UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
[ ] 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 000-32531
NOVA OIL, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
NEVADA 91-2028450
------ ----------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
17922 N. HATCH ROAD, COLBERT, WA 99005-9377
-------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (509) 466-0576
COMMON STOCK (NONE)
TITLE OF EACH CLASS NAME AND EXCHANGE ON WHICH REGISTERED
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 AS THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO FILING REQUIREMENTS
FOR THE PAST 90 DAYS.
YES [X] NO [ ]
AT NOVEMBER 5, 2004, 5,735,000 SHARES OF THE REGISTRANT'S COMMON STOCK WERE
OUTSTANDING.
TABLE OF CONTENTS
PART I.
PAGE
----
ITEM 1. BALANCE SHEETS AS OF SEPTEMBER, 2004
AND DECEMBER 31, 2003 3
STATEMENTS OF OPERATIONS FOR THE THREE AND NINE
MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003 4
STATEMENTS OF CASH FLOWS FOR THE NINE
MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003 5
NOTES TO FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 7
ITEM 3. CONTROLS AND PROCEDURES 9
PART II.
ITEM 1. LEGAL PROCEEDINGS 10
ITEM 2. CHANGES IN SECURITIES 10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
ITEM 5. OTHER INFORMATION 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURES 11
CERTIFICATIONS 12
Page 2
BALANCE SHEETS AS OF SEPTEMBER 30, 2004
NOVA OIL, INC. AND DECEMBER 31, 2003
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PART I.
ITEM 1: FINANCIAL STATEMENTS
ASSETS
UNAUDITED
SEPTEMBER 30, DECEMBER 31,
2004 2003
----------------- ------------------
CURRENT ASSETS
CASH $ 45,306 $ 56,557
ACCOUNTS RECEIVABLE 1,146 1,496
INVENTORY 5,429 2,716
----------------- ------------------
TOTAL CURRENT ASSETS 51,881 60,769
----------------- ------------------
FIXED ASSETS
OIL PROPERTIES (SUCCESSFUL EFFORTS METHOD), NET 22,135 23,358
ASSET RETIREMENT OBLIGATION 6,296 -
----------------- ------------------
28,431 23,358
----------------- ------------------
TOTAL ASSETS $ 80,312 $ 84,127
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 3,789 $ 6,102
----------------- ------------------
TOTAL CURRENT LIABILITIES 3,789 6,102
----------------- ------------------
ASSET RETIREMENT OBLIGATION, NET 6,501 -
----------------- ------------------
TOTAL OTHER LIABILITIES 6,501 -
----------------- ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK; $0.0001 PAR VALUE; 5,000,000
SHARES AUTHORIZED; NO SHARES ISSUED AND
OUTSTANDING
COMMON STOCK; $0.001 PAR VALUE; 100,000,000 SHARES
AUTHORIZED; 5,735,000 SHARES OUTSTANDING AS OF
SEPTEMBER 30, 2004; 5,460,000 SHARES ISSUED AND
OUTSTANDING AS OF DECEMBER 31, 2003
5,735 5,460
ADDITIONAL PAID-IN CAPITAL 144,376 127,549
ACCUMULATED DEFICIT (80,089) (54,984)
------------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 70,022 78,025
------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 80,312 $ 84,127
=================== ==================
The accompanying notes are an integral part of these financial statements.
Page 3
STATEMENTS OF OPERATIONS FOR THE
NOVA OIL, INC. THREE AND NINE MONTH PERIODS ENDED
(UNAUDITED) SEPTEMBER 30, 2004 AND 2003
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SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
THREE NINE THREE NINE
MONTHS MONTHS MONTHS MONTHS
SALES OF OIL $ 3,236 $ 11,424 $ 1,960 $ 10,249
-------------- --------------- --------------- --------------
OPERATING EXPENSES:
PRODUCTION EXPENSES 2,247 10,728 6,419 11,236
GENERAL AND ADMINISTRATIVE
EXPENSES 10,770 24,696 2,323 13,569
AMORTIZATION 483 1,308 418 1,390
-------------- --------------- --------------- --------------
TOTAL OPERATING EXPENSES 13,500 36,732 9,160 26,195
-------------- --------------- --------------- --------------
OTHER (INCOME) EXPENSE:
INTEREST INCOME (82) (324) (40) (59)
ACCRETION 120 120 - -
-------------- --------------- --------------- --------------
TOTAL OTHER (INCOME) 38 (204) (40) (59)
-------------- --------------- --------------- --------------
NET LOSS $ 10,302 $ 25,104 $ 7,160 $ 15,887
============== =============== =============== ==============
NET LOSS PER SHARE $ NIL $ NIL $ NIL $ NIL
============== =============== =============== ==============
WEIGHTED AVERAGE NUMBER
OF SHARES OUSTANDING -
BASIC 5,735,000 5,698,358 5,017,391 4,618,608
============== =============== =============== ==============
The accompanying notes are an integral part of these financial statements.
Page 4
STATEMENTS OF CASH FLOWS FOR THE
NOVA OIL, INC. NINE MONTH PERIODS ENDED
(UNAUDITED) SEPTEMBER 30, 2004 AND 2003
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SEPTEMBER 30, SEPTEMBER 30,
2004 2003
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $ (25,104) $ (15,887)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED
BY OPERATING ACTIVITIES:
AMORTIZATION AND ACCRETION 1,428 1,390
CHANGE IN:
ACCOUNTS RECEIVABLE 350 1,111
INVENTORY (2,714) (702)
DEFERRED OFFERING COSTS - (6,310)
ACCOUNTS PAYABLE (2,313) (630)
--------------- ----------------
NET CASH FLOWS USED BY OPERATING ACTIVITIES (28,353) (21,028)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
PROCEEDS FROM PRIVATE PLACEMENT
SALE OF COMMON STOCK, NET OF OFFERING COSTS 17,102 -
PROCEEDS FROM THE EXERCISE OF COMMON STOCK OPTIONS - 32,000
--------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,102 32,000
--------------- ----------------
NET INCREASE (DECREASE) IN CASH (11,251) 10,972
CASH AT BEGINNING OF PERIOD 56,557 11,479
--------------- ----------------
CASH AT END OF PERIOD $ 45,306 $ 22,451
=============== ================
The accompanying notes are an integral part of these financial statements.
Page 5
Nova Oil, Inc.
Notes to Financial Statements
(Unaudited)
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1. Basis of Presentation:
The financial statements of Nova Oil, Inc. included herein have been prepared
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Although certain information normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America has been condensed or omitted, Nova Oil, Inc.
believes that the disclosures are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
financial statements and notes thereto for the fiscal year ended December 31,
2003, included in Nova Oil, Inc.'s annual report on Form 10-KSB/A1.
The financial statements included herein reflect all normal recurring
adjustments that, in the opinion of management, are necessary for a fair
presentation. The results for interim periods are not necessarily indicative of
trends or of results to be expected for the full year ending December 31, 2004.
Included in the Company's production expenses as presented are all direct
expenses of oil production, including severance taxes and royalties, not
included in production expenses are depreciation, depletion, and amortization
("DD&A") expenses and corporate administration expenses. All information is
presented on the accrual basis of accounting.
2. Nature of Business:
Nova Oil, Inc. is a Nevada Corporation that was formed on February 25, 2000. The
Company was organized to acquire and develop working interests in oil and gas
properties in the United States of America. Unless otherwise indicated, amounts
provided in these notes to the financial statements pertain to continuing
operations.
3. Commitments and Contingencies:
In connection with the purchase of working interests in two oil and gas wells,
the Company entered into an operating agreement with the seller of the interests
and operator of the wells. The agreement, modeled after agreements standard and
customary to the oil industry, commits the Company to pay its share of joint
interest operating costs incurred in the operation, maintenance and potential
future development of the wells. The joint interest payments are billed monthly
by the operator and are due fifteen days after receipt. Oil prices are extremely
volatile and instances may occur where the Company's revenues received from oil
sales are less than its corresponding production expenses. In addition, oil well
repair and maintenance activities may interrupt oil sales revenue and add to
overall operation costs.
4. Asset Retirement Obligation
In the third quarter of 2004, the Company recorded an asset retirement
obligation of $6,381 related to costs associated with closing its oil wells at
retirement in twelve years. Under SFAS No. 143, which establishes a uniform
methodology for accounting for estimated reclamation and abandonment costs, a
liability for the present value of our estimated closure costs is recorded and a
related asset with it. The liability will be accreted and the assets will be
amortized over their lives. Adjustments for changes resulting from the passage
of time and changes to either the timing or amount of the original present value
estimate underlying the obligation will be made.
5. Revenue Recognition:
Nova Oil, Inc. recognizes revenue associated with the sale of its crude oil on
the date when the purchaser accepts title by taking physical delivery of the
oil. The commodity price paid for the Company's crude oil, West Texas/New Mexico
Intermediate, is set by Koch's daily average (www.ksandt.com/crude.asp) for the
calendar month immediately prior to the month that the purchaser takes delivery.
Page 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
This report contains both historical and prospective statements concerning the
Company and its operations. Prospective statements (known as "forward-looking
statements") may or may not prove true with the passage of time because of
future risks and uncertainties. The Company cannot predict what factors might
cause actual results to differ materially from those indicated by prospective
statements.
RESULTS OF OPERATIONS
FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE-MONTH
PERIOD ENDED SEPTEMBER 30, 2003
For the three months ended September 30, 2004, the Company experienced a net
loss of $10,302 compared to a net loss of $7,160 during the comparable period of
the previous year. The increase in the net loss from 2003 to 2004 resulted from
increased general and administrative expenses incurred during the third quarter
of 2004 as compared to the same period of 2003.
During the three-month period ended September 30, 2004, the Company generated
$3,236 from the sale of 92 barrels of oil that sold at an average sales price of
approximately $35 per barrel. During the three-month period ended September 30,
2003, the Company generated $1,960 from the sale of 66 barrels of oil that sold
at an average sales price of approximately $30 per barrel.
Direct oil production expenses during the three-month period ended September 30,
2004 were $2,247, compared to $6,419 for the three-month period ended September
30, 2003. This decrease was primarily due to fewer repair expenses incurred
during the third quarter of 2004.
Amortization and accretion expenses during the three-month period ended
September 30, 2004, were $603 or $7 per barrel of oil sold, as compared to $418
or $6 per barrel of oil sold during the three-month period ended September 30,
2003.
General and administrative expenses increased from $2,323 during the third
quarter of 2003, to $10,770 during the comparable quarter of 2004. The increase
in general and administrative expenses during the third quarter of 2004 was due
to additional fees and expenditures associated with legal and EDGARizing
services for the preparation and filing of a Form SB2 registration statement.
Interest income increased from $40 during the third quarter of 2003, to $82
during the first quarter of 2004. The increase was due to a corresponding
increase in interest bearing cash assets.
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE-MONTH
PERIOD ENDED SEPTEMBER 30, 2003
For the nine months ended September 30, 2004, the Company experienced a net loss
of $25,104 compared to a net loss of $15,887 during the comparable period of the
previous year. The increase in the net loss from 2003 to 2004 was primarily due
to increased general and administrative expenses during the second and third
quarters of 2004.
FINANCIAL CONDITION AND LIQUIDITY
During the nine-month period ended September 30, 2004, the Company used $28,353
of cash in operating activities. The Company has incurred operating losses of
$80,089, since its inception (February 25, 2000), which raises substantial doubt
about its ability to continue as a going concern.
Management plans to fund future short-term operating needs through profits from
its oil producing properties, existing cash reserves, possibly loans from
shareholders, and, if necessary, sales of the Company's common stock. There
currently is no market for the Company's common stock, however, and there are no
assurances that management will be successful in its plans.
Management has not undertaken any reorganization of the Company. A
reorganization of the Company may include, but not be limited to, reduction in
expenditures, disposal of assets, reducing ownership interest in the oil wells,
a reverse stock split, seeking
Page 7
out a larger oil company for merger, and/or developing strategic alliances with
other companies.
Management anticipates that revenue derived from the Company's on-going oil
production and sales, and proceeds from the sale of its common stock through a
private placement offering of its securities, should provide sufficient
operating capital for the next twelve months.
Management estimates fiscal year 2004 cash inflows from oil sales, interest
earned from interest bearing accounts, and sale of common stock to equal
$44,279, and cash outflows from operating expenditures to be $79,753, which will
result in a projected net cash inflow/outflow operating loss of $35,474 at the
end of the fiscal year, as shown in the following table. The cash inflow
estimate for fiscal year 2004 does not take into consideration any income that
was generated from the sale of the Company's common stock during the fourth
quarter of 2003. No expenditures for capital projects have been budgeted for
fiscal year 2004.
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Page 8
Cash Inflows and Outflows & Timing of Work Scheduled
Fiscal Year 2004
(Estimated)
2004 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
(Actual) (Actual) (Actual)
Cash Inflows (estimated)
Sale of oil $16,377 $4,049 $4,139 $4,136 $4,053
Proceeds from private placement offering 27,500 27,500 0 0 0
Interest income 402 127 115 82 78
-------- -------- -------- -------- --------
Total $44,279 $31,676 $4,254 $4,218 $4,131
Cash Outflows (estimated)
Capital expenditures (Projects) 0 0 0 0 0
Operating expenses
Oil production expenses $15,500 $2,056 $2,185 $2,587 $8,672
General & administrative expenses (G&A)
Printing & copying 900 4 423 0 473
Postage 793 25 568 1 199
Telephone & fax 350 51 78 0 221
Office supplies 317 26 191 0 100
Accounting & auditing 16,200 8,052 2,435 2,233 3,480
Legal fees 12,500 0 4,500 8,000 0
Legal counsel trust account 2,000 0 2,000 0 0
Consulting services fees 10,000 0 0 0 10,000
Underwriter - sales commission 6,950 0 6,950 0 0
Underwriter - accountable 283 0 283 0 0
Underwriter - nonaccountable 1,390 0 1,390 0 0
Transfer agent fees 2,000 25 500 5 1,470
Taxes and licensing fees 100 0 0 0 100
Bank fees 111 24 39 24 24
CUSIP 100 0 100 0 0
Registered agent - Texas 149 149 0 0 0
Registered agent - Nevada 135 135 0 0 0
Nevada Secretary of State 175 175 0 0 0
SEC filings - EDGAR 9,500 136 696 1,976 6,692
Stock quotation service 300 0 0 0 300
-------- -------- -------- -------- --------
Total operating expenses (estimated): $79,753 $10,858 $22,338 $14,826 $ 31,731
-------- -------- -------- -------- --------
Net cash inflows (outflows) (estimated): $(35,474) $20,818 $(18,084) $(10,608) $(27,600)
ITEM 3. CONTROLS AND PROCEDURES
Based on their most recent evaluation, which was completed within 90 days of the
filing of this Form 10-QSB, the Company's president and principal financial
officer believe the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) are effective to ensure that information
required to be disclosed by the Company in this report is accumulated and
communicated to the Company's management, as appropriate, to allow timely
decisions regarding required disclosure. There were no significant changes in
the Company's internal controls or other factors that could significantly affect
these controls subsequent to the date of their evaluation and there were no
corrective actions with regard to significant deficiencies and material
weaknesses.
Page 9
PART II.
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (filed
herewith)
31.2 Certification Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (filed
herewith)
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(furnished herewith)
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(furnished herewith)
(b) Reports on Form 8-K
NONE
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Page 10
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SIGNATURES
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Pursuant to the requirements of Section 13 or 15(b) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Nova Oil, Inc.
(Registrant)
By: /s/ PAUL E. FREDERICKS November 11, 2004
- ------------------------------------ ---------------------------
Paul E. Fredericks Date
President and Principal Executive Officer
By: /s/ ARTHUR P. DAMMARELL, JR. November 11, 2004
- ------------------------------------ ---------------------------
Arthur P. Dammarell, Jr. Date
Treasurer and Principal Financial Officer
Page 11