Item
1. Financial Statements.
NORRIS
INDUSTRIES, INC.
CONSOLIDATED
BALANCE SHEETS
AUGUST
31, 2022 AND FEBRUARY 28, 2022
(UNAUDITED)
The
accompanying notes are an integral part of these interim unaudited consolidated financial statements.
NORRIS
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE THREE AND SIX MONTHS ENDED AUGUST 31, 2022 AND 2021
(UNAUDITED)
The
accompanying notes are an integral part of these interim unaudited consolidated financial statements.
NORRIS
INDUSTRIES, INC.
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR
THE SIX MONTHS ENDED AUGUST 31, 2021 (UNAUDITED)
NORRIS
INDUSTRIES, INC.
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR
THE SIX MONTHS ENDED AUGUST 31, 2022 (UNAUDITED)
| | |
Series A Convertible
Preferred Stock | | |
Common Stock | | |
Additional Paid-in | | |
Accumulated | | |
Total Stockholders’ | |
| | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Equity | |
| Balance, March 1, 2022 | |
| 1,000,000 | | |
$ | 1,000 | | |
| 90,883,013 | | |
$ | 90,883 | | |
$ | 6,286,399 | | |
$ | (10,163,942 | ) | |
$ | (3,785,660 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (140,722 | ) | |
| (140,722 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance, May 31, 2022 | |
| 1,000,000 | | |
| 1,000 | | |
| 90,883,013 | | |
| 90,883 | | |
| 6,286,399 | | |
| (10,304,664 | ) | |
| (3,926,382 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (15,726 | ) | |
| (15,726 | ) |
| Balance, August 31, 2022 | |
| 1,000,000 | | |
$ | 1,000 | | |
| 90,883,013 | | |
$ | 90,883 | | |
$ | 6,286,399 | | |
$ | (10,320,390 | ) | |
$ | (3,942,108 | ) |
The
accompanying notes are an integral part of these interim unaudited consolidated financial statements.
NORRIS
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED AUGUST 31, 2022 AND 2021
(UNAUDITED)
The
accompanying notes are an integral part of these interim unaudited 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, 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, 2022. 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
demand for oil and gas has impacted all producers as commodity prices of oil and gas has increased substantially, but so has inflation
resulting in higher costs for materials, equipment, personnel, and service providers. In addition, in early 2022 the industry faced added
complications as result of the Russian Federation invasion of Ukraine. As a result, energy prices have risen; however, we are unable
to predict the impact of these matters on future oil prices.
As
a result of the COVID-19 pandemic and war in Ukraine and the various governmental and political responses and those of our subcontractors,
customers, and suppliers, we expect continued delays or disruptions and temporary suspensions of operations due to shortages of labor
and increased cost from suppliers. In addition, our financial condition and results of operations have been and are likely to continue
to be adversely affected by the COVID-19 public health developments.
The
Company has incurred continuing losses since 2016, including a loss of $498,947 and $156,448 for the fiscal year ended February 28, 2022,
and the six-month ended August 31, 2022, respectively. During the six months ended August 31, 2022, the Company incurred cash losses
of approximately $72,772 from its operating activities. As of August 31, 2022, the Company had a cash balance of approximately $167,000
and working capital of approximately $103,000.
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. As of August 31, 2022, the Company had $500,000 available to borrow under its
existing credit line with JBB Partners, Inc. (“JBB”), an affiliate of the Company’s Chief Executive Officer. The credit
line’s maturity date is September 30, 2023. The Company expects the line of credit to be extended under similar terms prior to
maturity.
The
Company believes that it has sufficient cash on hand and available funds from its credit line to fund its costs for such expenditures
as well as other operating costs, for the 12-month period subsequent to issuance of these consolidated financial statements.
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, 2023, 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.
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.
Uncertain
Tax Positions
The
Company evaluates uncertain tax positions to recognize a tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Those
tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more likely
than not standard or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations.
De-recognition of a tax position that was previously recognized occurs when an entity subsequently determines that a tax position no
longer meets the more likely than not threshold of being sustained.
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 Norris Industries, Inc. 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 three and six months ended August 31, 2022 and 2021:
Schedule
of Antidilitive Securities Excluded from Computation of Earning Per Shares
| | |
2022 | | |
2021 | |
| Stock options | |
| - | | |
| - | |
| Series A Convertible Preferred Stock | |
| 66,666,667 | | |
| 66,666,667 | |
| Convertible debt | |
| 22,250,000 | | |
| 18,500,000 | |
| Total common shares to be issued | |
| 88,916,667 | | |
| 85,166,667 | |
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 August 31, 2022, the Company had no uninsured cash balances. 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 2024 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
Note
2 – Revenue from Contracts with Customers
Disaggregation
of Revenue from Contracts with Customers
The
following table disaggregates revenue by significant product type for the three and six months ended August 31, 2022, and 2021:
Schedule of Disaggregation of Revenue
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
Three Months Ended
August 31, | | |
Six Months Ended
August 31, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Oil sales | |
$ | 102,795 | | |
$ | 40,671 | | |
$ | 214,320 | | |
$ | 141,557 | |
| Natural gas sales | |
| 104,020 | | |
| 30,526 | | |
| 145,136 | | |
| 56,281 | |
| Total | |
$ | 206,815 | | |
$ | 71,197 | | |
$ | 359,456 | | |
$ | 197,838 | |
There
were no significant contract liabilities or transaction price allocations to any remaining performance obligations as of August 31, 2022
and February 28, 2022.
Note
3 – Oil and Gas Properties
The
following table summarizes the Company’s oil and gas activities by classification for the six months ended August 31, 2022:
Summary of Oil and Gas Activities
| | |
February 28, 2022 | | |
Additions | | |
Change in Estimates | | |
August 31, 2022 | |
| | |
| | |
| | |
| | |
| |
| Oil and gas properties, subject to depletion | |
$ | 2,930,237 | | |
$ | - | | |
$ | - | | |
$ | 2,930,237 | |
| Asset retirement costs | |
| 52,218 | | |
| - | | |
| 11,828 | | |
| 64,046 | |
| Accumulated depletion | |
| (2,805,902 | ) | |
| (17,448 | ) | |
| - | | |
| (2,823,350 | ) |
| Total oil and gas assets | |
$ | 176,553 | | |
$ | (17,448 | ) | |
$ | 11,828 | | |
$ | 170,933 | |
The
depletion recorded for production on proved properties for the six months ended August 31, 2022 and 2021 amounted to $17,448 and $35,118,
respectively. The depletion recorded for production on proved properties for the three months ended August 31, 2022, and 2021, amounted
to $10,110 and $10,592, respectively.
During
the three and six months ended August 31, 2022, and 2021, 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 six months ended August 31, 2022:
Schedule of Asset Retirement Obligations
| Asset retirement obligations as of February 28, 2022 | |
$ | 92,822 | |
| Additions | |
| - | |
| Current year revision of previous estimates | |
| 11,828 | |
| Accretion adjustment during the six months ended August 31, 2022 | |
| 13,421 | |
| Asset retirement obligations as of August 31, 2022 | |
$ | 118,071 | |
During
the three and six months ended August 31, 2021, the Company recognized accretion expense of negative $2,316 and $2,714, respectively.
During the three and six months ended August 31, 2022, the Company recognized accretion expense of $4,462 and $13,421, 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 (“Loan
Note”). 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 Note, 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 Marshell 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.
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.
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.
On
May 2, 2022, the Company entered into an extension agreement with JBB to extend the maturity of its outstanding Loan Note to September
30, 2023.
During
the three and six months ended August 31, 2022, draws of $-0- and $100,000, respectively, of additional funds were advanced to the Company
under the Loan Note. As of August 31, 2022, the Company had availability of $500,000 on its existing credit line with JBB.
The
Company recognized interest expense of $57,671 and $52,435 for the six months ended August 31, 2022 and 2021, respectively. The Company
recognized interest expense of $29,189 and $26,764 for the three months ended August 31, 2022 and 2021, respectively.
Note
6 – Commitments and Contingencies
Office
Lease
As
of September 1, 2018, the Company moved to the offices of International Western Oil (“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 six months ended August 31, 2022,
the Company incurred $2,850 and $5,700, respectively, of rent expense under this lease that is included in lease operating expenses on
the consolidated 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.
Note
7 – Subsequent Event
In
preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure
through the date these consolidated financial statements were issued.
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
Norris
Industries, Inc. (the “Company”, “we”, or “us”) is an oil and natural gas company that focuses on
the acquisition, development, and exploration of crude oil and natural gas properties in Texas. As of March 1, 2022 the SEC Non-Escalated
Analysis of Estimated Proved Reserve of our various leases in Jack County and Palo-Pinto County, the Ratliff leases, the Marshall-Walden,
and the Bend Arch Lion 1A and Bend Arch Lion 1B leaseholds, is a total of 29 Mbbl in oil net reserves, plus 150 MMcf in natural gas net
reserves being out of total of BOE equivalent of 54 Mbbl in gross reserves, which is down from prior year by 322 Mbbl due to reduction
of expected production as result of well workover issues.
For
near- to medium-term cash flow enhancement, the Company will plan to focus on existing fields and to selectively consider larger-reserve
oil and gas properties with low production to acquire at reasonable cost 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 oil-field
related, and niche enterprises to consider for bolt on, or diversified acquisition targets to grow Company revenues. This may be with
use of capital partners to buyout via the Company’s strategic joint venture partnerships, and to raise outside capital to fund
any potential future acquisition.
The
Company’s long-term objective is to increase shareholder value by growing reserves, production, and cash flow. As result we may
seek to identify and consider acquisition opportunities of oilfield services companies and other non-oilfield companies that align with
our operational plan to implement a diversified growth strategy. One of the Company’s objectives is to focus on improving its existing
fields and to look for additional reserve oil and gas concessions and production opportunities, aiming to participate with capital partners
for a transaction related to buyouts and joint ventures. The Company will continue to conserve capital to be able to focus on smaller
oil and natural gas properties in West, Central West, East and South Texas, aiming to increase its revenues via an acquisition. It also
will try to improve the existing production revenues of the Bend Arch Lion 1A, Bend Arch Lion 1B, Marshall Walden joint venture property,
which includes the purchase of the leases in Jack County and Palo Pinto County, re-entries and EOR methods as mentioned in the Operational
Plan section above.
The
Company will consider plans to tap into the high potential leases of the West Texas region of the United States, aiming to obtain reserves
for future development, so as to increase its overall oil and gas assets in the Permian Basin. The Permian Basin is a sedimentary basin
largely contained in the western part of the U.S. state of Texas and the southeastern part of the U.S. state of New Mexico. It reaches
from just south of Lubbock, TX, to just south of Midland and Odessa, TX, extending westward into the southeastern part of New Mexico.
It is so named because it has one of the world’s thickest deposits of rocks from the Permiangeologic period. The greater Permian
Basin comprises several component basins: of these, Midland Basin is the largest, Delaware Basin is the second largest, and Marfa Basin
is the smallest. The Permian Basin extends beneath an area approximately 250 miles (400 km) wide and 300 miles (480 km) long.
During
the 2022 fiscal year, we performed an analysis of our oil and gas properties in light of recovery from the COVID-19 pandemic, and the
increase in oil and gas prices and anticipated economic conditions in our industry. As a result, there was no impairment expense to the
carrying value of our oil and gas properties in the March 1, 2022, Reserve Report.
Our
business and operations were adversely affected by and are expected to continue to be adversely affected by the recent COVID-19 pandemic
and the public health response and may be adversely affected in the future by other similar outbreaks. 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 and have somewhat recovered due to significant recovery of oil and gas prices.
The
future potential magnitude of the COVID-19 outbreak is currently still unknown. The continuation or amplification of this virus could
continue to affect the United States and global economy. The recent resurgent of outbreaks in China may affect prices and cause further
disruptions on the broader demand for oil and gas. Prices and demand could further be affected as a result of the invasion of Ukraine
by Russian forces in 2022.
The
coronavirus pandemic has resulted in a widespread health crisis that may adversely affect the economies and financial markets of many
countries, resulting in an economic downturn that will affect our operating results. Other contagious diseases in the human population
could have similar adverse effects. In addition, it has negatively impacted the 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; to us this means that our production may have to be shut-in for some of
our wells at any point in time and may hold, or continue to store some, or all of our oil as inventory to be sold at a later date as
we have refused to accept zero price for our production.
These
unprecedented situations are anticipated to continue to affect the same for the foreseeable future. As the impact from COVID-19, and
Ukraine invasion are difficult to predict, the extent to which it will negatively or positively affect our operating results, or the
duration of any potential business disruption is uncertain. The magnitude and duration of any impact will depend on future developments
and new information that may emerge regarding the severity and duration of COVID-19 or the Ukrainian war and the actions taken by various
governmental authorities related to the Ukrainian war or to treat the pandemic and related impacts, all of which are beyond our control.
These
potential impacts, while uncertain, have already impacted our 2023 fiscal year first quarter results of operations, and are anticipated
to have an unknown impact on multiple future quarters’ results as well.
Our
Business Strategy
We
are a small 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 generally available
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.
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.
The
Company’s long-term objective is to increase shareholder value by growing reserves, production, and cash flow. As result we may
seek to identify and consider acquisition opportunities of oilfield services companies and other non-oilfield companies to implement
a diversified growth strategy.
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 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.
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 will have the capacity to produce a reasonable amount of hydrocarbon and
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. 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.
As
result of COVID-19 the Company took a pause on any activity in the past year . Now that energy prices appear to have stabilized, the
Company may review new acquisition opportunities, and when it does, 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 limit its operating budget for current wells to basic maintenance and has not determined whether to spend for any
new drill programs in the near future.
Results
of Operations
Comparison
of the Three Months Ended August 31, 2022, with the Three Months Ended August 31, 2021
Revenues
The
Company generated revenues of $206,815 from oil and gas sales for the three months ended August 31, 2022, compared to $71,197 for the
three months ended August 31, 2021. The increase in revenues mainly came from an increase in the market price of the Company’s
oil and gas.
Operating
Expenses
Operating
expenses for the three months ended August 31, 2022, and 2021 were $178,780 and $151,030, respectively. Our lease operating expenses
increased and were $158,302 for the three-month period ended August 31, 2021, compared to $108,672 for the three-month period ended August
31, 2021, that was related to higher variable lease operating expenses as a result of the higher production during the current period.
Our general and administrative expense decreased to $20,478 for the three-month period ended August 31, 2022, compared to $42,358 for
the three-month period ended August 31, 2021, primarily because of implemented cost cutting measures.
Depletion
and Accretion Expenses
For
the three months ended August 31, 2022 and 2021, the Company recorded depletion and accretion expense of $14,572 and $10,194, respectively,
related to depletion of oil and gas properties and revision of asset retirement obligations estimate.
Other
Expense
For
the three months ended August 31, 2022 and 2021, the Company recorded interest expense of $29,189 and $26,764, respectively, related
to additional draws from the related party loans.
Net
Loss
We
had a net loss in the amount of $15,726 for the three months ended August 31, 2022, compared to a net loss of $116,791 for the three
months ended August 31, 2021. The decrease in losses was primarily related to a reduction in general and administrative expenses and
higher revenue due to higher oil and gas market prices.
Comparison
of the Six Months Ended August 31, 2022 with the Six Months Ended August 31, 2021
Revenues
The
Company generated revenues of $359,456 from oil and gas sales for the six months ended August 31, 2022, compared to $197,838 for the
six months ended August 31, 2021. The increase in revenues mainly came from an increase in the market price of the Company’s oil
and gas.
Operating
Expenses
Operating
expenses for the six months ended August 31, 2022, and 2021 were $427,364 and $437,980, respectively. Our lease operating expenses increased
and were $322,752 for the six-month period ended August 31, 2022, compared to $287,645 for the six-month period ended August 31, 2021,
that was primarily related to slightly higher variable lease operating expenses as a result of higher efforts during the current period.
Our general and administrative expense decreased slightly to $104,612 for the six-month period ended August 31, 2022, compared to $150,335
for the six-month period ended August 31, 2021, primarily because of implemented cost cutting measures.
Depletion
and Accretion Expenses
For
the six months ended August 31, 2022, and 2021, the Company recorded depletion and accretion expense of $30,869 and $32,404, respectively,
related to depletion of oil and gas properties and revision of asset retirement obligations estimate.
Other
Expense
For
the six months ended August 31, 2022, and 2021, the Company recorded interest expense of $57,671 and $52,435, respectively, related to
additional draws from the related party loans.
Net
Loss
We
had a net loss in the amount of $156,448 for the six months ended August 31, 2022, compared to a net loss of $324,981 for the six months
ended August 31, 2021. The decrease in losses was primarily related to a reduction in general and administrative expenses and higher
revenue due to higher oil and gas market prices.
Liquidity
and Capital Resources
As
of August 31, 2022, the Company had cash on-hand of $166,797.
Net
cash used by operating activities during the six months ended August 31, 2022, was $72,772, compared to cash used in operating activities
of $276,130 for the same period in 2021. The decrease was mainly related to lower expenses due to less workover repairs recognized during
the six months ended August 31, 2022 compared to the six months ended August 31, 2021.
Net
cash provided by financing activities for six months ended August 31, 2022, was $100,000, related to proceeds of $100,000 from the Company’s
line of credit with JBB, compared to cash provided by financing activities of $200,000 for the same period in 2021, related to proceeds
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 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.
In
addition, in June 2019, the Company entered into a separate promissory note agreement with JBB for $250,000, with a maturity date of
June 30, 2022 to complete the purchase of the additional ownership in the Marshall-Walden oil and gas property.
The
Company will require additional financing to support its operations and to pursue its acquisition program. As of August 31, 2022, the
Company had availability of $500,000 on its existing credit line with JBB. If the Company requires additional financing beyond what is
available under its existing credit line, it does not have any committed sources of financing at this time. If it is unable to obtain
financing, it will have to reduce or curtail its operations and acquisition program. There is no assurance that it will be able to obtain
financing in the future, and even if financing is available, it may not be on terms acceptable to the Company.
To
date, the funding during the past three fiscal years to support operations and facilitate some acquisitions has been provided by the
largest shareholder of the Company. This individual does not have any legal obligation to continue to provide funding to the Company.
Yet the majority owner has indicated a willingness, and provided some assurances, to selectively review and determine added funding for
certain low risk initiatives on those oil and gas wells in which the Company has either a 100% or a majority working interest in order
to increase its existing production. Our majority shareholder expects, but is not legally obligated, to provide funding for the Company’s
capital expenditure program for fiscal year 2023. Such funding may be provided in the form of loans, issuance of equity or other means.
The
consolidated financial statements of the Company have been prepared on a going concern basis. The Company will either have to increase
its operating revenues to a point to be able to cover its operating expenses or obtain funding from other investors or lenders. There
is no assurance that the Company will be able to increase its revenues or obtain funding. The Company believes that it will experience
revenue disruption and declines as a result of the COVID-19 pandemic and the government response thereto as well as the war and general
political instability in Europe due to Russian Federation invasion of Ukraine. If it is not able to do so, it will have to adjust operations
or cease operations. There is no assurance that the Company will be able to continue its operations. In such instances, investors will
suffer a loss in the value of their investment in the Company.
On
May 2, 2022, the Company entered into an extension agreement with JBB to extend the maturity of its outstanding Loan Note and promissory
note agreement to September 30, 2023. The Company expects the line of credit to be extended under similar terms prior to maturity.
Off-Balance
Sheet Arrangements
As
of August 31, 2022, 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.