Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Our unaudited financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles. The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this quarterly report.
In this quarterly report, unless otherwise specified, all dollar amounts are expressed in United States dollars. All references to "US$" refer to United States dollars and all references to "common stock" refer to the common shares in our capital stock.
As used in this quarterly report, the terms “we”, “us”, “our” and “our company” mean Norstra Energy Inc., unless otherwise indicated.
Corporate Overview
We are an exploration stage company, incorporated in the State of Nevada on November 12, 2010 under the name Norstra Inc., as a for-profit company. Our fiscal year end is February 28. Our office is located at 1048 West 11
th
Avenue, Spokane, Washington 99204. Our telephone number is 1-888-474-8077. Our website and further information about our company can be found at http://www.norstraenergy.com.
On November 18, 2011, we filed a certificate of amendment with the Nevada Secretary of State to change our name from Norstra Inc. to Norstra Energy Inc.
On March 28, 2012, we filed a certificate of change with the Nevada Secretary of State to effect a 2 new for 1 old forward split of our authorized and issued and outstanding shares of common stock such that our authorized capital increased from 75,000,000 shares of common stock with a par value of $0.001 to 150,000,000 shares of common stock with a par value of $0.001.
Effective February 27, 2013, the Nevada Secretary of State accepted for filing a Certificate of Amendment, wherein our company amended our Articles of Incorporation to create 50,000,000 shares of preferred stock, $0.001 par value for which our board of directors may fix and determine the designations, rights, preferences or other variations of each class or series within each class of preferred stock of our company. The creation of the preferred stock was approved on February 26, 2013 by written consent by our board of directors and the holders of 54.94% of our voting securities. Our company’s authorized capital now consists of 150,000,000 shares of common stock and 50,000,000 shares of preferred stock, all with a par value of $0.001.
Current Business
We are engaged in the exploration and development of oil and gas properties.
On February 1, 2011, we entered into an agreement with an unrelated third-party entity to purchase a 100% working interest and an 80% net revenue interest in an oil and mineral lease in Reno County, Kansas. As consideration for the purchase, our company paid $15,000 in cash. Our company has not incurred any exploration or development costs in connection with this lease. We have had limited operations and have been issued a "going concern" opinion by our auditor, based upon our reliance on the sale of our common stock as the sole source of funds for our future operations.
Effective February 27, 2013, we entered into a secured promissory note in an aggregate principal amount of $100,000 pursuant to the terms of a subscription agreement between our company and Jackson Bennett, LLC. The note bears interest at an annual rate of 10% which is to be paid with principal in full on the maturity date of February 27, 2015. The principal amount of the note together with interest may be converted into shares of our common stock, at the option of Jackson Bennett, LLC, at a conversion price of $0.25 per share.
Additionally, on March 1, 2013, we entered into consulting agreements with Mr. Glen Landry, our president, chief executive officer, secretary, treasurer and director, and Mr. Dallas Kerkenezov, our chief financial officer. Mr. Landry will receive a consulting fee of $5,000 per month and shall be issued 1,000,000 shares of our preferred stock, which will be convertible into 10,000,000 shares of our common stock upon achievement of production from the South Sun River Bakken Prospect. Mr. Kerkenezov shall receive $500 a month for performing duties as our chief financial officer. Both agreements have a term of 12 months.
Also on March 1, 2013, Mr. Kerkenezov, our chief financial officer and Ms. Heredia, our former director, cancelled a total of 35,513,100 shares of our common stock held by them. Mr. Kerkenezov cancelled 27,013,100 and Ms. Heredia cancelled 8,500,000. These shares were cancelled in order to make our company more attractive for financing, given the capital requirements of the South Sun River Bakken Prospect.
Effective April 5, 2013, we entered into a secured promissory note in an aggregate principal amount of $50,000 pursuant to the terms of a subscription agreement between our company and Jackson Bennett, LLC. The note bears interest at an annual rate of 10% which is to be paid with principal in full on the maturity date of April 5, 2015. The principal amount of the note together with interest may be converted into shares of our common stock at the option of the holder, at a conversion price of $0.30 per share.
Effective April 25, 2013, we entered into a secured promissory note in an aggregate principal amount of $180,000 pursuant to the terms of a subscription agreement between our company and Jackson Bennett, LLC. The note bears interest at an annual rate of 10% which is to be paid with principal in full on the maturity date of April 25, 2015. The principal amount of the note together with interest may be converted into shares of our common stock at the option of the holder, at a conversion price of $0.50 per share.
Effective May 15, 2013, we entered into a secured promissory note in an aggregate principal amount of $100,000 pursuant to the terms of a subscription agreement between our company and Jackson Bennett, LLC. The note bears interest at an annual rate of 10% which is to be paid with principal in full on the maturity date of May 15, 2015. The principal amount of the note together with interest may be converted into shares of our common stock at the option of the holder, at a conversion price of $0.55 per share.
Effective May 29, 2013, we entered into a secured promissory note in an aggregate principal amount of $170,000 pursuant to the terms of a subscription agreement between our company and Jackson Bennett, LLC. The note bears interest at an annual rate of 10% which is to be paid with principal in full on the maturity date of May 29, 2015. The principal amount of the note together with interest may be converted into shares of our common stock at the option of the holder, at a conversion price of $0.60 per share.
On March 12, 2013, we entered into a farmout agreement with Summit West Oil, LLC for approximately 10,000 acres of oil and gas exploration property in northwest Montana known as the South Sun River Bakken Prospect. Under the terms of the original farmout agreement, which was subsequently amended, we were required to carry out the following expenditures in order to earn a 100% interest in the property, subject to an underlying 20% burden to Summit West Oil, LLC and the State of Montana:
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$60,000 by April 5, 2013 for the acquisition of seismic and other exploration data (requirement met);
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·
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$140,000 by April 30, 2013 for the reinterpretation of the seismic data as well as delineation and surveying of potential drill locations; (requirement met);
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·
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Drilling of an additional horizontal well at an estimated expenditure of $5,000,000 by December 31, 2013;
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·
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Drilling of a horizontal well at an estimated expenditure of $5,000,000 by June 30, 2014; and
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·
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Drilling of an additional horizontal well at an estimated expenditure of $5,000,000 by December 31, 2014.
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The terms of the March 12, 2013 farmout agreement with Summit West were subsequently amended by the June 6, 2013 farmout agreement and Letter of Understanding and Agreement dated September 20, 2013 with Summit West. The drilling obligations of the March 12, 2013 agreement are no longer applicable and the claims subject to that agreement have been returned to Summit West.
On June 6, 2013, we entered into a second farmout agreement with Summit West Oil, LLC, related to an additional property (known as the “Milford Colony Oil and Gas Lease” or the “Milford Property”) which is an extension of and located to the east of the first South Sun River lease block (which was the subject of the March 12, 2013farmout agreeement). This additional property is the primary focus of our operations.
Under the terms of the farmout agreement, we were required to carry out the following expenditures in order to earn a 100% interest in the property, subject to an underlying 20% royalty burden to Summit West, Teton Resources, and the Milford Hutterite Colony:
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Exercise the lease renewal option by December 20, 2013 with full payment of all or some of the lease tracts;
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Drilling of horizontal well at an estimated expenditure of $5,000,000 by June 30, 2014;
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Drilling of a second horizontal well at an estimated expenditure of $5,000,000 by December 31, 2014 (no expenditures have occurred to date);
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·
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Drilling of a third horizontal well at an estimated expenditure of $5,000,000 by June 30, 2016 (no expenditures have occurred to date).
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Pursuant to the June 6, 2013 farmout agreement, our company also acquired the option to purchase the property outright and without drilling obligations for 10,000,000 shares of our common stock until December 31, 2013.
By September, 2013 we had incurred approximately $225,000 in work expense on the property toward the satisfaction of our drilling obligations. By October, 2013 we had also paid approximately $170,000 in satisfaction of our lease renewal requirements by acquiring leases and lease extensions for 5 years on the Milford Property totaling approximately 13,300 net acres.
Effective as at September 20, 2013 we entered into a Letter of Understanding and Agreement with Summit West Oil, LLC which modifies the terms of the above described farmout agreements dated March 12, and June 6, 2013. Pursuant the September 20, 2013 agreement, Norstra and Summit West have agreed to the following terms:
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Summit West will release portions of the Milford Colony Oil and Gas Lease assigned to Summit West by Teton Resources.
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Summit West will exercise its option to extend those portions of the Milford Colony Oil and Gas Lease not released by Summit West.
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Norstra will negotiate new leases with Milford Colony for those lands released by Summit West.
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In consideration of the above agreements between Summit West and Norstra, the parties have made the following undertakings and acknowledgments:
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The Farmout Agreements of March 12, 2013 and June 6, 2013 between Summit West and Norstra shall be deemed to be satisfied.
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The State of Montana Oil and Gas Leases currently owned by Summit West shall be retained by Summit West and not assigned to Norstra.
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Norstra will no longer be obligated to issue 10,000,000 shares to Summit West pursuant to the June 6, 2013 agreement.
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Norstra will instead issue 300,000 restricted common shares on or before October 1, 2013 to Fred Taylor, President, Summit West Oil LLC, in exchange for Summit retaining the State of Montana Oil and Gas Leases. Additionally, Summit West will forfeit all royalty overrides on the Milford Colony leases.
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Summit will authorize a Change of Operator to Black Gold, LLC
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Upon closing of our September 20, 2013 agreement with Summit West, we will hold 100% of the Milford Property without any obligations for approximately 5 years. As at October 21, 2013 the Letter of Understanding Agreement has not closed and the 300,000 restricted common shares issuable to Mr. Fred Taylor have not been issued. It is anticipated that a formal closing will be completed prior to November, 2013. In order to secure Black Gold, LLC as operator of the Milford Property, we anticipate issuing 3,000,000 common shares to Black Gold upon finalization of an operating agreement.
Effective September 10, 2013, we entered into a secured promissory note in an aggregate principal amount of $250,000 pursuant to the terms of a subscription agreement between our company and Jackson Bennett, LLC. The note bears interest at an annual rate of 10% which is to be paid with principal in full on the maturity date of July 30, 2015. The principal amount of the note together with interest may be converted into shares of our common stock at the option of the holder, at a conversion price of $0.50 per share.
We have had limited operations and have been issued a "going concern" opinion by our auditor, based upon our reliance on the sale of our common stock as the sole source of funds for our future operations.
Results of Operations
Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation. We expect we will require additional capital to meet our long term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities.
We have generated no revenues and have incurred a net loss of $313,579 since inception through August 31, 2013.
Three and Six Month Periods Ended August 31, 2013 Compared to the Three Months Ended August 31, 2012 and the Period From Inception (November 12, 2010) to August 31, 2012.
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Three Months Ended
August 31,
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Six Months Ended
August 31,
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2013
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2012
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2013
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2012
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General and administrative expenses
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$
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93,124
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$
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10,242
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$
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145,912
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$
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11,757
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Accretion expense
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$
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167
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$
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168
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$
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334
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$
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333
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Professional fees
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$
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59,034
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$
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1,250
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$
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71,918
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$
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6,500
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Interest expense
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$
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41,549
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$
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Nil
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$
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51,325
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$
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Nil
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Net Loss
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$
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(
193,874
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$
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(11,660
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$
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(269,489
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$
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(18,590
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Our net loss for the three months ended August 31, 2013 was approximately $193,874 compared to a net loss of $11,660 during the three months ended August 31, 2012. Our net loss for the six months ended August 31, 2013 was approximately $269,489 compared to a net loss of $18,590 during the six months ended August 31, 2012. During the three and six month periods ended August 31, 2013 and 2012, we did not generate any revenue. Net loss during the period from inception (November 12, 2010) to August 31, 2013 was $313,579.
During the three months ended August 31, 2013, we incurred general and administrative, accretion expense and professional expenses of approximately $152,325 compared to general and administrative and accretion expense of $11,660 during the three months ended August 31, 2012. During the six months ended August 31, 2013, we incurred general and administrative, accretion expense and professional expenses of approximately $218,164 compared to general and administrative and accretion expense of $18,590 during the six months ended August 31, 2012. General and administrative expenses and professional fees incurred during the three and six month periods ended August 31, 2013 and 2012 were generally related to corporate overhead, financial and administrative contracted services, such as legal and accounting and developmental costs. During the period from inception (November 12, 2010) to August 31, 2013, we incurred general and administrative, accretion expense and professional expenses of approximately $262,227.
Our net loss per common share during the three months ended August 31, 2013 and 2012 was $0.01 and $0.00, respectively. The weighted average number of shares outstanding was 38,250,000 for the three month period ended August 31, 2013. Our net loss per common share during the six months ended August 31, 2013 and 2012 was $0.01 and $0.00, respectively. The weighted average number of shares outstanding was 40,373,066 for the six month period ended August 31, 2013.
Liquidity and Capital Resources
Working Capital
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August 31,
2013
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February 28,
2013
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Current Assets
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$
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230,740
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$
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106,050
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Current Liabilities
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$
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64,986
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$
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9,387
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Working Capital
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$
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165,754
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$
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96,663
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Cash Flows
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August 31,
2013
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August 31,
2012
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Cash Flows from (used in) Operating Activities
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$
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(166,371
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)
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$
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(10,233
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)
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Cash Flows from (used in) Investing Activities
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$
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(223,079
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)
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$Nil
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Cash Flows from (used in) Financing Activities
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$
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500,000
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$
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35,750
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Net Increase (decrease) in Cash During Period
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$
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110,550
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$
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25,517
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As at the six months ended August 31, 2013, our current assets were $230,740 and our current liabilities were $64,986 which resulted in working capital of $165,754. As at the six months ended August 31, 2013, current assets were comprised of $210,100 in cash compared to $99,550 in cash at February 28, 2013. At the six months ended August 31, 2013, current liabilities were comprised of $8,274 in advances from a directors and $1,113 in general accounts payable. Long term liabilities were comprised of $5,393 in asset retirement obligations, $436,024 in convertible notes payable, net and $20,603 in accrued interest.
Stockholders' equity /decreased $64,764 from $10,641 as of February 28, 2013 to a deficit $54,123 as of August 31, 2013.
Cash Flows from Operating Activities
We have not generated positive cash flows from operating activities. For the six month period ended August 31, 2013, net cash flows used in operating activities was $166,371 consisting of a net loss of $269,489 and was offset by an accretion expense of $334, share-based compensation of $10,000, interest on beneficial conversion of $30,749, accounts payable of $55,599 and accrued interest-notes payable of $20,576. For the six month period ended August 31, 2012, net cash flows used in operating activities was $10,233 consisting of a net loss of $18,590 and was offset by expenses paid on behalf of the company by a related party of $6,774, an accretion expense of $333 and accounts payable of $1,250.
Net cash flows used in operating activities was $208,052 for the period from inception (November 12, 2010) to August 31, 2013 consisting of a net loss of $313,579 which was offset by expenses paid on behalf of the company by a related party of $6,774, an accretion expenses of $1,329, share based compensation of $10,000, interest on beneficial conversion of $30,749, accounts payable of $56,712 and accrued interest-notes payable of $20,603.
Cash Flows used in Investing Activities
For the six months ended August 31, 2013, we used $223,079 in investing activities. For the six month ended August 31, 2012 we did not use any cash flows for investing activities.
For the period from inception on November 12, 2010 through August 31, 2013, net cash used in investing activities was $238,079.
Cash Flows from Financing Activities
We have financed our operations primarily from either advances from directors or the issuance of equity and debt instruments. For the six months ended August 31, 2013, we generated $500,000 from financing activities. For the six months ended August 31, 2012, we generated $35,750 from financing activities. For the period from inception on November 12, 2010 through August 31, 2013, net cash provided by financing activities was $656,231primarily due to the issuance of 33,250,000 common shares for cash of $33,250 pursuant to our company's S-1 offering and proceeds from convertible notes payable of $600,000.
Plan of Operation
We are a start-up, exploration-stage company and have not yet generated or realized any revenues from our business operations.
Our auditors have issued a going concern opinion on our audited financial statements for the year ended February 28, 2013. This means that there is substantial doubt that we can continue as an on-going business for the next twelve months unless we obtain additional capital to pay our bills. This is because we have not generated any revenues and no revenues are anticipated until we begin removing and selling minerals. There is no assurance we will ever reach this point. Accordingly, we must raise cash from sources from other sources. Our only other source for cash at this time is investments by others. We must raise cash to implement our project and stay in business. As of August 31, 2013, our company had $210,100 in cash on hand.
On March 12, 2013, we entered into a farmout agreement with Summit West Oil, LLC for approximately 10,000 acres of oil and gas exploration property in northwest Montana known as the South Sun River Bakken Prospect. Under the terms of the original farmout agreement, which was subsequently amended, we were required to carry out the following expenditures in order to earn a 100% interest in the property, subject to an underlying 20% burden to Summit West Oil, LLC and the State of Montana:
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$60,000 by April 5, 2013 for the acquisition of seismic and other exploration data (requirement met);
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|
·
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$140,000 by April 30, 2013 for the reinterpretation of the seismic data as well as delineation and surveying of potential drill locations; (requirement met);
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|
·
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Drilling of an additional horizontal well at an estimated expenditure of $5,000,000 by December 31, 2013 ;
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·
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Drilling of a horizontal well at an estimated expenditure of $5,000,000 by June 30, 2014; and
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·
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Drilling of an additional horizontal well at an estimated expenditure of $5,000,000 by December 31, 2014.
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The terms of the March 12, 2013 farmout agreement with Summit West were subsequently amended by the June 6, 2013 farmout agreement and Letter of Understanding and Agreement dated September 20, 2013 with Summit West. The drilling obligations of the March 12, 2013 agreement are no longer applicable and the claims subject to that agreement have been returned to Summit West. On June 6, 2013, we entered into a second farmout agreement with Summit West Oil, LLC, related to an additional property (known as the “Milford Colony Oil and Gas Lease” or the “Milford Property”) which is an extension of and located to the east of the first South Sun River lease block (which was the subject of the March 12, 2013farmout agreeement). This additional property is the primary focus of our operations.
Under the terms of the farmout agreement, we were required to carry out the following expenditures in order to earn a 100% interest in the property, subject to an underlying 20% royalty burden to Summit West, Teton Resources, and the Milford Hutterite Colony:
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·
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Exercise the lease renewal option by December 20, 2013 with full payment of all or some of the lease tracts;
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·
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Drilling of horizontal well at an estimated expenditure of $5,000,000 by June 30, 2014;
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Drilling of a second horizontal well at an estimated expenditure of $5,000,000 by December 31, 2014 (no expenditures have occurred to date);
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·
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Drilling of a third horizontal well at an estimated expenditure of $5,000,000 by June 30, 2016 (no expenditures have occurred to date).
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Pursuant to the June 6, 2013 farmout agreement, our company also acquired the option to purchase the property outright and without drilling obligations for 10,000,000 shares of our common stock until December 31, 2013.
By September, 2013 we had incurred approximately $225,000 in work expense on the property toward the satisfaction of our drilling obligations. By October, 2013 we had also paid approximately $170,000 in satisfaction of our lease renewal requirements by acquiring leases and lease extensions for 5 years on the Milford Property totaling approximately 13,300 net acres.
Effective as at September 20, 2013 we entered into a Letter of Understanding and Agreement with Summit West Oil, LLC which modifies the terms of the above described farmout agreements dated March 12, and June 6, 2013. Pursuant the September 20, 2013 agreement, Norstra and Summit West have agreed to the following terms:
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Summit West will release portions of the Milford Colony Oil and Gas Lease assigned to Summit West by Teton Resources.
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Summit West will exercise its option to extend those portions of the Milford Colony Oil and Gas Lease not released by Summit West.
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Norstra will negotiate new leases with Milford Colony for those lands released by Summit West.
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In consideration of the above agreements between Summit West and Norstra, the parties have made the following undertakings and acknowledgments:
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The Farmout Agreements of March 12, 2013 and June 6, 2013 between Summit West and Norstra shall be deemed to be satisfied.
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The State of Montana Oil and Gas Leases (which are the subject of the March 12, 2013 farmout agreement) currently owned by Summit West shall be retained by Summit West and not assigned to Norstra.
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Norstra will no longer be obligated to issue 10,000,000 shares to Summit West pursuant to the June 6, 2013 agreement.
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·
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Norstra will instead issue 300,000 restricted common shares on or before October 1, 2013 to Fred Taylor, President, Summit West Oil LLC, in exchange for Summit retaining the State of Montana Oil and Gas Leases. Additionally, Summit West will forfeit all royalty overrides on the Milford Colony leases.
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Summit will authorize a Change of Operator to Black Gold, LLC
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As at October 21, 2013 the Letter of Understanding Agreement has not closed and the 300,000 restricted common shares issuable to Mr. Fred Taylor have not been issued. It is anticipated that a formal closing will be completed prior to November, 2013. In order to secure Black Gold, LLC as operator of the Milford Property, we anticipate issuing 3,000,000 common shares to Black Gold upon finalization of an operating agreement.
Limited Operating History; Need for Additional Capital
There is no historical financial information about us upon which to base an evaluation of our performance. We are an exploration stage corporation and have not generated any revenues from operations. We cannot guarantee we will be successful in our business operations. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources, possible delays in the exploration of our properties, and possible cost overruns due to price and cost increases in services.
To become profitable and competitive, we must conduct the research and exploration of our properties before we start production of any minerals we may find. We sought equity financing to provide for the capital required to implement our research and exploration phases. We believe that the funds raised from our offering will allow us to operate for one year.
We have no assurance that future financing will be available to us on acceptable terms. If financing is not available on satisfactory terms, we may be unable to continue, develop or expand our operations. Equity financing could result in additional dilution to existing shareholders.
Purchase of Significant Equipment
We do not currently intend to purchase any significant equipment during the next twelve months.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Going Concern
The financial statements accompanying this report have been prepared on a going concern basis, which implies that our company will continue to realize its assets and discharge its liabilities and commitments in the normal course of business. Our company has not generated revenues since inception and has never paid any dividends and is unlikely to pay dividends or generate earnings in the immediate or foreseeable future. The continuation of our company as a going concern is dependent upon the continued financial support from our shareholders, the ability of our company to obtain necessary equity financing to achieve our operating objectives, and the attainment of profitable operations. As of August 31, 2013, our company has accumulated losses of $313,579 since inception. We do not have sufficient working capital to enable us to carry out our stated plan of operation for the next twelve months.
Due to the uncertainty of our ability to meet our current operating expenses and the capital expenses noted above in their report on the financial statements for the year ended February 28, 2013, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors.
The continuation of our business is dependent upon us raising additional financial support. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
Critical Accounting Policies
Basis of Presentation
The financial statements of our company have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in US dollars. Our company's fiscal year end is February 28.
Cash and Cash Equivalents
Our company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents. Our company had $210,100 and $99,550 of cash and cash equivalents at August 31, 2013 and February 28, 2013, respectively.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 could differ from those estimates.
Financial Instruments
The carrying value of our company’s financial instruments approximates their fair value because of the short maturity of these instruments.
Stock-based compensation is accounted for at fair value in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718). To date, our company has not adopted a stock option plan and has not granted any stock options.
Income Taxes
Income taxes are accounted for under the assets and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
Basic and Diluted Net Loss per Share
Our company computes net loss per share in accordance with ASC 260,"Earnings per Share". ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement.
Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding during the period. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive. At August 31, 2013 and 2012, 6,511,837 and 0 potentially dilutive shares were issued or outstanding.
Oil and Gas Properties
Our company uses the full cost method of accounting for oil and natural gas properties. Under this method, all acquisition, exploration and development costs, including certain payroll, asset retirement costs, other internal costs, and interest incurred for the purpose of finding oil and natural gas reserves, are capitalized. Internal costs that are capitalized are directly attributable to acquisition, exploration and development activities and do not include costs related to production, general corporate overhead or similar activities. Costs associated with production and general corporate activities are expensed in the period incurred. Proceeds from the sale of oil and natural gas properties are applied to reduce the capitalized costs of oil and natural gas properties unless the sale would significantly alter the relationship between capitalized costs and proved reserves, in which case a gain or loss is recognized.
Capitalized costs associated with impaired properties and capitalized costs related to properties having proved reserves, plus the estimated future development costs, and asset retirement costs under ASC 410 “Asset Retirement and Environmental Obligations”, are amortized using the unit-of-production method based on proved reserves. Capitalized costs of oil and natural gas properties, net of accumulated amortization and deferred income taxes, are limited to the total of estimated future net cash flows from proved oil and natural gas reserves, discounted at ten percent, plus the cost of unevaluated properties.
There are many factors, including global events that may influence the production, processing, marketing and price of oil and natural gas. A reduction in the valuation of oil and natural gas properties resulting from declining prices or production could adversely impact depletion rates and capitalized cost limitations. Capitalized costs associated with properties that have not been evaluated through drilling or seismic analysis, including exploration wells in progress at August 31, 2013, are excluded from the unit-of-production amortization. Exclusions are adjusted annually based on drilling results and interpretative analysis.
Revenue recognition: Sales of oil and natural gas properties are accounted for as adjustments to the net full cost pool with no gain or loss recognized, unless the adjustment would significantly alter the relationship between capitalized costs and proved reserves. If it is determined that the relationship is significantly altered, the corresponding gain or loss will be recognized in the statements of operations. Costs of oil and gas properties are amortized using the units of production method.
Ceiling test: Under the full-cost method of accounting, the net book value of oil and gas properties, less related deferred income taxes, may not exceed a calculated “ceiling.” The ceiling limitation is the estimated after-tax future net cash flows from proved oil and gas reserves, discounted at 10 percent per annum and adjusted for cash flow hedges. Estimated future net cash flows exclude future cash outflows associated with settling accrued asset retirement obligations. Our company has adopted U.S. Securities and Exchange Commission (“SEC”) Release 33-8995 and the amendments to ASC 932, “Extractive Industries — Oil and Gas” (the Modernization Rules). Under the Modernization Rules, estimated future net cash flows are calculated using end-of-period costs and an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months, held flat for the life of the production, except where prices are defined by contractual arrangements.
Any excess of the net book value of proved oil and gas properties, less related deferred income taxes, over the ceiling is charged to expense and reflected as additional depletion, depreciation and amortization expense (“DD&A”) in the accompanying statement of operations. Such limitations are tested quarterly. As of August 31, 2013 and February 28, 2013, capitalized costs did not exceed the ceiling limitation, and no write-down was indicated.
The Company periodically assesses for impairment and no indication of impairment existed at August 31, 2013 and February 28, 2013.
The amount of capitalized costs for the Reno County, Kansas lease at August 31, 2013 and February 28, 2013 is $19,064. The amount of capitalized costs for the South Sun River Bakken Prospect at August 31, 2013 and February 28, 2013 is $223,079 and nil, respectively.
Asset Retirement Obligations
Our company records the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized.
Recent Accounting Pronouncements
Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB ASC is the sole source of authoritative GAAP literature recognized by the FASB and applicable to our company. Management has reviewed the aforementioned rules and releases and believes any effect will not have a material impact on our company's present or future consolidated financial statements.