Item
1. Financial Statements.
NORRIS
INDUSTRIES, INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF NOVEMBER 30, 2021 AND FEBRUARY 28, 2021
(UNAUDITED)
The
accompanying notes are an integral part of these unaudited interim consolidated financial statements.
NORRIS
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2021 AND 2020
(UNAUDITED)
The
accompanying notes are an integral part of these unaudited interim consolidated financial statements.
NORRIS
INDUSTRIES, INC.
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR
THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2021 (UNAUDITED)
NORRIS
INDUSTRIES, INC.
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR
THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2020 (UNAUDITED)
|
|
|
Series
A Convertible
Preferred Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Subscription
|
|
|
Accumulated
|
|
|
Total
Stockholders’
Equity
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Receivable
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
Balance,
March 1, 2020
|
|
|
1,000,000
|
|
|
$
|
1,000
|
|
|
|
90,883,013
|
|
|
$
|
90,883
|
|
|
$
|
6,286,399
|
|
|
|
(7,200
|
)
|
|
$
|
(8,555,203
|
)
|
|
$
|
(2,184,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collection
of subscription receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,200
|
|
|
|
-
|
|
|
|
7,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(239,105
|
)
|
|
|
(239,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
May 31, 2020
|
|
|
1,000,000
|
|
|
|
1,000
|
|
|
|
90,883,013
|
|
|
|
90,883
|
|
|
|
6,286,399
|
|
|
|
-
|
|
|
|
(8,794,308
|
)
|
|
|
(2,416,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(204,470
|
)
|
|
|
(204,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
August 31, 2020
|
|
|
1,000,000
|
|
|
|
1,000
|
|
|
|
90,883,013
|
|
|
|
90,883
|
|
|
|
6,286,399
|
|
|
|
-
|
|
|
|
(8,998,778
|
)
|
|
|
(2,620,496
|
)
|
|
Balance
|
|
|
1,000,000
|
|
|
|
1,000
|
|
|
|
90,883,013
|
|
|
|
90,883
|
|
|
|
6,286,399
|
|
|
|
-
|
|
|
|
(8,998,778
|
)
|
|
|
(2,620,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(232,139
|
)
|
|
|
(232,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
November 30, 2020
|
|
|
1,000,000
|
|
|
$
|
1,000
|
|
|
|
90,883,013
|
|
|
$
|
90,883
|
|
|
$
|
6,286,399
|
|
|
|
-
|
|
|
$
|
(9,230,917
|
)
|
|
$
|
(2,852,635
|
)
|
|
Balance
|
|
|
1,000,000
|
|
|
$
|
1,000
|
|
|
|
90,883,013
|
|
|
$
|
90,883
|
|
|
$
|
6,286,399
|
|
|
|
-
|
|
|
$
|
(9,230,917
|
)
|
|
$
|
(2,852,635
|
)
|
The
accompanying notes are an integral part of these unaudited interim consolidated financial statements.
NORRIS
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED NOVEMBER 30, 2021 AND 2020
(UNAUDITED)
The
accompanying notes are an integral part of these unaudited interim consolidated financial statements.
NORRIS
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
1 – Organization, Nature of Operations and Summary of Significant Accounting Policies
Norris
Industries, Inc. (“NRIS” or the “Company”), was incorporated on February 19, 2014, as a Nevada corporation. The
Company was formed to conduct operations in the oil and gas industry. The Company’s principal operating properties are in the Ellenberger
formation in Coleman County, and in Jack County and Palo-Pinto County, Texas. The Company’s production operations are all located
in the State of Texas.
On
April 25, 2018, the Company incorporated a Texas registered subsidiary, Norris Petroleum, Inc., as an operating entity.
Basis
of Presentation
The
accompanying financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should
be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual report filed with
the SEC on Form 10-K for the year ended February 28, 2021. In the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented
have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected
for the full year. The Company’s consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries
and entities in which the Company has a controlling financial interest. All significant inter-company accounts and transactions have
been eliminated in consolidation.
Liquidity
and Capital Considerations
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following
the issuance date of these consolidated financial statements.
The
Company’s business and operations have been adversely affected by and are expected to continue to be adversely affected by the
COVID-19 outbreak and may be adversely affected in the future by other similar outbreaks.
As
a result of the COVID-19 outbreak, including voluntary and mandatory quarantines, travel restrictions and other restrictions, the Company’s
operations, and those of its subcontractors, customers and suppliers, have and are anticipated to continue to experience delays or disruptions
and temporary suspensions of operations. In addition, the Company’s financial condition and results of operations have been and
are likely to continue to be adversely affected by the COVID-19 outbreak.
The
timeline and potential magnitude of the COVID-19 outbreak is currently unknown. The continuation or amplification of this virus could
continue to more broadly affect the United States and global economy, including our business and operations, and the demand, for oil
and gas.
The
Company has incurred continuing losses since 2016, including a loss of $1,109,792
for the fiscal year ended February 28, 2021.
During the nine months ended November 30, 2021, the Company received $300,000
in funding from its credit line and incurred
cash losses of $363,753
from its operating activities. As of November
30, 2021, the Company had $700,000
available to borrow under its existing credit
line with JBB Partners, Inc. (“JBB”), an affiliate of the Company’s Chief Executive Officer. As of November 30, 2021,
the Company had a cash balance of $96,878 and
negative working capital of $3,845,817.
The Company expects to renegotiate the terms of
the related party debt, or to extend the maturity date of its line of credit on or before the due date of May 31, 2022.
The
Company’s principal capital and exploration expenditures during next fiscal year are expected to relate to selected well workovers
on its Jack and Palo Pinto County acreages. The Company believes that it has the ability to fund its costs for such expenditures from
cash on-hand and available funds from its line of credit.
In
the event that the Company requires additional capital to fund higher operational losses or oil and gas property lease purchases for
fiscal year ending February 28, 2022, the Company expects to seek additional capital from one or more sources via restricted private
placement sales of equity and debt securities from those other than JBB. However, there can be no assurance that the Company would be
able to secure the necessary capital to fund its costs on acceptable terms, or at all. If, for any reason, the Company is unable to fund
its operations, it would have to undertake other aggressive cost cutting measures and then be subject to possible loss of some of its
rights and interests in prospects to curtail operations and forced to forego opportunities or in worst case, cease operations.
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 and disclosure of contingent
assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expense during the period.
Actual results could differ from those estimates.
Risks
and Uncertainties
The
Company’s operations are subject to significant risks and uncertainties, including financial, operational, technological, and other
risks associated with operating an emerging business, including the potential risk of business failure.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original maturity of the year or less to be cash equivalents. The Company
has not experienced any losses on its deposits of cash and cash equivalents.
Oil
and Gas Properties, Full Cost Method
The
Company follows the full cost method of accounting for its oil gas properties, whereby all costs incurred in connection with the acquisition,
exploration for and development of petroleum and natural gas reserves are capitalized. Such costs include lease acquisition, geological
and geophysical activities, rentals on non-producing leases, drilling, completing and equipping of oil wells and administrative costs
directly attributable to those activities and asset retirement costs. Disposition of oil properties are accounted for as a reduction
of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capital
costs and proved reserves of oil and gas, in which case the gain or loss is recognized in the statement of operations.
Depletion
and depreciation of proved oil properties are calculated on the units-of-production method based upon estimates of proved reserves. Such
calculations include the estimated future costs to develop proved reserves. Costs of unproved properties are not included in the costs
subject to depletion. These costs are assessed periodically for impairment.
At
the end of each quarter, the unamortized cost of oil and gas properties, net of related deferred income taxes, is limited to the sum
of the estimated future after-tax net revenues from proved properties, after giving effect to cash flow hedge positions, discounted at
10%, and the lower of cost or fair value of unproved properties, adjusted for related income tax effects. Costs in excess of the present
value of estimated future net revenues are charged to impairment expense. This limitation is known as the “ceiling test,”
and is based on SEC rules for the full cost oil and gas accounting method.
The
Company capitalizes pre-acquisition costs directly identifiable with specific properties when the acquisition of such properties is probable.
Capitalized pre-acquisition costs are presented in the balance sheet.
Income
Taxes
Income
taxes are accounted for in accordance with the provisions of ASC Topic No. 740. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amounts expected to be realized.
Revenue
Recognition
The
Company’s revenue is comprised entirely of revenue from exploration and production activities. The Company’s oil is sold
primarily to wholesalers and others that sell product to end use customers. Natural gas is sold primarily to interstate and intrastate
natural-gas pipelines, various end-users, local distribution companies, and natural-gas marketers. NGLs are sold primarily to various
end-users. Payment is generally received from the customer in the month following delivery.
Contracts
with customers have varying terms, including spot sales or month-to-month contracts, or contracts with a finite term, where the production
from a well or group of wells is sold to one or more customers. The Company recognizes sales revenues for oil, natural gas, and NGLs
based on the amount of each product sold to a customer when control transfers to the customer. Generally, control transfers at the time
of delivery to the customer at a pipeline interconnect, the tailgate of a processing facility, or as a tanker lifting is completed. Revenue
is measured based on the contract price, which may be index-based or fixed, and may include adjustments for market differentials and
downstream costs incurred by the customer, including gathering, transportation, and fuel costs.
Revenues
are recognized for the sale of the Company’s net share of production volumes. Sales on behalf of other working interest owners
and royalty interest owners are not recognized as revenues. The Company does not hedge nor forward sell any of its current production
via derivative financial contracts.
Net
Loss per Common Share
Basic
net loss per common share amounts are computed by dividing the net loss available to the Company’s shareholders by the weighted
average number of common shares outstanding over the reporting period. In periods in which the Company reports a net loss, dilutive securities
are excluded from the calculation of diluted earnings per share as the effect would be anti-dilutive. The following table summarizes
the common stock equivalents excluded from the calculation of diluted net loss per common share since the inclusion of these shares would
be anti-dilutive for the nine months ended November 30, 2021 and 2020:
Schedule
of Antidilutive Securities Excluded from Computation of Earning Per Shares
|
|
|
2021
|
|
|
2020
|
|
|
Stock
options
|
|
|
-
|
|
|
|
-
|
|
|
Series
A Convertible Preferred Stock
|
|
|
66,666,667
|
|
|
|
66,666,667
|
|
|
Convertible
debt
|
|
|
19,750,000
|
|
|
|
15,500,000
|
|
|
Total
common shares to be issued
|
|
|
86,416,667
|
|
|
|
82,166,667
|
|
Concentrations
of Credit Risk
Financial
instruments which potentially subject the Company to concentrations of credit risk include cash deposits placed with financial institutions.
The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits as guaranteed by the Federal Deposit
Insurance Corporation (“FDIC”). At November 30, 2021, none of the Company’s cash balances were uninsured. The Company
has not experienced any losses on such accounts.
Recent
Issued Accounting Pronouncements
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses
on Financial Instruments. The standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology
that reflects expected credit losses on instruments within its scope, including trade receivables. This update is intended to provide
financial statement users with more decision-useful information about the expected credit losses. The effective date of ASU No. 2016-13
will be the first quarter of the Company’s fiscal 2022 with early adoption permitted. The Company is currently evaluating the impact
of the adoption of ASU No. 2016-13 on its consolidated financial statements.
The
Company does not expect the adoption of any other recently issued accounting pronouncements to have a significant impact on its financial
position, results of operations, or cash flows.
Subsequent
Events
The
Company has evaluated all transactions through the date the consolidated financial statements were issued for subsequent event disclosure
consideration.
Note
2 – Revenue from Contracts with Customers
Exploration
and Production
There
were no significant changes to the timing or valuation of revenue recognized for sales of production from exploration and production
activities.
Disaggregation
of Revenue from Contracts with Customers
The
following table disaggregates revenue by significant product type for the three and nine months ended November 30, 2021 and 2020:
Schedule of Disaggregation of Revenue
|
|
|
Three
Months Ended
November 30,
|
|
|
Nine
Months Ended
November 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Oil
sales
|
|
$
|
59,553
|
|
|
$
|
39,749
|
|
|
$
|
201,110
|
|
|
$
|
144,023
|
|
|
Natural
gas sales
|
|
|
45,477
|
|
|
|
20,229
|
|
|
|
101,758
|
|
|
|
38,566
|
|
|
Total
|
|
$
|
105,030
|
|
|
$
|
59,978
|
|
|
$
|
302,868
|
|
|
$
|
182,589
|
|
There
were no significant contract liabilities or transaction price allocations to any remaining performance obligations as of November 30,
2021 and February 28, 2021.
Note
3 – Oil and Gas Properties
The
following table summarizes the Company’s oil and gas activities by classification for the nine months ended November 30, 2021:
Summary
of Oil and Gas Activities
|
|
|
February
28, 2021
|
|
|
Additions
|
|
|
Change
in
Estimates
|
|
|
November
30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas properties, subject to depletion
|
|
$
|
2,930,237
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,930,237
|
|
|
Asset
retirement costs
|
|
|
58,919
|
|
|
|
-
|
|
|
|
(10,075
|
)
|
|
|
48,844
|
|
|
Accumulated
depletion
|
|
|
(2,768,306
|
)
|
|
|
(47,952
|
)
|
|
|
-
|
|
|
|
(2,816,258
|
)
|
|
Total
oil and gas assets
|
|
$
|
220,850
|
|
|
$
|
(47,952
|
)
|
|
$
|
(10,075
|
)
|
|
$
|
162,823
|
|
The
depletion recorded for production on proved properties for the nine months ended November 30, 2021 and 2020, amounted to $47,952 and
$123,225, respectively. The depletion recorded for production on proved properties for the three months ended November 30, 2021 and 2020,
amounted to $12,834 and $33,366, respectively. During the three and nine months ended November 30, 2021 and 2020, there were no ceiling
test write-downs of the Company’s oil and gas properties.
Note
4 – Asset Retirement Obligations
The
following table summarizes the change in the Company’s asset retirement obligations during the nine months ended November 30, 2021:
Schedule
of Asset Retirement Obligations
|
Asset
retirement obligations as of February 28, 2021
|
|
$
|
96,010
|
|
|
Additions
|
|
|
-
|
|
|
Current
year revision of previous estimates
|
|
|
(10,075
|
)
|
|
Accretion
adjustment during the nine months ended November 30, 2021
|
|
|
(894
|
)
|
|
Asset
retirement obligations as of November 30, 2021
|
|
$
|
85,041
|
|
During
the three and nine months ended November 30, 2021, the Company recognized accretion expense adjustments of $1,820 and ($894), respectively.
During the three and nine months ended November 30, 2020, the Company recognized accretion expense adjustment of $4,949 and $1,015, respectively.
Note
5 – Related Party Transactions
Promissory
Note to JBB
On
December 28, 2017, the Company borrowed $1,550,000 from JBB to complete the purchases of a series of oil and gas leases. The loan has
an interest rate of 3% per annum, a maturity date of December 28, 2018 and is secured by all assets of the Company. The loan is convertible
to the Company’s common stock at the conversion rate of $0.20 per share.
On
June 26, 2018, the Company and JBB entered into a modification of the existing loan, to add provisions to permit the Company to obtain
additional advances under the Loan Note up to a maximum of $1,000,000. The Company may request an advance in increments of $100,000 no
more frequently than every 30 days, provided that (i) it provides a description of the use of proceeds for the advance reasonably acceptable
to JBB, and (ii) the Company is not otherwise in default of the Loan Note. The original loan amount and the advances are secured by all
the assets of the Company and are convertible into common stock of the Company at the rate of $0.20 per share, subject to adjustment
for any reverse and forward stock splits. The Loan Note may be repaid at any time, without penalty, however, any advance that is repaid
before maturity may not be re-borrowed as a further advance.
On
May 21, 2019, the Company entered into an extension agreement with JBB to extend the maturity of its outstanding promissory note to September
30, 2020.
On
June 13, 2019, JBB lent the Company $250,000 under a secured promissory note. The funds were used to acquire the remaining working interest
in the Marshall Walden oil and gas property from Odyssey Enterprises LLC. The loan has an interest rate of 5% per annum, a maturity date
of June 30, 2022, and is secured by all assets of the Company. The loan is convertible into the Company’s common stock at a conversion
rate of $0.20 per share.
On
October 1, 2019, the Company entered into another amendment of its promissory with JBB to increase the borrowing capacity of the line
of credit by an additional $500,000, for total of $1,500,000, and extend the maturity date for the original note and line of credit to
December 31, 2020.
On
May 29, 2020, the Company entered into an extension agreement with JBB to extend the maturity of its outstanding Loan Note to September
30, 2021.
On
December 22, 2020, the Company entered into an extension agreement with JBB to extend the maturity of all its outstanding indebtedness
under credit line and Loan Note to May 31, 2022, while there can be no guarantees, the Company expects to renegotiate the terms or to
extend the maturity date on or before the due date of May 31, 2022.
On
May 1, 2021, the Company entered into a new funding agreement with a maturity date of May 31, 2022 and an interest rate of five percent
annual percentage rate (5% APR) with JBB for a further $1 million drawable in $100,000 increments at the discretion of JBB to cover the
Company’s current and projected working capital requirements in near-term. The loan is convertible into common stock of the Company
at the rate of $0.08 per share, subject to adjustment for any reverse and forward stock splits. The Company has availability of $700,000
on its $1,000,000 credit line entered into May 1, 2021.
During
the nine months ended November 30, 2021, JBB advanced $300,000 to the Company. The Company recognized interest expense of $27,403 and
$23,677 for the three months ended November 30, 2021 and 2020, respectively, and $79,838 and $68,345 for the nine months ended November
30, 2021 and 2020, respectively. As of November 30, 2021, and February 28, 2021, there was $3,500,000 and $3,200,000, respectively, outstanding
under the Company’s outstanding notes.
Note
6 – Commitments and Contingencies
Office
Lease
As
of September 1, 2018, the Company moved to the offices of IWO in Weatherford, TX that is being rented on a month-to-month sublease basis
at rate of $950 per month from IWO. During the three and nine months ended November 30, 2021, the Company incurred $2,850 and $8,550,
respectively, of rent expense under this lease that is included in general and administrative expenses on the statement of operations.
Leasehold
Drilling Commitments
The
Company’s oil and gas leasehold acreage is subject to expiration of leases if the Company does not drill and hold such acreage
by production or otherwise exercises options to extend such leases, if available, in exchange for payment of additional cash consideration.
In the King County, Texas lease acreage, 640 acres expired in June 2021; and the Company chose not to extend this lease.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary
Notice Regarding Forward Looking Statements
The
information contained in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may materially differ from those indicated
in the forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although the Company’s
management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no
assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations
expressed in this report.
This
filing contains a number of forward-looking statements which reflect management’s current views and expectations with respect to
our business, strategies, products, future results and events, and financial performance. All statements made in this filing other than
statements of historical fact, including statements addressing operating performance, events or developments which management expects
or anticipates will or may occur in the future, and non-historical information are forward looking statements. In particular, the words
“believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,”
and variations of those words and similar expressions identify forward-looking statements. The foregoing are not the exclusive means
of identifying forward looking statements, and their absence does not mean that a statement is not forward-looking. These forward-looking
statements are subject to certain risks and uncertainties. Our actual results, performance or achievements could differ materially from
historical results as well as those expressed in, anticipated, or implied by these forward-looking statements.
Readers
should not place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections
about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described
below), and apply only as of the date of this filing. Factors which could cause or contribute to such differences include, but are not
limited to, the risks discussed in our Annual Report on Form 10-K and in the press releases and other communications to shareholders
issued by us from time to time which attempt to advise interested parties of the risks and factors which may affect our business. We
undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events,
or otherwise.
Overview
The
Company underwent a change of control in July 2017, when Patrick Norris, and his affiliate JBB Partners (“JBB”) acquired
the majority of ownership of the Company and provided loans and equity funding for the oil/gas mineral rights purchases and covering
the operational expenses of Company.
The
Company will, from time to time, seek strategic investors and other funding to help it develop additional exploration and acquisition
projects located within the Bend Arch-Fort Worth Basin and other prime acquisition targets in the Central West, South and East Texas.
THE
OIL AND GAS INDUSTRY IS IN A SUBSTANTIAL DOWNTURN DUE TO THE COVID-19 PANDEMIC.
Our
business and operations have been adversely affected by and are expected to continue to be adversely affected by the COVID-19 pandemic
and the public health response.
As
a result of the COVID-19 outbreak and the adverse public health developments, including voluntary
and mandatory quarantines, travel restrictions and other restrictions, our operations, and
those of our subcontractors, customers and suppliers, have experienced and are anticipated
to continue to experience delays or disruptions and temporary suspensions of operations.
In addition, our financial condition and results of operations have been and are likely to
continue to be adversely affected by the coronavirus outbreak.
The
timeline and potential magnitude of the COVID-19 outbreak and its consequences are currently unknown. The continuation or amplification
of this virus could continue to more broadly affect the United States and global economy, including the demand for oil and gas.
The
Company has experienced the effects of a negatively impacted domestic and international demand for crude oil and natural gas, which has
contributed to price volatility, impacted the price we receive for oil and natural gas, and has materially and adversely affected the
demand for and marketability of our production. For the Company, this means that our production may have to be shut-in for some of our
wells at any point in time and we may hold, or continue to store some, or all of our oil production as inventory to be sold at a later
date because to date we have refused to accept a loss price for our production. Our 2020 fiscal year end was negatively impacted by the
pandemic response, and the negative impact of the pandemic was continued to be experienced in the first quarter of the 2021 fiscal year.
In the second and third quarter of the 2021 fiscal year, there was some recovery in oil prices and production from the previous quarter.
Nevertheless, at this time, we continue to expect that our financial results for the full fiscal year to be adversely impacted by the
existence of and the government response to the COVID-19 pandemic.
Our
Business Strategy
We
are an Exploration and Production (“E&P”) oil and natural gas company that focuses on the acquisition, development, and
exploration of crude oil and natural gas properties in Texas. The Company is currently managed by business and oil and gas exploration
veterans who specialize in the oil and gas acquisition and exploration markets of the Central West Texas region. The Company’s
goal is to tap into the high potential leases of the Central West Texas region of the United States, aiming to unlock its potential,
specifically in the prolific Bend Arch-Fort Worth region. This area is approximately 120 miles long and 40 miles wide running from Archer
County, Texas in the north to Brown County, Texas in the south. The Company is also looking at other acquisition opportunities in the
Permian Basin, West Texas, East Texas and South Texas region.
Management
believes that focusing on the development of existing small producing fields is one of the key differentiators of the Company. Oil and
natural gas reserve development is a technologically oriented industry. Management believes that the use of current technology has greatly
increased the success rate of finding commercial oil or natural gas deposits. In this context, success means the ability to make an oil/gas
well that produces a commercialized quantity of hydrocarbons. In general, the Company expects to conduct 3D Seismic surveys to determine
more accurate drilling locations and drilling depths beside its initial georadiometry technology application via its last 10 drilling
projects. For short-term cash flow enhancement, the Company plans to seek large-reserve oil and gas properties with low production to
acquire at the lowest cost possible and then implement effective Enhanced Oil Recovery (“EOR”) methods to improve its current
revenues and assets. For long-term cash flow enhancement, the Company plans to identify other potential business opportunities for selected
acquisition that may or may not be directly oilfield related businesses to diversify its income stream while selecting capital and strategic
operating partners to assist in completion of any potential buyout via the Company’s strategic joint venture partnerships, in order
to increase revenues for the Company via acquisition
We
plan to execute the following business strategies:
Develop
and Grow Our Hydrocarbon Resource Acreage Positions Using Outside Development Expertise. We plan to continue to seek and acquire
niche assets in hydrocarbon-rich resource plays to improve our asset quality and expand our drilling inventory. We plan to leverage our
management team’s expertise and apply the latest available EOR technologies to economically develop our existing property portfolio
in Central West and East Texas in addition to any assets in other regions we may acquire. We operate the majority of our acreage, thus
giving us certain control over the planning of capital expenditures, execution and cost reduction. Our operational plan allows us to
adjust our capital spending based on drilling results and the economic environment. As a small producer, we regionally evaluate industry
drilling results to implement simple yet effective operating practices which may increase our initial production rates, ultimate recovery
factors and rate of return on invested capital.
Acquire
Small Producing Companies with Compelling Underlying Values. We identify acquisition opportunities of exploration and production
companies with underlying assets to unlock the development potential and accelerate production using new technologies and capital infusion
from capital partners.
Our
operation strategy is to identify “niche” hydrocarbon land leases in Texas with studies to develop reserves via drilling
or re-entering existing low production wells to increase production and enhance valuation of our production assets. We also plan to position
the Company by growing our management team with added petroleum experts in the United States to partner up with other oil and gas players
once we have established our business to positive cash flow from our existing presence in the Texas oil field markets.
Our
management’s time in the petroleum markets and our ability to contract experienced geology expertise, allows us to identify and
secure acreage with potential reserves. Management believes that the Company’s near-term prospects as a public company could become
attractive, even if our current business is still small and at a risky stage of transition and development.
We
may also identify acquisition opportunities of oilfield services companies and other non-oilfield companies that align with our operation
strategy.
Our
Competitive Strengths
Management
believes that we have a number of competitive strengths that will allow us to successfully execute our business strategies:
Simple
Capital Structure. We have a simple capital structure and de-risked inventory of quality locations with what we believe is upside
potential to take advantage of the current recovery of oil prices to acquire potential production at reasonable cost. Management believes
there are opportunities for profits to be made now that oil prices appear to have stabilized and if they continue to gradually rise higher.
Moderate
Risk Exploration Practice. Unlike many major oil companies that often drill very deep wells with a high degree of risk, we focus
on shallow well exploration (sub 5,000 feet) that is less expensive and has lower risk factors. The basis for management’s belief
that the wells that can be drilled in the prospective leases and will have the capacity to produce a reasonable amount of hydrocarbon
is due to our recent studies of the general areas where we are prospecting the projects. That is our most important exploration practice.
Under
The Radar Asset Base. Management believes our local West Texas E&P team has a special talent in acquiring local “prime
time” hydrocarbon land leases with sub-300 barrels of oil per day (“bopd”) wells that have large hydrocarbon reserves.
Management believes that these “under the radar” prospective leases have multi-year drilling inventory and reasonable production
history with high upside potential and not readily accessible to the public for auctions, thus adding to our competitive advantage on
these “under the radar” opportunities. It is because management also believes that these highly valuable leases are not economically
justifiable for the major oil and gas companies in the region because such companies need the wells they drill to produce at least 300
barrels (“Bbls”) of oil per day per well.
Technologies
Oil
and natural gas reserve development is a technologically oriented industry; many techniques developed by the industry are now used in
other industries, including the space program. Management believes that technological innovations have made it possible for the oil and
natural gas industry to furnish the fuels that power the world economy. Management also believes that technology has greatly increased
the success rate of finding commercial oil or natural gas deposits. In this context, success rate means the ability to make an oil/gas
well that can produce a commercialized quantity of hydrocarbon.
At
NRIS, we focus on core basic field EOR management practices and contract outside experts to provide us the understanding of complex mineralogy
in shale reservoirs to better determine zones prone to fracture stimulation. This technology can suggest where to frack by providing
us with available data to deliver us a greater chance of success. Our field engineers, geologists and petrophysicists work together for
better drilling decisions.
Sales
Strategy
Our
sales strategy in relation to spot pricing will be to produce less when the sales price is lower and produce more when the sales price
is higher. To maintain the lowest production cost, we will aim to have our inventory be as low as possible, in some instances virtually
zero. Our E&P core team has business relationships with BML, Transport Oil, and Lion Oil Trading & Transportation, for oil sales
and WTG Jameson for gas sales. The Company entered into production agreements with BML, Lion Oil and WTG Jameson so that, as our tier
1 buyer, they can handle pick-up and sales of our crude oil stock to refineries and gas via local gas pipelines.
As
such, crude oil will be picked up from our leases as needed during the calendar month. At the end of the month the crude total sales
will be tallied by lease and the 30-day average of the daily closing of oil will be tabulated. On or about the 25th of the following
month the proceeds checks will be issued to the financial parties of record.
Operational
Plans
Overall,
we seek to acquire on a selective basis, oil and gas reserve concessions with existing production, as well as consider selected acquisitions
of oilfield service businesses. To maintain our operations and complete any acquisitions we intend to raise capital via equity or debt,
be this from our control owner, or other third-party financing sources, including the capital markets. The Company is still in the process
of assessing the wells it holds, or recently acquired and is reviewing its options to make improvements in the future to address underperformance.
The
Company shifted its E&P plan on regional acquisition(s) to a focus in the North Texas and Outside of Permian Basin region. This region
has been producing oil continuously for nearly 100 years and the U.S. Geological Survey (“USGS”) has recently announced that
this region has the largest estimate of continuous oil production that it has ever assessed. Our area of interest is production locations
in Texas but outside of the Texas Permian Basin market where property prices are too high for a smaller player as a result of USGS estimates
that there are 20 billion barrels of undiscovered, technically recoverable oil.
As
result of COVID-19 the Company will likely take a pause on any new drilling activity until such time has elapsed that energy prices have
stabilized. If the Company does review any acquisitions, it will follow model which is based on a concept that has been proven in the
past to be an effective and successful path of development for many other well- known E&P players:
|
a)
|
The
financed acquisition of mature smaller oil fields that have potential for instituting EOR incremental production processes; and
|
|
|
|
|
b)
|
Develop
strategic partnerships with existing operators to share production increases garnered through the implementation of this EOR plan.
|
The
Company has plans to curtail its operating budget for each wells to basic maintenance and does not plan any new drill programs in the
current fiscal year.
Results
of Operations
Comparison
of the Three Months Ended November 30, 2021, with the Three Months Ended November 30, 2020
Revenues
The
Company generated revenues of $105,030 from oil and gas sales for the three months ended November 30, 2021, compared to $59,978 for the
three months ended November 30, 2020. The increase in revenues was from a higher prices for oil and gas price as the price increase was
in part attributable to the changes in demand pick up due to the economic recovery from some of the effects of opening up of parts of
the economy after initial shutdowns during the COVID-19 pandemic.
Operating
Expenses
Total
operating expenses for the three months ended November 30, 2021, and 2020 were $233,968 and $268,440, respectively. Our lease operating
expenses decreased and were $160,498 for the three-month ended November 30, 2021, compared to $215,691 for the three-month ended November
30, 2020, that was primarily related to lower variable lease operating expenses because of the lower well workover expenses incurred
during the current period that the extra expense incurred for well shutdowns during prior year period. However, our general and administrative
expense increased to $58,816 for the three-month period ended November 30, 2021, compared to $14,434 for the three-month period ended
November 30, 2020, primarily because of added personnel time, and outside services incurred.
Depletion
and Accretion Expenses
For
the three months ended November 30, 2021, and 2020, the Company recorded depletion and accretion expense of $14,654 and $38,315, respectively,
related to depletion of oil and gas properties and revision of asset retirement obligations estimate.
Other
Income (Expense)
For
the three months ended November 30, 2021, and 2020, the Company recorded interest expense of $27,403 and $23,677, respectively, related
to outstanding related party debts.
Net
Loss
We
had a net loss in the amount of $156,341 for the three months ended November 30, 2021, compared to a net loss of $232,139 for the three
months ended November 30, 2020. The decreased in losses was primarily related to lower operating expenses incurred from the Company’s
oil and gas properties because of reduction in lease operating expenses in response to curtailing of production due to low energy prices
and general cost cutting measures during the current period.
Comparison
of the Nine Months Ended November 30, 2021 with the Nine Months Ended November 30, 2020
Revenues
The
Company generated revenues of $302,868 from oil and gas sales for the nine months ended November 30, 2021, compared to $182,589 for the
nine months ended November 30, 2020. The increase in revenues mainly came from a increase in the market price of the Company’s
oil and gas, and higher production from our oil and gas properties.
Operating
Expenses
Operating
expenses for the nine months ended November 30, 2021, and 2020 were $704,352 and $798,958, respectively. Our lease operating expenses
decreased and were $448,143 for the nine-month period ended November 30, 2021, compared to $500,081 for the nine-month period ended November
30, 2020, that was primarily related to lower variable lease operating expenses as a result of the lower production expenses during the
current period. Our general and administrative expense increased to $209,151 for the nine-month period ended November 30, 2021, compared
to $167,667 for the nine-month period ended November 30, 2020, primarily because of implemented cost cutting measures.
Depletion
and Accretion Expenses
For
the nine months ended November 30, 2021, and 2020, the Company recorded depletion and accretion expense of $47,058 and $122,210, respectively,
related to depletion of oil and gas properties and revision of asset retirement obligations estimate.
Other
Income (Expense)
For
the nine months ended November 30, 2021 and 2020, the Company recorded interest expense of $79,838 and $68,345, respectively, related
to outstanding related party debts.
Net
Loss
We
had a net loss in the amount of $481,322 for the nine months ended November 30, 2021, compared to a net loss of $675,714 for the nine
months ended November 30, 2020. The decrease in losses was primarily related to lower operating expenses incurred from the Company’s
oil and gas properties as a result of reduction in lease operating expenses combined with higher production levels and higher prices
received for our products during the current period.
Liquidity
and Capital Resources
As
of November 30, 2021, the Company had cash on-hand of $96,878.
Net
cash used by operating activities during the nine months ended November 30, 2021, was $363,753, compared to cash used in operating activities
of $457,009 for the same period in 2020. The decrease was mainly related to us being able to increase production while having decreased
lease operating expenses and other costs in the current period.
Net
cash provided by financing activities for nine months ended November 30, 2021 was $300,000, related to proceeds of $300,000 from the
Company’s line of credit with JBB, compared to cash provided by financing activities of $407,200 for the same period in 2020, primarily
related to proceeds of $400,000 from the Company’s line of credit with JBB.
The
Company will seek capital from various third party sources and to the extent necessary from its officers and significant stockholders,
from time to time. There is no assurance that it will be able to obtain financing of any amount or of any specific nature. If obtained
the terms may have restrictive covenants or obligations that will be difficult to meet or may be too onerous for the Company to accept.
Any financing accepted by the Company may have a dilutive effect on the outstanding equity of the Company and may restrict the payment
of dividends.
The
Company currently has a secured, convertible note entered into effective December 28, 2017, which is secured by all the assets of the
Company. The note is issued to an affiliate of the Chief Executive Officer of the Company, and the holder of the note is a controlling
majority shareholder of the Company. The existence of the notes, as well as the security interest, may limit the opportunity to raise
financing that requires a security interest or would suffer dilution because of the convertibility of the notes. Additionally, the note
is convertible into shares of common stock of the Company, which if converted will cause a substantial dilution to the equity of the
outstanding Common Stock. On February 26, 2018, the note holder converted its prior note for $750,000, that was due July 28, 2018, into
1,000,000 Series A Preferred Stock. The note for $1,550,000 was extended to September 30, 2020, from the original due date of December
28, 2018.
On
June 26, 2018, and May 21, 2019, the Company and JBB entered into modifications of the existing Secured Promissory Note originally dated
December 28, 2017 (“Loan Note”), to add provisions to permit the Company to obtain advances under the Loan Note up to a maximum
of $1,000,000 and extend the maturity dates. The Company may request an advance in an amount of $100,000 no more frequently than every
30 days, provided that it provides a description of the use of proceeds for the advance reasonably acceptable to JBB, and the Company
is not otherwise in default of the Loan Note. The Company received advances under the line of credit of $200,000 during the three months
ended May 31, 2019. On October 1, 2019, the Company entered into another amendment of its Loan
Note with JBB to increase the line of credit by an additional $500,000, for a total of $1,500,000, and extend the maturity date for the
original note and line of credit to December 31, 2020. On May 29, 2020, the Company entered into an extension agreement with JBB
to extend the maturity of its outstanding Loan Note to September 30, 2021. On December 22, 2020,
the Company entered into an extension agreement with JBB to extend the maturity of all its outstanding indebtedness under credit line
and Loan Note to May 31, 2022, while there can be no guarantees the Company expects to renegotiate the terms, or to extend the maturity
date on or before the due date of May 31, 2022.
The
original loan amount and the advances are secured by all the assets of the Company and are convertible into common stock of the Company
at the rate of $0.20 per share, subject to adjustment for any reverse and forward stock splits. The Loan Note may be repaid at any time,
without penalty, however, any advance that is repaid before maturity may not be re-borrowed as a further advance.
On
June 13, 2019, JBB lent the Company $250,000 under a secured promissory note. The funds were used to acquire the remaining working interest
in the Marshall Walden oil and gas property from Odyssey Enterprises LLC. The loan has an interest rate of 5% per annum, a maturity date
of June 30, 2022, and is secured by all assets of the Company. The loan is convertible into the Company’s common stock at a conversion
rate of $0.20 per common share.
The
original loan amount and the advances are secured by all the assets of the Company and are convertible into common stock of the Company
at the rate of $0.20 per share, subject to adjustment for any reverse and forward stock splits. The Loan Note may be repaid at any time,
without penalty, however, any advance that is repaid before maturity may not be re-borrowed as a further advance.
On
May 1, 2021, the Company entered into a new funding agreement with a maturity date of May 31, 2022 and an interest rate of five percent
annual percentage rate (5% APR) with JBB for a further $1 million drawable in $100,000 increments at the discretion of JBB to cover the
Company’s current and projected working capital requirements in near-term. The loan is convertible into common stock of the Company
at the rate of $0.08 per share, subject to adjustment for any reverse and forward stock splits. The Company has availability of $700,000
on its new $1,000,000 credit line entered into May 1, 2021.
Off-Balance
Sheet Arrangements
As
of November 30, 2021, we did not have any off-balance sheet arrangements as defined in Item 303 (a)(4)(ii) of Regulation S-K promulgated
under the Securities Act of 1934.