Condensed Notes to Consolidated
Financial Statements
January 31, 2021
(unaudited)
NOTE 1 - ORGANIZATION AND BUSINESS OPERATIONS
Northern
Minerals & Exploration Ltd. (the “Company”) is an
emerging natural resource company operating in oil and gas
production in central Texas and exploration for gold and silver in
northern Nevada.
The
Company was incorporated in Nevada on December 11, 2006 under the
name Punchline Entertainment, Inc. On August 22, 2012, the
Company’s board of directors approved an agreement and plan
of merger to effect a name change of the Company from Punchline
Entertainment, Inc. to Punchline Resources Ltd. On July 12, 2013,
the stockholders approved an amendment to change the name of the
Company from Punchline Resources Ltd. to Northern Mineral &
Exploration Ltd. FINRA approved the name change on August 13,
2013.
On
November 22, 2017, the Company created a wholly owned subsidiary,
Kathis Energy LLC (“Kathis”) for the purpose of
conducting oil and gas drilling programs in Texas.
On
December 14, 2017, Kathis Energy, LLC and other Limited Partners,
created Kathis Energy Fund 1, LP, a limited partnership created for
raising investor funds.
On May
7, 2018, the Company created ENMEX LLC, a wholly owned subsidiary
in Mexico, for the purposes of managing and operating its
investments in Mexico including but not limited to the Joint
Venture opportunity being negotiated with Pemer Bacalar on the 61
acres on the Bacalar Lagoon on the Yucatan Peninsula. There was no
activity from inception to date.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The Company’s unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
(“U.S. GAAP”). The accompanying unaudited condensed
financial statements reflect all adjustments, consisting of only
normal recurring items, which, in the opinion of management, are
necessary for a fair statement of the results of operations for the
periods shown and are not necessarily indicative of the results to
be expected for the full year ending July 31, 2021. These unaudited
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related
notes included in the Company’s Annual Report on
Form 10-K for the year ended July 31, 2020.
Use of estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results may differ from those
estimates.
Cash and Cash Equivalents
The Company considers all cash accounts, which are not subject to
withdrawal restrictions or penalties, and all highly liquid debt
instruments purchased with a maturity of three months or less as
cash and cash equivalents. The carrying amount of financial
instruments included in cash and cash equivalents approximates fair
value because of the short maturities for the instruments
held. The Company had no cash equivalents as of January 31,
2021 and July 31, 2020.
Principles of Consolidation
The
accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, Kathis Energy
LLC, Kathis Energy Fund 1, LLP and Enmex Operations LLC. All
financial information has been prepared in conformity with
accounting principles generally accepted in the United States of
America. All significant intercompany transactions and balances
have been eliminated.
Revenue Recognition
Revenue
is recognized when a customer obtains control of promised goods or
services and is recognized in an amount that reflects the
consideration that an entity expects to receive in exchange for
those goods or services. In addition, the standard requires
disclosure of the nature, amount, timing, and uncertainty of
revenue and cash flows arising from contracts with customers. The
amount of revenue that is recorded reflects the consideration that
the Company expects to receive in exchange for those goods. The
Company applies the following five-step model in order to determine
this amount: (i) identification of the promised goods in the
contract; (ii) determination of whether the promised goods are
performance obligations, including whether they are distinct in the
context of the contract; (iii) measurement of the transaction
price, including the constraint on variable consideration; (iv)
allocation of the transaction price to the performance obligations;
and (v) recognition of revenue when (or as) the Company satisfies
each performance obligation.
The Company only applies the five-step model to contracts
when it is probable that the entity will collect the consideration
it is entitled to in exchange for the goods or services it
transfers to the customer. Once a contract is determined to be
within the scope of ASC 606 at contract inception, the Company
reviews the contract to determine which performance obligations the
Company must deliver and which of these performance obligations are
distinct. The Company recognizes as revenues the amount of the
transaction price that is allocated to the respective performance
obligation when the performance obligation is satisfied or as it is
satisfied. Generally, the Company’s performance obligations
are transferred to customers at a point in time, typically upon
delivery.
Long Lived Assets
Property
consists of mineral rights purchases as stipulated by underlying
agreements and payments made for oil and gas exploration rights.
Our company assesses the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying value
may not be recoverable. When we determine that the carrying value
of long-lived assets may not be recoverable based upon the
existence of one or more indicators of impairment and the carrying
value of the asset cannot be recovered from projected undiscounted
cash flows, we record an impairment charge. Our company measures
any impairment based on a projected discounted cash flow method
using a discount rate determined by management to be commensurate
with the risk inherent in the current business model. Significant
management judgment is required in determining whether an indicator
of impairment exists and in projecting cash flows.
Mineral Property Acquisition and Exploration Costs
Mineral
property acquisition and exploration costs are expensed as incurred
until such time as economic reserves are quantified. Cost of lease,
exploration, carrying and retaining unproven mineral lease
properties are expensed as incurred. We have chosen to expense all
mineral exploration costs as incurred given that it is still in the
exploration stage. Once our company has identified proven and
probable reserves in its investigation of its properties and upon
development of a plan for operating a mine, it would enter the
development stage and capitalize future costs until production is
established. When a property reaches the production stage, the
related capitalized costs will be amortized over the estimated life
of the probable-proven reserves. When our company has capitalized
mineral properties, these properties will be periodically assessed
for impairment of value and any diminution in value.
Oil and Gas Properties
The
Company follows the successful efforts method of accounting for its
oil and gas properties. Under this method of accounting, all
property acquisition costs and costs of exploratory and development
wells are capitalized when incurred, pending determination of
whether the well found proved reserves. If an exploratory well does
not find proved reserves, the costs of drilling the well are
charged to expense. The costs of development wells are capitalized
whether those wells are successful or unsuccessful. Other
exploration costs, including certain geological and geophysical
expenses and delay rentals for oil and gas leases, are charged to
expense as incurred. Maintenance and repairs are charged to
expense, and renewals and betterments are capitalized to the
appropriate property and equipment accounts. Depletion and
amortization of oil and gas properties are computed on a
well-by-well basis using the units-of-production method. Although
the Company has recognized minimal levels of production and
revenue, none of its property have proved reserves. Therefore, the
Company’s properties are designated as unproved
properties.
Unproved
property costs are not subject to amortization and consist
primarily of leasehold costs related to unproved areas. Unproved
property costs are transferred to proved properties if the
properties are subsequently determined to be productive and are
assigned proved reserves. Proceeds from sales of partial interest
in unproved leases are accounted for as a recovery of cost without
recognizing any gain until all cost is recovered. Unproved
properties are assessed periodically for impairment based on
remaining lease terms, drilling results, reservoir performance,
commodity price outlooks or future plans to develop
acreage.
Asset Retirement Obligation
Accounting
Standards Codification (“ASC”) Topic 410, Asset
Retirement and Environmental Obligations (“ASC 410”)
requires an entity to recognize the fair value of a liability for
an asset retirement obligation in the period in which it is
incurred. The net estimated costs are discounted to present values
using credit-adjusted, risk-free rate over the estimated economic
life of the oil and gas properties. Such costs are capitalized as
part of the related asset. The asset is depleted on the equivalent
unit-of-production method based upon estimates of proved oil and
natural gas reserves. The liability is periodically adjusted to
reflect (1) new liabilities incurred, (2) liabilities settled
during the period, (3) accretion expense and (4) revisions to
estimated future cash flow requirements. To date, the Company has
very few operating wells. Currently, the Company has one working
well. Because there is only one active well on the Ritchie Lease,
the Company estimates the asset retirement obligation to be trivial
and has not recorded an ARO liability.
Basic and Diluted Earnings Per Share
Net
income (loss) per common share is computed pursuant to ASC
260-10-45, Earnings per
Share—Overall—Other Presentation Matters. Basic
net income (loss) per common share is computed by dividing net
income (loss) by the weighted average number of shares of common
stock outstanding during the period. Diluted net income (loss) per
common share is computed by dividing net income (loss) by the
weighted average number of shares of common stock and potentially
outstanding shares of common stock during the period.
For the
six months ended January 31,
2021, the Company had 2,596,233 of potentially dilutive
shares. The shares consisted of common shares and warrants from
convertible debt of 1,730,822 and 864,411, respectively.
For the six months ended January
31, 2020 the Company had 3,682,683 potentially dilutive
shares. The shares consisted of common shares and warrants from
convertible debt of 1,645,122 and 822,561, respectively, and an
additional 1,215,000 warrants. The diluted loss per share is
the same as the basic loss per share for the three and six months
ended January 31, 2021, as the
inclusion of any potential shares would have had an antidilutive
effect due to our loss from operations.
Recently adopted accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments -
Credit Losses, and also issued subsequent amendments to the initial
guidance, ASU 2018-19, ASU 2019-04, ASU 2019-05, and ASU 2019-11
(collectively, Topic 326), to introduce a new impairment model for
recognizing credit losses on financial instruments based on an
estimate of current expected credit losses (CECL). Under Topic 326,
an entity is required to estimate CECL on available-for-sale (AFS)
debt securities only when the fair value is below the amortized
cost of the asset and is no longer based on an impairment being
“other-than-temporary”. Topic 326 also requires the
impairment calculation on an individual security level and requires
an entity use present value of cash flows when estimating the CECL.
The credit-related losses are required to be recognized through
earnings and non-credit related losses are reported in other
comprehensive income. In April 2019, the FASB further clarified the
scope of Topic 326 and addressed issues related to accrued interest
receivable balances, recoveries, variable interest rates and
prepayment. The new guidance will require modified retrospective
application to all outstanding instruments, with a cumulative
effect adjustment recorded to opening retained earnings as of the
beginning of the first period in which the guidance becomes
effective. The amendments in this Update for the Company are
effective for fiscal years beginning after December 15, 2022,
including interim periods within those fiscal years. Early adoption
is permitted in any interim period after the issuance of this of
this Update. The Company is evaluating the impact of the adoption
of the new standard on its financial statement and
disclosures.
In
August 2018, the FASB issued ASU 2018-13 to improve the
effectiveness of disclosures about fair value measurements required
under ASC 820. The ASU modifies the disclosure objective paragraphs
of ASC 820 to eliminate (1) “at a minimum” from
the phrase “an entity shall disclose at a minimum” and
(2) other similar “open ended” disclosure
requirements to promote the appropriate exercise of discretion by
entities. The disclosure objective added in ASC 820-10-50-1C
states: The objective of the disclosure requirements in this
Subtopic is to provide users of financial statements with
information about assets and liabilities measured at fair value in
the statement of financial position or disclosed in the notes
to financial statements: a) the valuation techniques and inputs
that a reporting entity uses to arrive at its measures of fair
value, including judgments and assumptions that the entity makes,
b) the uncertainty in the fair value measurements as of the
reporting date, and c) how changes in fair value measurements
affect an entity’s performance and cash flows. The new ASU is
effective for all entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. Early
adoption is permitted. There was no material impact as a result of
the adoption of this standard.
NOTE 3 - GOING
CONCERN
The
accompanying unaudited consolidated financial statements are
prepared and presented on a going concern basis, which contemplates
the realization of assets and the satisfaction of liabilities in
the normal course of business. Accordingly, they do not include any
adjustments relating to the realization of the carrying value of
assets or the amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going
concern. Since inception to January 31, 2021, the Company has an
accumulated deficit of $3,062,167. The Company intends to fund
operations through equity financing arrangements, which may be
insufficient to fund its capital expenditures, working capital and
other cash requirements for the next twelve months. These factors,
among others, raise substantial doubt about the Company’s
ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
On January 30, 2020, the World Health Organization declared the
coronavirus outbreak a "Public Health Emergency of International
Concern" and on March 10, 2020, declared it to be a pandemic.
Actions taken around the world to help mitigate the spread of the
coronavirus include restrictions on travel, and quarantines in
certain areas, and forced closures for certain types of public
places and businesses. The coronavirus and actions taken to
mitigate it have had and are expected to continue to have an
adverse impact on the economies and financial markets of many
countries, including the geographical area in which the Company
plan to operates. While it is unknown how long these conditions
will last and what the complete financial effect will be to the
company, to date, the Company has experienced a decline in revenue
due to the decreasing price of oil.
NOTE 4 - OIL AND GAS PROPERTIES
Active Projects:
The
Company currently has one active lease. We hold a 24% working
interest in one producing well (“Concho Richey #1”) on
the lease and a 100% working interest in the remainder of the
206-acre J. E Richey Lease. The Concho Richey #1 well is currently
producing 2.8 barrels of oil and 16 MCF of gas per
day.
The
Richey #1 well was plugged on January 3, 2018. As of July 31, 2019, management determined that
the $50,000 asset carried on the balance sheet was impaired
resulting in a loss on impairment of $21,200 lowering the value of
the investment in the Richey lease to $28,800. No additional
impairment was recognized through January 31,
2021.
NOTE 5 – MINERAL RIGHTS AND PROPERTIES
ENMEX Operations LLC – Wholly owned Subsidiary - Pemer
Bacalar – Resort Development Project
On
September 22, 2017 the Company entered into a Letter of Intent
with Pemer Bacalar SAPI DE CV to
examine the opportunity of acquiring ownership in approximately 80
acres (“Property”) on a freshwater lagoon near the
community of Bacalar, Mexico in the state of Quintana Roo for the
purpose of entering into a joint venture for the potential
development of the Property into a resort. This was
followed up with a Memorandum of Understanding (“MOU”)
on November 16, 2017 in order to
further conduct due diligence toward this potential project.
An amended MOU was entered into on April 13, 2018 setting forth the
conditions for entering into a definitive agreement with Pemer
Bacalar to acquire 51% of the Property. These conditions
included obtaining an independent appraisal of the Property and
develop a business plan in conjunction with a Joint Venture
Operating Agreement. On June 11, 2019 a new agreement was
entered into regarding this property to incorporate certain requirements including, but
not limited to, finalizing the acquisition of additional acreage
and obtaining permits as well as formalize a plan to conduct
feasibility studies, etc.
NOTE 6 – WINNEMUCCA MOUNTAIN PROPERTY
As
previously announced, on September 14, 2012, we entered into an
option agreement with AHL Holdings Ltd., and Golden Sands
Exploration Inc. (“Optionors”), wherein we acquired an
option to purchase an 80% interest in and to certain mining claims,
which claims form the Winnemucca Mountain Property in Humboldt
County, Nevada (“Property”). This property currently is
comprised of 138 unpatented mining claims covering approximately
2,700 acres.
On July
23, 2018, the Company entered into a New Option Agreement with the
Optioners. This agreement provided for the payment of $25,000 and
the issuance of 3,000,000 shares of the Company’s common
stock and work commitments. The Company issued the shares and made
the initial payment of $25,000 per the terms of the July 31, 2018
agreement. The second payment of $25,000 per the terms of the
agreement was not paid when it became due on August 31, 2018
causing the Company to default on the terms of the July 23, 2018
agreement.
On
March 25, 2019 the Company entered into a New Option Agreement with
the Optionors. As stated in the New Option Agreement the Company
has agreed to certain terms and conditions to have the right to
earn an 80% interest in the Property, these terms include cash
payments, issuance of common shares of the Company and work
commitments.
The
Company’s firm commitments per the March 25, 2019 option
agreement total $381,770 of which cash payments total
$181,770 and a firm work commitment of $200,000. These commitments
include payments for rentals payable to BLM and also for the
staking of new claims adjoining the existing claims. The work
commitment was to be conducted prior to December 31, 2020. As of
January 31, 2021 and July 31, 2020, the Company has accounted for
$285,453 and $334,000, respectively, in its accrued liabilities
(Note 7).
The Company has received notice, effective October 27, 2020, that
its Option Agreement to earn an interest in the Winnemucca Mountain
Gold Property has been terminated for being in default of certain
terms and conditions of the Agreement. Management is in discussions
with the principals of the Winnemucca property to resolve any
outstanding obligations.
During the six months ended January 31, 2021, the Company received
confirmation of the current amount due resulting in the reduction
of the liability to $285,453. As a result, the Company recognized a
gain on debt forgives of $23,616.
NOTE 7 - ACCRUED LIABILITIES
The
Company has partnered with others whereby they provide all or a
portion of the working capital for either well work to be completed
on existing properties or towards the acquisition of new
properties. As of January 31, 2021 and July 31, 2020, the Company
has unused funds it has received of $23,175 and $23,175,
respectively.
Accrued
liabilities are as follows:
|
|
|
|
|
General
accrual
|
$1,961
|
$2,444
|
|
Interest
|
$70,551
|
$62,597
|
|
Distributions and
royalty
|
$15,416
|
$15,416
|
|
Advances for well
work
|
$23,175
|
$23,175
|
|
Winnemucca
Property
|
$285,453
|
$334,000
|
|
|
$396,556
|
$437,632
|
NOTE 8 - CONVERTIBLE DEBT
On
August 22, 2013 the Company entered into a $50,000 Convertible Loan
Agreement with an un-related party. The Loan and interest are
convertible into Units at $0.08 per Unit with each Unit consisting
of one common share of the Company and ½ warrant with each
full warrant exercisable for one year to purchase one common share
at $0.30 per share. On July 10, 2014, a further $35,000 was
received from the same unrelated party under the same terms. On
July 31, 2018, this Note was amended whereby the principal and
interest are now convertible into Units at $0.04 per Unit with each
Unit consisting of one common share of the Company and ½
warrant with each full warrant exercisable for one year to purchase
one common share at $0.08 per share. The Loan shall bear interest
at the rate of Eight Percent (8%) per annum and matures on March
26, 2020. As of January 31, 2021, there is $85,000 and $53,466 of
principal and accrued interest, respectively, due on this loan. As
of July 31, 2020, there was $85,000 and $50,038 of principal and
accrued interest, respectively, due on this loan. This note is
currently in default.
On
October 20, 2017, the Company executed a convertible promissory
note for $25,000 with a third party. The note accrues interest at
6%, matures in two years and is convertible into shares of common
stock at maturity, at a minimum of $0.10 per share, at the option
of the holder. As of January 31, 2021 and July 31, 2020, there is
$5,013 and $4,257, respectively, of accrued interest due on this
loan. This note is currently in default.
NOTE 9 – LOANS PAYABLE
On
April 16, 2017, the Company executed a promissory note for $15,000
with a third party. The note matures in two years and interest is
set at $3,000 for the full two years. As of January 31, 2021, there
is $15,000 and $4,125 of principal and accrued interest,
respectively, due on this loan. As of July 31, 2020, there is
$15,000 and $3,375 of principal and accrued interest, respectively,
due on this loan. This loan is currently in default.
On June
11, 2020, a third party loaned the Company $14,000. On September 9,
2020, the Company repaid $5,000 on this loan. The loan is
unsecured, non-interest bearing and due on demand.
As of
January 31, 2021, the Company owed $5,000 to a third party. The
loan is unsecured, non-interest bearing and due on
demand.
During
the year ended July 31, 2020, a
third party loaned the Company $15,000. The loan is unsecured,
bears interest at 8% per annum and matures on September 1, 2021. As
of January 31, 2021, there is $1,627 of interest accrued on this
note.
During
the year ended July 31, 2020, a
third party loaned the Company $60,000. The loan is unsecured,
bears interest at 8% per annum and matures on September 1, 2021. As
of January 31, 2021, there is $6,325 of interest accrued on this
note.
NOTE 10 - COMMON STOCK
On June
4, 2020, the Company filed a Certificate of Amendment to its
Articles of Incorporation in which it increased its authorized
capital stock to 250,000,000 shares of common stock, par value
$0.001 and 50,000,000 shares of preferred stock, par value
$0.001.
During the six months ended January 31, 2020, the Company sold
666,660 shares of common stock at $0.03 per share for total cash
proceeds of $20,000.
During the six months ended January 31, 2020, the Company issued
75,000 shares of common stock that had been shown in equity as a
common stock payable as of July 31, 2019.
During the six months ended January 31, 2021, the Company sold 2,667,200 shares of common
stock at $0.03 per share for
total cash proceeds of $80,000.
During the six months ended January 31, 2021, the Company sold 2,500,000 shares of common
stock at $0.02 per share for total cash proceeds of
$50,000.
NOTE 11 - WARRANTS
|
|
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contract Term
|
|
Exercisable at July
31, 2019
|
2,365,000
|
$0.15
|
$.65
|
|
Granted
|
-
|
-
|
-
|
|
Expired
|
(1,865,000)
|
0.15
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Exercisable at July
31, 2020
|
500,000
|
0.15
|
.27
|
|
Granted
|
-
|
-
|
-
|
|
Expired
|
(500,000)
|
0.15
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Exercisable at
January 31, 2021
|
-
|
$-
|
-
|
NOTE 12 - RELATED PARTY TRANSACTIONS
For the six months ended January 31, 2021 and 2020, total payments of $30,000 and $30,000,
respectively, were made to Noel Schaefer, a Director of the
Company, for consulting services. As of January 31,
2021, and July 31, 2020 there is
$27,500 and $27,500 credited to accounts
payable.
As of January 31, 2021 and July
31, 2020, there is $2,200 and $2,200, respectively, credited to
accounts payable for amounts due to Rachel Boulds, CFO, for
consulting services.
On September 25, 2018, the Company executed a loan agreement with
the wife of the CEO for $6,800. The loan was to be repaid by
December 15, 2018, with an additional $680 to cover interest and
fees. On October 10, 2018, the Company executed another loan
agreement for $15,000. The loan was to be repaid by December 15,
2018, with an additional $1,500 to cover interest and fees. As
of January 31, 2021, the
Company owes $23,210 on this loan. This loan is in
default.
Victor Miranda, a Director of the Company is also President and
owner of Labrador Capital SAPI DE CV (“Labrador”), a
major shareholder of the Company owning 8.8% of its issued and
outstanding shares. The Company has entered into a Memorandum of
Understanding with Labrador to jointly pursue developing real
estate projects in Mexico. As of the date of this report no
projects have been identified to jointly pursue. In the event
of a decision to go forward with Labrador, Victor Miranda will
abstain from voting to avoid any conflict of interest.
NOTE 13 - SUBSEQUENT EVENTS
Management
has evaluated subsequent events pursuant to the requirements of ASC
Topic 855, from the balance sheet date through the date the
financial statements were available to be issued, and has
determined that no material subsequent events exist.