ITEMS
1 BUSINESS AND PROPERTY GENERAL
CN
Resources Inc. (the “Company” or “CNRR” or “we” or “us”) was incorporated in Nevada of
the United States of America on May 18, 2010.The Company currently owns oil well properties in Alberta, Canada. The Company is
actively assessing business opportunities including opportunities to pursue potential investment in areas other than the oil and
gas industry.
Our
principal office is located at 255 Duncan Mill Road, Suite 203, Toronto, Ontario, Canada and our telephone number is (416) 510-2991.
STRATEGY
We
are committed to a measured-risk growth strategy and focused on determining the most efficient way to create greatest value and
highest returns for our shareholders.
The
Controlling shareholder and the Board have evaluated the Company’s growth path and has decided to discontinue to invest
in the oil and gas business, as a result, the Company will pursue shareholder value building opportunities in other business areas.
The Company will continue to retain its ownership interest in its joint venture producing oil well in Alberta, Canada.
SIGNIFICANT
DEVELOPMENTS IN FISCAL YEAR 2017
During
fiscal year 2017, the Company adopted a defensive approach and has been watching the oil and gas industry very closely. The Board
has decided to pursue investment opportunities in other area.
Our
Company is a small but financially sound company, our philosophy is to take a measured risk approach to our growth, As a result,
the Company has taken a prudent step by evaluating various alternative growth strategies in the coming year.
Financial
Performance
Revenues
For the fiscal year ended May 31, 2017, revenues, net of royalty, totaled $66,526 compared to $69,286 in the prior year.
The decrease in the Company’s revenue is due to the crude price decrease and production decrease in 2017, and the fact that
there is no additional capital investment in the oil well.
Investment
Income
For the fiscal year ended May 31, 2017, investment interest income totaled $88,091 compared to $21,942 in prior
year. The increase is due to management’s decision to enhance cash management in the 2nd quarter in fiscal year ended May
31, 2017.
Net
Income and Earnings per Share
. For the fiscal year ended May 31, 2017, net income was $19,631 ($0.00 /basic share), compared
to net loss of $37,705 ($(0.00)/basic share) for the prior fiscal year ended May 31, 2016. The net income result is primarily
due to interest income generated from the Company’s short-term investment.
Cash
.
As of May 31, 2017, the Company had $2,606,586 in cash and cash equivalents as compared to $4,980,735 at the end of the prior
fiscal year. The decrease is primarily due to the Company has used the cash to invest in short-term investment.
OUTLOOK
FOR FISCAL YEAR 2018
The
Board has decided to pursue potential investment opportunities in other area(s) rather than in the oil and gas industry. The Board
is evaluating a number of potential opportunities with a view to effect an acquisition transaction in 2018. The Company will take
an active approach to its cash management to generate income.
RESERVES
Estimates
of reserves are inherently imprecise and continually subject to revision based on production history, results of additional exploration
and development, price changes, and other factors.
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Oil
and Gas
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Proved developed and producing (PDP)
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nil
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nil
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Proved plus Probable Producing
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nil
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nil
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The
Company’s proved developed reserves in Canada consist of only one location at Redwater, Alberta, Canada.
Proved
Undeveloped Reserves
As
of May 31, 2017, we had no proved undeveloped reserves.
Probable
Reserves
Estimates
of probable developed and undeveloped reserves are inherently imprecise. When estimating the amount of oil and gas that is recoverable
from a particular reservoir, an estimated quantity of probable reserves is an estimate that more likely than not will be achieved.
Estimates of probable reserves are continually subject to revision based on production history, results of additional exploration
and development, price changes, and other factors.
We
use deterministic methods to estimate probable reserve quantities, and when deterministic methods are used, it is as likely as
not that actual remaining quantities recovered will exceed the sum of estimated proved plus probable reserves. Probable reserves
may be assigned to areas of a reservoir adjacent to proved reserves where data control or interpretations of available data are
less certain, even if the interpreted reservoir continuity of structure or productivity does not meet the reasonable certainty
criterion. Probable reserves may be assigned to areas that are structurally higher than the proved area if these areas are in
communication with the proved reservoir. Probable reserves estimates also include potential incremental quantities associated
with a lower percentage recovery of the hydrocarbons in place than assumed for proved reserves.
Internal
Controls Over Reserve Estimates
Our
internal controls over the recording of proved reserves are structured to objectively and accurately estimate our reserve quantities
and values in compliance with regulations established by the SEC. The Company relies upon independent third party consulting arrangements
for reserve estimation and review.
The
reserve estimate for 2017 and 2016 was not conducted as the impairment was provided in full in prior years.
Third
Party Reserve Audit
There
is no third party reserve audit conducted for the 2017 and 2016 fiscal years.
VOLUMES
AND REALIZED PRICES
The
following table summarizes volumes and prices realized from the sale of oil from property in which we owned an interest during
the periods stated. The table also summarizes operational costs per barrel of oil equivalent.
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Oil volume
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Average
realized price
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For the year ended May 31, 2017
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9
bbl/day
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$
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40.00
per bbl
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For the year ended May 31, 2016
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9 bbl/day
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$
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40.29 per bbl
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DRILLING
ACTIVITY
The
Company at present has no further drilling activities, and management intends to execute its growth strategy by acquiring quality
oil producing assets rather than drilling for new exploratory or development wells. Due to the substantial decrease in crude oil
price, we may not engage in any drilling activities in the foreseeable future.
ACREAGE
The
Company at present is only have one joint venture well pumping oil and does not own any other acreage of oil and gas land. The
Company intends to acquire proved-developed-and-developed light oil assets in Western Canada, if successful, will own oil and
gas mineral rights on the acreage of land.
TITLES
TO PROPERTY, PERMITS, AND LICENSES
CN
Resources Inc. maintains interests in its oil and gas properties directly or through contractual arrangements with its Joint Venture
partner, customary to the oil and gas industry and relevant to the local jurisdictions of its assets in Alberta, Canada.
MARKETING
ACTIVITIES AND CUSTOMERS
Customers
The
Company operates in Canada and has a sole arm’s length customer who purchased all light oil produced from the joint venture
well in the fiscal year ended May 31, 2017 and 2016.
CURRENT
MARKET CONDITIONS AND COMPETITION
Cyclical
Seasonality of Business
There
are many factors directly impact the crude oil price, such as but not limited to, world economic growth, geopolitical stabilities,
technological advancements in exploration and development in energy sectors, government regulations. In the past year, crude oil
price as plunged to below $40 a barrel. No consensus exists as to when and how the crude oil price will recover.
Demand
and prices for oil and gas can also be impacted by seasonal factors. Increased demand for heating oil in the winter and gasoline
during the summer driving season can positively impact the price of oil during those times. Unusual weather patterns can increase
or dampen normal price levels. Our ability to carry out drilling activities can be adversely affected by weather conditions during
winter months in Alberta, Canada. In general, the Company’s working capital balances are not materially impacted by seasonal factors.
The
Company faces enormous uncertainties in the oil industry and at present we do not foresee the oil price recover any time soon.
The Company will proceed with caution in the oil development space.
Competitive
Conditions in the Business
The
Company will no longer pursue additional business in Oil and gas Industry.
EMPLOYEES
AND OFFICE SPACE
As
of May 31, 2017, the Company had no full time employee. All work is completed through subcontracts. We use office space provided
by our President and CEO on a rent free and month-to-month basis.
GOVERNMENT
REGULATIONS
Our
business is extensively regulated by numerous federal, provincial and local laws and governmental regulations in the United States
and in Canada. These laws and regulations may be changed from time to time in response to economic or political conditions, or
other developments, and our regulatory burden may increase in the future. Laws and regulations have the potential of increasing
our cost of doing business and, consequently, could affect our results of operations.
ITEM
1A: RISK FACTORS
In
addition to the other information included in this report, the following risk factors should be carefully considered when evaluating
an investment in us. These risk factors and other uncertainties may cause our actual future results or performance to differ materially
from any future results or performance expressed or implied in the forward-looking statements contained in this report and in
other public statements we make. In addition, because of these risks and uncertainties, as well as other variables affecting our
operating results, our past financial performance is not necessarily indicative of future performance.
RISKS
RELATING TO OUR BUSINESS
Our
growth strategy will no longer in oil and gas industry
Our
strategy is to discontinue investment in oil and gas area and will seek and evaluate other business opportunities.
Our
growth strategy may not be successful.
Our
strategy as described may not be successful because our strategy is not unique. For our strategies to be successful, we will need
financing and available and reasonable acquisition opportunities. Even the opportunity is there, competition for quality assets
may increase the acquisition cost to a level that we may not be interest to acquire the assets.
We
currently only have one joint venture producing well in Alberta, Canada, making us vulnerable to ricks associated with high concentration
and single asset.
Because
our current revenue-producing operation is only one joint venture well and is geographically concentrated in the Redwater area
in Alberta, Canada, the success and profitability of our operations are disproportionally exposed to risks associated with such
high concentration and single asset operation. If the joint venture well stopped production, we will have no revenue to cover
expenses.
The
loss of key personnel could adversely affect our ability to operate.
We
depend, and will continue to depend in the foreseeable future, on the services of our executive management team. The ability to
retain officers is important to our success and growth. The unexpected loss of the services of one or more of these individuals
could have a detrimental effect on our business. Competition for many of these professionals is intense. If we cannot retain our
technical personnel or attract additional experienced technical personnel and professionals, our ability to compete could be harmed.
There
are risks inherent in foreign operations, such as adverse changes in currency values and foreign regulations relating to our business
operations.
Our
well and operations are located outside the US and are subject to certain risks related to the indirect ownership and development
of foreign properties, including adverse changes in currency values, foreign taxes, US taxes on the repatriation of funds to the
US, and other laws and regulations, any of which may have a material adverse effect on our properties, financial condition, results
of operations, or cash flows.
We
have limited management and staff and will be dependent upon contract arrangements.
We
have no full time employee as of May 31, 2017. We expect that we will continue to require the services of independent consultants
and contractors to perform various professional services. Our dependence on third party consultants and service providers creates
a number of risks, including but not limited to:
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the possibility that such third parties may
not be available to us as and when needed; and
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the risk that we may not be able to properly
control the timing and quality of work conducted with respect to our projects.
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If
we experience significant delays in obtaining the services of such third parties or poor performance by such parties, our results
of operations may be materially adversely affected.
Our
current operations are subject to complex laws and regulations, including environmental regulations that result in substantial
costs and other risks.
Legislation
and regulations affecting the industry are under constant review for amendment or expansion, raising the possibility of changes
that may become more stringent and, as a result, may affect, among other things, the pricing or marketing of crude oil and natural
gas production. Noncompliance with statutes and regulations and more vigorous enforcement of such statutes and regulations by
regulatory agencies may lead to substantial administrative, civil, and criminal penalties, including the assessment of natural
resource damages, the imposition of significant investigatory and remedial obligations, and may also result in the suspension
or termination of our operations. The overall regulatory burden on the industry increases the cost to place, design, drill, complete,
install, operate, and abandon wells and related facilities and, in turn, decreases profitability.
Governmental
authorities regulate various aspects of drilling for and the production of crude oil and natural gas, including the permit and
bonding requirements of drilling wells, the spacing of wells, the unitization or pooling of interests in crude oil and natural
gas properties, rights-of-way and easements, environmental matters, occupational health and safety, the sharing of markets, production
limitations, plugging, abandonment, and restoration standards, and oil and gas operations. Public interest in environmental protection
has increased in recent years, and environmental organizations have opposed, with some success, certain projects. Under certain
circumstances, regulatory authorities may deny a proposed permit or right-of-way grant or impose conditions of approval to mitigate
potential environmental impacts, which could, in either case, negatively affect our ability to explore or develop certain properties.
Governmental authorities also may require any of our ongoing or planned operations on their leases or licenses to be delayed,
suspended, or terminated. Any such delay, suspension, or termination could have a material adverse effect on our operations.
Our
operations are also subject to complex and constantly changing environmental laws and regulations adopted by federal, state, tribal,
and local governmental authorities in jurisdictions where we are engaged in exploration or production operations. New laws or
regulations, or changes to current requirements, could result in material costs or claims with respect to properties we own or
have owned. We will continue to be subject to uncertainty associated with new regulatory interpretations and inconsistent interpretations
between various regulatory agencies. Under existing or future environmental laws and regulations, we could incur significant liability,
including joint and several liability or strict liability under federal, state, and tribal environmental laws for noise emissions
and for discharges of crude oil, natural gas, and associated liquids or other pollutants into the air, soil, surface water, or
groundwater. We could be required to spend substantial amounts on investigations, litigation, and remediation for these discharges
and other compliance issues. Any unpermitted release of petroleum or other pollutants from our operations could result not only
in cleanup costs but also natural resources, real or personal property, and other compensatory damages and civil and criminal
liability. Existing environmental laws or regulations, as currently interpreted or enforced, or as they may be interpreted, enforced,
or altered in the future, may have a material adverse effect on us.
Legislative
and regulatory initiatives related to global warming and climate change could have an adverse effect on our operations and the
demand for crude oil and natural gas.
Due
to concerns about the risks of global warming and climate change, a number of various national and regional legislative and regulatory
initiatives to limit greenhouse gas emissions are currently in various stages of discussion or implementation. For example, the
US Environmental Protection Agency has been adopting and implementing various rules regulating greenhouse gas emissions under
the US Clean Air Act, the US Congress has from time to time considered other legislative initiatives to reduce emissions of greenhouse
gases, and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases, primarily
through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs.
Most of these cap and trade programs work by requiring major sources of emissions, such as electric power plants, or major producers
of fuels, such as refineries and gas processing plants, to acquire and surrender emission allowances. The number of allowances
available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emission reduction goal.
Legislative
and regulatory programs to reduce emissions of greenhouse gases could require us to incur substantially increased capital, operating,
maintenance, and compliance costs, such as costs to purchase and operate emissions control systems, costs to acquire emissions
allowances, and costs to comply with new regulatory or reporting requirements. Any such legislative or regulatory programs could
also increase the cost of consuming, and thereby reduce demand for, the oil and natural gas we produce. Consequently, legislative
and regulatory programs to reduce emissions of greenhouse gases could have an adverse effect on our business, financial condition,
results of operations, and cash flows.
In
addition, there has been public discussion that climate change may be associated with more extreme weather conditions, such as
increased frequency and severity of storms, droughts, and floods. Extreme weather conditions can interfere with our development
and production activities, increase our costs of operations or reduce the efficiency of our operations, and potentially increase
costs for insurance coverage in the aftermath of such conditions. Significant physical effects of climate change could also have
an indirect effect on our financing and operations by disrupting the transportation or process related services provided by midstream
companies, service companies, or suppliers with whom we have a business relationship. We may not be able to recover through insurance
some or any of the damages, losses, or costs that may result from potential physical effects of climate change.
Weakness
in economic conditions or uncertainty in financial markets may have material adverse impacts on our business.
US,
Canadian and global economies and financial systems have recently experienced turmoil and upheaval characterized by extreme volatility
and declines in prices of securities, diminished liquidity and credit availability, inability to access capital markets, the bankruptcy,
failure, collapse, or sale of financial institutions, increased levels of unemployment, and an unprecedented level of government
intervention. Although some economies appear to have stabilized and begun to recover, the extent and timing of recovery, and whether
it can be sustained, are uncertain. Continued weakness in the US, Canadian or other large economies could materially adversely
affect our business, financial condition, results of operations, and cash flows.
Currency
exchange rate fluctuations may negatively affect our operating results.
The
exchange rates between the Canadian dollar and the US dollar have changed in recent periods and may fluctuate substantially in
the future. We expect that a majority of our revenues will be denominated in Canadian dollars in the future. However, the US dollar
has strengthened against the Canadian dollar, which has had, and may continue to have, a negative impact on our revenues generated
in the Canadian dollar, as well as our operating income and net income. Any appreciation of the US dollar against the Canadian
dollar is likely to have a negative impact on our revenue, operating income, and net income.
RISKS
RELATED TO OUR COMMON STOCK
The
market price of our common stock may fluctuate significantly, which may result in losses for investors.
During
the past several years, the stock markets in general and for oil and gas exploration and production companies in particular have
experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating results
and asset values of the underlying companies. In addition, due to relatively low trading volumes for our common stock, the market
price for our common stock may fluctuate significantly more than the markets as a whole. The market price of our common stock
could fluctuate widely in response to a variety of factors, including factors beyond our control. These factors include:
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changes in crude oil or natural gas commodity
prices;
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our quarterly or annual operating results;
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any investment recommendations by securities
analysts following our business or our industry;
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additions or departures of key personnel;
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changes in the business, earnings estimates,
or market perceptions of comparable companies;
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changes in industry, general market, or regional
or global economic conditions; and
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announcements of legislative or regulatory changes
affecting our business or our industry.
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Fluctuations
in the market price of our common stock may be significant, and may result in declines in the market price and losses for investors.
We
may establish a stock option plan in the future and issue a significant number of shares of common stock under the stock options,
and common stockholders may be adversely affected by the issuance and sale of those shares.
As
of May 31, 2017 we do not have a stock option plan. However, in the future we may establish a Stock Option Plan to align key management
interest with that of our common stockholders. Sales of the shares under the stock option plan, if established, could adversely
affect the market price of our common stock, even if our business is doing well.
Our
common stock is illiquid, its liquidity and value could be reduced.
Our
common stocks are quoted for trading on the OTCQB, however, our stock is very thinly traded. The value of our common stocks may
be significantly adversely affected.
We
do not intend to pay cash dividends on our common stock in the foreseeable future, and therefore only appreciation of the price
of our common stock will provide a return to our common stockholders.
We
do not intend to pay cash dividends on our common stock in the foreseeable future. Any future determination as to the declaration
and payment of cash dividends on our common stock will be at the discretion of our board of directors and will depend upon our
financial condition, results of operations, contractual restrictions, capital requirements, business prospects, and any other
factors that our board determines to be relevant. As a result, only appreciation of the price of our common stock, which may not
occur, will provide a return to our common stockholders.
Our
largest stockholder beneficially owns a significant percentage of our common stock, and its interests may conflict with those
of our other stockholders.
Shanghai
Yuankai Group Co., Ltd. owns 39,000,000 shares of our common stock. The concentration of ownership and voting power with Shanghai
Yuankai makes it difficult for any other holder or group of holders of our common stock to be able to affect the way we are managed
or the direction of our business. The interests of Shanghai Yuankai with respect to matters potentially or actually involving
or affecting us, such as future acquisitions, financings, and other corporate opportunities, and attempts to acquire us, may conflict
with the interests of our other stockholders. This continued concentration of ownership will make it difficult for another company
to acquire us and for stockholders to receive any related takeover premium unless Shanghai Yuankai approves the acquisition.