Notes to the Unaudited Financial Statements
1. ORGANIZATION BUSINESS OPERATIONS AND GOING CONCERN
CN RESOURCES INC. (“
the Company
”) was incorporated in Nevada of the United States of America on May 18, 2010. The Company was in the development stage as defined under the Financial Accounting Standards Board codification 915 “Development Stage Entities” and it intends to identify, acquire, explore and develop natural resources properties in Alberta, Canada. The Company ceased development stage this past quarter when its proved oil properties achieved significant and ongoing revenues.
Going Concern
The financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has made an insignificant profit of $ 27,354 for the three months ended February 28, 2014 and has an accumulated deficit of $265,386 since inception; further losses are anticipated in the development of its business raising substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with existing cash on hand and loans from director and or private placements of common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
We recognize oil revenue from interests in producing well as the oil is sold. Revenue from the purchase, transportation, and sale of oil is recognized upon completion of the sale and when transported volumes are delivered.
Property and Equipment
Property and equipment are carried at the cost of acquisition or construction and depreciated over the estimated useful lives of the assets. Costs associated with repair and maintenance are expensed as incurred. Costs associated with improvements which extend the life, increase the capacity or improve the efficiency of our property and equipment are capitalized and depreciated over the remaining life of the related asset. Gains and losses on dispositions of equipment are reflected in operations. Depreciation is provided using the straight-line method over the estimated useful life of the asset, which is 20 years. Depreciation expense for the period ended February 28, 2014 was $1,913.
Oil and Gas Property
Oil and gas exploration and development costs are accounted for using the successful efforts method of accounting.
Oil and gas leasehold acquisition costs are capitalized and included in the balance sheet caption properties, plants and equipment. Leasehold impairment is recognized based on exploratory experience and management’s judgment. Upon achievement of all conditions necessary for the classification of reserves as proved, the associated leasehold costs are reclassified to proved properties.
Oil and gas exploration costs and the costs of carrying and retaining undeveloped properties are expensed as incurred. Exploratory well costs are capitalized, or “suspended,” on the balance sheet pending further evaluation of whether economically recoverable reserves have been found. If economically recoverable reserves are not found, exploratory well costs are expensed as dry holes. If exploratory wells encounter potentially economic quantities of oil and gas, the well costs remain capitalized on the balance sheet as long as sufficient progress assessing the reserves and the economic and operating viability of the project is being made. For complex exploratory discoveries, it is not unusual to have exploratory wells remain suspended on the balance sheet for several years while we perform additional appraisal drilling and seismic work on the potential oil and gas field, or while we seek government or co-venture approval of development plans or seek environmental permitting. Once all required approvals and permits have been obtained, the projects are moved into the development phase, and the oil and gas reserves are designated as proved reserves.
Oil and gas development costs incurred to drill and equip development wells, including unsuccessful development wells, are capitalized.
Depreciation, depletion and amortization of the cost of proved oil and gas properties is calculated using the unit-of-production method. The reserve base used to calculate depreciation, depletion and amortization for leasehold acquisition costs and the cost to acquire proved properties is the sum of proved developed reserves and proved undeveloped reserves. With respect to lease and well equipment costs, which include development costs and successful exploration drilling costs, the reserve base includes only proved developed reserves. Estimated future dismantlement, restoration and abandonment costs, net of salvage values, are taken into account. Depletion expense for the period ended February 28, 2014 was $4,370.
Assets are grouped in accordance with the Extractive Industries - Oil and Gas Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). The basis for grouping is a reasonable aggregation of properties with a common geological structural feature or stratigraphic condition, such as a reservoir or field.
Amortization rates are updated quarterly to reflect: 1) the addition of capital costs, 2) reserve revisions (upwards or downwards) and additions, 3) property acquisitions and/or property dispositions and 4) impairments.
When circumstances indicate that an asset may be impaired, the Company compares expected undiscounted future cash flows at a producing field level to the unamortized capitalized cost of the asset. If the future undiscounted cash flows, based on the Company’s estimate of future natural gas and crude oil prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is calculated by discounting the future cash flows at an appropriate risk-adjusted discount rate. During the period ended February 28, 2014, the Company recorded impairment expense of $0.
Exploration Stage Company
The financial statements are no longer presented in accordance with Accounting Standards Codification 915 and SEC Industry Guide 7. The Company ceased to be an Exploration Stage Company in fiscal year 2014 as disclosed in Note 1 above.
3. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC on Form 10-K. 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 period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted
.
4. OIL AND GAS PROPERTIES
On March 1, 2013, the Company entered into an agreement with RedWater Energy Corporation to form a joint venture to drill in the Redwater area in Alberta, Canada. The Company agreed to pay 50% of the drilling cost to acquire a 50% working interest in the unproved property. The aggregate cost of the well is estimated to be $672,787. As of February 28, 2014, the Company exchanged the $292,890 note receivable on the balance sheet at May 31, 2012 for the working interest in the well. In addition, the President of the Company invested $175,375 on behalf of the Company in the form of a related party payable. The payable is non-interest bearing and due on demand. Included in the total $419,515 paid to RedWater Energy Corporation was $71,237 for the Company’s portion of the land acquisition cost.
The joint venture well is currently in commercial production. The Company has accounted for the cost of this oil and gas property as proved properties.
5. COMMITMENTS
On March 1, 2013, the Company entered into an agreement with RedWater Energy Corporation (see note 3). The Company agreed to loan RedWater Energy Corporation the other 50% of the drilling cost in the form of a note. The loan will bear interest at 10% per annum payable quarterly, is redeemable at any time without penalty, and shall be secured by a general security agreement of RedWater Energy Corporation in favour of the Company. The Company will receive an additional 10% working interest of the property until the loan is repaid in full. As of February 28, 2014, the Company has made arrangement with a related party and funded this note.
6. DUE TO DIRECTOR
The director loans the company money from time to time on an interest-free due-on-demand basis. As of February 28, 2014, the total amount advanced and unpaid is $288,755.