NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2013
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1.
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Organization and Summary of Significant Accounting Policies
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Organization and business
Texas Resources Energy, Inc.
(“TREI”) was incorporated under the laws of Nevada on December 9, 2010, as a wholly-owned subsidiary of Russian
Resources Energy, Inc., a Texas corporation (“RREI”), and then spun off to the shareholders of RRIE on the same
date. On June 30, 2011, TREI changed its name to West Texas Resources, Inc. (the “Company”). The Company is
engaged in the acquisition, exploration and development of oil and gas properties in North America.
Basis
of presentation
The accompanying unaudited financial statements
have been prepared in accordance with accounting principles generally accepted in the United States (U.S.) for interim financial
information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X promulgated by the Securities and
Exchange Commission (“SEC”) and reflect all adjustments, consisting of normal recurring adjustments and other adjustments,
which management believes are necessary to fairly present the financial position, results of operations and cash flows of the Company,
for the respective periods presented. The results of operations for an interim period are not necessarily indicative of the results
that may be expected for any other interim period or the year as a whole. The accompanying unaudited financial statements should
be read in conjunction with the financial statements and notes for the year ended September 30, 2012.
Liquidity and management’s plans
The Company’s
ability to generate revenue primarily depends on its success in investigation and exploration of oil and gas properties. The
Company incurred a net loss of $131,746 during the nine months ended June 30, 2013 and a net loss of $380,163 from inception to
June 30, 2013. Also, the Company had a cash balance of $75,376, a working capital deficit of $577,561 and a stockholders’
equity of $144,089 at June 30, 2013.
The Company will require up to $1 million
of additional capital in order to fund its proposed operations over the next 12 months. Management plans to continue to seek sources
of financing on favorable terms; however, there are no assurances that any such financing can be obtained on favorable terms, if
at all. Management expects to monitor and control the Company’s operating costs until cash is available through
financing or operating activities. There are no assurances that the Company will be successful in achieving these plans. The
Company anticipates that losses will continue until such time, if ever, as the Company is able to generate sufficient revenues
to support its operations.
WEST TEXAS RESOURCES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2013
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1.
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Organization and Summary of
Significant Accounting Policies (continued)
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Oil and gas properties
The Company uses the successful efforts
method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill
and equip exploratory wells that find proved reserves, to drill and equip development wells and related asset retirement costs
are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs
of carrying and retaining unproved properties are expensed.
Unproved oil and gas properties that are
individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment
by providing an impairment allowance. Other unproved properties are amortized based on the Company's experience of successful drilling
and average holding period. Capitalized costs of producing oil and gas properties, after considering estimated residual salvage
values, are depreciated and depleted by the unit-of-production method.
On the sale or retirement of a complete
unit of a proved property, the cost and related accumulated depreciation, depletion, and amortization are eliminated from the property
accounts, and the resultant gain or loss is recognized. On the retirement or sale of a partial unit of proved property, the cost
is charged to accumulated depreciation, depletion, and amortization with a resulting gain or loss recognized in income. On
the sale of an entire interest in an unproved property for cash or cash equivalent, gain or loss on the sale is recognized, taking
into consideration the amount of any recorded impairment if the property had been assessed individually. If a partial interest
in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained.
Impairment of long-lived assets
The Company accounts for the impairment
and disposition of long-lived assets in accordance with ASC 360-10-35,
Impairment or Disposal of Long-Lived Assets
. In
accordance with ASC 360-10-35, long-lived assets are reviewed for events of changes in circumstances, which indicate that their
carrying value may not be recoverable.
During the three months ended June 30, 2013, the
Company determined that the investment in its oil and gas properties was impaired due to unsuccessful fracking process. Accordingly,
the Company recorded impairment loss of $108,373 to write off the capitalized fracking costs.
Asset retirement obligations
ASC 410-20,
Asset Retirement Obligations
,
clarifies that a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional
on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity
is unconditional even though uncertainty exists about the timing and/or method of settlement. ASC 410-20 requires a liability to
be recognized for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably
estimated.
WEST TEXAS RESOURCES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2013
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1.
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Organization and Summary of
Significant Accounting Policies (continued)
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Cash, cash equivalents, and other cash
flow statement supplemental information
The Company considers all liquid investments
with an original maturity of three months or less that are readily convertible into cash to be cash equivalents. The
Company places its cash equivalents with high credit quality financial institutions. Accounts at these institutions
are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. The Company performs ongoing evaluations of
these institutions to limit its concentration of risk exposure. Management believes this risk is not significant due
to the financial strength of the financial institutions utilized by the Company.
Furniture, fixtures and equipment
Furniture, fixtures and equipment are carried
at cost depreciated using the straight-line method over their estimated useful lives. Gain or loss on retirement or sale or other
disposition of these assets is included in income in the period of disposition.
Use of estimates
The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Income taxes
The Company reports certain expenses differently
for financial and tax reporting purposes and, accordingly, provides for the related deferred taxes. Income taxes are
accounted for under the liability method in accordance with ASC 740,
Income Taxes
.
Management has considered its tax positions
and believes that all of the positions taken by the Company in its Federal and State tax returns are more likely than not to be
sustained upon examination. The Company is subject to examination by U.S. Federal and State tax authorities from 2010 to the present,
generally for three years after they are filed.
Basic and diluted net income (loss)
per share
Basic net income (loss) per share is based
upon the weighted average number of common shares outstanding. Diluted net income (loss) per share is based on the assumption
that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying
the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the
period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average
market price during the period. For the nine months ended June 30, 2013, all common stock equivalents were anti-dilutive.
WEST TEXAS RESOURCES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2013
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1.
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Organization and Summary of
Significant Accounting Policies (continued)
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Stock-based payments
Compensation costs for all share-based
awards are measured based on the grant date fair value and are recognized over the vesting period. The Company has no awards with
market or performance conditions. Excess tax benefits will be recognized as an addition to additional paid-in-capital.
Fair value of financial instruments
The accounting standards regarding fair
value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the
fair value of financial instruments held by the Company. The Company considers the carrying amount of cash and other current assets
and liabilities to approximate their fair values because of the short period of time between the origination of such instruments
and their expected realization.
The Company has also adopted ASC 820-10
which defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances
disclosure requirements for fair value measures. The three levels are defined as follows:
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Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets
or liabilities in active markets.
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Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities
in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially
the full term of the financial instruments.
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Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.
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As of June 30, 2013, the Company did not
identify any assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with
ASC 820-10.
Recent Accounting Pronouncements
In July 2012, the Financial Accounting
Standards Board (“FASB”) issued ASU 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived
Intangible Assets for Impairment, to simplify the manner in which entities test indefinite-lived intangible assets for impairment.
The ASU permits an entity to first assess qualitative factors to determine whether events and circumstances indicate that it is
more likely than not that the indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary
to perform a quantitative impairment test. The ASU is effective for annual and interim impairment tests performed for fiscal years
beginning after September 15, 2012, with early adoption permitted. The implementation of the standard did not have a significant
impact on the Company’s financial statements.
WEST TEXAS RESOURCES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2013
In August 2011, the Company
purchased a water truck for $35,759 cash. In October 2011, the Company's water truck was placed in service pursuant to a
lease arrangement with an unaffiliated third party. The lease requires the lessee to pay the Company $2,500 per month
plus 10% of the revenue collected by the lessee from its use or sublease of the truck. The lease is for a term of two
years and the lessee has the option to purchase the truck at the end of the lease term for 75% of the Company's purchase
price. During the year ended September 30, 2012, the Company terminated the lease and wrote off the lease income
receivable of $5,616 as bad debt expense due to the lessee’s cash flow problems. In January 2013. the Company sold the
water truck for net proceeds of $16,458 and recorded a loss on disposal of equipment of $5,265.
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3.
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Oil and Gas Properties
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In September 2011, the Company acquired
a 31.25% working interest in an exploratory oil and gas drilling prospect covering 120 acres in Eastland County, Texas, for $127,123
cash.
In October 2011, West Texas Royalties,
Inc., the operator of the Company's Eastland County prospect began drilling and fracturing operations.
As
of June 30, 2013, no revenue has yet to be derived from the wells. During the three months ended June 30, 2013, the Company determined
that its investment in this oil and gas property was impaired due to the unsuccessful fracking process. Accordingly, the Company
recorded an impairment loss of $108,373 to write off the capitalized fracking costs. In addition, the Company determined and recorded
its share of the asset retirement obligation of $10,000 at June 30, 2013.
Effective April 1, 2013, the Company acquired
a 7.24625% working interest in the oil and gas leases, wells and attendant production in the Port Hudson field, Baton Rouge Parish,
Louisiana, for a total consideration of $702,900. The Port Hudson field has three producing wells with estimated total remaining
recoverable proved developed producing reserves of 294,000 bbls and 229,000 bbls of proven developed behind pipes reserves. The
wells are currently producing approximately 290 bbls per day. The Company’s working interest is subject to certain overriding
royalty interests, subject to which it has a 5.65158% net revenue interest in the Port Hudson Field.
The entire purchase consideration of $702,900
was paid in July and August 2013.
WEST TEXAS RESOURCES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2013
The Company is authorized to issue 200,000,000
shares of common stock, par value of $0.001, and 10,000,000 shares of preferred stock, par value of $0.001.
Commencing on January 24, 2011, the Company
began the sale of up to 2,000,000 shares of its common stock at $.25 per share in a private placement. During fiscal
2011, the Company sold 962,000 shares for gross proceeds of $240,500. No commissions were incurred with respect to these sales
of stock.
On November 26, 2012, the Board of Directors
of the Company approved the Private Placement Memorandum for an offering of 3,000,000 shares of the Company’s common stock
at $0.50 per share. The Shares are being offered by the Company’s executive officers on a straight best-efforts basis. However,
in the event the Company engages finders or FINRA member firms, the Company expects to pay finders’ fees or sales commissions
of up to 10% of the gross offering proceeds.
On November 29, 2012 and January 10,
2013, the Company entered into subscription agreements with its majority shareholder whereby the shareholder converted
$41,000 he advanced to the Company into 82,000 common shares and purchased an additional 58,000 common shares for $29,000
cash.
During the six months ended March 31, 2013,
the Company entered into various subscription agreements with accredited investors to sell 144,700 shares of its common stock at
$0.50 per share. The total consideration of $72,350 was received upon signing of the subscription agreements.
During the three months ended June 30,
2013, the Company entered into various subscription agreements with accredited investors to sell 152,000 shares of its common stock
at $0.50 per share. The total consideration of $76,000 was received upon signing of the subscription agreements.
On September 15, 2011, the Company adopted
the West Texas Resources, Inc. 2011 Stock Incentive Plan (the “Plan”) providing for the grant of non-qualified stock
options and incentive stock options to purchase its common stock and for grant of restricted and unrestricted grants. The Company
has reserved 3,000,000 shares of its common stock under the Plan. All officers, directors, employees and consultants to the Company
are eligible to participate under the Plan. The purpose of the Plan is to provide eligible participants with an opportunity to
acquire an ownership interest in the Company.
WEST TEXAS RESOURCES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2013
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4.
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Shareholders’ Equity (continued)
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The Company granted options to certain
consultants to purchase 400,000 shares of the Company’s common stock. The options vest immediately and expire on September
15, 2016. The fair value of each share-based award was estimated using the Black-Scholes option pricing model or a lattice model.
The fair value of these options, determined to be $65,402, was included in general and administrative expenses for the year ended
September 30, 2011.
The following assumptions were used in the fair value method
calculation:
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Risk free rate of return: 1%
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The following information applies to all options outstanding
at June 30, 2013:
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Weighted average exercise price: $0.25
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Options outstanding and exercisable: 400,000
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Average remaining life: 3.25 years
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Events subsequent to June 30, 2013 have
been evaluated through the date these financial statements were issued to determine whether they should be disclosed to keep the
financial statements from being misleading. The following events occurred since June 30, 2013:
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In July 2013, the Company entered into various subscription agreements with accredited investors
to sell 359,000 shares of its common stock at $0.50 per share. The total amount of $179,500 was received upon signing of the subscription
agreements.
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On August 14,
2013, we entered into a loan agreement with our majority shareholder, Gary Bryant, pursuant to which Mr. Bryant loaned us $417,762,
the proceeds of which were used to partially finance our acquisition of the Port Hudson interest. The loan bears interest on the
unpaid principal amount at the rate of 8% per annum. All principal and interest are payable over a four year period, commencing
November 1, 2013, at the amortized rate of $10,198 per month. Our obligations under the loan are secured by our working interest
in the Port Hudson field.
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On August 16, 2013, the Company entered into an agreement with
Enovation Resources, LLC to purchase a 10.0167% working interest (7.2120% net revenue interest) in an offshore oil and gas field,
known as West Cam 225, located in the shallow waters of the Gulf of Mexico near Cameron, Louisiana. The Company’s purchase
price for the working interest is $50,000, payable on August 28, 2013.
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