NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 its own 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”). The financial
statements are presented on a consolidated basis and include all of the accounts of Torchlight Energy Resources Inc. and its wholly owned
subsidiary, Norris Petroleum, Inc. All significant intercompany balances and transactions have been eliminated.
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
recent COVID-19 outbreak and may be adversely affected in the future by other similar outbreaks.
As
a result of the recent 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 $1,109,482 for the fiscal year ended February 28, 2021. During
the fiscal year ended February 28, 2021, the Company accessed $500,000 in funding, reduced its general and administrative costs, decreased
revenues, and incurred cash losses of approximately $505,000 from its operating activities. Further, as of February 28, 2021, the
Company had availability of $100,000 on its existing credit line with JBB Partners, Inc. (“JBB”), an entity that is owned
and controlled by Mr. Patrick Norris, the Company’s Chief Executive Officer and principal shareholder, a cash balance of approximately
$161,000 and net working capital deficit of approximately $0.2 million. On May 20, 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
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 in-place financing. The Company believes that it has sufficient working capital and in-place financing to fund its expected
operational losses for twelve months following the issuance of these financial statements.
In
the event that the Company required additional capital to fund higher operational losses, or oil and gas property leases purchases for
fiscal year ending February 28, 2021, the Company expects to seek additional capital from one or more sources via sales of restricted
private placement of 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 consolidated 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 consolidated 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 consolidated 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 consolidated balance sheet.
Equipment
Equipment
is stated at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred. Renewals and betterments
which extend the life or improve existing equipment are capitalized. Upon disposition or retirement of equipment, the cost and related
accumulated depreciation are removed and any resulting gain or loss is reflected in operations. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets, which are 3 to 10 years.
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
ASU
2014-09, “Revenue from Contracts with Customers (Topic 606)”, supersedes the revenue recognition requirements and
industry-specific guidance under Revenue Recognition (Topic 605). Topic 606 requires an entity to recognize revenue when it transfers
promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange
for those goods or services. The Company adopted Topic 606 on March 1, 2018, using the modified retrospective method applied to contracts
that were not completed as of March 1, 2018. Under the modified retrospective method, prior period financial positions and results were
not adjusted. The cumulative effect adjustment recognized in the opening balances included no significant changes as a result of this
adoption.
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.
Share-based
Compensation
The
Company estimates the fair value of each share-based compensation award at the grant date by using the Black-Scholes option pricing model.
The fair value determined represents the cost for the award and is recognized over the vesting period during which an employee is required
to provide service in exchange for the award. Share-based compensation expense is recognized based on awards ultimately expected to vest.
Excess tax benefits, if any, are recognized as an addition to paid-in capital.
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 as the inclusion of these shares would be anti-dilutive
for the years ended February 28, 2021 and February 29, 2020:
|
|
2021
|
|
|
2020
|
|
Stock options
|
|
|
-
|
|
|
|
-
|
|
Series A Convertible Preferred Stock
|
|
|
66,666,667
|
|
|
|
66,666,667
|
|
Convertible debt
|
|
|
16,000,000
|
|
|
|
13,500,000
|
|
Total Common Shares to be issued
|
|
|
82,666,667
|
|
|
|
80,166,667
|
|
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 February 28, 2021, $0 of the Company’s cash balances was uninsured. The Company
has not experienced any losses on such accounts.
Recent
Adopted Accounting Pronouncements
Leases
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases (Topic 842)”.
The new lease guidance supersedes Topic 840. The core principle of the guidance is that entities should recognize the assets and liabilities
that arise from leases. Topic 840 does not apply to leases to explore for or use minerals, oil, natural gas and similar non-regenerative
resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources
are contained. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”, which provides
entities with an alternative modified transition method to elect not to recast the comparative periods presented when adopting Topic
842. The Company adopted Topic 842 as of March 1, 2019, using the alternative modified transition method, for which, comparative periods,
including the disclosures related to those periods, are not restated. In addition, the Company elected practical expedients provided
by the new standard whereby, the Company has elected to not reassess its prior conclusions about lease identification, lease classification,
and initial direct costs and to retain off-balance sheet treatment of short-term leases (i.e., 12 months or less and does not contain
a purchase option that the Company is reasonably certain to exercise). As a result of the short-term expedient election, the Company
has no leases that require the recording of a net lease asset and lease liability on the Company’s consolidated balance sheet or
have a material impact on consolidated earnings or cash flows as of February 28, 2021. Moving forward, the Company will evaluate any
new lease commitments for application of Topic 842.
Compensation-Stock
Compensation
In
June 2018, the FASB issued ASU 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting”. The amendments in this update maintain or improve the usefulness of the information provided to the users
of financial statements while reducing cost and complexity in financial reporting. The areas for simplification in this update involve
several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, to
include share-based payment transactions for acquiring goods and services from nonemployees. Some of the areas for simplification apply
only to nonpublic entities. The amendments in this update are effective for all entities for fiscal years beginning after December 15,
2018, and interim periods within those fiscal years. The Company adopted the standard as of March 1, 2019. There was no impact of the
standard on its consolidated financial statements.
Recently
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 2022 fiscal year, 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
Disaggregation
of Revenue from Contracts with Customers
The
following table disaggregates revenue by significant product type for the years ended February 28, 2021 and February 29, 2020:
|
|
2021
|
|
|
2020
|
|
Oil sales
|
|
$
|
208,347
|
|
|
$
|
493,192
|
|
Natural gas sales
|
|
|
71,813
|
|
|
|
79,824
|
|
Total
|
|
$
|
280,160
|
|
|
$
|
573,016
|
|
There
were no significant contract liabilities or transaction price allocations to any remaining performance obligations as of February 28,
2021 and February 29, 2020.
Note
3 – Oil and Gas Properties
The
following table summarizes the Company’s oil and gas activities by classification for the years ended February 28, 2021, and February
29, 2020:
|
|
February 28, 2019
|
|
|
Additions
|
|
|
Dispositions
|
|
|
February 29, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas properties, subject to amortization
|
|
$
|
2,646,878
|
|
|
$
|
283,359
|
|
|
$
|
-
|
|
|
$
|
2,930,237
|
|
Asset retirement costs
|
|
|
69,224
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69,224
|
|
Accumulated depletion and impairment
|
|
|
(259,292
|
)
|
|
|
(2,081,969
|
)
|
|
|
-
|
|
|
|
(2,341,261
|
)
|
Total oil and gas assets
|
|
$
|
2,456,810
|
|
|
$
|
(1,798,610
|
)
|
|
$
|
-
|
|
|
$
|
658,200
|
|
|
|
February 29, 2020
|
|
|
Additions
|
|
|
Dispositions
|
|
|
February 21, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas properties, subject to amortization
|
|
$
|
2,930,237
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,930,237
|
|
Asset retirement costs
|
|
|
69,224
|
|
|
|
(10,305
|
)
|
|
|
-
|
|
|
|
58,919
|
|
Accumulated depletion and impairment
|
|
|
(2,341,261
|
)
|
|
|
(427,045
|
)
|
|
|
-
|
|
|
|
(2,768,306
|
)
|
Total oil and gas assets
|
|
$
|
658,200
|
|
|
$
|
(437,350
|
)
|
|
$
|
-
|
|
|
$
|
220,850
|
|
The
depletion recorded for production on proved properties for the years ended February 28, 2021 and February 29, 2020, amounted to $230,848
and $762,525, respectively. During the years ended February 28, 2021 and February 29, 2020, the Company recognized impairment expense
of $196,197 and $1,319,444, respectively, related to a ceiling test write-down of its oil and properties subjection to amortization.
Note
4 – Asset Retirement Obligations
The
following table summarizes the change in the Company’s asset retirement obligations during the year ended February 28, 2021:
Asset retirement obligations as of February 29, 2020
|
|
$
|
102,162
|
|
Additions
|
|
|
-
|
|
Current year revision of previous estimates
|
|
|
(10,305
|
)
|
Accretion during the year ended February 28, 2021
|
|
|
4,153
|
|
Asset retirement obligations as of February 21, 2021
|
|
$
|
96,010
|
|
During
the year ended February 28, 2021, the Company decreased the asset retirement obligations estimate by $10,305 and recognized accretion
expense of $4,153. During the year ended February 29, 2020, the Company recognized accretion expense of $9,312.
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
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 common 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 Loan 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 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.
During
the year ended February 29, 2020, JBB advanced $600,000 to fund the Company’s operations under the Loan Note. As of February 29,
2020, the Company had availability of $600,000 on its existing credit line with JBB.
During
the year ended February 28, 2021, JBB advanced $500,000 to fund the Company’s operations under the Loan Note. As of February 28,
2021, the Company had availability of $100,000 on its existing credit line with JBB.
The
Company recognized interest expense of $92,526 and $73,295 for the years ended February 28, 2021 and February 29, 2020, respectively.
As of February 28, 2021, and February 29, 2020, there was $3,200,000 and $2,700,000, respectively, outstanding under notes payable to
JBB.
Equipment
Sale
During
the year ended February 29, 2020, the Company sold one used vehicle, a work truck, for proceeds $10,000 to affiliate operator of IWO.
As a result of this sale, the Company recognized a gain on sale of equipment on its statement of operations of $2,254.
Note
6 – Commitments and Contingencies
Office
Lease
Change
in Accounting Policy – The Company adopted ASU No. 2016-02, “Leases (Topic 842)” and ASU No. 2018-11, “Leases
(Topic 842): Targeted Improvements”, on March 1, 2019, using the alternative modified transition method, for which, comparative
periods, including the disclosures related to those periods, are not restated as of March 1, 2019. Refer to Note 1 – Summary of
Significant Accounting Policies above for additional information.
As
of September 1, 2018, the Company moved to the offices of International Western Oil Corp. (“IWO”), a related party, in Weatherford,
TX that is being rented on a month-to-month sublease basis at rate of $950 per month from IWO. During the years ended February 28, 2021
and February 29, 2020, the Company incurred $11,400 and $11,400, respectively, of rent expense under this lease that is included in general
and administrative 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 are due to expire in June 2021.
Note
7 – Equity Transactions
There
were no issuances of common stock (or common stock activity) during the year ended February 28, 2021.
On
November 25, 2019, one of the employees exercised the option and purchased 720,000 shares of the Company’s common stock at an exercise
price of $0.01 per share, for total proceeds of $7,200.
On
January 6, 2020, one of the officers exercised the option and purchased 720,000 shares of the Company’s common stock at an exercise
price of $0.01 per share, for total of $7,200. The Company fully collected the outstanding proceed from the officer during the fiscal
year ended February 28, 2021.
During
the years ended February 28, 2021, and February 29, 2020, the Company recorded stock-based compensation expense of $-0- and $89,956,
respectively. During the year ended February 29, 2020, the options were fully vested and exercised. As such, as of February 29, 2020,
the intrinsic value was $0. There were no outstanding stock options as of February 28, 2021.
Note
8 – Income Taxes
Due
to the Company’s net losses, there were no provisions for income taxes for the years ended February 28, 2021 and February 29, 2020.
The
difference between the income tax expense of zero shown in the statement of operations and pre-tax book net loss times the federal statutory
rate of 21% for the years ended February 28, 2021 and February 29, 2020, respectively, are summarized as follows:
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Pretax book loss
|
|
$
|
(233,056
|
)
|
|
$
|
(608,608
|
)
|
Permanent differences:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
18,891
|
|
Loss on settlement of debt
|
|
|
-
|
|
|
|
-
|
|
Impairment expense
|
|
|
41,201
|
|
|
|
277,083
|
|
Change in valuation allowance
|
|
|
191,855
|
|
|
|
312,634
|
|
Change in the effective rates
|
|
|
-
|
|
|
|
-
|
|
Other adjustments
|
|
|
-
|
|
|
|
-
|
|
Total tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
income tax assets for the years ended February 28, 2021 and February 29, 2020 are as follows:
Deferred Tax Assets
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Net operating losses carry forwards
|
|
$
|
2,167,036
|
|
|
$
|
1,889,953
|
|
Others
|
|
|
191,855
|
|
|
|
277,083
|
|
Total deferred tax assets
|
|
|
2,358,891
|
|
|
|
2,167,036
|
|
Less valuation allowance
|
|
|
(2,358,891
|
)
|
|
|
(2,167,036
|
)
|
Total deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
In
assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of
deferred assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become deductible.
Based
on the available objective evidence, management believes it is more likely than not that the net deferred tax assets will not be fully
realizable. Accordingly, management has applied a full valuation allowance against its net deferred tax assets at February 28, 2021 and
February 29, 2020. The net change in the total valuation allowance from February 28, 2021 and February 29, 2020, was an increase of $191,855.
The
Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.
As of February 28, 2021, and February 29, 2020, the Company did not have any significant uncertain tax positions or unrecognized tax
benefits.
As
of February 28, 2021, the Company has federal net operating loss carryforwards of approximately $10,300,000 for federal and state tax
purposes, respectively.
Utilization
of NOL and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have
occurred or that could occur in the future, as required by the Internal Revenue Code (the “Code”), as amended, as well as
similar state provisions. In general, an “ownership change” as defined by the Code results from a transaction or series of
transactions over a three-year period resulting in an ownership change of more than 50 percent of the outstanding stock of a company
by certain shareholders or public groups. The Company experienced an “ownership change” within the meaning of IRC Section
382 during the year ended February 28, 2021. As a result, certain limitations apply to the annual amount of net operating losses that
can be used to offset post ownership change taxable income.
Note
9 – Supplemental Oil and Gas Disclosures (Unaudited)
Capitalized
Costs Relating to Oil and Gas Producing Activities
The
estimates of proved oil and gas reserves utilized in the preparation of these statements were prepared by Kurt Mire for the year ended
February 28, 2021 and prepared by Bryant M. Mook for the ended February 29, 2020, using reserve definitions and pricing requirements
prescribed by the SEC. The Company used a combination of production performance and offset analogies, along with estimated future operating
and development costs as provided by the Company and based upon historical costs adjusted for known future changes in operations or developmental
plans, to estimate its reserves.
There
are numerous uncertainties inherent in estimating quantities of proved reserves, projecting future rates of production and projecting
the timing of development expenditures, including many factors beyond our control. The reserve data represents only estimates. Reservoir
engineering is a subjective process of estimating underground accumulations of natural gas and oil that cannot be measured in an exact
manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretations
and judgment. All estimates of proved reserves are determined according to the rules prescribed by the SEC. These rules indicate that
the standard of “reasonable certainty” be applied to the proved reserve estimates. This concept of reasonable certainty implies
that as more technical data becomes available, a positive, or upward, revision is more likely than a negative, or downward, revision.
Estimates are subject to revision based upon a number of factors, including reservoir performance, prices, economic conditions and government
restrictions. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of
that estimate. Reserve estimates are often different from the quantities of natural gas and oil that are ultimately recovered. The meaningfulness
of reserve estimates is highly dependent on the accuracy of the assumptions on which they were based. In general, the volume of production
from natural gas and oil properties we own declines as reserves are depleted. Except to the extent we conduct successful development
activities or acquire additional properties containing proved reserves, or both, our proved reserves will decline as reserves are produced.
There have been no major discoveries or other events, favorable or adverse, that may be considered to have caused a significant change
in the estimated proved reserves since February 28, 2021. The Company emphasizes that reserve estimates are inherently imprecise. Accordingly,
the estimates are expected to change as more current information becomes available. In addition, a portion of the Company’s proved
reserves are proved developed non-producing and proved undeveloped, which increases the imprecision inherent in estimating reserves which
may ultimately be produced.
All
of the Company’s reserves are located in the United States.
|
|
February 28, 2021
|
|
|
February 29, 2020
|
|
Proved oil and gas properties
|
|
$
|
2,989,156
|
|
|
$
|
2,999,461
|
|
Unproved oil and gas properties
|
|
|
-
|
|
|
|
-
|
|
Accumulated depreciation, depletion, amortization and impairment
|
|
|
(2,768,306
|
)
|
|
|
(2,341,261
|
)
|
Total acquisition, development and exploration costs
|
|
$
|
220,850
|
|
|
$
|
658,200
|
|
Costs
Incurred in Oil and Gas Property Acquisition, Exploration, and Development Activities
At
February 28, 2021 and February 29, 2020, unevaluated costs of $0 were excluded from the depletion base.
|
|
February 28, 2021
|
|
|
February 29, 2020
|
|
Acquisition of properties – proved
|
|
$
|
-
|
|
|
$
|
283,359
|
|
Acquisition of properties – unproved
|
|
|
-
|
|
|
|
-
|
|
Exploration costs
|
|
|
-
|
|
|
|
-
|
|
Development costs
|
|
|
-
|
|
|
|
-
|
|
Disposition/sale
|
|
|
-
|
|
|
|
-
|
|
Total costs incurred
|
|
$
|
-
|
|
|
$
|
283,359
|
|
Estimated
Quantities of Proved Oil and Gas Reserves
The
following table sets forth proved oil and gas reserves together with the changes therein, proved developed reserves and proved undeveloped
reserves for the years ended February 28, 2021 and February 29, 2020. Units of oil are in thousands of barrels (“MBbls”)
and units of gas are in millions of cubic feet (“MMcf”). Gas is converted to barrels of oil equivalents (“MBoe”)
using a ratio of six Mcf of gas per Bbl of oil.
|
|
2021
|
|
|
2020
|
|
|
|
Oil
|
|
|
Gas
|
|
|
BOE
|
|
|
Oil
|
|
|
Gas
|
|
|
BOE
|
|
Proved reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
29
|
|
|
|
150
|
|
|
|
54
|
|
|
|
120
|
|
|
|
1,536
|
|
|
|
376
|
|
Revisions
|
|
|
(9
|
)
|
|
|
(50
|
)
|
|
|
(17
|
)
|
|
|
(81
|
)
|
|
|
(1,324
|
)
|
|
|
(302
|
)
|
Extensions and discoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Purchases of minerals-in-place
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of minerals-in-place
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Production
|
|
|
(5
|
)
|
|
|
(47
|
)
|
|
|
(13
|
)
|
|
|
(10
|
)
|
|
|
(62
|
)
|
|
|
(20
|
)
|
End of year
|
|
|
15
|
|
|
|
53
|
|
|
|
24
|
|
|
|
29
|
|
|
|
150
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved developed reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
29
|
|
|
|
110
|
|
|
|
48
|
|
|
|
27
|
|
|
|
210
|
|
|
|
62
|
|
End of year
|
|
|
8
|
|
|
|
5
|
|
|
|
9
|
|
|
|
29
|
|
|
|
110
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved not producing reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48
|
|
|
|
1,206
|
|
|
|
249
|
|
End of year
|
|
|
7
|
|
|
|
48
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved undeveloped reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
-
|
|
|
|
40
|
|
|
|
6
|
|
|
|
45
|
|
|
|
120
|
|
|
|
65
|
|
End of year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
|
6
|
|
Standardized
Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Reserves
The
standardized measure of discounted future net cash flows, in management’s opinion, should be examined with caution. The basis for
this table is the reserve studies prepared by the Company’s independent petroleum engineering consultants, which contain imprecise
estimates of quantities and rates of future production of reserves. Revisions of previous year estimates can have a significant impact
on these results. Also, exploration costs in one year may lead to significant discoveries in later years and may significantly change
previous estimates of proved reserves and their valuation. Therefore, the standardized measure of discounted future net cash flow is
not necessarily indicative of the fair value of the Company’s proved oil and natural gas properties.
Future
cash inflows for 2021 were computed by applying the average price for the year to the year-end quantities of proved reserves. The 2021
average price for the year was calculated using the 12-month period prior to the ending date of the period covered by the report, determined
as an un-weighted arithmetic average of the first-day-of-the-month price for each month within such period. Adjustment in this calculation
for future price changes is limited to those required by contractual arrangements in existence at the end of each reporting year. Future
development, abandonment and production costs were computed by estimating the expenditures to be incurred in developing and producing
proved oil and natural gas reserves at the end of the year, based on year-end costs, assuming continuation of year-end economic conditions.
Future income tax expense was computed by applying statutory rates, less the effects of tax credits for each period presented, and to
the difference between pre-tax net cash flows relating to the Company’s proved reserves and the tax basis of proved properties,
after consideration of available net operating loss and percentage depletion carryovers. Discounted future net cash flows have been calculated
using a ten percent discount factor. Discounting requires a year-by-year estimate of when future expenditures will be incurred and when
reserves will be produced.
The
estimated present value of future cash flows relating to prove reserves is extremely sensitive to prices used at any measurement period.
The prices used for each commodity for the years ended February 28, 2021 and February 29, 2020, as adjusted, were as follows:
|
|
Oil
(Bbl)
Using
NYMEX
WTI
|
|
|
Gas
(Mcf)
Using
NYMEX
Henry Hub
|
|
2021
(average price)
|
|
$
|
38.69
|
|
|
$
|
2.08
|
|
2020
(average price)
|
|
$
|
56.69
|
|
|
$
|
2.40
|
|
The
information provided in the tables set out below does not represent management’s estimate of the Company’s expected future
cash flows or of the value of the Company’s proved oil and gas reserves. Estimates of proved reserve quantities are imprecise and
change over time as new information becomes available. Moreover, probable and possible reserves, which may become proved in the future,
are excluded from the calculations. The arbitrary valuation prescribed under ASC No. 932 requires assumptions as to the timing and amount
of future development and production costs. The calculations should not be relied upon as an indication of the Company’s future
cash flows or of the value of its oil and gas reserves.
The
following table sets forth the standardized measure of discounted future net cash flows relating to proven reserves for the years ended
February 28, 2021 and February 29, 2020, respectively (stated in thousands):
|
|
2021
|
|
|
2020
|
|
Future cash inflows
|
|
$
|
626
|
|
|
$
|
1,998
|
|
Future costs:
|
|
|
|
|
|
|
|
|
Production costs
|
|
|
(269
|
)
|
|
|
(809
|
)
|
Future tax expense
|
|
|
(47
|
)
|
|
|
(159
|
)
|
Future development costs
|
|
|
(29
|
)
|
|
|
-
|
|
Future net cash flows
|
|
|
281
|
|
|
|
1,030
|
|
10% annual discount for estimated timing of cash flows
|
|
|
(60
|
)
|
|
|
(372
|
)
|
Standardized measure of discounted net cash flows
|
|
$
|
221
|
|
|
$
|
658
|
|
Summary
of Changes in Standardized Measure of Discounted Future Net Cash Flows
The
following table summarizes the principal sources of change in the standardized measure of discounted future estimated net cash flows
at 10% per annum for the years ended February 28, 2021 and February 29, 2020, respectively (stated in thousands):
|
|
2021
|
|
|
2020
|
|
Increase (decrease):
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
658
|
|
|
$
|
3,415
|
|
Sales of oil produced, net of production costs
|
|
|
273
|
|
|
|
442
|
|
Net changes in sales and transfer prices and in production costs and production costs related to future production
|
|
|
820
|
|
|
|
(1,829
|
)
|
Previously estimated development costs incurred during the period
|
|
|
-
|
|
|
|
-
|
|
Changes in future development costs
|
|
|
(29
|
)
|
|
|
-
|
|
Revisions of previous quantity estimates due to prices and performance
|
|
|
(156
|
)
|
|
|
(3,679
|
)
|
Accretion of discount
|
|
|
66
|
|
|
|
342
|
|
Discoveries, net of future production and development costs associated with these extensions and discoveries
|
|
|
-
|
|
|
|
-
|
|
Purchases and sales of minerals in place
|
|
|
-
|
|
|
|
-
|
|
Timing and other
|
|
|
(1,411
|
)
|
|
|
1,967
|
|
End of year
|
|
$
|
221
|
|
|
$
|
658
|
|