Overview
Norris Industries, Inc. (the "Company", "we", or "us") is an oil and natural gas
company that focuses on the acquisition, development, and exploration of crude
oil and natural gas properties in Texas. As of March 1, 2022 the SEC
Non-Escalated Analysis of Estimated Proved Reserve of our various leases in Jack
County and Palo-Pinto County, the Ratliff leases, the Marshall-Walden, and the
Bend Arch Lion 1A and Bend Arch Lion 1B leaseholds, is a total of 29 Mbbl in oil
net reserves, plus 150 MMcf in natural gas net reserves being out of total of
BOE equivalent of 54 Mbbl in gross reserves, which is down from prior year by
322 Mbbl due to reduction of expected production as result of well workover
issues.
The reserves associated with the report from Kurt Mire , PE have been classified
in accordance with the definitions of the Securities and Exchange Commission as
found in Part 210 - Form and Content of and Requirements for Financial
Statements, Securities Act of 1933, Securities Exchange Act of 1934, Public
Utility Holding Company Act of 1935, Investment Company Act of 1940, Investment
Advisers Act of 1940, and Energy Policy and Conservation Act of 1975, under
Rules of General Application § 210.4-10 Financial accounting and reporting for
oil and gas producing activities pursuant to the Federal securities laws and the
Energy Policy and Conservation Act of 1975.
The Company's longer term main objective is to actively focus on improving its
existing fields and to look for additional reserve oil and gas concessions and
production opportunities, aiming to participate with capital partners for a
transaction related to buyouts and joint ventures. The Company will continue to
conserve capital to be able to focus on smaller oil and natural gas properties
in West, Central West, East and South Texas, aiming to increase its revenues via
an acquisition. It also will try to improve the existing production revenues of
the Bend Arch Lion 1A, Bend Arch Lion 1B, Marshall Walden joint venture
property, which includes the purchase of the leases in Jack County and Palo
Pinto County, re-entries and EOR methods as mentioned in the Operational Plan
section above.
The Company ultimately 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.
Results of Operations
Revenues
The Company generated revenues of $452,291 from oil and gas production sales
during the year ended February 28, 2022, compared to $280,160 during the year
ended February 28, 2021. The increase in oil and gas sales revenues was
primarily due to the dramatic increase in oil and gas prices obtained from
buyers due to the increases of energy prices due to recovery of global demand
and instability of possible supply disruptions due to Russia invasion of
Ukraine.
Because of the disruption to the oil and gas industry caused by recovery of
demand from the COVID-19 pandemic and world supply disruptions from Russia the
Company expects that there will be continued volatility of energy prices and
Company cannot make a prediction of its expected revenues for fiscal year 2023.
Lease Operating Expenses
Lease operating expenses for the years ended February 28, 2022 and February 28,
2021, were $599,455 and $552,713, respectively. We incurred slightly higher
lease operating expenses in 2022 primarily because of higher costs of operations
primarily as a result of the increased prices of oil and gas due to recovering
industry caused by the events described above.
Operating Expenses
Operating expenses for the years ended February 28, 2022 and February 28, 2021,
were $203,682 and $313,515, respectively. The decrease was primarily due to
management implementing cost controls to lower the general and administrative
expenses incurred by the Company.
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Depletion and Accretion Expenses
For the years ended February 28, 2022 and February 28, 2021, the Company
recorded depletion and accretion expense of $41,109 and $235,001, respectively,
related to depletion of oil and gas properties and amortization of asset
retirement obligations. The decrease was majorly resulted from higher oil and
gas reserves evaluated as of March 1, 2022, which majorly due to higher oil and
gas prices in the market. The Company recognized lower depletion expenses for
the current fiscal year due to the greater oil and gas reserve as of the fiscal
year end to be depleted in future years.
Impairment Expense
For the years ended February 28, 2022 and February 28, 2021, the Company
recorded impairment of $nil and $196,197, respectively, related to a ceiling
test write-down of its oil and gas properties.
Other Income (Expense)
For the years ended February 28, 2022 and February 28, 2021, the Company
recorded interest expense of $106,992 and $92,526, respectively. Higher interest
expense was incurred in 2022 due to additional debt issuances to related parties
in the current year.
Net Loss
Our operations resulted in a net loss in the amount of $498,947 for the year
ended February 28, 2022, compared to a net loss of $1,109,792 for the year ended
February 28, 2021. The decrease was primarily related to lower SG&A costs
recognized during the current fiscal year and lower impairment recognized from
our oil and gas properties.
Liquidity and Capital Resources
On February 28, 2022, the Company had cash of $139,569.
Net cash used in operating activities during the year ended February 28, 2022,
was $421,062, compared to cash used in operating activities of $504,650 for the
same period in 2021. The decrease was primarily related to slightly lower
expenses incurred from our oil and gas properties.
Net cash used in investing activities during years ended February 28, 2022 and
2021, was $-0-.
During the year ended February 28, 2022, cash provided by financing activities
was $400,000 related to proceeds from the Company's related party loans. Net
cash provided by financing activities during the year ended February 28, 2021,
was $507,200, related to proceeds of $500,000 from the Company's line of credit
with JBB and proceeds of $7,200 from the exercise of stock options.
The Company will require additional financing to support its operations and to
pursue its acquisition program. As of February 28, 2022, the Company had
availability of $600,000 on its existing credit line with JBB. If the Company
requires additional financing beyond what is available under its existing credit
line, it does not have any committed sources of financing at this time. If it is
unable to obtain financing, it will have to reduce or curtail its operations and
acquisition program. There is no assurance that it will be able to obtain
financing in the future, and even if financing is available, it may not be on
terms acceptable to the Company.
To date, the funding during the past three fiscal years to support operations
and facilitate some acquisitions has been provided by the largest shareholder of
the Company. This individual does not have any legal obligation to continue to
provide funding to the Company. Yet the majority owner has indicated a
willingness, and provided some assurances, to selectively review and determine
added funding for certain low risk initiatives on those oil and gas wells in
which the Company has either a 100% or a majority working interest in order to
increase its existing production. Our majority shareholder expects, but is not
legally obligated, to provide funding for the Company's capital expenditure
program for fiscal year 2023. Such funding may be provided in the form of loans,
issuance of equity or other means.
The 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.
Off-Balance Sheet Arrangements
As of February 28, 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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Critical Accounting Policies
We believe it is helpful to investors to understand the critical accounting
policies underlying our financial statements and the following discussion of our
company's financial condition and results of operations.
Significant Accounting Policies.
Our significant accounting policies relate to use of estimates, cash, accounts
receivable and allowance for doubtful accounts, property and equipment, revenue
recognition, income taxes, impairment or disposal of long-lived assets, asset
retirement obligations, and computation of earnings per share.
Use of Estimates.
The nature of our business requires that we make estimates and assumptions in
accordance with U.S. GAAP. These estimates and assumptions affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenue and expenses during the reporting period. These estimates are
based on information as of the date of the consolidated financial statements.
Significant estimates required to be made by management include, but are not
limited to, the valuation of accounts receivable, depletion and accretion, and
oil and gas reserves. Actual results could differ from those estimates. The
ongoing COVID-19 pandemic has impacted these estimates and assumptions and will
continue to do so.
The ongoing COVID-19 pandemic and related governmental responses, volatility in
commodity prices, and severe weather resulting from climate change have impacted
and likely will continue to impact our business. Under earlier state and federal
mandates that regulated business closures, our business was deemed as an
essential business and, as such, remained open. As U.S. federal, state, and
local officials address surging coronavirus cases and roll out COVID-19
vaccines, we expect to continue operating.
In February 2022, Russia invaded neighboring Ukraine. The conflict has caused
turmoil in global markets, resulting in higher oil prices, and injected even
more uncertainty into a worldwide economy recovering from the effects of
COVID-19. Given the evolving conflict, there are many unknown factors and events
that could materially impact our operations.
We have instituted various initiatives throughout the company as part of our
business continuity programs, and we are working to mitigate risk when
disruptions occur. The Russian conflict with Ukraine and the COVID-19 pandemic
continue to evolve. Therefore, uncertainty around the availability and commodity
prices of crude oil, the commodity prices and demand for our refined products,
and the general business environment is expected to continue through 2022 and
beyond.
We assessed certain accounting matters that generally require consideration of
forecasted financial information in context with the information reasonably
available to us and the unknown future impacts of the Russian-Ukrainian conflict
and COVID-19 as of February 28, 2022 and through the filing date of this report.
The accounting matters assessed included, but were not limited to, our allowance
for doubtful accounts and related reserves, and the carrying value of long-lived
assets.
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 will be calculated on the
units-of-production method based upon estimates of proved reserves. Such
calculations include the estimated future costs to develop proved reserves.
Costs of unproved properties are not included in the costs subject to depletion.
These costs are assessed periodically for impairment.
At the end of each quarter, the unamortized cost of oil and gas properties, net
of related deferred income taxes, is limited to the sum of the estimated future
after-tax net revenues from proved properties, after giving effect to cash flow
hedge positions, discounted at 10%, and the lower of cost or fair value of
unproved properties, adjusted for related income tax effects. Costs in excess of
the present value of estimated future net revenues are charged to impairment
expense. This limitation is known as the "ceiling test," and is based on SEC
rules for the full cost oil and gas accounting method.
The Company capitalizes pre-acquisition costs directly identifiable with
specific properties when the acquisition of such properties is probable.
Capitalized pre-acquisition costs are presented in the balance sheet.
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NORRIS INDUSTRIES, INC. 
