UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

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FORM 10-Q

 

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X QUARTERLY REPORT PURSUANT SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

 TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the transition period from _______________ to _______________

 

Commission File # 333-165373

 

SUPERNOVA ENERGY, INC.

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

 

Nevada

(State or other jurisdiction of incorporation or organization)

 

98-0628594

(IRS Employer Identification Number)

153 W. Lake Mead Pkwy.,

Ste 2240

Henderson NV 89015

(Address of principal executive offices)

 

  (702) 839-4029

(Issuer’s telephone number)

 

Indicate by check mark whether the registrant(1) has filed all reports required 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 day. [X }  Yes  [  ] No

 

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 [ ]

Small reporting company [ X ]

 

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

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. The issuer had 31,726,585 shares of common stock and 874,400 shares of preferred stock (with 100:1 conversion and voting rights) issued and outstanding as of August 19, 2014.

 

 

 

TABLE OF CONTENTS

 

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Plan of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	13
Item 4.	Controls and Procedures	13
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	14
Item 1A.	Risk Factors	14
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	14
Item 3.	Defaults Upon Senior Securities	15
Item 4.	Submission of Matters to a Vote of Security Holders	15
Item 5.	Other Information	15
Item 6.	Exhibits	15
SIGNATURES		16

  

 

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

SUPERNOVA ENERGY, INC.
(Formely Northumberland Resources, Inc.)
Balance Sheets
		June 30,				December 31,
		2014				2013
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	7,354			$	2,035
Prepaid expenses			689				3,314
Deposits			1,400				1,400
Total Current Assets			9,443				6,749
PROPERTY AND EQUIPMENT
Oil and gas properties (full cost method)
Proved			625,335				1,058,517
Unproved			396,325				264,717
Support equipment			267,630				229,864
Total property, plant and equipment			1,289,290				1,553,098
Accumulated depletion and depreciation			(739,099	)			(834,336	)
Total Property, Plant and Equipment, net			550,191				718,762
TOTAL ASSETS		$	559,634			$	725,511
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	244,093			$	118,461
Accounts payable and accrued expenses, related parties			54,000				67,500
Notes payable			5,000				5,000
Notes payable, related parties			123				123
Convertible notes payable			—				—
Derivative liability			—				—
Total Current Liabilities			303,216				191,084
LONG TERM LIABILITIES
Asset retirement obligations, net			149,532				151,353
TOTAL LIABILITIES			452,748				342,437
STOCKHOLDERS' EQUITY
Preferred stock, 2,000,000 shares authorized at par
value of $0.10; 809,400 shares issued and outstanding			87,440				80,940
Common stock, 198,000,000 shares authorized at
par value of $0.001; 31,726,585 and 31,726,585
shares issued and outstanding, respectively			31,727				31,727
Additional paid-in capital			2,527,727				2,469,227
Accumulated deficit			(2,540,008	)			(2,198,820	)
Total Stockholders' Equity			106,886				383,074
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	559,634			$	725,511
The accompanying notes are an integral part of these financial statements

 

 

SUPERNOVA ENERGY, INC.
(Formerly Northumberland Resources, Inc.)
Condensed Statements of Operations
(Unaudited)
		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2014				2013				2014				2013
REVENUES		$	115,344			$	40,157			$	138,423			$	79,475
OPERATING EXPENSES
Depletion, depreciation, amortization
and accretion expense			121,755				64,946				168,895				128,785
Lease operating expenses			67,792				128,020				122,026				181,931
Professional fees			75,096				76,475				155,637				145,207
General and administrative expenses			21,983				28,956				32,930				43,387
Total Operating Expenses			286,626				298,397				479,488				499,310
NET LOSS FROM OPERATIONS			(171,282	)			(258,240	)			(341,065	)			(419,835	)
OTHER EXPENSES
Gain (loss) on derivative liability			—				—				—				11,136
Interest expense			—				—				(123	)			(2,232	)
Total Other Expenses			—				—				(123	)			8,904
LOSS BEFORE INCOME TAXES			(171,282	)			(258,240	)			(341,188	)			(410,931	)
PROVISION FOR INCOME TAXES			—				—				—				—
NET LOSS		$	(171,282	)		$	(258,240	)		$	(341,188	)		$	(410,931	)
BASIC AND DILUTED LOSS
PER COMMON SHARE		$	(0.01	)		$	(0.01	)		$	(0.01	)		$	(0.01	)
BASIC AND DILUTED WEIGHTED
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING			31,726,585				31,467,725				31,726,585				31,357,177

 

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

 

 

SUPERNOVA ENERGY, INC.
(Formerly Northumberland Resources, Inc.)
Condensed Statements of Cash Flows
(Unaudited)
		For the Six Months Ended
		June 30,
		2014				2013
OPERATING ACTIVITIES
Net loss		$	(341,188	)		$	(410,931	)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation, depletion, amortization
and accretion			168,895				128,785
Change in derivative liability			—				(11,136	)
Changes in operating assets and liabilities:
Prepaid expenses			2,625				(21,500	)
Accounts payable - related parties			239,132				—
Accounts payable and accrued expenses			(13,500	)			57,934
Net Cash Used in Operating Activities			55,964				(256,848	)
INVESTING ACTIVITIES
Purchase of oil and gas properties			—				—
Capitalized exploration and development costs			(28,234	)			(104,766	)
Purchase of well operating equipment			(87,411	)			(18,324	)
Net Cash Used in Investing Activities			(115,645	)			(123,090	)
FINANCING ACTIVITIES
Common stock issued for cash			—				400,000
Preferred stock issued for cash			65,000				—
Repayment of notes payable			—				(18,000	)
Net Cash Provided by Financing Activities			65,000				382,000
NET INCREASE IN CASH			5,319				2,062
CASH AT BEGINNING OF PERIOD			2,035				1,026
CASH AT END OF PERIOD		$	7,354			$	3,088
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
Common stock issued for subscription receivable		$	—			$	15,000
Sale of oil and gas properties		$	379,453			$	173,831
The accompanying notes are an integral part of these condensed financial statements.

 

SUPERNOVA ENERGY, INC.

(Formerly Northumberland Resources, Inc.

Notes to Condensed Financial Statements

June 30, 2014 and December 31, 2013

(Unaudited)

NOTE 1 – CONDENSED FINANCIAL STATEMENTS

 

The accompanying financial statements have been prepared by the Company without audit.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at June 30, 2014, and for all periods presented herein, have been made.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2013 audited financial statements.  The results of operations for the period ended June 30, 2014 and 2013 are not necessarily indicative of the operating results for the full year.

 

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 – SIGNIFICANT ACCOUNTING POLICIES

 

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. 

  

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.

 

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.

 

 

SUPERNOVA ENERGY, INC.

(Formerly Northumberland Resources, Inc.

Notes to Condensed Financial Statements

June 30, 2014 and December 31, 2013

(Unaudited)

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Oil and Gas Properties (Continued)

 

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 six-month periods ended June 30, 2014 and 2013, the Company recognized $134,853 and $97,829, respectively of depletion expense related to oil and gas production.

 

Ceiling Test

 

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. The Company has recorded no impairment expense in connection with the full cost ceiling test calculation for the six-month periods ending June 30, 2014 and 2013, respectively.

 

Revenue Recognition

 

Revenues from the sale of oil and natural gas are recognized according to the sales method, which is 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.

 

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.

 

SUPERNOVA ENERGY, INC.

(Formerly Northumberland Resources, Inc.

Notes to Condensed Financial Statements

June 30, 2014 and December 31, 2013

(Unaudited)

 

  

NOTE 4 – OIL AND GAS PROPERTIES

 

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.

 

On February 1, 2014 the Company entered into a Purchase and Sale Agreement whereby it agreed to sell 100 percent of its working interest in two oil and gas leases located in Cowley and Stafford counties, Kansas. As consideration for this transaction, the buyer agreed to forgive $113,500 in Company debts due to the buyer.

 

During the six months ended June 30, 2014 and the year ended December 31, 2013, the Company incurred development costs including certain work-over costs and other improvements to its wells. The Company paid $29,383and $119,149, respectively for these improvements, which have been capitalized to the book value of the wells.

 

Through June 30, 2014, the Company established an asset retirement obligation of $102,611 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 $46,921, leaving an ending net balance of $149,532 at June 30, 2014.

 

NOTE 5 – 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 June 30, 2014 the Company had an aggregate total of $5,123 in notes payable to related parties.

 

NOTE 6 – 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.

 

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 $1.20 per share, resulting in total cash proceeds of $465,000.

 

On February 26, 2014 the Company issued 65,000 shares of preferred stock for cash at $1.00 per share, resulting in total cash proceeds of $65,000. The preferred shares have 1:100 conversion and voting rights.

 

 

NOTE 7 – 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.

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

Forward-looking statements

 

This quarterly report on Form 10-Q contains “forward-looking statements” relating to the registrant which represent the registrant’s current expectations or beliefs, including statements concerning registrant’s operations, performance, financial condition and growth.  For this purpose, any statement contained in this quarterly report on Form 10-Q that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as “may”, “anticipation”, “intend”, “could”, “estimate”, or “continue” or the negative or other comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel and variability of quarterly results, ability of registrant to continue its growth strategy and competition, certain of which are beyond the registrant’s control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements.

 

The following discussion and analysis should be read in conjunction with the information set forth in the Company’s audited financial statements for the period ended December 31, 2013.

 

Overview

 

We are in the business of precious minerals exploration and oil and gas exploration and production.  The Company was incorporated in the State of Nevada on June 22, 2009.

 

On March 31st, 2011 Northumberland (NHUR) was a successful bidder at the Evenson Oil Production Auction in Wichita, Kansas. NHUR acquired the Mason, Thompson, Keyes and Harrell leases inclusive of all production and improvements. The leases were purchased at auction from Reh Oil & Gas LLC. The leases of 280 acres located in the Sawyer field in Pratt County Kansas and 120 acres located in the Wildcat field, filed in Pratt County Kansas, were purchased for Two Hundred Sixty Thousand Dollars. 

 

The Company’s Articles of Incorporation are being amended to reflect a decrease in the number of common shares from Two Billion (2,000,000,000) to One Hundred Ninety Eight Million (198,000,000) and the creation of a preferred stock in the amount of Two Million (2,000,000) shares with voting and conversion rights of 1 for 100. The Amendment was adopted pursuant to written consent of stockholders holding a majority of the voting power of the outstanding capital stock of the Company. On October 15, 2013 the Company reduced its authorized number of common shares to 100,000,000 common and 2,000,000 preferred.

 

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. Subsequent to acquiring the interests in these leases the Company has incurred $23,310 of exploration costs and $60,702 of development costs which have been capitalized to the value of oil and gas properties.

 

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. Subsequent to acquiring the interest in these wells the Company incurred an additional $119,350 of exploration costs and $110,531 of development costs on the property which have been capitalized to the value of oil and gas properties.

 

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 and incurred an additional $26,881 of development costs which were capitalized to the value of oil and gas properties under.

 

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. Subsequent to purchase the Company capitalized $990 in exploration costs and $18,363 in development costs relating to these leases.

 

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. Subsequent to purchase the Company capitalized $2,326 in development costs relating to these leases. 

 

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. The Company has incurred no exploration or development costs with respect to these properties as of December 31, 2011.

 

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 $19,174 in additional development costs, and $66,181 for support equipment, for an aggregate purchase price of $97,924.

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 $27,261 in additional development costs, and $17,542 for support equipment, for an aggregate purchase price of $62,011.

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. Pursuant to this transaction the Company transferred a 30 percent interest in all related support equipment and asset retirement obligations.

 

On February 1, 2014 the Company entered into a Purchase and Sale Agreement whereby it agreed to sell 100 percent of its working interest in two oil and gas leases located in Cowley and Stafford counties, Kansas. As consideration for this transaction, the buyer agreed to forgive $113,500 in Company debts due to the buyer.

 

During the six months ended June 30, 2014 and the year ended December 31, 2013, the Company incurred development costs including certain work-over costs and other improvements to its wells. The Company paid $29,383and $119,149, respectively for these improvements, which have been capitalized to the book value of the wells.

 

Through June 30, 2014, the Company established an asset retirement obligation of $102,611 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 $46,921, leaving an ending net balance of $149,532 at June 30, 2014.

 

Effective April 1, 2012, Chris Knowles was elected as an additional director of the Company, bringing the total number of directors to three. On January 1, 2013 Mr. Knowles resigned as Director of the Company.

 

On January 7, 2013, Ryan Kerr was appointed to serve as a replacement director in the stead of Chris Knowles. Mr. Kerr resigned his position as a director on August 9, 2013.

 

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 D, Sanders, Asmussen and Carver leases with the objective to improve current oil and gas production.

 

Results of Operations for the Three Months Ended June 30, 2014 and 2013

 

Revenues

 

We had revenues of $115,344 during the three months ended June 30, 2014, compared to $40,157 in revenues during the corresponding period in 2013. Our revenues increased from 2014 to 2013 due primarily to increased production from our proven wells during the period. Revenues were from oil and gas production occurring at previously purchased property sites.

 

Expenses

 

We incurred operating expenses in the amount of $286,626 during the three months ended June 30, 2014, compared to $298,397 for the corresponding period in 2013. The 2014 operating expenses consisted primarily of $21,983 in general and administrative expenses such as office expenses, $75,096 in professional fees, $67,792 in lease operating expenses and $121,755 in depletion, depreciation, amortization, and accretion expenses. This compares to lease operating costs of $128,020, professional fees of $76,475, and general and administrative expenses of $28,956, and $64,946 in depletion, depreciation, amortization and accretion expense during the corresponding period in 2013. We expect our operating costs to continue to increase in the next 12 months.

 

Net Loss

 

We incurred a net loss of $171,282 during the three months ended June 30, 2014, compared to a net loss of $258,240 during the corresponding period in 2013. This translates to a loss per share of $0.01 and $0.01 for the three months ended June 30, 2014 and 2013, respectively.

 

Results of Operations for the Six Months Ended June 30, 2014 and 2013

 

Revenues

 

We had revenues of $138,423 during the three months ended June 30, 2014, compared to $79,475 in revenues during the corresponding period in 2013. Our revenues increased from 2014 to 2013 due primarily to increased production from our proven wells during the period. Revenues were from oil and gas production occurring at previously purchased property sites.

 

Expenses

 

We incurred operating expenses in the amount of $479,488 during the six months ended June 30, 2014, compared to $499,310 for the corresponding period in 2013. The 2014 operating expenses consisted primarily of $32,930 in general and administrative expenses such as office expenses, $155,637 in professional fees, $122,026 in lease operating expenses and $168,895 in depletion, depreciation, amortization, and accretion expenses. This compares to lease operating costs of $181,931, professional fees of $145,207, and general and administrative expenses of $43,387, and $128,785 in depletion, depreciation, amortization and accretion expense during the corresponding period in 2013. We expect our operating costs to continue to increase in the next 12 months.

 

Other Expenses

 

We incurred interest expense in the amount of $123 during the six months ended June 30, 2014. This compares to interest expense of $2,232 and an $11,136 gain on derivative liability during the corresponding period of 2013.

 

Net Loss

 

We incurred a net loss of $341,188 during the six months ended June 30, 2014, compared to a net loss of $410,931 during the corresponding period in 2013. This translates to a loss per share of $0.01 and $0.01 for the six months ended June 30, 2014 and 2013, respectively.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Since its inception, the Company has financed its cash requirements from the sale of common stock. Uses of funds have included activities to establish our business, professional fees and other general and administrative expenses.

 

The Company’s principal sources of liquidity as of June 30, 2014 consisted of $7,354 in cash.

 

We believe the Company will have adequate resources to implement its strategic objectives in upcoming quarters. Due to our lack of operating history and present inability to generate revenues, however, our auditors have stated their opinion that there currently exists substantial doubt about our ability to continue as a going concern.

 

Material Events and Uncertainties

 

Our operating results are difficult to forecast. Our prospects should be evaluated in light of the risks, expenses and difficulties commonly encountered by comparable exploration stage companies.

 

There can be no assurance that we will successfully address such risks, expenses and difficulties.

 

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. Subsequent to acquiring the interests in these leases the Company has incurred $23,310 of exploration costs and $60,702 of development costs which have been capitalized to the value of oil and gas properties.

 

On June 11, 2011, the Company purchased a 30 percent working interest on a 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. Subsequent to acquiring the interest in these wells the Company incurred an additional $119,350 of exploration costs and $110,531 of development costs on the property which have been capitalized to the value of oil and gas properties.

 

On July 7, 2011, the Company purchased a 20 percent working interest on a 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 and incurred an additional $26,881 of development costs which were capitalized to the value of oil and gas properties under.

On September 27, 2011 we purchased at auction two leases with the multiple acquisition of an additional 1040 acres of productive oil and gas leases. The two leases located in Pratt County, KS consist of six wells with a 100% Working Interest of 82% Net Revenue Interest. These six wells leases are directly adjacent to our existing leases and will integrate the 6 fields and maximize efficiency and production. Included in the purchase is a gas compression station which will enhance flows from current operations.  The purchase price associated with the Pratt County acquisition was $72,500.

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. Subsequent to purchase the Company capitalized $2,326 in development costs relating to these leases.”

 

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. Subsequent to purchase the Company capitalized $65,741 in development costs relating to these leases.

 

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. Subsequent to purchase the company capitalized $1,488 in support equipment and $26,351 in development costs.

 

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. As of December 31, 2012, pursuant to a ceiling test analysis, the Company recognized an impairment expense on these leases in the amount of $6,484.

 

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. Subsequent to purchase the Company capitalized $479 in support equipment. As of December 31, 2012, pursuant to a ceiling test analysis, the Company recognized an impairment expense on these leases in the amount of $7,464.

 

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 is classified as a note receivable at June 30, 2013. Pursuant to this transaction the Company transferred a 30 percent interest in all related support equipment and asset retirement obligations.

 

On July 2, 2013 we plugged the Asmussen 16-2 and on July 13, 2013 drilled the Asmussen 16-3 well.

 

On February 1, 2014 the Company entered into a Purchase and Sale Agreement whereby it agreed to sell 100 percent of its working interest in two oil and gas leases located in Cowley and Stafford counties, Kansas. As consideration for this transaction, the buyer agreed to forgive $113,500 in Company debts due to the buyer.

 

On June 28, 2014 Dr. Fortunato Villamagna resigned from the Board of Directors.

 

On June 28, 2014, I-Quest, Inc. the majority shareholder of the corporation of which Dr. Villamagna was President, entered into a Stock Purchase Agreement with Wexford Industries, LTD. under which I-Quest, Inc. agreed to sell its 475,000 Preferred shares (convertible to 47,500,000 common shares and with equivalent voting rights) for One Hundred Fifteen Thousand Dollars within 90 days of the execution of the agreement. 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

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

 

Item 4. Controls and Procedures

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

As of June 30, 2014, 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 intends, prior to the next fiscal year as the company's finances improve, to hire additional accounting staff and implement additional controls.

 

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 June 30, 2014.  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 Quarterly Report on Form 10-Q that our internal control over financial reporting has not been effective. The company intends, prior to the next fiscal year as the company's finances improve, to hire additional accounting staff and implement additional controls.

 

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 June 30, 2014:

 

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.

 

CHANGES IN INTERNAL CONTROLS.

 

There was no change in our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect our internal control 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.

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

There is no litigation pending or threatened by or against 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 required under this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On February 15, 2013 we received $100,000 from ThorFinn Partners for the issuance of 83,334 post-split shares of the Company’s stock at $1.20 per share.

 

On February 26, 2014 we received $50,000 from an unrelated investor for 50,000 preferred shares at $1.00 per share.

 

On May 21, 2014 we received $15,000 from an unrelated investor for 15,000 preferred shares at $1.00 per share.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

The Company has no senior securities outstanding.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None

 

 

ITEM 5. OTHER INFORMATION

 

  None 

 

ITEM 6. EXHIBITS

 

EXHIBIT INDEX

Number         Exhibit Description

 

3.1 Articles of Incorporation of Supernova Energy, Inc.*

 

3.2 Bylaws of Supernova Energy, Inc.*

 

3.3 Certificate of Change with Nevada Secretary of State. Incorporated by reference in 8K filed 9/16/11.

 

10.0 Materials Contracts-leases and ThorFinn documents. Incorporated by reference in 10Q filed 5/21/12.

 

10.1 Purchase Agreement and Investors Rights Agreement with Thorfinn Partners. Incorporated by reference in 8K filed 5/02/12.

 

10.2 Property acquisitions. Incorporated by reference in 8K filed 10/03/11 and August 14, 2012.

 

10.3 Convertible Debenture September 26, 2011 Incorporated by reference in 10Q/a filed 11/25/11.

 

10.4 Addendum to ThorFinn Partners Purchase Agreement dated 3/19/13.

 

14.1 Code of Ethics, Corporate Charters and Governances. Incorporated by reference in 8K filed 5/02/12.

 

31.1 Certificate of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2 Certificate of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1 Certificate of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*    Filed as an exhibit to our registration statement on Form S-1 filed March 9, 2010 and incorporated herein by this reference

 

 

SIGNATURES

 

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

 

SUPERNOVA ENERGY, INC.

 

/s/ Peter Hewitt

Peter Hewitt

President, Secretary, CEO, CFO (Principal Executive and Accounting Officer)

 

August 19, 2014