parallel arrangement.

 

Greenstone belt - An area underlain by metamorphosed volcanic and sedimentary rocks, usually in a continental shield.

 

Host rock - The rock surrounding an ore deposit.

 

Igneous rocks - Rocks formed by the solidification of molten material from far below the earth's surface.

 

Intrusive - A body of igneous rock formed by the consolidation of magma intruded into other rocks, in contrast to lavas, which are extruded upon the surface.

 

Lava - A general name for the molten rock ejected by volcanoes.

 

Lens - Generally used to describe a body of ore that is thick in the middle and tapers towards the ends.

 

Limestone - A bedded, sedimentary deposit consisting chiefly of calcium carbonate.

 

Lode - A mineral deposit in solid rock.

 

Mafic - Igneous rocks composed mostly of dark, iron- and magnesium-rich minerals.

 

Magma - The molten material deep in the Earth from which rocks are formed.

 

Magnetic survey - A geophysical survey that measures the intensity of the Earth's magnetic field.

 

Metamorphic rocks - Rocks which have undergone a change in texture or composition as the result of heat and/or pressure.

 

Metamorphism - The process by which the form or structure of rocks is changed by heat and pressure.

 

Mineral - A naturally occurring homogeneous substance having definite physical properties and chemical composition and, if formed under favorable conditions, a definite crystal form.

 

Net smelter return - A share of the net revenues generated from the sale of metal produced by a mine.

 

5
 

Option - An agreement to purchase a property reached between the property vendor and some other party who wishes to explore the property further.

 

Ore - A mixture of ore minerals and gangue from which at least one of the metals can be extracted at a profit.

 

Orebody- A natural concentration of valuable material that can be extracted and sold at a profit.

 

Outcrop - An exposure of rock or mineral deposit that can be seen on surface, that is, not covered by soil or water.

 

Plug - A common name for a small offshoot from a large body of molten rock.

 

Plutonic - Refers to rocks of igneous origin that have come from great depth.

 

Pyrite - A yellow iron sulphide mineral, normally of little value. It is sometimes referred to as "fool's gold".

 

Pyrrhotite - A bronze-colored, magnetic iron sulphide mineral.

 

Quartz - Common rock-forming mineral consisting of silicon and oxygen.

 

Quartzite - A metamorphic rock formed by the transformation of a sandstone by heat and pressure.

 

Reclamation - The restoration of a site after mining or exploration activity is completed.

 

Resource - The calculated amount of material in a mineral deposit, based on limited drill information.

 

Rock - Any natural combination of minerals; part of the earth's crust.

 

Royalty - An amount of money paid at regular intervals by the lessee or operator of an exploration or mining property to the owner of the ground. Generally based on a certain amount per ton or a percentage of the total production or profits. Also, the fee paid for the right to use a patented process.

 

Sample - A small portion of rock or a mineral deposit taken so that the metal content can be determined by assaying.

 

Sampling - Selecting a fractional but representative part of a mineral deposit for analysis.

 

Sandstone - A sedimentary rock consisting of grains of sand cemented together.

 

Schist - A foliated metamorphic rock the grains of which have a roughly parallel arrangement; generally developed by shearing.

 

Sedimentary rocks - Secondary rocks formed from material derived from other rocks and laid down under water. Examples are limestone, shale and sandstone.

 

Shaft - A vertical or inclined excavation in rock for the purpose of providing access to an orebody. Usually equipped with a hoist at the top, which lowers and raises a conveyance for handling workers and materials.

 

Shale - Sedimentary rock formed by the consolidation of mud or silt.

6
 

 

Shear or shearing - The deformation of rocks by lateral movement along innumerable parallel planes, generally resulting from pressure and producing such metamorphic structures as cleavage and schistosity.

 

Shear zone - A zone in which shearing has occurred on a large scale.

 

Silica - Silicon dioxide. Quartz is a common example.

 

Siliceous - A rock containing an abundance of quartz.

 

Sill - An intrusive sheet of igneous rock of roughly uniform thickness that has been forced between the bedding planes of existing rock.

 

Silt - Muddy deposits of fine sediment usually found on the bottoms of lakes.

 

Spot price - Current delivery price of a commodity traded in the spot market.

 

Stope - An excavation in a mine from which ore is, or has been, extracted.

 

Strike - The direction, or bearing from true north, of a vein or rock formation measure
on a horizontal surface.

 

Sulphide - A compound of sulphur and some other element.

 

Trench - A long, narrow excavation dug through overburden, or blasted out of rock, to expose a vein or ore structure.

 

Tuff - Rock composed of fine volcanic ash.

 

Vein - A fissure, fault or crack in a rock filled by minerals that have travelled upwards from some deep source.

 

Volcanic rocks - Igneous rocks formed from magma that has flowed out or has been violently ejected from a volcano.

 

Zone - An area of distinct mineralization.

 

 

7
 

 

PART I

 

Item 1. Business

 

Overview

 

We are in the business of oil and gas exploration and production.

 

On March 1, 2011, the Company purchased a 100 percent working interest on a 70 percent net revenue interest in certain oil and gas leases and related well operating equipment in Pratt County, Kansas for $260,000. Of this total, $149,000 was allocated to oil and gas leases, and the remaining $111,000 was allocated to the purchased well operating equipment.

 

On June 11, 2011, the Company purchased a 30 percent working interest on an 24.45 percent net revenue interest in an unproved oil and gas well located in Cowley County, KS. The Company paid $17,220 for the lease on 640 acres at $85 per acre.

 

On July 7, 2011, the Company purchased a 20 percent working interest on an 16.41 percent net revenue interest in a proved and producing oil and gas well located in Cowley County, KS. The Company paid $45,000 to acquire the leases .

 

On September 27, 2011, the Company purchased two leases and related well operating equipment located in Pratt County for $72,500. Of this total, $22,500 was allocated to oil and gas leases, and the remaining $50,000 was allocated to the purchased well operating equipment.   The leases carry a 100 percent working interest of 70 percent net revenue interest.

 

On September 27, 2011, the Company also purchased a 23 percent interest in a net revenue interest ranging from 18.66 to 19.65 percent in three leases in Barton and Stafford Counties, Kansas for $220,800.   The three leases combined contain slightly more than 564 net acres.   In total there are seven active wells located in these leases.   There are four oil producing wells, two disposal wells and one injection well. 

 

On December 19, 2011, the company purchased a 15 percent interest in net revenue interests ranging from 12.675 percent to 13.125 percent in four leases in Cowley County, Kansas for $75,600. The four leases combined contain approximately 720 acres.

 

On February 9, 2012, the Company purchased a 30 percent gross working interest and a 26.25 percent net revenue interest in six unproved oil and gas leases in Cowley County, Kansas for $140,400. The six leases combined contain approximately 1,025 acres.

 

On May 14, 2012 the Company purchased a 35 percent gross working interest and a 28 percent net revenue interest in 98 acres of unproved oil and gas leases in Stafford County, Kansas for $12,569. Concurrent with this purchase, the Company paid $22,673 in additional development costs, and $66,181 for support equipment, for an aggregate purchase price of $101,387.

 

On May 14, 2012 the Company purchased a 13 percent gross working interest and a 10 percent net revenue interest in 70 acres of unproved oil and gas leases in Butler County, Kansas for $17,208. Concurrent with this purchase, the Company paid $27,401 in additional development costs, and $18,021 for support equipment, for an aggregate purchase price of $62,630.

 

On February 5, 2013 the Company sold a 30 percent gross working interest and a 30 percent net revenue interest in six oil and gas leases located in Pratt County, Kansas for $100,000. This amount was deducted from funds payable from the Company to the purchasing entity on July 18, 2013. Pursuant to this transaction the Company transferred a 30 percent interest in all related support equipment and asset retirement obligations.

 

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Oil and gas properties are stated at cost. The Company recognized depletion expense totaling $263,987 and $459,258 during the years ended December 31, 2013 and 2012, respectively. As of December 31, 2013 and 2012 oil and gas properties consisted of the following:

 

   December 31,
2013
  December 31,
2012
       
Proved producing properties  $1,044,068   $967,512 
Proved non-producing properties   14,448    20,036 
Unproved properties   264,718    340,097 
Accumulated depletion   (745,638)   (516,312)
           
Net Oil and Gas Properties  $577,596   $811,333 

 

All of the Company’s oil and natural gas properties are located in the United States.  Costs being amortized at December 31, 2013 and 2012 are as follows:

 

   December 31,
   2013  2012
Proved leasehold costs  $596,631   $700,297 
Costs of wells and equipment   842,829    745,969 
Capitalized asset retirement costs   113,638    137,633 
    Total oil and gas properties   1,553,098    1,583,899 
Accumulated depreciation and depletion   (834,336)   (574,618)
    Net Capitalized Costs  $718,762   $1,009,281 

 

The following table sets forth the changes in the total cost of oil and natural gas properties at December 31, for each of the two years in the period ended December 31, 2013:

   December 31,
   2013  2012
Balance at Beginning of Period  $1,583,899   $1,146,546 
  Acquisitions using cash   —      175,116 
  Other capitalized costs   133,075    262,237 
  Sale proceeds   (163,876)   —   
  Other non-cash transactions   —      —   
Balance at End of Period  $1,553,098   $1,583,899 

 

Other capitalized costs include title related expenses and tangible and intangible drilling costs.

  

Plan of Operation

 

Our plan of operations is to further develop our recent oil and gas acquisitions in Kansas and carry out further exploration and acquisition in the oil and gas sectors. NHUR has upgraded the facilities on its acquired Mason, Thompson, Keyes and Harrell leases with the objective to improve current oil and gas production.

 

To date, we have raised $2,346,050 through the offer and sale of shares of our common stock pursuant to an exemption from registration provided by Regulation S promulgated under the Exchange Act. The following table summarizes the date of the offerings, the price per share paid, the number of shares sold and the amount raised for each offering.

9
 

 

Closing Date of Offering  Price Per Share Sold (post-split)  Number of Shares Sold (post-split)  Amount Raised
September 8, 2009  $0.0001    35,000,000   $3,500 
November 30, 2009  $0.002    21,275,000   $42,550 
March 30, 2011  $0.055    5,454,550   $300,000 
May 12, 2011  $0.055    909,090   $50,000 
June 6, 2011  $0.055    9,090,560   $500,000 
September 28, 2011   Convertible Debenture (1)    TBD   $100,000 
October 4, 2011   $ 0.3 (2)    1,333,333   $400,000 
March 21, 2012  $1.20    416,666   $500,000 
February 14, 2013  $0.60    83,334   $100,000 
May 3, 2013  $0.83    250,000   $300,000 
October 2, 2013  $0.32    156,250   $50,000 

 

(1) 5% debenture due 9/24/12 convertible at the average of three lowest trades during five trading days previous to conversion date.

 

(2) The Company forward split the common shares 20:1 by means of a 19:1 dividend to shareholders of record 9/26/11

 

On September 15, 2013 the Company authorized a reverse-split of its common stock on a one-share-for-two-shares basis.

 

Competition

 

The oil and gas industry is highly competitive. Our competitors and potential competitors include major oil companies and independent producers of varying sizes which are engaged in the acquisition of producing properties and the exploration and development of prospects. Most of our competitors have greater financial, personnel and other resources than we do and therefore have greater leverage in acquiring prospects, hiring personnel and marketing oil and gas.

 

Government Regulations

 

The production and sale of oil and gas is subject to regulation by state, federal and local authorities. In most areas there are statutory provisions regulating the production of oil and natural gas under which administrative agencies may set allowable rates of production and promulgate rules in connection with the operation and production of such wells, ascertain and determine the reasonable market demand of oil and gas, and adjust allowable rates with respect thereto.

 

The sale of liquid hydrocarbons was subject to federal regulation under the Energy Policy and Conservation Act of 1975 which amended various acts, including the Emergency Petroleum Allocation Act of 1973. These regulations and controls included mandatory restrictions upon the prices at which most domestic and crude oil and various petroleum products could be sold. All price controls and restrictions on the sale of crude oil at the wellhead have been withdrawn. It is possible, however, that such controls may be re-imposed in the future but when, if ever, such re-imposition might occur and the effect thereof is unknown.

 

The sale of certain categories of natural gas in interstate commerce is subject to regulation under the Natural Gas Act and the Natural Gas Policy Act of 1978 (“NGPA”). Under the NGPA, a comprehensive set of statutory ceiling prices applies to all first sales of natural gas unless the gas specifically exempt from regulation (i.e., unless the gas is deregulated). Administration and enforcement of the NGPA ceiling prices are delegated to the Federal Energy Regulatory Commission (“FERC”). In June 1986 the FERC issued Order No. 451, which in general is designed to provide a higher NGPA ceiling price for certain vintages of old gas. It is possible, though unlikely, that we may in the future acquire significant amounts of natural gas subject to NGPA price regulations and/or FERC Order No. 451.

10
 

 

Our operations are subject to extensive and continually changing regulation because of legislation affecting the oil and natural gas industry is under constant review for amendment and expansion. Many departments and agencies, both federal and state, are authorized by statute to issue and have issued rules and regulations binding on the oil and natural gas industry and its individual participants. The failure to comply with such rules and regulations can result in large penalties. The regulatory burden on this industry increases our cost of doing business and, therefore, affects our profitability. However, we do not believe that we are affected in a significantly different way by these regulations than our competitors are affected.

 

Transportation and Production

 

Transportation and Sale of Oil and Natural Gas. We can make sales of oil, natural gas and condensate at market prices which are not subject to price controls at this time. The price that we receive from the sale of these products is affected by our ability to transport and the cost of transporting these products to market. Under applicable laws, FERC regulates:

 

● the construction of natural gas pipeline facilities, and

● the rates for transportation of these products in interstate commerce.

 

Our possible future sales of natural gas are affected by the availability, terms and cost of pipeline transportation. The price and terms for access to pipeline transportation remain subject to extensive federal and state regulation. Several major regulatory changes have been implemented by Congress and FERC from 1985 to the present. These changes affect the economics of natural gas production, transportation and sales. In addition, FERC is continually proposing and implementing new rules and regulations affecting these segments of the natural gas industry that remain subject to FERC’s jurisdiction. The most notable of these are natural gas transmission companies.

 

FERC’s more recent proposals may affect the availability of interruptible transportation service on interstate pipelines. These initiatives may also affect the intrastate transportation of gas in some cases. The stated purpose of many of these regulatory changes is to promote competition among the various sectors of the natural gas industry. These initiatives generally reflect more light-handed regulation of the natural gas industry. The ultimate impact of the complex rules and regulations issued by FERC since 1985 cannot be predicted. In addition, some aspects of these regulatory developments have not become final but are still pending judicial and FERC final decisions. We cannot predict what further action FERC will take on these matters. However, we do not believe that any action taken will affect us much differently than it will affect other natural gas producers, gatherers and marketers with which we might compete.

 

Effective as of January 1, 1995, FERC implemented regulations establishing an indexing system for transportation rates for oil. These regulations could increase the cost of transporting oil to the purchaser. We do not believe that these regulations will affect us any differently than other oil producers and marketers with which we compete.

 

Regulation of Drilling and Production. Our proposed drilling and production operations are subject to regulation under a wide range of state and federal statutes, rules, orders and regulations. Among other matters, these statutes and regulations govern:

 

  the amounts and types of substances and materials that may be released into the environment,

 

  the discharge and disposition of waste materials,

 

  the reclamation and abandonment of wells and facility sites, and

 

  the remediation of contaminated sites,

 

and require:

 

  permits for drilling operations,

 

  drilling bonds, and

 

  reports concerning operations.

 

11
 

Environmental Regulations

 

General. Our operations are affected by the various state, local and federal environmental laws and regulations, including the:

 

  Clean Air Act,

 

  Oil Pollution Act of 1990,

 

  Federal Water Pollution Control Act,

 

  Resource Conservation and Recovery Act (“RCRA”),

 

  Toxic Substances Control Act, and

 

  Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”).

 

 These laws and regulations govern the discharge of materials into the environment or the disposal of waste materials, or otherwise relate to the protection of the environment. In particular, the following activities are subject to stringent environmental regulations:

 

  drilling,

 

  development and production operations,

 

  activities in connection with storage and transportation of oil and other liquid hydrocarbons, and

 

  use of facilities for treating, processing or otherwise handling hydrocarbons and wastes.

 

Violations are subject to reporting requirements, civil penalties and criminal sanctions. As with the industry generally, compliance with existing regulations increases our overall cost of business. The increased costs cannot be easily determined. Such areas affected include:

 

  unit production expenses primarily related to the control and limitation of air emissions and the disposal of produced water,

 

  capital costs to drill exploration and development wells resulting from expenses primarily related to the management and disposal of drilling fluids and other oil and natural gas exploration wastes, and

 

  capital costs to construct, maintain and upgrade equipment and facilities and remediate, plug and abandon inactive well sites and pits.

 

Environmental regulations historically have been subject to frequent change by regulatory authorities. Therefore, we are unable to predict the ongoing cost of compliance with these laws and regulations or the future impact of such regulations on our operations. However, we do not believe that changes to these regulations will have a significant negative effect on our operations.

 

A discharge of hydrocarbons or hazardous substances into the environment could subject us to substantial expense, including both the cost to comply with applicable regulations pertaining to the cleanup of releases of hazardous substances into the environment and claims by neighboring landowners and other third parties for personal injury and property damage. We do not maintain insurance for protection against certain types of environmental liabilities.

 

12
 

The Clean Air Act requires or will require most industrial operations in the United States to incur capital expenditures in order to meet air emission control standards developed by the EPA and state environmental agencies. Although no assurances can be given, we believe the Clean Air Act requirements will not have a material adverse effect on our financial condition or results of operations.

 

RCRA is the principal federal statute governing the treatment, storage and disposal of hazardous wastes. RCRA imposes stringent operating requirements, and liability for failure to meet such requirements, on a person who is either:

 

  a “generator” or “transporter” of hazardous waste, or

 

  an “owner” or “operator” of a hazardous waste treatment, storage or disposal facility.

 

At present, RCRA includes a statutory exemption that allows oil and natural gas exploration and production wastes to be classified as non-hazardous waste. As a result, we will not be subject to many of RCRA’s requirements because our operations will probably generate minimal quantities of hazardous wastes.

 

CERCLA, also known as “Superfund,” imposes liability, without regard to fault or the legality of the original act, on certain classes of persons that contributed to the release of a “hazardous substance” into the environment. These persons include:

 

  the “owner” or “operator” of the site where hazardous substances have been released, and

 

  companies that disposed or arranged for the disposal of the hazardous substances found at the site.

 

CERCLA also authorizes the EPA and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. In the course of our ordinary operations, we could generate waste that may fall within CERCLA’s definition of a “hazardous substance.” As a result, we may be liable under CERCLA or under analogous state laws for all or part of the costs required to clean up sites at which such wastes have been disposed.

 

Under such law we could be required to:

 

  remove or remediate previously disposed wastes, including wastes disposed of or released by prior owners or operators,

 

  clean up contaminated property, including contaminated groundwater, or

 

  perform remedial plugging operations to prevent future contamination.

 

We could also be subject to other damage claims by governmental authorities or third parties related to such contamination.

 

Market for oil and gas production

 

The market for oil and gas production is regulated by both the state and federal governments. The overall market is mature and with the exception of gas, all producers in a producing region will receive the same price. The major oil companies will purchase all crude oil offered for sale at posted field prices. There are price adjustments for quality differences from the Benchmark. Benchmark is Saudi Arabian light crude oil employed as the standard on which OPEC price changes have been based. Quality variances from Benchmark crude results in lower prices being paid for the variant oil. Oil sales are normally contracted with a purchaser or gatherer as it is known in the industry who will pick up the oil at the well site. In some instances there may be deductions for transportation from the well head to the sales point. At this time the majority of crude oil purchasers do not charge transportation fees unless the well is outside their service area. The service area is a geographical area in which the purchaser of crude oil will not charge a fee for picking upon the oil. The purchaser or oil gatherer as it is called within the oil industry, will usually handle all check disbursements to both the working interest and royalty owners. We will be a working interest owner. By being a working interest owner, we are responsible for the payment of our proportionate share of the operating expenses of the well. Royalty owners and overriding royalty owners receive a percentage of gross oil production for the particular lease and are not obligated in any manner whatsoever to pay for the costs of operating the lease. Therefore, we, in most instances, will be paying the expenses for the oil and gas revenues paid to the royalty and overriding royalty interests.

13
 

 

Gas sales are by contract. The gas purchaser will pay the well operator 100% of the sales proceeds on or about the 25th of each and every month for the previous month’s sales. The operator is responsible for all checks and distributions to the working interest and royalty owners. There is no standard price for gas. Price will fluctuate with the seasons and the general market conditions. It is our intention to utilize this market whenever possible in order to maximize revenues. We do not anticipate any significant change in the manner production is purchased, however, no assurance can be given at this time that such changes will not occur.

 

Employees

 

At present, we have no employees. We currently operate with two executive officers, who devote their time as required to our business operations. Our executive officers receive $1,000 per month as directors fees but do not have an employment agreement with us.

 

Item 1A Risk Factors

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

Item 1B. Unresolved Staff Comments

 

Not applicable.

 

Item 2 Properties.

 

Principal Office

 

Our principal office is located at 701 N Green Valley Pkwy., Ste. 200-258, Henderson, NV 89074. Our telephone number is (702) 335-0356. On January 1, 2012 we entered into an office rent agreement at $500 per month for the principal office space. The original annual lease expired on 12/31/2013 and we will be accounting for the new lease on a month-to-month basis going forward. We believe that the condition of our principal office is satisfactory, suitable and adequate for our current needs.

 

Our Oil and Gas Leases

 

On March 1, 2011, the Company purchased a 100 percent working interest on a 70 percent net revenue interest in certain oil and gas leases and related well operating equipment in Pratt County, Kansas for $260,000. Of this total, $149,000 was allocated to oil and gas leases, and the remaining $111,000 was allocated to the purchased well operating equipment.

 

On June 11, 2011, the Company purchased a 30 percent working interest on an 24.45 percent net revenue interest in an unproved oil and gas well located in Cowley County, KS. The Company paid $17,220 for the lease on 640 acres at $85 per acre.

 

On July 7, 2011, the Company purchased a 20 percent working interest on an 16.41 percent net revenue interest in a proved and producing oil and gas well located in Cowley County, KS. The Company paid $45,000 to acquire the leases .

 

On September 27, 2011, the Company purchased two leases and related well operating equipment located in Pratt County for $72,500. Of this total, $22,500 was allocated to oil and gas leases, and the remaining $50,000 was allocated to the purchased well operating equipment.   The leases carry a 100 percent working interest of 70 percent net revenue interest.

 

On September 27, 2011, the Company also purchased a 23 percent interest in a net revenue interest ranging from 18.66 to 19.65 percent in three leases in Barton and Stafford Counties, Kansas for $220,800.   The three leases combined contain slightly more than 564 net acres.   In total there are seven active wells located in these leases.   There are four oil producing wells, two disposal wells and one injection well. 

 

On December 19, 2011, the company purchased a 15 percent interest in net revenue interests ranging from 12.675 percent to 13.125 percent in four leases in Cowley County, Kansas for $75,600. The four leases combined contain approximately 720 acres.

14
 

 

On February 9, 2012, the Company purchased a 30 percent gross working interest and a 26.25 percent net revenue interest in six unproved oil and gas leases in Cowley County, Kansas for $140,400. The six leases combined contain approximately 1,025 acres.

 

On May 14, 2012 the Company purchased a 35 percent gross working interest and a 28 percent net revenue interest in 98 acres of unproved oil and gas leases in Stafford County, Kansas for $12,569. Concurrent with this purchase, the Company paid $22,673 in additional development costs, and $66,181 for support equipment, for an aggregate purchase price of $101,387.

 

On May 14, 2012 the Company purchased a 13 percent gross working interest and a 10 percent net revenue interest in 70 acres of unproved oil and gas leases in Butler County, Kansas for $17,208. Concurrent with this purchase, the Company paid $27,401 in additional development costs, and $18,021 for support equipment, for an aggregate purchase price of $62,630.

 

On February 5, 2013 the Company sold a 30 percent gross working interest and a 30 percent net revenue interest in six oil and gas leases located in Pratt County, Kansas for $100,000. This amount was deducted from funds payable from the Company to the purchasing entity on July 18, 2013. Pursuant to this transaction the Company transferred a 30 percent interest in all related support equipment and asset retirement obligations.

 

Oil and gas properties are stated at cost. The Company recognized depletion expense totaling $263,987 and $459,258 during the years ended December 31, 2013 and 2012, respectively. As of December 31, 2013 and 2012 oil and gas properties consisted of the following:

 

   December 31,
2013
  December 31,
2012
       
Proved producing properties  $1,044,068   $967,512 
Proved non-producing properties   14,448    20,036 
Unproved properties   264,718    340,097 
Accumulated depletion   (745,638)   (516,312)
           
Net Oil and Gas Properties  $577,596   $811,333 

 

All of the Company’s oil and natural gas properties are located in the United States.  Costs being amortized at December 31, 2013 and 2012 are as follows:

 

   December 31,
   2013  2012
Proved leasehold costs  $596,631   $700,297 
Costs of wells and equipment   842,829    745,969 
Capitalized asset retirement costs   113,638    137,633 
    Total oil and gas properties   1,553,098    1,583,899 
Accumulated depreciation and depletion   (834,336)   (574,618)
    Net Capitalized Costs  $718,762   $1,009,281 

 

The following table sets forth the changes in the total cost of oil and natural gas properties at December 31, for each of the two years in the period ended December 31, 2013:

   December 31,
   2013  2012
Balance at Beginning of Period  $1,583,899   $1,146,546 
  Acquisitions using cash   —      175,116 
  Other capitalized costs   133,075    262,237 
  Sale proceeds   (163,876)   —   
  Other non-cash transactions   —      —   
Balance at End of Period  $1,553,098   $1,583,899 

 

15
 

Other capitalized costs include title related expenses and tangible and intangible drilling costs.

 

Through December 31, 2013, the Company established an asset retirement obligation of $112,652 for the wells acquired by the Company, which was capitalized to the value of the oil and gas properties. The wells have an estimated useful life of 25 years. Total accretion expense on the asset retirement obligation was $38,701, leaving an ending net balance of $151,353 at December 31, 2013.

 

About Our Oil and Gas Leases

 

Our oil and gas leases are unencumbered and in good standing and there are no third party conditions which affect them other than conditions defined by the federal government. We have no insurance covering the claim.

  

The Company currently has 87 Oil, Gas and SWD wells, with interests in 2,020 acres of leaseholds.

 

Plant and equipment

 

There are pumping units, battery units, pipes and tubing adequate for maintaining continuous flow on the properties.

 

Agreements

 

We have a 100% Working Interest (WI) and a 70% Net Revenue Interest (NRI) in the Harrel D, Larrison, Keyes A, Keyes B, Mason, and Thompson wells. We have working interests and net revenue interests in the Lester, Moon, Brenn, Dannebohn, Welsch Beaver, Carver, Miller, and Magnussen leases ranging from 15% to 30% and from 12.675% to 24.45%, respectively. We have working interests and revenue interests in the Trobaugh, Wilson, Long, and Holt leases of 30% and 26.25%, respectively. We have a 12.5% working interest and a 10% revenue interest in the Asmussen lease, and a 35% working interest and a 28% revenue interest in the Sanders lease. Our operators and pumpers are Reh Oil and Gas, LLC in Pratt KS, and Lasso Energy, Inc. in Chase KS. The purchaser of our crude oil production is Parnon Gathering Inc.

 

Item 3. Legal Proceedings

 

We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to Northumberland.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

Effective September 24, 2011 the Company effected a 20:1 forward split of its common stock to holders of record by means of a 19:1 dividend. Also, the Board approved the change in its authorized common stock from 100,000,000 to 2,000,000,000 common shares. Both these submissions were approved by shareholders holding more than 51% of the issued and outstanding common shares of the Company.

 

On September 15, 2013 the Company authorized a reverse-split of its common stock on a one-share-for-two-shares basis. All references to common stock have been restated so as to retroactively incorporate the effects of this transaction.

 

16
 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Our shares of common stock are quoted on the OTC Bulletin Board under the symbol “NHUR”. Our CUSIP number is 667133-102. The quotation was first posted at the opening on July 16, 2010 with an opening bid of $0.50.The following table shows the high and low trading prices for the past two years.

 

   2013  2013  2012  2012
   High  Low  High  Low
 Qtr 1   $0.63   $0.24   $0.52   $0.45 
 Qtr 2   $1.69   $0.48   $0.52   $0.52 
 Qtr 3   $0.84   $0.13   $0.55   $0.52 
 Qtr 4   $0.18   $0.04   $0.55   $0.55 

 

We did not make any dividend payments during the fiscal years ended December 31, 2013 or 2012 and have no plans to pay dividends in the foreseeable future. We did not repurchase any shares of our common stock during the fiscal year ended December 31, 2013 or 2012.

 

Transfer Agent: Empire Stock Transfer Co., 1859 Whitney Mesa Dr., Henderson, NV 89014

 

The Company did not make any repurchases of its securities during the year ended December 31, 2012.

 

Holders of our Common Stock

 

As of March 27, 2014 the shareholders' list of our common shares showed 26 registered shareholders holding 31,726,585 common shares and 809,400 preferred shares.

 

Dividends

 

We have not declared any dividends since incorporation and do not anticipate that we will do so in the foreseeable future. Although there are no restrictions that limit the ability to pay dividends on our common shares, our intention is to retain future earnings for use in our operations and the expansion of our business.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

We do not have any equity compensation plans in place.

 

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

 

During the past five years, the Company. has sold the following securities which were not registered under the Securities Act:

 

We issued 35,000,000 (post-split) shares of restricted common stock at a price of $0.0001 per share through a Section 4(2) exemption to Geoffrey Scales our founder, officer and director on September 8, 2009 for cash consideration of $3,500.

 

Mr. Scales is a sophisticated investor and was in possession of all material information relating to the Company. Further, no commissions were paid in connection with the sale of the shares and no general solicitation was made.

 

On November 30, 2009 the Company issued 21,275,000 (post-split) of its common stock for $42,550 cash.

 

On January 17, 2011 the Company issued 3,600,000 (post-split) shares of its common stock to a consulting company for services provided valued at $7,200. The fair value of the shares was determined based on the most recent cash sale price of common stock of $0.002 per share

 

17
 

On February 8, 2011 the Company issued 200,000 (post-split) shares of its common stock, each to two officers of the Company for services provided valued at $800. The fair value of the shares was determined based on the most recent cash sale price of common stock of $0.002 per share

 

On March 20, 2011 the Company issued 5,454,550 (post-split) shares of its common stock with proceeds to the Company of $300,000.

 

On April 1, 2011 the Company issued 3,600,000 (post-split) shares of its common stock to a consulting company for services provided valued at $198,000. The fair value of the shares was determined based on the most recent cash sale price of common stock of $0.055 per share

 

On May 28, 2011 the Company issued 909,090 (post-split) shares of its common stock with proceeds to the Company of $50,000.

 

On June 10, 2011 the Company issued 9,090,560 (post-split) shares of its common stock with proceeds to the Company of $500,000.

 

On September 28, 2011 the Company entered into a convertible debenture agreement with an unaffiliated corporation at five percent and due September 24, 2012. The conversion is at the average of the lowest price the company’s share trade five days previous to the date of the conversion. The face value of the debenture is $100,000.

 

On October 3, 2011 the Company issued 1,333,333 shares of its common stock with proceeds to the Company of $400,000.

 

On March 21, 2012 the Company issued 416,667 shares of its common stock with proceeds to the Company of $500,000.

 

During the year ended December 31, 2013 the Company issued 109,950 shares of common stock upon the conversion of a $100,000 convertible note payable and related accrued interest payable. The Company also issued 502,084 shares of common stock for cash at prices ranging from $0.32 to $1.20 per share, resulting in total cash proceeds of $465,000.

 

On September 15, 2013 the Company authorized a reverse-split of its common stock on a one-share-for-two-shares basis. All references to common stock have been restated so as to retroactively incorporate the effects of this transaction.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

Item 6. Selected Financial Data

 

Not applicable.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

You should read the following discussion of our financial condition and results of operations together with the audited financial statements and the notes to audited financial statements included elsewhere in this report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those anticipated in these forward-looking statements.

 

We are engaged in the search for oil and gas. Our business plan is to proceed with exploration of the Pratt and Cowley County Oil &Gas projects to determine if further drilling and/or using techniques to increase the flow of crude oil from our existing wells. Determination of whether or not to proceed will be provided by Melland engineering LLC of McPherson KS.

18
 

 

Employees

 

We intend to continue to use the services of subcontractors for manual labor work and an engineer or geologist to manage the development program. We have retained James Melland P.E., P.G. as senior geological/engineering consultant.

 

At present, we have no employees. We currently operate with two executive officers, who devote their time as required to our business operations. Our executive officers receive a directors fee of $1,000 per month, but do not have an employment agreement with the Company.

 

We presently do not have pension, health, annuity, insurance, stock options, profit sharing or similar benefit plans; however, we may adopt such plans in the future. There are presently no personal benefits available to employees.

 

Results of Operations

 

   For the Years Ended
December 31,
   2013  2012
Revenue  $232,572   $445,667 
Operating Expenses   (994,939)   (1,186,789)
Other Income (Expenses)   7,795    15,011 
Net Profit (Loss)  $(754,572)  $(726,121)

 

Revenue

 

During the year ended December 31, 2013 revenues decreased 47.8% from $445,667 in 2012 to $232,572 in 2013. Revenues decreased due to the Company’s partial sale of certain producing oil properties, coupled with decreased production from certain producing wells during 2013.

 

Expenses

 

Our operating expenses for the years ended December 31, 2013 and 2012 are outlined in the table below:

 

   For the Years Ended
December 31,
   2013  2012
Professional fees  $292,284   $278,834 
Depletion, depreciation, amortization and accretion   325,927    520,693 
Impairment of oil and gas properties   —      13,948 
Lease operating expenses   301,266    292,878 
General and administrative expenses   75,462    80,446 
Total Operating Expenses  $994,939   $1,186,799 

 

Operating expenses for the year ended December 31, 2013, decreased by $191,860 compared to 2012, primarily as a result of decreased oil and gas production, which resulted in significantly lower depletion, depreciation, amortization and accretion expense when compared to 2012.

 

During the year ended December 31, 2013, the Company incurred operating expenses of $994,939 as compared to $1,186,799 for 2012. The costs incurred can be further subdivided into the following categories.

 

PROFESSIONAL FEES: The Company incurred $292,284 in professional fees for the fiscal year ended on December 31, 2013, as compared to $278,834 for the previous fiscal year. Professional fees consist primarily of legal, accounting, and consulting matters. This expense category will vary annually depending on corporate capital raising activities.

 

19
 

LEASE OPERATING EXPENSES: The Company incurred $301,266 in lease operating expenses for the fiscal year ended on December 31, 2013, as compared to $292,878 for the previous fiscal year. This expense category will likely increase as the Company expands its oil and gas production operations.

 

DEPLETION, DEPRECIATION, AMORTIZATION AND ACCRETION (“DDA”): The Company incurred $325,927 in DDA expenses for the fiscal year ended on December 31, 2013, as compared to $520,693 for the previous fiscal year. This expense category will likely increase as the Company expands its oil and gas production operations.

 

GENERAL AND ADMINISTRATIVE EXPENSES: The Company incurred $75,462 in general and administrative expenses during the fiscal year ended December 31, 2013 as compared to $80,446 in 2012.

 

RESEARCH AND DEVELOPMENT: The Company has not incurred any expenses for research and development since inception on June 22, 2009.

 

COMPENSATION: No compensation costs were incurred for the fiscal year ended on December 31, 2013, and none were incurred in the previous fiscal year which ended on December 31, 2012.

 

INCOME TAX PROVISION: As a result of operating losses, there has been no provision for the payment of income taxes to date or from the date of inception.

 

At the end of the fiscal year ended December 31, 2013, and as of the date of this report, the Company had 31,726,585 common shares issued and outstanding, , as well as 809,400 shares of preferred stock issued and outstanding, respectively.

 

Liquidity and Financial Condition

 

Working Capital

 

   For the Years Ended
December 31,
   2013  2012
Current Assets  $6,749   $2,426 
Current Liabilities   191,084    289,729 
Working Capital  $(184,335)  $(287,303)

 

Cash Flows

 

   For the Years Ended
December 31,
   2013  2012
Net Cash Used in Operating Activities  $301,416   $176,111 
Net Cash Used in Investing Activities   143,030    432,414 
Net Cash Provided by Financing Activities   445,455    518,000 
Change in Cash During the Period  $1,009   $(90,525)

 

Since inception we have used common stock to raise money for our oil and gas acquisitions and corporate expenses. Net cash provided by financing activities in the most recent fiscal year ended December 31, 2013 was $445,455. In the fiscal year ended December 31, 2012, net cash flows from financing activities totaled $518,000.

 

20
 

Presently, our revenues are not sufficient to meet operating and capital expenses. We have incurred operating losses since inception, and this is likely to continue through fiscal 2014. Management projects that we may require $500,000 to fund our ongoing operating expenses and working capital requirements for the next twelve months, broken down as follows:

  

General and administrative expenses  $50,000 
Operating expenses   —   
Future property acquisitions   200,000 
Working capital   250,000 
Total  $500,000 

 

As at December 31, 2013, we had a working capital deficit of $184,335. We plan to raise the additional capital required to meet the balance of our estimated funding requirements for the next twelve months primarily through the sale of equity based securities or loans from related parties. We do not anticipate that we will be able to satisfy any of these funding requirements internally until we significantly generate revenues.

 

Going Concern

 

We are in the exploration stage, have not yet achieved profitable operations and are dependent on our ability to raise capital from stockholders or other sources to meet obligations arising from normal business operations when they become due. Therefore, in their report on our audited financial statements for the years ended December 31, 2013 and 2012, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our financial statements contain additional note disclosure describing the circumstances that lead to this disclosure.

 

Future Financings

 

We will require additional financing in order to enable us to proceed with our plan of operations. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will not be able to meet our other obligations as they become due. We are pursuing various alternatives to meet our immediate and long-term financial requirements.

 

We anticipate continuing to rely on equity sales of our common stock in order 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 equity securities or arrange for debt or other financing to fund our planned business activities.

 

We presently do not have any arrangements for additional financing and no potential lines of credit or sources of financing are currently available for the purpose of proceeding with our plan of operations.

 

Off-Balance Sheet Arrangements

 

We have no 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 is material to stockholders.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 8. Financial Statements and Supplementary Data.

 

Our financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.

 

The Reports of the Independent Registered Public Accounting firm by Sadler, Gibb & Associates LLC for the audited financial statements for the year ended December 31, 2013 and 2012 and are included herein immediately preceding the audited financial statements.

 

21
 

  

 

 

SUPERNOVA ENERGY INC.

(FORMERLY NORTHUMBERLAND RESOURCES, INC.)

 

AUDIT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

AND

FINANCIAL STATEMENTS 

For the Years Ended December 31, 2013 and 2012

 

Table of Contents

 

  Page
   
Report of Independent Registered Public Accounting Firm F-1
   
Balance Sheets F-2
   
Statements of Operations F-3
   
Statement of Stockholders’ Equity F-4
   
Statements of Cash Flows F-5
   
Notes to Financial Statements F-7

 

 

 

22
 

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors

Supernova Energy, Inc.

(Formerly known as Northumberland Resources, Inc.)

 

We have audited the accompanying balance sheets of Supernova Energy, Inc. (formerly known as Northumberland Resources, Inc.) (“the Company”) as of December 31, 2013 and 2012, and the related statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.  

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 audits 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 audits provide a reasonable basis for our opinion.

 

In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of Supernova Energy, Inc. as of December 31, 2013 and 2012, and the results of its operations and cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has not yet established an ongoing source of revenue sufficient to cover its operating costs which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

 

/s/ Sadler Gibb, LLC

 

Salt Lake City, UT

April 11, 2014

 

 

 

 

 

F-1
 

 

SUPERNOVA ENERGY, INC.
(Formely Northumberland Resources, Inc.)
Balance Sheets
       
   December 31,  December 31,
   2013  2012
       
ASSETS          
           
CURRENT ASSETS          
Cash and cash equivalents  $2,035   $1,026 
Prepaid expenses   3,314    —   
Deposits   1,400    1,400 
Total Current Assets   6,749    2,426 
           
PROPERTY AND EQUIPMENT          
Oil and gas properties (full cost method)          
Proved   1,058,517    987,548 
Unproved   264,717    340,097 
Support equipment   229,864    256,254 
Total property, plant and equipment   1,553,098    1,583,899 
Accumulated depletion and depreciation   (834,336)   (574,618)
Total Property, Plant and Equipment, net   718,762    1,009,281 
           
TOTAL ASSETS  $725,511   $1,011,707 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES          
Accounts payable and accrued expenses  $118,461   $100,470 
Accounts payable and accrued expenses, related parties   67,500    60,000 
Notes payable   5,000    14,000 
Notes payable, related parties   123    4,123 
Convertible notes payable   —      100,000 
Derivative liability   —      11,136 
Total Current Liabilities   191,084    289,729 
           
LONG TERM LIABILITIES          
Asset retirement obligations, net   151,353    158,976 
           
TOTAL LIABILITIES   342,437    448,705 
           
STOCKHOLDERS' EQUITY          
Preferred stock, 2,000,000 shares authorized at par          
   value of $0.10; 809,400 shares issued and outstanding   80,940    80,940 
Common stock, 100,000,000 shares authorized at          
   par value of $0.001; 31,726,585 and 31,114,550          
   shares issued and outstanding, respectively   31,727    31,115 
Additional paid-in capital   2,469,227    1,895,195 
Accumulated deficit   (2,198,820)   (1,444,248)
Total Stockholders' Equity   383,074    563,002 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $725,511   $1,011,707 
           
           
           
           
The accompanying notes are an integral part of these financial statements  

 

 

 

F-2
 

 

SUPERNOVA ENERGY, INC.
(Formerly Northumberland Resources, Inc.)
Condensed Statements of Operations
       
       
   For the Years Ended  
   December 31,  
   2013  2012
       
REVENUES  $232,572   $445,667 
           
OPERATING EXPENSES          
           
Depletion, depreciation, amortization          
  and accretion expense   325,927    520,693 
Lease operating expenses   301,266    292,878 
Impairment of oil and gas properties   —      13,948 
Professional fees   292,284    278,834 
General and administrative expenses   75,462    80,446 
           
Total Operating Expenses   994,939    1,186,799 
           
NET LOSS FROM OPERATIONS   (762,367)   (741,132)
           
OTHER INCOME (EXPENSE)          
           
Gain on derivative liability   11,136    92,445 
Interest expense   (3,341)   (77,434)
           
Total Other Income (Expense)   7,795    15,011 
           
LOSS BEFORE INCOME TAXES   (754,572)   (726,121)
PROVISION FOR INCOME TAXES   —      —   
           
NET LOSS  $(754,572)  $(726,121)
           
BASIC AND DILUTED LOSS          
   PER COMMON SHARE  $(0.02)  $(0.01)
           
BASIC AND DILUTED WEIGHTED          
  AVERAGE NUMBER OF COMMON          
  SHARES OUTSTANDING   31,504,836    61,766,932 

 

 

The accompanying notes are an integral part of these condensed financial statements

F-3
 

 

SUPERNOVA ENERGY, INC.
(Formerly Northumberland Resources, Inc.
Statements of Stockholders' Equity
                      
                      
               Additional     Total
   Preferred Stock  Common Stock  Paid-in  Accumulated  Stockholders'
   Shares  Amount  Shares  Amount  Capital  Deficit  Equity
                      
Balance, December 31, 2011   —     $—      80,662,883   $80,663   $1,421,387   $(718,127)  $783,923 
                                    
Common stock issued                                   
  for cash   —      —      416,667    417    499,583    —      500,000 
                                    
Common stock issued                                   
  for services   —      —      5,000    5    5,195    —      5,200 
                                    
Common stock converted                                   
  to preferred stock   809,400    80,940    (40,470,000)   (40,470)   (40,470)   —      —   
                                    
Cancellation of common                                   
  stock   —      —      (9,499,999)   (9,500)   9,500    —      —   
                                    
Net loss for the year                                   
  ended December 31, 2012   —      —      —      —      —      (726,121)   (726,121)
                                    
Balance, December 31, 2012   809,400    80,940    31,114,551    31,115    1,895,195    (1,444,248)   563,002 
                                    
Common shares issued in                                   
  settlement of debt   —      —      109,950    110    109,534    —      109,644 
                                    
Common shares issued                                   
  for cash   —      —      83,334    83    99,917    —      100,000 
                                    
Common shares issued                                   
  for cash   —      —      262,500    263    314,737    —      315,000 
                                    
Common shares issued                                   
  for cash   —      —      156,250    156    49,844    —      50,000 
                                    
Net loss for the year ended                                   
  December 31, 2013   —      —      —      —      —      (754,572)   (754,572)
                                    
Balance, December 31, 2013   809,400   $80,940    31,726,585   $31,727   $2,469,227   $(2,198,820)  $383,074 

 

  

The accompanying notes are an integral part of these condensed financial statements

 

F-4
 

 

SUPERNOVA ENERGY, INC.
(Formerly Northumberland Resources, Inc.)
Condensed Statements of Cash Flows
       
   For the Years Ended  
   December 31,  
   2013  2012
OPERATING ACTIVITIES          
Net loss  $(754,572)  $(726,121)
Adjustments to reconcile net loss to          
  net cash used in operating activities:          
Depreciation, depletion, amortization          
  and accretion   325,927    520,693 
Amortization of debt discount   —      69,327 
Change in derivative liability   (11,136)   (92,445)
Common stock issued for services   —      5,200 
Impairment of oil and gas properties   —      13,948 
Changes in operating assets and liabilities:          
Deposits   —      (200)
Prepaid expenses   (3,314)   —   
Accounts payable and accrued expenses   141,679    33,487 
           
Net Cash Used in Operating Activities   (301,416)   (176,111)
           
INVESTING ACTIVITIES          
Capitalized costs of oil and gas properties   (119,149)   (340,128)
Purchase of well operating equipment   (23,881)   (92,286)
           
Net Cash Used in Investing Activities   (143,030)   (432,414)
           
FINANCING ACTIVITIES          
Common stock issued for cash   465,000    500,000 
Repayment of related-party payables   (6,545)   —   
Proceeds from note payable   5,000    18,000 
Repayment of notes payable   (18,000)   —   
           
Net Cash Provided by Financing Activities   445,455    518,000 
           
NET DECREASE IN CASH   1,009    (90,525)
CASH AT BEGINNING OF PERIOD   1,026    91,551 
           
CASH AT END OF PERIOD  $2,035   $1,026 
           
SUPPLEMENTAL DISCLOSURES OF          
CASH FLOW INFORMATION          
           
CASH PAID FOR:          
           
Interest  $—     $—   
Income Taxes  $—     $—   
           
NON-CASH FINANCING AND INVESTING ACTIVITES  $—     $—   
           
Common stock issued for debt  $109,644   $—   
Sale of oil & gas properties for other receivables  $173,831   $—   
Accounts payable paid by related-party note  $6,545   $—   
Account receivable credited to account payable  $100,000   $—   
Preferred stock issued in conversion of common stock  $—     $80,940 
Increase in asset retirement obligations  $—     $20,129 
           
           
The accompanying notes are an integral part of these condensed financial statements.  

 

  

F-5
 

 

SUPERNOVA ENERGY, INC.

(Formerly Northumberland Resources, Inc.)

Notes to Financial Statements

December 31, 2013 and 2012

NOTE 1 – NATURE OF BUSINESS

 

Supernova Energy, Inc. (“the Company”) is an oil and gas exploration and production company incorporated in the state of Nevada on June 22, 2009. On October 21, 2013 the Company elected to change its corporate name from Northumberland Resources, Inc. to Supernova Energy, Inc.

 

NOTE 2 – GOING CONCERN

 

The Company's financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

 

In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management's plan is to obtain such resources for the Company by obtaining capital from management and significant shareholders sufficient to meet its minimal operating expenses and seeking equity and/or debt financing. However management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with the original maturities of three months or less to be cash equivalents. The Company had $2,035 and $1,026 of cash and cash equivalents at December 31, 2013 and 2012, respectively.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing these financial statements include the estimate of proved oil and gas reserves and related present value estimates of future net cash flows therefrom and the assessment of asset retirement obligations.

 

Recent Accounting Pronouncements

 

The Company has evaluated recent accounting pronouncements and their adoption has not had or is not expected to have a material impact on the Company’s financial position or statements.

 

Reclassification of Financial Statement Accounts

 

Certain amounts in the December 31, 2012 financial statements have been reclassified to conform to the presentation in the December 31, 2013 financial statements.

 

  

F-6
 

SUPERNOVA ENERGY, INC.

(Formerly Northumberland Resources, Inc.)

Notes to Financial Statements

December 31, 2013 and 2012

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Oil and Gas Properties

 

The Company uses the full cost method of accounting for oil and natural gas properties. Under this method, all acquisition, exploration and development costs, including certain payroll, asset retirement costs, other internal costs, and interest incurred for the purpose of finding oil and natural gas reserves, are capitalized. Internal costs that are capitalized are directly attributable to acquisition, exploration and development activities and do not include costs related to production, general corporate overhead or similar activities. Costs associated with production and general corporate activities are expensed in the period incurred. Proceeds from the sale of oil and natural gas properties are applied to reduce the capitalized costs of oil and natural gas properties unless the sale would significantly alter the relationship between capitalized costs and proved reserves, in which case a gain or loss is recognized.

 

Capitalized costs associated with impaired properties and capitalized costs related to properties having proved reserves, plus the estimated future development costs, and asset retirement costs under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 410 “Asset Retirement and Environmental Obligations” (FASB ASC 410), are amortized using the unit-of-production method based on proved reserves. Capitalized costs of oil and natural gas properties, net of accumulated amortization and deferred income taxes, are limited to the total of estimated future net cash flows from proved oil and natural gas reserves, discounted at ten percent, plus the cost of unevaluated properties.  

 

There are many factors, including global events that may influence the production, processing, marketing and price of oil and natural gas. A reduction in the valuation of oil and natural gas properties resulting from declining prices or production could adversely impact depletion rates and capitalized cost limitations. Capitalized costs associated with properties that have not been evaluated through drilling or seismic analysis, including exploration wells in progress, are excluded from the unit-of-production amortization. Exclusions are adjusted annually based on drilling results and interpretative analysis.

 

Sales of oil and natural gas properties are accounted for as adjustments to the net full cost pool with no gain or loss recognized, unless the adjustment would significantly alter the relationship between capitalized costs and proved reserves. If it is determined that the relationship is significantly altered, the corresponding gain or loss will be recognized in the statements of operations.

  

Costs of oil and gas properties are depleted using the unit-of-production method. For the years ended December 31, 2013 and 2012, the Company recognized $263,987 and $459,258, respectively of depletion expense related to oil and gas production.

 

Ceiling Test – In applying the full cost method and in accordance with ASC 932, the Company performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of property and equipment is compared to the value of its proved reserves discounted at a ten percent interest rate of future net revenues, based on current economic and operating conditions, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. As of December 31, 2013 and 2012, $-0- and $13,948 of impairment expense has been recorded, respectively, in connection with the full cost ceiling test calculation.

 

Revenue Recognition – Revenues from the sale of oil and natural gas are recognized when the product is delivered at a fixed or determinable price, title has transferred, and collectability is reasonably assured. For oil sales, this occurs when the customer takes delivery of oil from the operators’ storage tanks.

 

F-7
 

SUPERNOVA ENERGY, INC.

(Formerly Northumberland Resources, Inc.)

Notes to Financial Statements

December 31, 2013 and 2012

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Asset Retirement Obligations

 

The Company records the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized.

 

Long-Lived Assets

 

Long-lived assets include equipment and intangible assets other than those with indefinite lives. We assess the carrying value of our long-lived asset groups when indicators of impairment exist and recognize an impairment loss when the carrying amount of a long-lived asset is not recoverable from the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Indicators of impairment include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically a discounted cash flow analysis, and an impairment charge is recorded for the excess of carrying value over fair value.

 

Property and equipment are recorded at historical cost less accumulated depreciation, unless impaired. Depreciation is charged to operations over the estimated useful lives of the assets using the straight-line. Upon retirement or sale, the historical cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized. Expenditures for repairs and maintenance are charged to expense as incurred.

 

Income Taxes

 

Income taxes are provided in accordance with FASB Codification Topic 740, Accounting for Income Taxes. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss-carry forwards.

 

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.

 

The asset and liability approach is used to account for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.

 

F-8
 

SUPERNOVA ENERGY, INC.

(Formerly Northumberland Resources, Inc.)

Notes to Financial Statements

December 31, 2013 and 2012

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Fair Value Measurements

 

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market-based inputs or inputs that are corroborated by market data

Level 3: Unobservable inputs that are not corroborated by market data

 

Basic and Diluted Loss per Share

 

Basic and diluted loss per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. There were -0- and 202,020 such common stock equivalents outstanding as of December 31, 2013 and 2012, respectively.

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

As of December 31, 2013 and 2012 the Company’s oil and gas pumping and support equipment consisted of the following:

 

   

December 31,

2013

 

December 31,

2012

             
Oil and gas pumping and support equipment   $ 229,864   $ 256,254
Accumulated depreciation     (88,698)     (58,306)
Net   $ 141,166   $ 197,948

 

Depreciation expense was $45,500 and $44,436 for the years ended December 31, 2013 and 2012, respectively.

 

NOTE 5 – OIL AND GAS PROPERTIES

 

Oil and gas properties are stated at cost. The Company recognized depletion expense totaling $263,987 and $459,258 during the years ended December 31, 2013 and 2012, respectively. As of December 31, 2013 and 2012 oil and gas properties consisted of the following:

 

   December 31,
2013
  December 31,
2012
       
Proved producing properties  $1,044,068   $967,512 
Proved non-producing properties   14,448    20,036 
Unproved properties   264,718    340,097 
Accumulated depletion   (745,638)   (516,312)
           
Net Oil and Gas Properties  $577,596   $811,333 

 

F-9
 

SUPERNOVA ENERGY, INC.

(Formerly Northumberland Resources, Inc.)

Notes to Financial Statements

December 31, 2013 and 2012

NOTE 5 – OIL AND GAS PROPERTIES (CONTINUED)

 

All of the Company’s oil and natural gas properties are located in the United States.  Costs being amortized at December 31, 2013 and 2012 are as follows:

 

   December 31,
   2013  2012
Proved leasehold costs  $596,631   $700,297 
Costs of wells and equipment   842,829    745,969 
Capitalized asset retirement costs   113,638    137,633 
    Total oil and gas properties   1,553,098    1,583,899 
Accumulated depreciation and depletion   (834,336)   (574,618)
    Net Capitalized Costs  $718,762   $1,009,281 

 

The following table sets forth the changes in the total cost of oil and natural gas properties at December 31, for each of the two years in the period ended December 31, 2013:

   December 31,
   2013  2012
Balance at Beginning of Period  $1,583,899   $1,146,546 
  Acquisitions using cash   —      175,116 
  Other capitalized costs   133,075    262,237 
  Sale proceeds   (163,876)   —   
  Other non-cash transactions   —      —   
Balance at End of Period  $1,553,098   $1,583,899 

 

Other capitalized costs include title related expenses and tangible and intangible drilling costs.

 

On March 1, 2011, the Company purchased a 100 percent working interest on a 70 percent net revenue interest in certain oil and gas leases and related well operating equipment in Pratt County, Kansas for $260,000. Of this total, $149,000 was allocated to oil and gas leases, and the remaining $111,000 was allocated to the purchased well operating equipment.

 

On June 11, 2011, the Company purchased a 30 percent working interest on an 24.45 percent net revenue interest in an unproved oil and gas well located in Cowley County, KS. The Company paid $17,220 for the lease on 640 acres at $85 per acre.

 

On July 7, 2011, the Company purchased a 20 percent working interest on an 16.41 percent net revenue interest in a proved and producing oil and gas well located in Cowley County, KS. The Company paid $45,000 to acquire the leases .

 

On September 27, 2011, the Company purchased two leases and related well operating equipment located in Pratt County for $72,500. Of this total, $22,500 was allocated to oil and gas leases, and the remaining $50,000 was allocated to the purchased well operating equipment.   The leases carry a 100 percent working interest of 70 percent net revenue interest.

 

On September 27, 2011, the Company also purchased a 23 percent interest in a net revenue interest ranging from 18.66 to 19.65 percent in three leases in Barton and Stafford Counties, Kansas for $220,800.   The three leases combined contain slightly more than 564 net acres.   In total there are seven active wells located in these leases.   There are four oil producing wells, two disposal wells and one injection well. 

 

On December 19, 2011, the company purchased a 15 percent interest in net revenue interests ranging from 12.675 percent to 13.125 percent in four leases in Cowley County, Kansas for $75,600. The four leases combined contain approximately 720 acres.

F-10
 

SUPERNOVA ENERGY, INC.

(Formerly Northumberland Resources, Inc.)

Notes to Financial Statements

December 31, 2013 and 2012

NOTE 5 – OIL AND GAS PROPERTIES (CONTINUED)

 

On February 9, 2012, the Company purchased a 30 percent gross working interest and a 26.25 percent net revenue interest in six unproved oil and gas leases in Cowley County, Kansas for $140,400. The six leases combined contain approximately 1,025 acres.

 

On May 14, 2012 the Company purchased a 35 percent gross working interest and a 28 percent net revenue interest in 98 acres of unproved oil and gas leases in Stafford County, Kansas for $12,569. Concurrent with this purchase, the Company paid $22,673 in additional development costs, and $66,181 for support equipment, for an aggregate purchase price of $101,387.

 

On May 14, 2012 the Company purchased a 13 percent gross working interest and a 10 percent net revenue interest in 70 acres of unproved oil and gas leases in Butler County, Kansas for $17,208. Concurrent with this purchase, the Company paid $27,401 in additional development costs, and $18,021 for support equipment, for an aggregate purchase price of $62,630.

 

On February 5, 2013 the Company sold a 30 percent gross working interest and a 30 percent net revenue interest in six oil and gas leases located in Pratt County, Kansas for $100,000. This amount was deducted from funds payable from the Company to the purchasing entity on July 18, 2013. Pursuant to this transaction the Company transferred a 30 percent interest in all related support equipment and asset retirement obligations.

 

During the years ended December 31, 2013 and 2012, the Company incurred development costs including certain work-over costs and other improvements to its wells. The Company paid $119,149 and $169,951, respectively for these improvements, which have been capitalized to the book value of the wells.

 

NOTE 6 – NOTES PAYABLE

 

As of December 31, 2011 the Company owed $123 to a related party. During the year ended December 31, 2012 the Company borrowed $18,000 from related parties, and in 2013 repaid the entire $18,000 open balances. On August 21, 2013 the Company borrowed an additional $5,000 from the related party, with principal due in full on August 21, 2014, along with an additional $500 in accrued interest. As of December 31, 2013 the Company had an aggregate total of $5,123 in notes payable to related parties.

 

NOTE 7 – CONVERTIBLE NOTES PAYABLE

 

On September 28, 2011 the Company borrowed $100,000 from an unrelated third party entity in the form of a convertible note. The note bore interest at a rate of five percent per annum, with principal and interest due in full on September 24, 2012. The note was convertible at any time, at the option of the note holder, into shares of the Company’s common stock, at ten percent below the current market price on the date of conversion. For purposes of the note, “current market price” is defined as the average of the lowest three daily closing prices per share for the five business days prior to the date of conversion.

 

Pursuant to this conversion feature, the Company recognized a derivative liability in the amount of $93,976 on the note date. At December 31, 2011, the derivative liability was revalued at $103,581, and at December 31, 2012 the derivative liability was revalued at $11,136. This led to the Company recording a gain on derivative liability of $92,445 for the period ended December 31, 2012. On March 17, 2013 the derivative liability was revalued at $-0-, resulting in a gain on derivative liability of $11,136 for the year ended December 31, 2013.

 

On March 17, 2013 the holder of the note elected to convert the entire face value of the note of $100,000, along with $9,644 in accrued interest, into 109,952 shares of common stock (see Note 10).

 

NOTE 8 – DERIVATIVE LIABILITY 

 

On September 28, 2011 the Company executed a convertible note payable in the amount of $100,000 which was convertible at the holder’s option at 90 percent of the average of the lowest three daily closing prices per share for the five business days prior to the date of conversion.

  

F-11
 

 

SUPERNOVA ENERGY, INC.

(Formerly Northumberland Resources, Inc.)

Notes to Financial Statements

December 31, 2013 and 2012

NOTE 8 – DERIVATIVE LIABILITY (CONTINUED)

 

The fair value of the conversion option of the convertible note of $93,976 was recognized as a derivative liability on the date of issuance with all future changes in the fair value of these conversion options being recognized in earnings in the Company’s statement of operations under the caption “Other income (expense) – gain (loss) on derivative liability” until such time as the note was converted.

 

The Company used the Black-Scholes options pricing model to value the derivative liability and subsequent remeasurement. Included in the models were the following assumptions: risk free rates ranging from 0.02 percent to 0.16 percent, and annual volatilities which ranged from 10 percent to 500 percent.

 

ASC 815 requires the Company to assess the fair market value of certain derivatives at each reporting period and recognize any change in the fair market value of the derivatives as gain (loss) on the income statements.   At December 31, 2012 the derivative liability was revalued at $11,136, which led to the Company recording a gain on derivative liability in the amount of $92,445.

 

On March 17, 2013, pursuant to the full conversion of the note into 109,952 shares of common stock, the derivative liability was revalued at $-0-, resulting in a gain on derivative liability of $11,136 for the year ended December 31, 2013.

 

NOTE 9 – ASSET RETIREMENT OBLIGATIONS

 

The total future asset retirement obligation is estimated by management based on the Company’s net working interests in all wells and facilities, estimated costs to reclaim and abandon wells and facilities and the estimated timing of the costs to be incurred in future periods. At December 31, 2013 and 2012, the Company estimated the undiscounted cash flows related to asset retirement obligation to total approximately $323,400 and $399,900, respectively. The fair value of the liability at December 31, 2013 and 2012 is estimated to be $151,353 and $158,976, respectively, using risk free rates between 2.48 and 4.24 percent and inflation rates between 2.75 and 4.20 percent. The actual costs to settle the obligation are expected to occur in approximately 25 years.

 

On February 5, 2013 the Company sold a 30 percent gross working interest and a 30 percent net revenue interest in six oil and gas leases located in Pratt County, Kansas for $100,000. This amount was deducted from funds payable from the Company to the purchasing entity on July 18, 2013. Pursuant to this transaction the Company transferred a 30 percent interest in all related support equipment and asset retirement obligations.

 

Through December 31, 2013, the Company established an asset retirement obligation of $112,652 for the wells acquired by the Company, which was capitalized to the value of the oil and gas properties. The wells have an estimated useful life of 25 years. Total accretion expense on the asset retirement obligation was $38,701, leaving an ending net balance of $151,353 at December 31, 2013.

 

Changes to the asset retirement obligation for the years ended December 31, 2013 and 2012 were as follows:

 

   December 31,
2013
  December 31,
2012
       
Balance, beginning of year  $158,976   $121,848 
Liabilities incurred   —      20,129 
Disposal   (24,063)   —   
Accretion expense   16,440    16,999 
Balance, end of year  $151,353   $158,976 

 

F-12
 

 

SUPERNOVA ENERGY, INC.

(Formerly Northumberland Resources, Inc.)

Notes to Financial Statements

December 31, 2013 and 2012

 

NOTE 10 – STOCKHOLDERS’ EQUITY

 

On October 21, 2013 the Company elected to reduce its authorized number of common shares from 200,000,000 to 100,000,000. On September 15, 2013 the Company authorized a reverse-split of its common stock on a one-share-for-two-shares basis. All references to common stock have been restated so as to retroactively incorporate the effects of this transaction. As of December 31, 2013 and 2012, there were 31,726,585 and 31,114,550 post-split shares of common stock issued and outstanding, respectively.

 

On March 21, 2012, the Company issued 416,667 shares of common stock at $1.20 per share for cash proceeds of $500,000.

 

On April 1, 2012, the Company appointed a new member of its Board of Directors. The Company has agreed to pay the director $1,000 per month. In addition, the Company has also agreed to issue the new director 5,000 shares of common stock at $1.04 per share, for services valued at $5,200. The price per share of common stock issued for services was based on the trading price of the Company’s common stock on the dates such services were performed.

 

During the year ended December 31, 2012, the Company increased its authorized $0.001 par value common stock to 198,000,000 shares, and authorized 2,000,000 preferred shares with 1-to-100 voting rights and conversion ratio from preferred to common shares.

 

During the year ended December 31, 2012, the Company converted 40,470,000 shares of outstanding common stock into 809,400 shares of preferred stock. During the same fiscal period, the Company cancelled 9,499,999 shares of common stock.

 

During the year ended December 31, 2013 the Company issued 109,950 shares of common stock upon the conversion of a $100,000 convertible note payable and related accrued interest payable (see Note 7). The Company also issued 502,084 shares of common stock for cash at $1.20 per share, resulting in total cash proceeds of $465,000.

 

NOTE 11 – INCOME TAXES

 

The Company accounts for income taxes in accordance with ASC 740, Income Taxes , which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount that is more likely than not to be realized.

 

ASC 740 provides guidance on the accounting for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.

 

Net deferred tax assets consist of the following components as of December 31, 2013 and 2012:

  

   December 31,
2013
  December 31,
2012
Book income (loss) from operations  $(256,555)  $(246,881)
Amortization of debt discounts   —      22,891 
Common stock issued for services   —      1,768 
Impairment of oil and gas properties   —      4,742 
Change in derivative liability   (3,786)   (31,431)
Change in valuation allowance   260,341    248,911 
Total provision for income taxes  $—     $—   

F-13
 

SUPERNOVA ENERGY, INC.

(Formerly Northumberland Resources, Inc.)

Notes to Financial Statements

December 31, 2013 and 2012

 

NOTE 11 – INCOME TAXES (CONTINUED)

 

The income tax provision differs from the amount of income tax determined by applying the estimated U.S. federal and state income tax rates of 34 percent to pretax income from continuing operations for the year ended December 31, 2013 and 2012 due to the following:

   December 31,
2013
  December 31,
2012
       
Loss carry forwards (expire through 2032)  $747,599   $491,044 
           
Total gross deferred tax asset   670,368    410,708 
Valuation allowance   (670,368)   (410,708)
Net deferred taxes  $—     $—   

 

At December 31, 2013, the Company had net operating loss carry forwards of approximately $747,599 through 2032.  No tax benefit has been reported in the December 31, 2013 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount. Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry forwards may be limited as to use in future years.

 

In accordance with generally accepted accounting principles, the Company has analyzed its filing positions in all jurisdictions where it is required to file income tax returns for the open tax years in such jurisdictions. The Company has identified its federal income tax returns for the previous five years remain subject to examination. The Company’s income tax returns in state income tax jurisdictions also remain subject to examination for the previous five years. The Company currently believes that all significant filing positions are highly certain and that all of its significant income tax filing positions and deductions would be sustained upon audit. Therefore, the Company has no significant reserves for uncertain tax positions, and no adjustments to such reserves were required by generally accepted accounting principles. No interest or penalties have been levied against the Company and none are anticipated, therefore no interest or penalty has been included in the provision for income taxes in the consolidated statements of operations.

 

NOTE 12 – COMMITEMENTS AND CONTINGENCIES

 

Compensation to Directors – The Company’s two directors are entitled to a director’s fee of $1,000 per month, per director.

 

Other Commitments – The Company has a consulting agreement with a third party whereby the consultant provides consulting services for a fee of $12,000 per month. In addition, the Company has an agreement with a third party investor relations firm whereby the firm provides investor relations services to the Company for a fee of $6,000 per month.

 

NOTE 13 – SUBSEQUENT EVENTS

 

In accordance with ASC 855-10, the Company’s management has reviewed all material events and there are no additional material subsequent events to report.

F-14
 

SUPERNOVA ENERGY, INC.

(Formerly Northumberland Resources, Inc.)

Notes to Financial Statements

December 31, 2013 and 2012

 

SUPPLEMENTAL INFORMATION TO

FINANCIAL STATEMENTS (Unaudited) 

 

Oil and Gas Producing Activities

 

In January 2010, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2010-03, "Oil and Gas Reserve Estimations and Disclosures" (ASU No. 2010-03). This update aligns the current oil and gas reserve estimation and disclosure requirements of the Extractive Industries - Oil and Gas topic of the FASB Accounting Standards Codification (ASC Topic 932) with the changes required by the final rule of the Securities and Exchange Commission (the “SEC”), "Modernization of Oil and Gas Reporting." ASU No. 2010-03 must be applied prospectively as a change in accounting principle that is inseparable from a change in accounting estimate and is effective for entities with annual reporting periods ending on or after December 31, 2009.

 

Oil and Gas Reserves. Users of this information should be aware that the process of estimating quantities of "proved," "proved developed," "proved undeveloped" and "probable" crude oil, natural gas liquids and natural gas reserves is complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time. Although reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statement disclosures. See ITEM 1A. Risk Factors.

 

Proved reserves represent estimated quantities of crude oil, natural gas liquids and natural gas that geoscience and engineering data can estimate, with reasonable certainty, to be economically producible from a given day forward from known reservoirs under economic conditions, operating methods and government regulation before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation.

 

Proved developed reserves are proved reserves expected to be recovered under operating methods being utilized at the time the estimates were made, through wells and equipment in place or if the cost of any required equipment is relatively minor compared to the cost of a new well.

 

Proved undeveloped reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required. Reserves on undrilled acreage are limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. Estimates for proved undeveloped reserves are not attributed to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology establishing reasonable certainty.

F-15
 

SUPERNOVA ENERGY, INC.

(Formerly Northumberland Resources, Inc.)

Notes to Financial Statements

December 31, 2013 and 2012

 

SUPPLEMENTAL INFORMATION TO

FINANCIAL STATEMENTS (Unaudited)

 

Oil and Gas Producing Activities (Continued)

 

Probable undeveloped reserves are those additional reserves that are less certain to be recovered than proved reserves but which, together with proved reserves, are as likely as not to be recovered. Probable reserves may be assigned to areas of a reservoir adjacent to proved reserves where data control or interpretations of available data are less certain, even if the interpreted reservoir continuity of structure or productivity does not meet the reasonable certainty criterion. Probable reserves may be assigned to areas that are structurally higher than the proved area if these areas are in communication with the proved reservoir.

 

No major acquisition or sale of oil and gas properties or other favorable or adverse event subsequent to December 31, 2013 is believed to have caused a material change in the estimates of proved developed or proved undeveloped or probable undeveloped reserves as of that date.

  

NET PROVED RESERVE SUMMARY

 

The following table sets forth the Company's net proved reserves, including proved developed and proved undeveloped reserves, at December 31, 2013, as pursuant to reserve reports prepared by the Company’s independent, certified petroleum engineer.

 

   At December 31, 2013  At December 31, 2012
Net Proved Developed Reserves          
Crude Oil (Bbls)   83,743    58,116 
Natural Gas (Mcf)   —      138,102 
Oil Equivalents (Boe)   —      —   
           
Net Proved Undeveloped Reserves          
Crude Oil (Bbls)   32,391    —   
Natural Gas (Mcf)   —      —   
Oil Equivalents (Boe)   —      —   
           
Net Proved Developed and Undeveloped Reserves          
Crude Oil (Bbls)   116,134    58,116 
Natural Gas (Mcf)   —      138,102 
Oil Equivalents (Boe)   —      —   
           

 

F-16
 

SUPERNOVA ENERGY, INC.

(Formerly Northumberland Resources, Inc.)

Notes to Financial Statements

December 31, 2013 and 2012

 

SUPPLEMENTAL INFORMATION TO

FINANCIAL STATEMENTS (Unaudited)

 

Capitalized Costs Relating to Oil and Gas Producing Activities. The following table sets forth the capitalized costs relating to the Company’s crude oil and natural gas producing activities at December 31, 2013 and 2012:

 

   At December 31, 2013  At December 31, 2012
Proved leasehold costs  $—     $—   
Costs of wells and development   1,430,333    1,461,134 
Capitalized asset retirement costs   112,652    136,715 
Total cost of oil and gas properties   1,542,985    1,597,849 
Accumulated depreciation and depletion   (798,673)   (574,618)
Net Capitalized Costs  $744,312   $1,023,231 
           

 

Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities. The following table sets forth the costs incurred in the Company’s oil and gas property acquisition, exploration and development activities for the ended December 31, 2013 and 2012:

 

   For the Year Ended
December 31, 2013
  For the Year Ended
December 31, 2012
Acquisition of properties          
Proved  $—     $170,177 
Exploration costs   —      —   
Development costs   119,149    169,951 
Net Capitalized Costs  $119,149   $340,128 
           

 

  Results of Operations for Oil and Gas Producing Activities. The following table sets forth the results of operations for oil and gas producing activities for the year ended December 31, 2013 and 2012:

 

   For the Year Ended
December 31, 2013
  For the Year Ended
December 31, 2012
Crude oil and gas revenues  $232,572   $445,667 
Production costs   (301,266)   (292,878)
Depreciation, depletion and accretion   (290,265)   (520,693)
Results of operations for producing activities, excluding corporate overhead  $(358,959)  $(367,904)
           

 

F-17
 

SUPERNOVA ENERGY, INC.

(Formerly Northumberland Resources, Inc.)

Notes to Financial Statements

December 31, 2013 and 2012

 

SUPPLEMENTAL INFORMATION TO

FINANCIAL STATEMENTS (Unaudited)

 

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves. The following information has been developed utilizing procedures prescribed by ASC Topic 932 and is based on crude oil and natural gas reserves and production volumes estimated by the Company’s independent petroleum consultants. The estimates were based on a $86.69/BO crude oil price plus a $3.75/BO adjustment for high gravity quotient, resulting in an overall crude oil price of $90.44/BO , and a gas price of $3.67/MCF. The following information may be useful for certain comparison purposes, but should not be solely relied upon in evaluating the Company or its performance. Further, information contained in the following table should not be considered as representative of realistic assessments of future cash flows, nor should the Standardized Measure of Discounted Future Net Cash Flows be viewed as representative of the current value of the Company.

 

The future cash flows presented below are based on sales prices, cost rates and statutory income tax rates in existence as of the date of the projections. It is expected that material revisions to some estimates of crude oil and natural gas reserves may occur in the future, development and production of the reserves may occur in periods other than those assumed, and actual prices realized and costs incurred may vary significantly from those used.

 

Future production and development costs were computed by estimating those expenditures expected to occur in developing and producing the proved oil and natural gas reserves at the end of the year, based on year-end costs. Actual future cash inflows may vary considerably, and the standardized measure does not necessarily represent the fair value of the Company’s oil and natural gas reserves.

 

Management does not rely upon the following information in making investment and operating decisions. Such decisions are based upon a wide range of factors, including estimates of probable and possible reserves as well as proved reserves, and varying price and cost assumptions considered more representative of a range of possible economic conditions that may be anticipated.

 

The following table sets forth the standardized measure of discounted future net cash flows from projected production of the Company’s oil and gas reserves as of December 31, 2013 and 2012:

 

    December 31,     December 31,    
    2013     2012    
               
Future cash inflows   $ 3,447,080     $ 3,327,753  
Future production and development costs     (1,401,303 )     (1,408,391 )
Future income tax and insurance expense     (38,691 )     (270,919 )
Future net cash inflows     2,007,086       1,648,443  
10% annual discount for estimated timing of cash flows     (1,060,905 )     (910,129 )
Standardized measure of discounted future net cash flows   $ 946,181     $ 738,314  
                   

 

F-18
 

 
SUPPLEMENTAL INFORMATION TO

FINANCIAL STATEMENTS (Unaudited)

 

Changes in Standardized Measure of Discounted Future Net Cash Flows. The following table sets forth the changes in the standardized measure of discounted future net cash flows for the year ended December 31, 2013 and 2012:

 

   December 31,  December 31,
   2013  2012
Beginning of period  $738,314   $1,037,287 
Revenues less production and other costs   68,694    (152,789)
Changes in price, net of production costs   44,445    (286,291)
Development costs incurred   119,149    169,951 
Net changes in future development costs   84,792    59,227 
Purchases of reserves in place   —      71,461 
Accretion of discount   87,444    79,240 
Net change in income taxes   99,996    23,255 
Timing differences and other   (296,653)   (256,329)
End of period  $946,181   $738,314 
           

 

 

F-19
 

 

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

None noted.

 

Item 9A(T). Controls and Procedures

 

As of Dec. 31, 2013, under the direction of the Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a — 15(e) under the Securities Exchange Act of 1934, as amended. Based on the evaluation of these controls and procedures required by paragraph (b) of Sec. 240.13a-15 or 240.15d-15 the disclosure controls and procedures have been found to be ineffective.

 

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in our reports filed under the securities Exchange Act, is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Evaluation of Internal Control Over Financial Reporting

 

Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of Dec. 31, 2013. In making this assessment, management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. In management’s assessment of the effectiveness of internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) as required by Exchange Act Rule 13a-15(c), our management concluded as of the end of the fiscal year covered by this Annual Report on Form 10-K that our internal control over financial reporting has not been effective.

 

As defined by Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements and Related Independence Rule and Conforming Amendments,” established by the Public Company Accounting Oversight Board ("PCAOB"), a material weakness is a deficiency or combination of deficiencies that results more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses as of Dec. 31, 2013:

  

i)   Lack of segregation of duties. At this time, our resources and size prevent us from being able to employ sufficient resources to enable us to have adequate segregation of duties within our internal control system. Management will periodically reevaluate this situation.

 

ii)   Lack of an independent audit committee. Although we have an audit committee it is not comprised solely of independent directors. We may establish an audit committee comprised solely of independent directors when we have sufficient capital resources and working capital to attract qualified independent directors and to maintain such a committee.

 

iii)   Insufficient number of independent directors. At the present time, our Board of Directors does not consist of a majority of independent directors, a factor that is counter to corporate governance practices as set forth by the rules of various stock exchanges.

 

Our management determined that these deficiencies constituted material weaknesses. Due to a lack of financial resources, we are not able to, and do not intend to, immediately take any action to remediate these material weaknesses. We will not be able to do so until we acquire sufficient financing to do so. We will implement further controls as circumstances, cash flow, and working capital permit. Notwithstanding the assessment that our ICFR was not effective and that there were material weaknesses as identified in this report, we believe that our financial statements fairly present our financial position, results of operations and cash flows for the years covered thereby in all material respects.

 

23
 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal controls over financial reporting that occurred during the period covered by this report, that has materially affected, or is reasonable likely to materially affect, our internal controls over financial reporting.

 

The Company has not taken any steps at this time to address these weaknesses but will formulate a plan before fiscal year ending December 31, 2014.

 

Item 9B. Other Information

 

Effective January 1, 2013, Chris Knowles resigned from our board of directors. There was no disagreement between Mr. Knowles and our company’s policies or procedures.

 

On January 7, 2013, Ryan Kerr was appointed to serve as a replacement director in the stead of Chris Knowles, to serve until the next regularly scheduled Board of Directors election by shareholders.

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The following individuals serve as the directors and executive officers of our company as of the date of this annual report. All directors of our company hold office until the next annual meeting of our shareholders or until their successors have been elected and qualified. The executive officers of our company are appointed by our board of directors and hold office until their death, resignation or removal from office.

 

   Position Held with Our     Date First Elected
Name  Company  Age  or Appointed
FortunatoVillamagna  Chief Executive Officer   53   January 15, 2011
            
Peter Hewitt  President/Director
Chief Financial Officer
Director
   48   February 8, 2011
Ryan Kerr  Director       January 7, 2013
            

 

None of the directors or officers has professional or technical accreditation in the exploration, development or operations of mining or mining related projects. During the past year, our president, G. Scales, spent approximately 20% of his time (approximately 8 hours per week) on the affairs of Northumberland. Mr. Scales resigned on January 15, 2011. Dr. Villamagna our current President expects his commitment and requirement will remain approximately the same for the coming year.

 

Business Experience

 

The following is a brief account of the education and business experience during at least the past five years of each director and executive officer of our company, indicating the person’s principal occupation during that period, and the name and principal business of the organization in which such occupation and employment were carried out.

 

24
 

Dr. Fortunato, Chief Executive Officer, President, Director

 

Dr. Fortunato Villamagna, age 53, has over 25 years of domestic and international experience in the mining services, specialty and bulk chemicals, capital equipment, bioenergy, aerospace and energetic materials businesses. Dr. Villamagna holds a PhD in Chemistry and MBA in Global Management, and has worked throughout North America, Europe, Australia and West Africa. In addition to joining Northumberland Resources Inc. Dr. Villamagna is also secretary and Director of Lucky Boy Silver Corp., (symbol LUCB.OB). Dr. Villamagna also served as director and CEO of UTEC Inc. from January 7, 2007 to May 21, 2010. Prior to the role, Dr. Villamagna served as President of BioEnergy Systems, a technology company serving the biofuels industry. Prior to that Dr. Villamagna was Vice President - Business Development for American Pacific Corporation (AMPAC), a publically listed company with divisions and subsidiaries that manufacture active pharmaceutical ingredients and registered intermediates, energetic products used primarily in space flight, aerospace and defense systems, clean fire- extinguishing agents and water treatment equipment. Prior to that Dr. Villamagna was the Vice President Technology, Americas and Europe for Orica Inc., an Australian-owned, publicly-listed global company, and global leader in mining products and services. Prior to that Dr. Villamagna was the Director of Bulk Delivered Products for Energetic Solutions, Inc., a part of UK Based ICI Explosive. We believe Dr. Villamagna is qualified to serve on our board of directors because of his knowledge of our company’s history and current operations in addition to his education and business experiences as described above.

 

Peter Hewitt, age 48, has over 20 years experience working within the Graphic Design and Print Industry. He has worked for blue chip companies such as TVR Sports Cars Ltd and Findel Plc. From 1998 to the present Peter has been with Express Gifts Ltd and is the Studio Manager running a team of 20 highly skilled Graphic Designers. He and his team are responsible for producing catalogues for the mail order and internet markets. Before joining Express Gifts Peter was the Studio Manager for TVR Sports Cars and was instrumental in the setting up and development of a successful PR and Marketing Company.We believe Mr. Hewitt is qualified to serve on our board of directors because of his knowledge of our company’s history and current operations in addition to his education and business experiences as described above.

 

Ryan Kerr currently manages Inland Oil Corp., his family-owned business. Mr. Kerr has over 15 years experience in locating, producing, completing and general operations in the oil and gas industry. Mr. Kerr has successfully drilled and completed hundreds of wells throughout the Mid-continent region and is actively involved with development and operations of fields in this region. Mr. Kerr’s extensive experience in oil and gas exploration and production is furthered as an exploration geologist where he has consulted on several water-flood and infill drilling projects throughout Oklahoma, Kansas, North Dakota, Wyoming, New Mexico, Texas, and California. Currently, Mr. Kerr has been heading drilling programs for several operators in Oklahoma, as well as design and implementation of a Nitrogen gas flood in Wagoner County Oklahoma in the Stone Bluff Field. This project consisted of flooding 1,200+ - acres with the producing interval from the Dutcher Sand zone at a depth of 1250’feet. Production since the start of the nitrogen injection flood has been increased from the formation at a rate of 1 MMCF per day. Mr. Kerr also serves on the Board of Directors of Tiger Oil and Energy, Inc. (OTC BB TGRO).

  

Family Relationships

 

There are no family relationships between any of our directors or executive officers.

 

Involvement in Certain Legal Proceedings

 

During the past ten years, none of our executive officers or directors have had any of the following events occur:

 

a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
conviction in a criminal proceeding or being subject to a pending criminal proceeding, excluding traffic violations and other minor offenses;
being subject to any order, judgment or decree, not substantially reversed, suspended or vacated, of any court of competent jurisdiction, permanently enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking business;
being found by a court of competent jurisdiction, in a civil action, the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated;
Being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (i) any federal or state securities or commodities law or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange Act of 1934), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

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Compliance with Section 16(a) of the Securities Exchange Act of 1934

 

Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than 10% of our common stock to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the SEC regulations to furnish us with copies of all Section 16(a) reports that they file.

 

Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during the fiscal year ended December 31, 2010, all filing requirements applicable to our officers, directors and greater than 10% percent beneficial owners were complied with.

 

Code of Ethics

 

Our board of directors has not adopted a formal written Code of Business Conduct and Ethics and Compliance Program for all officers, directors and senior employees.

 

Audit Committee and Audit Committee Financial Expert

 

Our board of directors has determined that we do not have an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K under the Exchange Act.

 

We believe that the members of our board of directors are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. We believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development and the fact that we have not generated any material revenues to date. In addition, we currently do not have an audit committee or committee performing similar functions nor do we have a written audit committee charter. Our board of directors does not believe that it is necessary to have such committees because it believes the functions of such committee can be adequately performed by our board of directors.

 

Nominating and Compensation Committees

 

We do not have nominating or compensation committees, or committees performing similar functions. Our board of directors believe that it is not necessary to have a compensation committee at this time because the functions of such committee are adequately performed by our board of directors. Our board of directors has not adopted a charter for the compensation committee.

 

Our board of directors also is of the view that it is appropriate for us not to have a nominating committee because our board of directors has performed and will perform adequately the functions of a nominating committee. Our board of directors has not adopted a charter for the nomination committee. There has not been any defined policy or procedure requirements for shareholders to submit recommendations or nomination for directors. Our board of directors does not believe that a defined policy with regard to the consideration of candidates recommended by shareholders is necessary at this time because we believe that, given the early stages of our development, a specific nominating policy would be premature and of little assistance until our business operations are at a more advanced level. There are no specific, minimum qualifications that our board of directors believes must be met by a candidate recommended by our board of directors. The process of identifying and evaluating nominees for director typically begins with our board of directors soliciting professional firms with whom we have an existing business relationship, such as law firms, accounting firms or financial advisory firms, for suitable candidates to serve as directors. It is followed by our board of directors’ review of the candidates’ resumes and interview of candidates. Based on the information gathered, our board of directors then makes a decision on whether to recommend the candidates as nominees for director. We do not pay any fee to any third party or parties to identify or evaluate or assist in identifying or evaluating potential nominee.

 

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Item 11. Executive Compensation

 

General

 

The particulars of the compensation paid to the following persons:

 

  (a) our principal executive officer who was serving as the executive officer at the end of the years ended December 31, 2013 and 2012; and

 

  (b) up to two additional individuals for whom disclosure would have been provided under (a) but for the fact that the individual was not serving as our executive officer at the end of the years ended December 31, 2013, and 2012,

 

whom we will collectively refer to as the named executive officers of our company, are set out in the following summary compensation table, except that no disclosure is provided for any named executive officer, other than our principal executive officers, whose total compensation did not exceed $100,000 for the respective fiscal year.

 

Summary Compensation Table
Name and Principal Position   Year   Salary
($)
  Bonus
($)
  Stock Awards
($)
  Option Awards
($)
  Non-Equity Incentive Plan Compensation
($)
  Nonqualified Deferred Compensation Earnings
($)
  All Other Compensation
($)
  Total
($)
Dr. Fortunato Villamanga (1)
President, Chief Executive Officer, and Director
   

2013

2012

   Nil
Nil
  Nil
Nil
  Nil
Nil
  Nil
Nil
  Nil
Nil
  Nil
Nil
  $ 12,000
$ 12,000
  $ 12,000
$ 12,000
Peter Hewitt (2)
Chief Financial Officer, Secretary and Director
   

2013

2012

   Nil
Nil
  Nil
Nil
  Nil
Nil
  Nil
Nil
  Nil
Nil
  Nil
Nil
  $ 12,000
$ 12,000
  $ 11,000
$ 12,000
Chris Knowles (4), Director   

2013

2012

   Nil
Nil
  Nil
Nil
  Nil
Nil
  Nil
Nil
  Nil
Nil
  Nil
Nil
  Nil
$12,000
  Nil
$12,000
Ryan Kerr (5), Director   

2013

2012

   Nil
Nil
  Nil
Nil
  Nil
Nil
  Nil
Nil
  Nil
Nil
  Nil
Nil
  Nil
Nil
  Nil
Nil
                              

 

Notes:

 

(1) Dr. Villamagna was appointed as our President, Chief Executive Officer and a director of our company on January 15, 2011.
(2) Peter Hewitt was appointed as our Chief Financial Officer, Secretary and a director of our company on February 8, 2010.
(3) Mr. Scales resigned as our President, Chief Executive Officer, Chief Financial Officer and Secretary on December 14, 2009 and as a director of our company on January 15, 2011.
(4) Mr. Knowles was appointed as a director on April 1, 2012, and resigned this position on January 1, 2013.
(5) Ryan Kerr was appointed as director on January 7, 2013.

 

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Options Grants During the Last Fiscal Year / Stock Option Plans

 

We do not currently have a stock option plan in favor of any director, officer, consultant or employee of our company. No individual grants of stock options, whether or not in tandem with stock appreciation rights known as SARs or freestanding SARs have been made to any executive officer or director since our inception; accordingly, no stock options have been granted or exercised by any of the officers or directors since we were founded.

 

Aggregated Options Exercises in Last Fiscal Year

 

No individual grants of stock options, whether or not in tandem with stock appreciation rights known as SARs or freestanding SARs have been made to any executive officer or any director since our inception; accordingly, no stock options have been granted or exercised by any of the officers or directors since we were founded.

 

Long-Tem Incentive Plans and Awards

 

We do not have any long-term incentive plans that provide compensation intended to serve as incentive for performance. No individual grants or agreements regarding future payouts under non-stock price-based plans have been made to any executive officer or any director or any employee or consultant since our inception; accordingly, no future payouts under non-stock price-based plans or agreements have been granted or entered into or exercised by any of the officers or directors or employees or consultants since we were founded.

 

Compensation of Directors

 

On February 8, 2011, the Board approved a Directors fee of $1,000 each per month to Fortunato Villamgna and Peter Hewitt as director compensation. On April 1, 2012 the Board approved a Directors fee of $1,000 per month to Chris Knowles as director compensation. Ryan Kerr will not be receiving a Directors fee.

 

Except as disclosed above, the members of the Board of Directors are not compensated by Northumberland for acting as such. Directors are reimbursed for reasonable out-of-pocket expenses incurred. There are no arrangements pursuant to which directors are or will be compensated in the future for any services provided as a director.

 

We do not have any agreements for compensating our directors for their services in their capacity as directors, although such directors are expected in the future to receive stock options to purchase shares of our common stock as awarded by our board of directors.

 

Employment Contracts, Termination of Employment, Change-in-Control Arrangements

  

There are no employment contracts or other contracts or arrangements with our officers or directors other than those disclosed in this report. There are no compensation plans or arrangements, including payments to be made by Northumberland, with respect to the officers, directors, employees or consultants of Northumberland that would result from the resignation, retirement or any other termination of such directors, officers, employees or consultants. There are no arrangements for directors, officers or employees that would result from a change-in-control.

 

Indebtedness of Directors, Senior Officers, Executive Officers and Other Management

 

None of our directors or executive officers or any associate or affiliate of our company during the last two fiscal years is or has been indebted to our company by way of guarantee, support agreement, letter of credit or other similar agreement or understanding currently outstanding.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth, as of the date of this report, the total number of shares owned beneficially by each of our directors, named executive officers and current executive officers, individually and our directors and current executive officers as a group, and the present owners of 5% or more of our total outstanding shares. The shareholder listed below has direct ownership of his shares and possesses sole voting and dispositive power with respect to the shares.

 

Title of Class  Name and Address of Beneficial Owner  Amount and Nature of Beneficial Relationship (1)  Percentage of Class (2)
 Common   Dr. Fortunato Villamanga
10805 Bernini Dr.
Las Vegas, NV 89141
   25,000,000 (3)    Indirect    80%
 Common  

Peter Hewitt

4 Chapel Close

West Bradford

Lancashire, England BB&4th

   200,000    Direct    <1% 
 Common   Directors and Executive Officers as a Group (2 Persons)   25,400,000         82%

 

Notes:

 

(1)   Beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock actually outstanding on the date of this report as of which there were 31,726,585 shares of our common stock issued and outstanding.

 

(2)   Based on 31,726,585 number of shares of common stock issued and outstanding as of the date of this report.

 

(3)   These shares are held of record by I-Quest, Inc., a private company of which Dr. Villamagna is also President and CEO.

 

(4)   These shares have not been issued at the date of this report.

 

Changes in Control

 

We do not anticipate at this time any changes in control of Northumberland. There are no arrangements either in place or contemplated which may result in a change of control of Northumberland. There are no provisions within our Articles or Bylaws that would delay or prevent a change of control.

 

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Item 13. Certain Relationships and Related Transactions, and Director Independence

 

Transactions with Related Persons

 

Except as disclosed herein, there has been no transaction, since June 22, 2009, or currently proposed transaction, in which we were or are to be a participant and the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years, and in which any of the following persons had or will have a direct or indirect material interest.

 

(i) any director or executive officer of our company;
(ii) any beneficial owner of shares carrying more than 5% of the voting rights attached to our outstanding shares of common stock; and
(iii) any member of the immediate family (including spouse, parents, children, siblings and in-laws) of any of the foregoing persons.

 

Director Independence

 

Our board of directors consists of Dr. Fortunato Villamagna, Chris Knowles and Peter Hewitt. Our securities are quoted on the OTC Bulletin Board which does not have any director independence requirements. According to the definition of “independent director” used in NASDAQ rule 5605(a)(2), Dr. Villamagna and Peter Hewitt are not independent directors as Dr. Villamagnais our President and Chief Executive Officer and Mr. Hewitt is our Chief Financial Officer and Secretary.

 

Item 14. Principal Accounting Fees and Services

 

The aggregate fees billed for the most recently completed fiscal years ended December 31, 2013 and 2012, for professional services rendered by the principal accountants for the audits of our annual financial statements and review of the financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by the accountants in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:

 

Sadler, Gibb &Associates LLC

 

   December 31,
   2013  2012
Audit Fees  $36,241   $35,000 
Audit Related Fees   —      —   
Tax Fees   —      —   
All Other Fees   —      —   
Total  $36,241   $35,000 

 

Policy on Pre-Approval by Audit Committee of Services Performed by Independent Registered Public Accounting Firm

 

Our board of directors, which acts as our audit committee, pre-approves all services provided by our independent registered public accounting firms. All of the above services and fees were reviewed and approved by our board of directors before the respective services were rendered.

 

Our board of directors has considered the nature and amount of fees billed by our independent registered public accounting firms and believes that the provision of services for activities unrelated to the audit is compatible with maintaining their independence.

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PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

 

Exhibit

Number

  Description
(3)   Articles of Incorporation and By-laws
     
3.1   Articles of Incorporation (incorporated by reference to an exhibit to our registration statement on Form S1/a filed on June 29, 2010)
     
3.2   Bylaws (incorporated by reference to an exhibit to our registration statement on Form S1/a filed on June 29, 2010)
     
(10)   Material Contracts
     
10.1   Business Consulting Agreement dated December 21, 2009 with Wannigan Consulting Corp.
     
10.2   Callable Convertible Note (incorporated by reference to an exhibit to the Form 10Q filed on 11/25/11).
     
(31)   Section 302 Certifications
     
31.1*   Section 302 Certification of FortunatoVillamagna
     
31.2*   Section 302 Certification of Peter Hewitt
     
(32)   Section 906 Certifications
     
32.1*   Section 906 Certification of FortunatoVillamagna
     
32.2*   Section 906 Certification of Peter Hewitt
     
(101)   XBRL Related Documents
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB   XBRL Taxonomy Extension Label Linkbase
     
101.PRE   XBRL Taxonomy Presentation Linkbase
     
    * Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

NORTHUMBERLAND RESOURCES INC.

 

/s/ FortunatoVillamagna  

By: FortunatoVillamagna

President, Chief Executive Officer and Director

(Principal Executive Officer)

Date: April 11, 2014

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

/s/ FortunatoVillamagna  

By: FortunatoVillamagna

President, Chief Executive Officer and Director

(Principal Executive Officer)

Date: April 11, 2014

 

/s/Peter Hewitt  

By: Peter Hewitt

Chief Financial Officer, Secretary and Director

(Principal Financial Officer and Principal Accounting Officer)

Date: April 11, 2014

 

 

 

 

 

 

 

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