UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - Q

☒      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2013

OR

☐      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: 000-50932

Nitro Petroleum Incorporated

(Exact name of registrant as specified in its charter)

624 W. Independence, Suite 101

Shawnee, OK  74804

(Address of principal executive offices, including zip code)

(405) 273-9119

(Registrant’s telephone number, including area code)

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 ☒    No ☐

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

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

At January 15, 2014, there were 7,335,348 shares of the registrant’s Common Stock outstanding.

EXPLANATORY NOTE

Effective as of October 31, 2012, we effected a 1-for-100 reverse split (“Reverse Split”) of our common stock. Pursuant to the Reverse Split, the common stock was combined and reclassified based on a ratio of 100 shares of issued and outstanding common stock being combined and reclassified into one share of common stock.  Fractional shares were rounded up to the next whole share.  All share and per share amounts for common stock have been restated to reflect the Reverse Split on a retro-active basis.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements, as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, are forward-looking statements. These forward-looking statements relate to, among other things, the following: our future financial and operating performance and results; our business strategy; market prices; and our plans and forecasts.

Forward-looking statements are identified by use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “will,” “continue,” “potential,” “should,” “could” and similar words and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. You should consider carefully the statements in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended January 31, 2013, as well as other sections of this report, which describe factors that could cause our actual results to differ from those set forth in the forward-looking statements, including, but not limited to, the following factors:

All forward-looking statements are expressly qualified in their entirety by the cautionary statements in this special note and elsewhere in this document. Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NITRO PETROLEUM INCORPORATED

CONDENSED BALANCE SHEETS

See accompanying notes to financial statements.

NITRO PETROLEUM INCORPORATED

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to financial statements.

NITRO PETROLEUM INCORPORATED

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to financial statements.

NITRO PETROLEUM INCORPORATED

NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS

(Unaudited)

The accompanying financial statements of Nitro Petroleum Incorporated (the “Company”) have not been audited by independent public accountants. In the opinion of management, the accompanying financial statements reflect all adjustments necessary to present fairly our financial position at October 31, 2013, our results of operations for the three and nine months ended October 31, 2013 and our cash flows for the nine months ended October 31, 2013. All such adjustments are of a normal recurring nature. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the financial statements and disclosures of contingencies. Actual results may differ from those estimated. The results for interim periods are not necessarily indicative of annual results.

The Company was incorporated in October 2003 in the State of Nevada and has established its corporate offices in Shawnee, Oklahoma. The Company is engaged primarily in the acquisition, development, production, exploration for, and the sale of oil, gas and natural gas liquids. All business activities are conducted in Texas and Oklahoma and the Company sells its oil and gas to a limited number of domestic purchasers.

These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year. Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classifications of assets and liabilities should the Company be unable to continue as a going concern. At October 31, 2013, the Company had not yet achieved profitable operations, has accumulated losses of $6,364,512 since its inception, has working capital of only $222,872 and expects to incur further losses in the development of its business, all of which casts substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management has no formal plan in place to address this concern but believes that the Company will be able to obtain additional funds through equity financing and/or related party advances; however there is no assurance of additional funding being available.

The Company follows the full cost method of accounting for oil and gas operations whereby all costs of exploring for and developing oil and gas reserves are initially capitalized on an aggregate (one cost center) basis. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling and overhead charges directly related to acquisition and exploration activities.

Costs of acquiring and evaluating unproved properties are initially excluded from depletion calculation. These unevaluated properties are assessed annually to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion calculations. 

Future net cash flows from proved reserves using average monthly prices, non-escalated and net of future operating and development costs are discounted to present value and compared to the carrying value of oil and gas properties.

At October 31, 2013 and January 31, 2013, the producing and undeveloped oil and gas properties were as follows:

		October 31, 2013				January 31, 2013
Cost of properties		$	2,490,549			$	1,301,322
Less: Accumulated depletion			(369,794	)			(285,876	)
Oil and gas properties, net		$	2,120,755			$	1,015,446

Depletion expense for the nine months ended October 31, 2013 and 2012 was $83,918 and $43,580, respectively. Depletion expense for the three months ended October 31, 2013 and 2012 was $60,321 and $7,263 respectively.

On May 9, 2013, the Company issued a promissory note in the principal amount of $175,000. The promissory note bears interest at 9% on the outstanding balance, with interest payable semi-annually. No principal payments are required until the maturity date of June 30, 2016, at which time the term note is payable in full. The promissory note also contains a conversion feature, which allows the lender, at any time prior to maturity, on a one-time basis, to convert all or a portion of the principal amount of the note into common stock at a price per share of $0.55. At issuance, no value was assigned to this conversion feature. At October 31, 2013, the outstanding balance on the promissory note was $175,000.

During the three months ended October 31, 2013, the Company received net proceeds of $39,600 from the sale of 82,500 shares of common stock, which shares were sold in a private offering of units consisting of working interests in the Giant #2 Well and common stock. The Company has not issued these shares as of October 31, 2013, and has recorded these proceeds as common stock, subscribed.

Effective as of October 31, 2012, the Company affected a 1-for-100 reverse split (“Reverse Split”) of the Company’s common stock. Pursuant to the Reverse Split, the common stock was combined and reclassified based on a ratio of 100 shares of issued and outstanding common stock being combined and reclassified into one share of common stock. Fractional share were rounded up to the next whole share. All share and per share amounts for common stock have been restated to reflect the Reverse Split on a retro-active basis.

The Company paid management fees to various companies under the control of executive officers of the Company totaling $49,500 and $35,167 for the quarters ended October 31, 2013 and 2012, respectively, and $148,500 and $63,352 for the nine months ended October 31, 2013 and 2012, respectively. These management fees are included in general and administrative expenses.

The Company evaluated events through January 15, 2014 that warrant disclosure in the financial statements. The company did not identify any events or transactions that would impact these financial statements.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources.  This discussion and analysis should be read in conjunction with our financial statements and the accompanying notes included in this report, as well as our audited financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended January 31, 2013.  The following discussion contains forward-looking statements that are dependent upon events, risks and uncertainties that may be outside our control.  Our actual results could differ materially from those discussed in these forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, market prices for natural gas and crude oil, economic and competitive conditions, regulatory changes, estimates of proved reserves, potential failure to achieve production from development projects, capital expenditures and other uncertainties, as well as those factors discussed below and elsewhere in this report and in our Annual Report on Form 10-K for the year ended January 31, 2013, all of which are difficult to predict.  In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur.

The financial information with respect to the three and nine month periods ended October 31, 2013 and 2012 that is discussed below is unaudited.  In the opinion of management, this information contains all adjustments, consisting only of normal recurring accruals, necessary to state fairly the unaudited financial statements.  The results of operations for the interim periods are not necessarily indicative of the results of operations for the full fiscal year.

The Company intends to continue to acquire high quality oil and gas properties, primarily “proved producing and proved undeveloped reserves” in the United States.  The Company sees significant opportunities in acquiring properties with proved producing reserves and undeveloped acreage in fields that have a long history of production.  The Company will also explore low-risk development drilling and work-over opportunities with experienced, strong operators.  The Company will attempt to finance oil and gas operations through a combination of privately placed debt and/or equity.  There can be no assurance that the Company will be successful in finding financing, or even if financing is found, that the Company will be successful in acquiring oil and/or gas assets that result in profitable operations.

As oil and gas properties become available and appear attractive to the Company’s management, funds, when they become available, will be spent on due diligence and research to determine if said prospects could be purchased to provide income for the Company.  Established oil companies continue to strive to reduce costs and debt.  The Company believes that this results in significant market opportunities for the Company to possibly position itself with sellers that wish to divest themselves of production or proved undeveloped properties in order to provide liquidity.  The Company’s management believes that current market conditions are creating situations that could result in the opportunity for such acquisitions.

The Company may also hedge price risk by selling forward a portion of future production acquired under fixed-price contracts to minimize risk associated with commodity prices.  In some cases the future value of such fixed-price contracts may be greater that the initial investments, thereby hedging the inherent acquisition risk, without limiting the upside available the stockholders and investors.  There can be no assurance, however, that any of these methods of financing will be successful in helping fund the Company.

Operating expenses will increase as the Company undertakes its plan of operations.  The increase will be attributable to the continuing geological exploration and acquisition programs and continued professional fees that will be incurred.

Financial Condition and Results of Operations

Revenues

The Company has three main revenue streams, including oil and gas production, production services, and sales of oil and gas properties.

Oil and gas production

For the three months ended October 31, 2013, the Company’s revenues from oil and gas production were $308,903, an increase of $269,495 compared to oil and gas production during the three months ended October 31, 2012 of $39,408. This increase was attributable to production of new wells, the Crown # 1, Branch #1 and Giant #1, and improved production from the Quinlan Properties, offset by a decrease in prices. Gross production for the three months in 2013 increased by 4,214 BOE (barrel of oil equivalent) from the same three months in 2012. The increase in production contributed to an increase in revenues of $403,954. The increase in revenues was offset by a decrease in price of $134,459.

For the nine months ended October 31, 2013, the Company’s revenues from oil and gas production were $431,629, an increase of $216,227 compared to revenues from oil and gas production during the nine months ended October 31, 2012 of $215,402. This increase is attributable to production from additional properties and improved production from existing properties. Gross production for the nine months in 2013 increased by 1,801 BOE (barrel of oil equivalent) from the same nine months in 2012. The increase in production contributed to an increase in revenues of $146,283. Further, the increase in revenue was also attributed to an increase in price of $69,944.

Production services

For the quarter ended October 31, 2013, production services increased over the same period in the prior year by $5,280, as a result in administrative charges for operator fees on the following new wells: the Branch # 1, Quinlan # 3, Thompson 2-18 and Giant # 1.

For the nine months ended October 31, 2013, production services increased over the same period in the prior year by $9,240, as a result in administrative charges for operator fees on the following new wells: the Branch # 1, Quinlan # 3, Thompson 2-18 and Giant #1.

Gain on sale of oil and gas properties

Revenues from sales of oil and gas properties, during the three months ended October 31, 2013, were $282,011. During the quarter ended October 31, 2013, the Company sold working interests in the Giant #2 Well as part of a private offering of common stock. The proceeds from the sale of the working interests constitute $282,011 of revenues from sales of oil and gas properties for the period. The same period in the prior year did not include any sales of working interests.

Revenues from sales of oil and gas properties increased for the nine month period ended October 31, 2013, over the same period in the prior year by $409,959. During the nine months ended October 31, 2013, the Company sold working interests in the Giant #1 well and Giant #2 well as part of private offerings of common stock. The proceeds of the working interest sales constitute $659,174 of the revenues from sales of oil and gas properties for the 2013 period. The same period in the prior year included sales of working interests in the Quinlan lease totaling $249,215.

Lease operating expenses

For the three months ended October 31, 2013, the Company’s lease operating expenses were $79,446, an increase of $35,794 compared to the three months ended October 31, 2012 of $43,652. This increase was a result of costs associated with the following new wells: the Branch # 1, Quinlan # 3, Thompson 2-18 and Giant # 1.

For the nine months ended October 31, 2013, the Company’s lease operating expenses were $364,841, an increase of $3,362 compared to the nine months ended October 31, 2012 of $361,479. Lease operating expenses remained relatively unchanged, despite increased production from these new wells.

General and administrative expenses

For the three months ended October 31, 2013, the Company’s general and administrative expenses were $275,206, an increase of $158,355 over the three months ended October 31, 2012 of $116,851. The increase in general and administrative expenses is, in part, the result of increased management fees of $42,000, due to payments to related parties during the current period. Salary expense increased by $50,048; the Company did not have any employees during the prior period, thus no expense was incurred. Geology type expenses also increased by $26,164. Further the Company’s accounting and legal expenses have significantly increased with general expenses, in correlation with the increase in the Company’s development activities and drilling operations.

For the nine months ended October 31, 2013, the Company’s general and administrative expenses were $855,402, an increase of $670,743 over the nine months ended October 31, 2012 of $184,659. The increase in general and administrative expenses is, in part, the result of increased management fees of $126,000, due to payments to related parties during the current period. Salary expense increased by $155,123; the Company did not have any employees during the prior period, thus no expense was incurred. Geology type expenses also increased by $88,325. Further the Company’s accounting and legal expenses have significantly increased with general expenses, in correlation with the increase in the Company’s development activities and drilling operations.

Liquidity and Capital Resources

As of October 31, 2013 and January 31, 2013, the Company’s cash balances were $616,913 and $160,460, respectively. This increase in cash as of October 31, 2013 relates primarily to capital raised through equity subscriptions and sales of well interests to fund the Company’s drilling operations, as well as increased revenues and an increase in accounts payable balance. Net cash used in the Company’s operating activities was $683,997 for the nine months ended October 31, 2013, compared to net cash used in operating activities of $406,193 during the comparable period in 2012. This change was primarily attributable to the decrease in accounts receivable and the Company’s gain on sale of well interest for the quarter ended October 31, 2013.

The net cash used in investing activities is primarily attributable to the purchase of oil and gas properties of $1,320,856 during the nine months ended October 31, 2013.

Cash generated from the Company’s financing activities was $1,585,673 for the nine months ended October 31, 2013, compared to $11,813 during the comparable period in 2012. This increase was primarily attributable to proceeds from the sale of common stock of $1,442,732, compared to $0 in 2012, and the issuance of long-term debt of $175,000 in 2013, compared to $0 in 2012. These increases were partially offset by an increase in bank overdraft of $94,144.

The Company will continue to utilize the labor of its directors and a stockholder until such time as funding is sourced from the capital markets. At the present time, these directors and stockholder are not being paid cash compensation, but have been compensated in the form of equity grants, and through management fees paid to related party management firms. It is anticipated that additional funding for the next twelve months will be required to maintain the Company’s operations.

Going Concern

The Company has not attained profitable operations and is dependent upon obtaining financing to pursue any acquisitions and exploration activities. These conditions raise substantial doubt about its ability to continue as a going concern without further financing. For these reasons, our audit report for the year ended January 31, 2013 states that there is substantial doubt that we will be able to continue as a going concern without further financing.

Future Financings

The Company will continue to rely on sales of the Company’s common shares in order to continue to fund the Company’s business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that the Company will achieve any additional sales of its equity securities or arrange for debt or other financing to fund planned acquisitions and exploration activities.

Off-Balance Sheet Arrangements

The Company has no significant off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by it in the reports that it files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that information is accumulated and communicated to the Company’s management, including its principal executive and principal financial officer (referred to in this periodic report as the Certifying Officer), as appropriate to allow timely decisions regarding required disclosure. The Company’s management evaluated, with the participation of its Certifying Officer, the effectiveness of the Company’s disclosure controls and procedures as of October 31, 2013, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Our Certifying Officer concluded that, as of October 31, 2013, our disclosure controls and procedures were not effective. We are taking steps to remedy these deficiencies as quickly as possible.

Changes in Internal Controls

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended October 31, 2013, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  Management has concluded that the design and operations of our internal controls over financial reporting at October 31, 2013 were not effective due to lack of segregation of duties and did not provide reasonable assurance that the books and records accurately reflected our transactions. We are taking steps to remedy these deficiencies as quickly as possible.

PART II

ITEM 1.   LEGAL PROCEEDINGS

The Company is party to lawsuits arising in the normal course of business. In the normal course of our business, title defects and lease issues of various degrees will arise and, if practicable, reasonable efforts will be made to cure any such defects and issues. The Company is not currently a party to any legal proceedings and, to the knowledge of the Company’s management, no such proceedings are threatened or, to the knowledge of the Company, contemplated.

ITEM 1.A.   RISK FACTORS

Not applicable. 

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

During the three months ended October 31, 2013, the Company issued 82,500 shares of common stock to investors, at a share price of $0.48. Proceeds from the sale of shares were used to fund the drilling of the Giant #2 Well.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.   MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.   OTHER INFORMATION

None.

ITEM 6.   EXHIBITS

  * Furnished herewith. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to signed on its behalf by the undersigned, thereunto duly authorized.

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