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CN RES (CNRR)
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CN RESOURCES INC. : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION (form 10-K)

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09/13/2017 | 08:02pm CEST

The following discussion and analysis presents management's perspective of our business, financial condition, and overall performance. This information is intended to provide investors with an understanding of our past performance, current financial condition, and outlook for the future, and should be read in conjunction with Item 8: Financial Statements and Supplementary Data of this Form 10-K.

Forward looking statements are not guarantees of future performance, and our actual results may differ significantly from the results expressed or implied in the forward looking statements. See "Forward Looking Statements" at the end of this section. Factors that might cause such differences include, but are not limited to, those discussed in Item 1A: Risk Factors of this Form 10-K. We assume no obligation to revise or update any forward looking statements for any reason, except as required by law.



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OVERVIEW OF THE COMPANY


CN Resources Inc. is an independent energy company engaged in the exploration, development, production, and sale of crude oil. Our operations are conducted through a 100% wholly owned Ontario Corporation (also named CN Resources Inc.) which owns a producing joint venture oil well in the Redwater area in Alberta, Canada. The Parent Company has no business or financial transactions or any commercial activities.

SIGNIFICANT DEVELOPMENTS IN FISCAL YEAR 2017

During fiscal year ended May 31, 2017, the Company has taken a cautious approach to its development. In the fiscal year 2017, the Company has focused on preserve cash and managed risks rather than venturing into additional acquisition or drilling activities. The Company will monitor the situation carefully and act prudently and accordingly.

SUMMARY RESULTS OF OPERATIONS FOR THE YEAR ENDED MAY 31, 2017

For the year ended May 31, 2017, revenues totaled $66,526 compared to $69,286 in the prior year. Operating income was $19,631 compared to operating loss of $37,705 in the prior year. The changes are due to interest income generated from investment.

LIQUIDITY AND CAPITAL RESOURCES

Historically, we have funded our activities from loans and our existing cash balance. The Company has limited capital expenditure obligations pertaining to its current operations, which allow for significant flexibility in the use of its capital resources to grow the Company in the future. Based on our existing cash position, the Company believes, for the fiscal year 2018, it has sufficient financial resources to fund its ongoing operations and to finance its core project acquisition in accordance with our growth strategies if opportunity presents itself



Uses of Funds


Capital Expenditures Plans. The Company does not face significant mandatory capital expenditure requirements to maintain its operation.

The Company's capital expenditure is discretionary for 2018 fiscal year. Management will only commit significant capital expenditure when the right acquisition opportunity can be captured. The acquisition must be for immediate appreciation of shareholders value and with excellent cash flow, the assets must be adequate and capable to produce predictable steady cash flow in the future years.




Sources of Funds



Cash and Cash Equivalents. As at May 31, 2017, the Company had approximately $2,606,586 of cash and cash equivalents compared to $4,980,735 in 2016. As of May 31, 2017, we have $31,315 trade accounts receivable from our Joint Venture partner for oil sale. We normally receive full payment in arrear when joint venture billing is completed. We have no reason to believe there would be any bad debt.

The Company considers cash equivalents to be short term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates.

Other Sources of Financing. In addition to its existing liquid capital resources the Company has various alternatives to fund the development of its assets. These alternatives could potentially include project finance loan facility, mezzanine financing from a bank and the alternative investment markets, equity issuances or secondary offering, and potential shareholder loan from the Company's controlling shareholder. However, there can be no guarantee that such financing opportunities will be available at the time of need or at reasonable cost to the Company.



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Cash Flows



The following table presents the Company's cash flow information for the fiscal
years ended:



                                                                  May 31
Cash (used in) provided by:                                2017            2016
Operating activities                                   $     76,293$   (36,106 )
Investing activities                                     (2,285,160 )     4,718,126
Financing activities                                              -          54,406
Effect of foreign currency exchange rates                  (165,282 )        17,523

Net (decrease) increase in cash and cash equivalents $ (2,374,149 )$ 4,753,949

Cash generated in operating activities during the year ended May 31, 2017 was $76,293, compared to cash used of $36,106 in 2016. The increase in cash generated in operating activities primarily resulted from interest income generated from short-term investment.

Cash used in investing activities during the year ended May 31, 2017 was $2,285,160, compared to cash generated in investing activities of $4,718,126 in 2016 fiscal year.

Cash generated in financing activities during the year ended May 31, 2017 was $nil compared to $54,406 in 2016. The increase in cash provided by financing activities primarily due to the fact that funds provided by the president from time to time increased in 2017.

COMPARISON OF FINANCIAL RESULTS AND TRENDS BETWEEN FISCAL 2017 AND 2016



Oil Sales Volumes


The following table presents oil sales volumes for the fiscal years ended:



                  May 31,                          Percent
              2017      2016       Difference       change
Net sales:
Oil (Mbbls)     2.7       2.8            (0.10 )      (3.57 %)



Sales volumes for the year ended May 31, 2017, totaled 2.7 Mboe, compared to 2.8 Mboe sold in the prior year period. The decrease is a result of normal production differentiation and not attributable to any other significant factors.




Oil and Gas Prices



The following table presents the average realized oil and gas prices for the
fiscal years ended:



                               May 31,                             Percent
                          2017        2016        Difference       change
Average realized price
Company (USD/bbl)        $ 31.60       31.66            (0.06 )        (0.2 )%



Price per bbl is converted into the USD based on average exchange rate in the year for CAD to USD as per Bank of Canada published exchange rate.



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Revenues


Revenues, excluding royalty expenses, for the year ended May 31, 2017 totaled $87,038, compared to $88,640 in the prior year period, the decrease is due to the Company price drop in crude oil as well as production drop.



Operating and Other Expenses



The following table presents selected operating expenses for the fiscal years
ended:



                                                   May 31,                              Percent
                                             2017          2016        Difference        change
Selected operating expenses:
Depletion, depreciation, amortization,
and accretion                              $   1,091$   1,092$        (0 )           (0 )%
General and administrative                 $  36,184$  37,178$      (994 )        (2.67 )%

Selected operating expenses: ($/bbl):
Depletion, depreciation, amortization,
and accretion                              $    0.39$    0.39$        (0 )           (0 )%



OFF-BALANCE SHEET ARRANGEMENTS

The Company does not use off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion of financial condition and results of operations is based upon the information reported in our financial statements. The preparation of these statements requires us to make certain assumptions and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses as well as the disclosure of contingent assets and liabilities at the date of our financial statements. We base our assumptions and estimates on historical experience and other sources that we believe to be reasonable at the time. Actual results may differ from these estimates and assumptions used in preparation of our financial statements.




Oil and Gas Properties

Successful Efforts Accounting. We account for our oil operations using the successful efforts method of accounting. Under this method, all property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending determination of whether proved reserves have been discovered. If an exploratory well does not find proved reserves, the costs of drilling the well are charged to expense and included within the statement of cash flows and reported as capital expenditures under investing activities when initially incurred. The costs of development wells are capitalized whether those wells are successful or unsuccessful. The application of the successful efforts method of accounting requires managerial judgment to determine the proper classification of wells designated as developmental or exploratory, which classification will ultimately determine the proper accounting treatment of the costs incurred.

Oil and Gas Reserve Quantities. Reserve quantities and the related estimates of future net cash flows affect our periodic calculations of depletion and the assessment of impairment. As a result, adjustments to depletion and evaluation of impairment are made concurrently with changes to reserves estimates. Reserve quantities and future cash flows included in this report are prepared in accordance with guidelines established by the SEC and the Financial Accounting Standards Board (the "FASB"). Our independent third party engineering firms adhere to the same guidelines when auditing our reserve reports. The accuracy of our reserve estimates is a function of many factors including the following: the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions, and the judgments of the individuals preparing the reserves estimates. Estimates prepared by others may be higher or lower than our estimates. Because these estimates depend on many assumptions, all of which may differ substantially from actual results, reserve estimates may be different from the quantities of oil and gas that are ultimately recovered. As a result, material revisions to existing reserves estimates may occur from time to time. Although every reasonable effort is made to ensure that the reported reserves estimates represent the most accurate assessments possible, the subjective decisions and variances in available data for various fields make these estimates generally less precise than other estimates included in our financial statements.



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Depreciation, Depletion, and Amortization. The provision for depletion of oil and gas properties is calculated on a field-by-field basis using the unit-of-production method and is dependent upon our estimates of total proved and proved developed reserves, which estimates incorporate various assumptions regarding future development and abandonment costs as well as our level of capital spending. If the estimates of total proved or proved developed reserves decline, the rate at which we record depreciation, depletion and amortization ("DD&A") expense increases, which in turn, increases DD&A expense. This decline may result from lower market prices, which may make it uneconomic to drill for and produce higher cost fields. We are unable to predict changes in reserve quantity estimates with a high level of precision as such quantities are dependent on the success of our exploitation and development program, as well as future economic conditions.

Impairment of Oil and Gas Properties. Oil and gas properties are assessed quarterly, or more frequently as economic events dictate, for potential impairment. Any impairment loss is the difference between the carrying value of the asset and its fair value. We estimate the fair value using expected future cash flows of our oil and gas properties and compare these undiscounted future cash flows to the carrying amount of the oil and gas properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, the cost of the property is written down to fair value, which is determined using net discounted future cash flows from the producing property. Different pricing assumptions or discount rates could result in a different calculated impairment. Our oil and gas properties were fully impaired in prior years'.

Asset Retirement Obligation. Our asset retirement obligations ("AROs") consist primarily of estimated future costs associated with the plugging and abandonment of oil and gas properties. The discounted fair value of an ARO liability is required to be recognized in the period in which it is incurred, with the associated asset retirement cost capitalized as part of the carrying cost of the oil and gas asset. The recognition of an ARO requires that management make numerous estimates, assumptions, and judgments regarding such factors as costs to satisfy plugging and abandonment and other obligations, future advances in technology, timing of settlements, the credit-adjusted risk-free rate, and inflation rates. In periods subsequent to the initial measurement of the ARO, we must recognize period-to-period changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. Increases in the ARO liability due to the passage of time impact operating results as accretion expense. The related capitalized cost, net of estimated salvage values, including revisions thereto, is charged to expense through DD&A over the life of the oil and gas property.



Revenue Recognition


We record revenues from the sale of oil and gas in the month in which the delivery to the purchaser occurred and title transferred. We receive payment one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers and the price we will receive. Variances between our estimated revenue and actual payment are recorded in the month the payment is received. Historically, any differences have been insignificant.



Stock Based Compensation


We have not established a stock based Compensation arrangement with our officers and directors of the Company or anyone else. However, we may establish such a system in the future.

If we establish such a system, we will recognize compensation expense for all share-based payment awards made to employees and directors. Stock based compensation expense will be measured at the grant date based on the fair value of the award. Judgments and estimates are made regarding, among other things, the appropriate valuation methodology to follow in valuing stock compensation awards and the related inputs required by those valuation methodologies. The Black-Scholes-Merton pricing model is used to value time based and performance based awards that do not contain performance or market conditions which impact the valuation of the award. This pricing model uses assumptions regarding expected volatility of our common stock, the risk-free interest rates, expected term of the awards, and other valuation inputs, which are subject to change. Any such changes could result in different valuations and thus impact the amount of stock based compensation expense recognized.



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Costs related to time based stock options are recognized as an expense on a straight-line basis over the requisite service period, which is generally the vesting period. Performance based options are recognized over the performance period when the achievement of the performance conditions is considered probable. Management re-assesses whether satisfaction of performance conditions are probable at the end of each reporting period. As of May 31, 2017, there were no performance based options outstanding.

Income Taxes and Uncertain Tax Positions

We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in our financial statements and our tax returns. We routinely assess the realizability of our deferred tax assets. If we conclude that it is more likely than not that some portion or all of our deferred tax assets will not be realized, the tax asset is reduced by a valuation allowance. We consider future taxable income in making such assessments. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions.

Accounting guidance for recognizing and measuring uncertain tax positions prescribes a more likely than not recognition threshold that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements. Previously recognized uncertain tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. There are no uncertain tax positions that would meet the more-likely-than-not recognition threshold for the fiscal year ended May 31, 2017 and 2016.

Foreign Currencies and Foreign Currency Adjustment of Intercompany Loans

When foreign currency transactions are of a long term investment nature (i.e., those for which settlement is not planned or anticipated in the foreseeable future) foreign currency translation adjustments resulting from those transactions are included in stockholders' equity as accumulated other comprehensive (loss) income. However, when transactions are deemed to be of a short term nature, translation adjustments are required to be included in the statement of operations.

Accounting for Business Combinations

The Company intends to pursue acquisitions as opportunities arise in order to grow our business. We will account for all of our business combinations in accordance with guidelines established by the Financial Accounting Standards Board, using the acquisition method of accounting, which involves the use of significant judgment.

In estimating the fair values of assets acquired and liabilities assumed in a business combination, we make various assumptions. The most significant assumptions relate to the estimated fair values assigned to proved and unproved crude oil and natural gas properties. We estimate future prices to apply to the estimated reserves quantities acquired, and estimate future operating and development costs, to arrive at estimates of future net cash flows. For estimated proved reserves, the future net cash flows are discounted using a market based weighted average cost of capital rate, adjusted for risk, determined to be appropriate at the time of the acquisition.

The calculation of the contingent consideration payable is a significant management estimate and is calculated using production projections and the estimated timing of production payouts. The Company also utilized a discount which is consistent with the Company's credit adjusted incremental borrowing rate.

MANAGEMENT ANALYSIS OF CERTAIN MARKET RISK ISSUES

The Company's exposure to market risk relates to fluctuations in foreign currency and world prices for crude oil, as well as market risk related to investment in marketable securities. The exchange rates between the Canadian dollar and the US dollar have changed in recent periods and may fluctuate substantially in the future. Any appreciation of the US dollar against the Canadian dollar is likely to have a negative impact on our revenue, operating income, and net income.

At May 31, 2017, the carrying value of cash and cash equivalents was approximately $2,606,586, which approximates the fair value.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is a smaller reporting company, as defined by 17 CFR § 229.10(f)(1), and therefore is not required to provide the information otherwise required by this Item.

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© Edgar Online, source Glimpses

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