NRIS 10-Q
Norris Industries, Inc. (NRIS)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
For the transition period from __________ to __________
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐
Indicate
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As of January 14, 2023, the registrant had shares of common stock issued and outstanding.
NORRIS INDUSTRIES, INC.
TABLE OF CONTENTS
FORM 10-Q REPORT
November 30, 2022
Page Number | ||
| PART I - FINANCIAL INFORMATION | F-1 | |
| Item 1. | Financial Statements (Unaudited) | |
| Consolidated Balance Sheets | F-1 | |
| Consolidated Statement of Operations | F-2 | |
| Consolidated Changes in Shareholders Deficit | F-3 | |
| Consolidated Statement of Cash Flows | F-4 | |
| Notes to Consolidated Financial Statements | F-5 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 9 |
| Item 4. | Controls and Procedures | 9 |
| PART II - OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 9 |
| Item 1A. | Risk Factors | 9 |
| Item 2. | Unregistered Sales of Equity Securities | 9 |
| Item 3. | Defaults Upon Senior Securities | 9 |
| Item 4. | Mine Safety Disclosures | 9 |
| Item 5. | Other Information | 10 |
| Item 6. | Exhibits | 10 |
| SIGNATURES | 11 | |
| 2 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
NORRIS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF NOVEMBER 30, 2022 AND FEBRUARY 28, 2022
(UNAUDITED)
| November 30, 2022 | February 28, 2022 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable - oil & gas | ||||||||
| Total Current Assets | ||||||||
| Oil and Gas Property - Full Cost Method | ||||||||
| Properties subject to depletion | ||||||||
| Less: accumulated depletion and impairment | ( | ) | ( | ) | ||||
| Total Oil and Gas Property, net | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Convertible note payable – related party | $ | $ | ||||||
| Accounts payable and accrued expenses – related party | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Total Current Liabilities | ||||||||
| Convertible note payable - related party | ||||||||
| Accounts payable and accrued expenses - related party | ||||||||
| Asset retirement obligations | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock, $ par value per share, shares authorized: | ||||||||
| Series A Convertible Preferred stock, $ par value per share shares authorized; shares issued and outstanding; liquidation preference of $ | ||||||||
| Common stock, $ par value per share, shares authorized, shares issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
| F-1 |
NORRIS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2022 AND 2021
(UNAUDITED)
| Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | ||||||||||||||||
| Oil and gas sales | $ | $ | $ | $ | ||||||||||||
| Total Revenues | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Lease operating expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Depletion, depreciation and accretion | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Loss from Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Other Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per common share - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding - basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
| F-2 |
NORRIS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2021 (UNAUDITED)
| Series A Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||||||||
| Balance, March 1, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, May 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, August 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, November 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
NORRIS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2022 (UNAUDITED)
| Series A Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||||||||
| Balance, March 1, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, May 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, August 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, November 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
| F-3 |
NORRIS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2022 AND 2021
(UNAUDITED)
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash from operating activities: | ||||||||
| Depletion, depreciation and accretion | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable - oil and gas | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Accounts payable and accrued expenses - related party | ||||||||
| Net Cash used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from related party loans | ||||||||
| Net Cash provided by Financing Activities | ||||||||
| Net Increase (Decrease) in Cash | ( | ) | ||||||
| Cash - beginning of period | ||||||||
| Cash - end of period | $ | $ | ||||||
| Noncash Investing and Financing Activities | ||||||||
| Change in estimate of asset retirement obligations | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
| F-4 |
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 $
As
of November 30, 2022, the Company had $
| F-5 |
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 and beyond, 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
| F-6 |
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.
| F-7 |
Basic net loss per common share amounts are computed by dividing the net loss available to the Company’s shareholders by the weighted average number of common shares outstanding over the reporting period. In periods in which the Company reports a net loss, dilutive securities are excluded from the calculation of diluted earnings per share as the effect would be anti-dilutive. The following table summarizes the common stock equivalents excluded from the calculation of diluted net loss per common share since the inclusion of these shares would be anti-dilutive for the nine months ended November 30, 2022 and 2021:
| 2022 | 2021 | |||||||
| Series A Convertible Preferred Stock | ||||||||
| Convertible debt | ||||||||
| Total common shares to be issued | ||||||||
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk include cash deposits placed with financial institutions. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits as guaranteed by the Federal Deposit Insurance Corporation (“FDIC”). At November 30, 2022, none of the Company’s cash balances were uninsured. The Company has not experienced any losses on such accounts.
Recent Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. The effective date of ASU No. 2016-13 will be the first quarter of the Company’s fiscal 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.
| F-8 |
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 nine months ended November 30, 2022 and 2021:
| Three Months Ended November30, | Nine Months Ended November 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Oil sales | $ | $ | $ | $ | ||||||||||||
| Natural gas sales | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
There were no significant contract liabilities or transaction price allocations to any remaining performance obligations as of November 30, 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 nine months ended November 30, 2022:
| February 28, 2022 | Additions | Change
in | November 30, 2022 | |||||||||||||
| Oil and gas properties, subject to depletion | $ | $ | $ | $ | ||||||||||||
| Asset retirement costs | ||||||||||||||||
| Accumulated depletion | ( | ) | ( | ) | ( | ) | ||||||||||
| Total oil and gas assets | $ | $ | ( | ) | $ | $ | ||||||||||
The
depletion recorded for production on proved properties for the nine months ended November 30, 2022 and 2021, amounted to $
| F-9 |
Note 4 – Asset Retirement Obligations
The following table summarizes the change in the Company’s asset retirement obligations during the nine months ended November 30, 2022:
| Asset retirement obligations as of February 28, 2022 | $ | |||
| Additions | ||||
| Current year revision of previous estimates | ||||
| Accretion adjustment during the nine months ended November 30, 202 | ||||
| Asset retirement obligations as of November 30, 2022 | $ |
During
the three and nine months ended November 30, 2022, the Company recognized accretion expense of negative $
Note 5 – Related Party Transactions
Promissory Note to JBB
On
December 28, 2017, the Company borrowed $
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 $
On
May 21, 2019,
On
June 13, 2019, JBB lent the Company $
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
$
On
May 29, 2020, the Company entered into an extension agreement with JBB to extend the maturity of its outstanding Loan Note to
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
On
May 1, 2021, the Company entered into a new funding agreement with a maturity date of
On
May 2, 2022, the Company entered into an extension agreement with JBB to extend the maturity of its outstanding Loan Note to
During
the three and nine months ended November 30, 2022, $
The
Company recognized interest expense of $
| F-10 |
Note 6 – Commitments and Contingencies
Office Lease
As
of September 1, 2018, the Company moved to the offices of IWO in Weatherford, TX that is being rented on a month-to-month sublease basis
at rate of $
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.
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.
| F-11 |
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 there are 150 MMcf in natural gas net reserves within 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.
| 3 |
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 has somewhat recovered due to significant recovery of oil and gas prices.
The future potential impacts 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.
These unprecedented situations may 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 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.
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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 as a potential merger candidate for acquisition of a private enterprise.
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.
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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 November 30, 2022, with the Three Months Ended November 30, 2021
Revenues
The Company generated revenues of $105,661 from oil and gas sales for the three months ended November 30, 2022, compared to $105,030 for the three months ended November 30, 2021. The revenues are consistent for the two quarters ended November 30, 2022 and 2021.
Operating Expenses
Total operating expenses for the three months ended November 30, 2022, and 2021 were $211,097 and $233,968, respectively. Our lease operating expenses increased and were $166,604 for the three-month ended November 30, 2022, compared to $160,498 for the three-month ended November 30, 2021, that was primarily related to higher production during the current quarter than the same quarter in the prior year. Our general and administrative expense decreased to $25,229 for the three-month period ended November 30, 2022, compared to $58,816 for the three-month period ended November 30, 2021, primarily because of implemented cost cutting measures.
Depletion and Accretion Expenses
For the three months ended November 30, 2022, and 2021, the Company recorded depletion and accretion expense of $19,264 and $14,654, respectively, related to depletion of oil and gas properties and revision of asset retirement obligations estimate.
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Other Income (Expense)
For the three months ended November 30, 2022, and 2021, the Company recorded interest expense of $29,208 and $27,403, respectively, related to outstanding related party debts.
Net Loss
We had a net loss in the amount of $134,644 for the three months ended November 30, 2022, compared to a net loss of $156,341 for the three months ended November 30, 2021. The decrease in loss was primarily related to lower operating expenses incurred from the Company’s oil and gas properties because of reduction in the general and administrative expense.
Comparison of the Nine Months Ended November 30, 2022 with the Nine Months Ended November 30, 2021
Revenues
The Company generated revenues of $465,117 from oil and gas sales for the nine months ended November 30, 2022, compared to $302,868 for the nine months ended November 30, 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 nine months ended November 30, 2022, and 2021 were $669,330 and $704,352, respectively. Our lease operating expenses decreased and were $489,356 for the nine-month period ended November 30, 2022, compared to $448,143 for the nine-month period ended November 30, 2021, that was primarily related to higher lease operating expenses as a result of the higher production during the current period. Our general and administrative expense increased to $129,841 for the nine-month period ended November 30, 2022, compared to $209,151 for the nine-month period ended November 30, 2021, primarily because of implemented cost cutting measures.
Depletion and Accretion Expenses
For the nine months ended November 30, 2022, and 2021, the Company recorded depletion and accretion expense of $50,133 and $47,058, respectively, related to depletion of oil and gas properties and revision of asset retirement obligations estimate.
Other Income (Expense)
For the nine months ended November 30, 2022 and 2021, the Company recorded interest expense of $86,879 and $79,838, respectively, related to outstanding related party debts.
Net Loss
We had a net loss in the amount of $291,092 for the nine months ended November 30, 2022, compared to a net loss of $481,322 for the nine months ended November 30, 2021, primarily because of implemented cost cutting measures.
Liquidity and Capital Resources
As of November 30, 2022, the Company had cash on-hand of $177,383.
Net cash used by operating activities during the nine months ended November 30, 2022, was $162,186, compared to cash used in operating activities of $363,753 for the same period in 2021. The decrease was mainly related to lower general and administrative expenses.
Net cash provided by financing activities for nine months ended November 30, 2022 was $200,000, related to proceeds of $200,000 from the Company’s line of credit with JBB, compared to cash provided by financing activities of $300,000 for the same period in 2021, primarily related to proceeds of $300,000 from the Company’s line of credit with JBB.
The Company will seek capital from various third party sources and to the extent necessary from its officers and significant stockholders, from time to time. There is no assurance that it will be able to obtain financing of any amount or of any specific nature. If obtained the terms may have restrictive covenants or obligations that will be difficult to meet or may be too onerous for the Company to accept. Any financing accepted by the Company may have a dilutive effect on the outstanding equity of the Company and may restrict the payment of dividends.
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The Company currently has a secured, convertible note entered into effective December 28, 2017, which is secured by all the assets of the Company. The note is issued to an affiliate of the Chief Executive Officer of the Company, and the holder of the note is a controlling majority shareholder of the Company. The existence of the notes, as well as the security interest, may limit the opportunity to raise financing that requires a security interest or would suffer dilution because of the convertibility of the notes. Additionally, the note is convertible into shares of common stock of the Company, which if converted will cause a substantial dilution to the equity of the outstanding Common Stock. On February 26, 2018, the note holder converted its prior note for $750,000, that was due July 28, 2018, into 1,000,000 Series A Preferred Stock. The note for $1,550,000 was extended to September 30, 2020, from the original due date of December 28, 2018.
On June 26, 2018, and May 21, 2019, the Company and JBB entered into modifications of the existing Secured Promissory Note originally dated December 28, 2017 (“Loan Note”), to add provisions to permit the Company to obtain advances under the Loan Note up to a maximum of $1,000,000 and extend the maturity dates. The Company may request an advance in an amount of $100,000 no more frequently than every 30 days, provided that it provides a description of the use of proceeds for the advance reasonably acceptable to JBB, and the Company is not otherwise in default of the Loan Note. The Company received advances under the line of credit of $200,000 during the three months ended May 31, 2019. On October 1, 2019, the Company entered into another amendment of its Loan Note with JBB to increase the line of credit by an additional $500,000, for a total of $1,500,000, and extend the maturity date for the original note and line of credit to December 31, 2020. On May 29, 2020, the Company entered into an extension agreement with JBB to extend the maturity of its outstanding Loan Note to September 30, 2021. On December 22, 2020, the Company entered into an extension agreement with JBB to extend the maturity of all its outstanding indebtedness under credit line and Loan Note to May 31, 2022.
The Company will require additional financing to support its operations and to pursue its acquisition program. As of November 30, 2022, the Company had availability of $400,000 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 four 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, with subsequent extension made January 10, 2023 for due dates of outstanding indebtedness changed to February 29th 2024.
Off-Balance Sheet Arrangements
As of November 30, 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities and Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized, and reported, within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, which in our case is the same individual. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of November 30, 2022 (the “Evaluation Date”). Based upon the evaluation of our disclosure controls and procedures as of the Evaluation Date, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective because of the identification of material weaknesses in our internal control over financial reporting that were disclosed in Item 9A. Controls and Procedures in our 2022 Annual Report on Form 10-K.
There were no changes in our internal control over financial reporting during the nine months ended November 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 1A. Risk Factors.
You should carefully consider the risk factors in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 15, 2022 (the “2022 10-K”), together with all of the other information included in this report, before investing in our common stock. Those risks and uncertainties encompass many of the risks that could affect our business and the value of our stock. Not all risks and uncertainties are described. Risks that we do not know about could occur and issues we now view as minor could become more important. If any of these risks actually occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Item 2. Unregistered Sales of Equity Securities.
None
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Other Information.
None.
Item 6. Exhibits.
* Filed herewith.
+ In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Norris Industries, Inc. | ||
| Date: January 17, 2023 | By: | /s/ Patrick L. Norris |
| Patrick L. Norris | ||
| Chief Executive Officer, Chief Financial Officer (Principal Executive Office, Principal Financial and Principal Accounting Officer) | ||
| Date: January 17, 2023 | By: | /s/ Ross Henry Ramsey |
| Ross Henry Ramsey | ||
| President of the Oil and Gas Division and Director | ||
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