FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2014

 

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to             .

 

Commission file number: 333-178437

 

West Texas Resources, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada   99-0365272
(State or other jurisdiction of
incorporation or organization) 		  (I.R.S. Employer
Identification no.)

 

5729 Lebanon Road, Suite 144

Frisco, Texas  75034

(Address of principal executive offices, including zip code)

 

(972) 712-1039

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act):

 

Large accelerated filer  o   Accelerated filer  o
     
Non-accelerated filer  o   Smaller reporting company  x
(Do not check if a smaller reporting company)    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

As of August 14, 2014, there were outstanding 14,385,400 shares of the common stock of West Texas Resources, Inc.

 

 
 

 

    Page
     
  PART I — FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Balance Sheets 1
     
  Statements of Operations 2
     
  Statements of Cash Flows 3
     
  Notes to Financial Statements 4
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
     
  General 14
     
  Results of Operations 15
     
  Financial Condition 16
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
     
Item 4. Controls and Procedures 17
     
 

PART II — OTHER INFORMATION

 
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
   
Item 6. Exhibits 18

 

 
 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

West Texas Resources, Inc.

Balance Sheets

 

 

    June 30,     September 30,  
    2014     2013  
    (Unaudited)        
ASSETS  
Current Assets                
Cash   $ 239,431     $ 16,631  
Accounts receivable     70,565       168,949  
Total Current Assets     309,996       185,580  
                 
Oil and gas properties, using successful effort accounting     737,610       1,002,109  
                 
TOTAL ASSETS   $ 1,047,606     $ 1,187,689  
                 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY  
                 
Current Liabilities                
Accrued expenses and other payables   $ 126,430     $ 151,196  
Payroll liabilities     3,499       3,911  
Asset retirement obligation     10,000       10,000  
Shareholder advances     66,079       15,000  
Interest payable     19,180       5,378  
Notes payable - related parties, net of discount     168,386       56,388  
Other notes payable     –       50,000  
Total Current Liabilities     393,574       291,873  
                 
Commitments and Contingencies     –       –  
                 
Shareholders' Equity                
Preferred stock, $0.001 par value; 10,000,000 shares authorized;  no shares issued and outstanding     –       –  
Common stock, $0.001 par value; 200,000,000 shares authorized; 14,271,400 and 14,079,400 shares issued and outstanding  at June 30, 2014 and September 30, 2013, respectively     14,271       14,079  
Additional paid-in capital     1,754,099       1,426,035  
Accumulated deficit     (1,114,338 )     (544,298 )
Total Shareholders' Equity     654,032       895,816  
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $ 1,047,606     $ 1,187,689  

 

See accompanying notes to these financial statements

 

1
 

 

 

West Texas Resources, Inc.

STATEMENTS OF OPERATIONS (UNAUDITED)

 

 

    For the Three Months Ended
June 30, 		    For the Nine Months Ended
June 30, 		 
    2014     2013     2014     2013  
Revenues                                
Oil and gas sales   $ 103,248     $ 127,705     $ 272,105     $ 127,705  
                                 
General and administrative expenses     67,782       26,397       573,347       132,833  
Operating Loss     35,466       101,308       (301,242 )     (5,128 )
                                 
Other income (expenses)                                
Interest expense     (11,490 )     –       (33,816 )     –  
Amortization of debt discount     (26,110 )     –       (214,997 )     –  
Asset retirement expense     –       (10,000 )     –       (10,000 )
Impairment loss on investment     –       (108,373 )     –       (108,373 )
Depreciation expense     –       –       –       (2,980 )
Loss on sale of oil and gas interest     –       –       (19,983 )     –  
Loss on disposal of fixed asset     –       –       –       (5,265 )
Loss Before Income Taxes     (2,134 )     (17,065 )     (570,038 )     (131,746 )
                                 
Tax provision     –       –       –       –  
Net Loss   $ (2,134 )   $ (17,065 )   $ (570,038 )   $ (131,746 )
                                 
Loss per share                                
Basic and diluted weighted average number of  common shares outstanding     14,187,224       13,397,000       14,124,118       13,207,500  
                                 
Basic and diluted net loss per share   $ (0.00 )   $ (0.00 )   $ (0.04 )   $ (0.01 )

 

 

See accompanying notes to these financial statements

 

2
 

 

West Texas Resources, Inc.

STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

    For the Nine Months Ended June 30,  
    2014     2013  
             
Cash flows from operating activities                
Net loss   $ (570,038 )   $ (131,746 )
Adjustments to reconcile net loss to net cash from operating activities:                
Depreciation expense     –       2,980  
Loss on disposal of fixed asset     –       5,265  
Asset retirement expense     –       10,000  
Impairment loss on investment     –       108,373  
Loss on sale of oil and gas interest     19,983       –  
Amortization of debt discount     214,997       –  
Stock-based compensation     232,256       –  
Changes in operating assets and liabilities:                
Accounts receivable     98,384       (127,705 )
Investment payable     –       702,900  
Payroll liabilities     (412 )     –  
Interest payable     13,802       –  
Other payables and accrued expenses     (24,766 )     (210 )
                 
Net cash provided by (used in) operating activities     (15,794 )     569,857  
                 
Cash flows from investing activities                
Investments     (45,483 )     (702,900 )
Proceeds from sale of oil and gas interest     290,000       –  
Net proceeds from sale of water truck     –       16,458  
                 
Net cash provided by (used in) investing activities     244,517       (686,442 )
                 
Cash flows from financing activities                
Proceeds from sale of common stock     96,000       177,350  
Repayment on notes payable     (153,002 )     –  
Shareholder Advances     51,079       6,000  
                 
Net cash (used in) provided by financing activities     (5,923 )     183,350  
                 
Net increase in cash     222,800       66,765  
                 
Cash, beginning of period     16,631       8,611  
                 
Cash, end of period   $ 239,431     $ 75,376  
                 
Supplemental cash flow disclosure:                
Interest paid   $ 20,014     $ –  
Income taxes paid   $ –     $ –  
                 
Supplemental disclosure of non-cash transactions:                
Conversion of shareholder advances to common stock   $ –     $ 41,000  

 

See accompanying notes to these financial statements

 

3
 

 

WEST TEXAS RESOURCES, INC.

 

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

 

June 30, 2014 and 2013

 

1.  Organization and Summary of Significant Accounting Policies

 

Organization and business

 

West Texas Resources, Inc., a Nevada corporation (the “Company”), was incorporated under the laws of Nevada on December 9, 2010 under the name Texas Resources Energy, Inc. On June 30, 2011, the Company changed its name to West Texas Resources, Inc. 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, 2013.

 

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.

 

 

4
 

 

WEST TEXAS RESOURCES, INC.

 

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

 

June 30, 2014 and 2013

 

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 year ended September 30, 2013, the Company determined that the investment in one of its oil and gas properties was impaired due to an unsuccessful fracking process. Accordingly, the Company recorded impairment loss of $108,373 for 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.

 

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 accounting principles generally accepted in the U.S. 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.

 

5
 

 

WEST TEXAS RESOURCES, INC.

 

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

 

June 30, 2014 and 2013

 

Revenue recognition

 

Substantially all of the Company’s revenue is from sales of oil and gas production and is recognized based on sales or delivery date completed by the operating company.

 

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, 2014 and 2013, all common stock equivalents were anti-dilutive.

 

Stock-based payments

 

Compensation costs for share-based awards with no market or performance conditions are measured based on the grant date fair value and are recognized over the vesting period. The fair value of share-based awards with market or performance conditions are measured upon the completion date. 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:

 

· Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

· 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.

 

· Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

6
 

 

WEST TEXAS RESOURCES, INC.

 

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

 

June 30, 2014 and 2013

 

As of June 30, 2014 and September 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 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The new guidance requires that unrecognized tax benefits be presented on a net basis with the deferred tax assets for such carryforwards. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2013. The adoption of the new provision did not have an material impact on the Company’s financial condition or results of operations.

 

2. Equipment

 

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 required 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 was for a term of two years and the lessee had 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.

 

The Company calculated the depreciation of the truck using straight-line method with a useful life of three years. For the three months ended December 31, 2012, the Company recorded depreciation expense of $2,980.

 

On December 31, 2012, the Company entered into an agreement with a third party to sell the water truck for a cash amount of $25,000 and recorded a receivable of $21,316, net of a replacement cost of tires of $3,684. The Company received cash of $21,316 as full payment of the sale on January 3, 2013. In addition, the Company paid $4,858 in title fees and commission for selling the water truck in January 2013. For the year ended September 30, 2013, the Company recorded loss on the disposal of a fixed asset of $5,265.

 

3. Oil and Gas Properties

 

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, the operator of the Company's Eastland County prospect began drilling and fracturing operations. As of June 30, 2014, no revenue has yet to be derived from the wells.

 

During the year ended September 30, 2013, the Company determined that the investment in the Eastland County 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. In addition, the Company determined and recorded its share of the asset retirement obligation of $10,000 for the year ended September 30, 2013.

 

7
 

 

WEST TEXAS RESOURCES, INC.

 

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

 

June 30, 2014 and 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 Company also assessed the asset retirement obligation on the Port Hudson field. Because the total cost of abandonment for the producing wells and related facilities will be substantially offset by the salvage value of the tangible equipment, the remaining costs will be insignificant. As a result, the Company did not record asset retirement obligation

 

On September 6, 2013, the Company acquired 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 was $50,000. In addition to the purchase price, the Company paid $230,459 to the operator of the West Cam 225 field in payment of the Company’s allocable share of the costs for development. Pursuant to the operating agreement, a fee of $0.31 per MCF is to be deducted from production revenue as accrual of asset retirement fund. The Company did not record asset retirement obligation.

 

On April 15, 2014, the Company entered into an agreement with EnTek Partners, LLC for the sale of 44.1% of its working interest in the Port Hudson field for the total consideration of $290,000, less any payments received by the Company for production from the Port Hudson field occurring after January 1, 2014. Pursuant to the agreement with EnTek Partners, the Company sold to EnTek an undivided 3.1956% of 8/8ths working interest (2.4926% net revenue interest) out of the working interests in the Port Hudson field owned by the Company. After giving effect to the sale, the Company continue to hold a 4.0506% working interest (3.1595% net revenue interest) in the Port Hudson field.

 

Pursuant to the same agreement, EnTek Partners has also agreed to provide to the Company $275,000 in non-recourse financing to pay for its share of a dual recompletion in the D-1 well at West Cam 225 property in exchange for its agreement to provide EnTek Partners with 75% of the net profits derived by the Company from the West Cam 225 property until such time as EnTek Partners has recouped 100% of the recompletion costs advanced on the Company’s behalf and 50% of the net profits thereafter.

 

The transactions under the agreement closed on April 16, 2014, with an effective date of January 1, 2014. As a result, during the nine months ended June 30, 2014, the Company recorded a loss on sale of the working interest of $19,983.

 

During the quarter ended June 30, 2014, the Company made additional investments of $45,484 on leases of various land in Hale County, Texas. As of June 30, 2014, $13,600 was not paid and recorded as accrued expenses and other payables.

 

As of June 30, 2014 and September 30, 2013, total oil and gas properties amounted to $737,610 and $1,002,109, respectively.

 

8
 

 

WEST TEXAS RESOURCES, INC.

 

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

 

June 30, 2014 and 2013

 

4. Notes Payable

 

Related Party Notes Payable

 

On August 14, 2013, the Company entered into a loan agreement with a shareholder, Gary Bryant, pursuant to which Mr. Bryant loaned the Company $417,762, the proceeds of which were used to partially finance the acquisition of the Port Hudson interest described in Note 3 above. 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. The Company’s obligations under the loan are secured by its working interest in the Port Hudson field.

 

On September 6, 2013, the Company entered into another loan agreement with Mr. Bryant, pursuant to which Mr. Bryant loaned the Company $130,000, the proceeds of which were used to partially finance the Company’s payment of its allocable expenses associated with its working interest in the West Cam 225 field, described in Note 3 above. The loan bears interest on the unpaid principal amount at the rate of 6% per annum. All principal and interest were payable on December 6, 2013 and are convertible into shares of the Company’s common stock, at the option of the holder, at the rate of $0.50 per share. The Company’s obligations under the loan are secured by its working interest in the Port Hudson field. At the same time, the Company entered into an amendment to its loan agreement with Mr. Bryant dated August 14, 2013, in the original principal amount of $417,762, to provide that all principal and interest under that loan agreement are convertible into shares of the Company’s common stock, at the option of the holder, at the rate of $0.50 per share.

 

Other Notes Payable

 

On September 6, 2013, the Company entered into a second loan agreement with an unrelated party pursuant to which the lender loaned the Company $100,000, the proceeds of which were used to partially finance the Company’s payment of its allocable expenses associated with its working interest in the West Cam 225 field, described in Note 3 above. The loan bears interest on the unpaid principal amount at the rate of 6% per annum. All principal and interest were payable on November 5, 2013. The Company’s obligations under the loan are secured by its working interest in the West Cam 225 field. In connection with the loan, the Company granted the lender a warrant to purchase 200,000 shares of its common stock, at an exercise price of $0.50 per share, over a two year period expiring on September 5, 2015.

 

The Company determined that the fair value of the above conversion options and the warrants using the Black – Scholes model with the variables listed below:

 

  · Volatility: 160%

 

  · Risk free rate of return: 0.01% to 0.875%

 

  · Expected term: 0.25 to 4 years

 

In connection with the issuance of the above notes, the Company recorded a note discount of $647,762, which is to be amortized over the lives of the notes. For the three and nine months ended June 30, 2014, the Company recorded amortization of note discount of $26,110 and $214,997, respectively.

 

9
 

 

WEST TEXAS RESOURCES, INC.

 

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

 

June 30, 2014 and 2013

 

As of the date of this report, the $417,762 note due to Mr. Gary Bryant is current. The outstanding balance of this note was $364,763 as of June 30, 2014. The maturity date of the $130,000 note has been extended to January 6, 2015. For the $100,000 noted due to the unrelated party, the Company had paid off the note in full during the quarter ended June 30, 2014.

 

5. Shareholder Advances

 

During the nine months ended June 30, 2014, a shareholder advanced a total amount of $51,079 as advances to the Company to support its daily operations. These advances are due on demand. Of the total amount of advances, $20,000 of the advances do not bear any interest and $31,079 of the advances bear interest at the rate of 5.9% percent per annum. In fiscal year 2013, $41,000 of shareholder advances were converted into 82,000 shares of the Company’s common stock. As of June 30, 2014 and September 30, 2013, the total outstanding amount due to the shareholder was $66,079 and $15,000, respectively.

 

6. Shareholders’ Equity

 

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.

 

Between January 2011 and October 2012, the Company conducted the private placement sale of 962,000 shares of its common stock at $.25 per share for the gross proceeds of $240,500. No commissions were incurred with respect to the sale of those shares.

 

In November 2012, the Company commenced the private placement sale of up to 5,000,000 shares of its common stock at $0.50 per share. The shares are being offered by the Company’s executive officers on a straight best-efforts basis and no commissions will be paid to the Company’s executive officers. 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. During the year ended September 30, 2013, the Company entered into various subscription agreements with accredited investors to sell 972,900 shares of the Company’s common stock at $0.50 per share, including 82,000 share of common stock that were issued in conversion of $41,000 of shareholder advances referred to in Note 5 above. The total amount of $445,450 of cash proceeds was received upon signing of the subscription agreements.

 

During the nine months ended June 30, 2014, the Company entered into various subscription agreements with accredited investors to sell 192,000 shares of the Company’s common stock at $0.50 per share. The shares were issued and the total amount of $96,000 was received during the nine months ended June 30, 2014.

 

As of June 30, 2014 and September 30, 2013, the Company had 14,271,400 and 14,079,400 shares of common stock issued and outstanding, respectively. The Company has not issued any of its preferred stock.

 

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.

 

10
 

 

WEST TEXAS RESOURCES, INC.

 

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

 

June 30, 2014 and 2013

 

The Company granted options to certain consultants to purchase 400,000 shares of the Company’s common stock. The options vested 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:

 

  · Volatility: 83%

 

  · Risk free rate of return: 1%

 

  · Expected term: 5 years

 

On March 7, 2014, the Company granted options to certain consultants to purchase 1,500,000 shares of the Company’s common stock. The options expire on March 7, 2019 and vest as following:

 

· 200,000 shares to vest upon the date of grant;
· 250,000 shares to vest upon the completion of financing of at least $250,000 during the first three months following the date of grant;
· 400,000 shares to vest upon the completion of financing of at least $1,000,000 (inclusive of any financing amounts attributed to the above-described vesting condition) during the first six months following the date of grant;
· 500,000 shares to vest upon the completion of financing of an additional of at least $5,000,000 (exclusive of any financing amounts attributed to the above-described vesting condition) during the first 18 months following the date of grant; and
· 150,000 shares to vest upon the closing stock price of the Company trading at a VWAP of $3 per share, for twenty of thirty consecutive trading days within 18 months following the date of grant.

 

The fair value of the vested options for 200,000 shares, determined to be $116,137, was recorded in general and administrative expenses for the period ended June 30, 2014. The unvested options will be evaluated upon completion of the market or performance condition. During the quarter ended June 30, 2014, the Company did not complete the financing of $250,000. Therefore, no share was vested for the three months ended June 30, 2014.

 

On March 11, 2014, the Company granted options to its officers to purchase a total of 200,000 shares of the Company’s common stock. The options expire on March 11, 2019 and vest immediately. The fair value of these options, determined to be $116,119 and was included in general and administrative expenses for the nine months ended June 30, 2014.

 

11
 

 

WEST TEXAS RESOURCES, INC.

 

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

 

June 30, 2014 and 2013

 

The following assumptions were used in the fair value method calculation:

 

  · Volatility: 190%

 

  · Risk free rate of return: 1.5%

 

  · Expected term: 5 years

 

 

The following information applies to all options outstanding at June 30, 2014:

 

  · Weighted average exercise price: $0.53

 

  · Options outstanding and exercisable: 800,000
     
  · Average remaining life: 3.70 years

 

 

7. Supplementary Oil and Gas Information (Unaudited)

 

Proved oil and gas reserve quantities are based on estimates prepared by management on behalf of West Texas Resources in accordance with guidelines established by the Securities and Exchange Commission (SEC).

 

There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and timing of development expenditures. The following reserve data represents those estimates only and should not be construed as being exact.

 

All of the reserves are located in the United States.

 

The information for the Company’s interests of reserves as of June 30, 2014, and after giving effect to dispositions described in Note 3 above, is as follows:

 

 

 

12
 

 

WEST TEXAS RESOURCES, INC.

 

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

 

June 30, 2014 and 2013

 

 

Net Remaining Reserves            
    Oil (bbls)     Gas (MMcf)     Cond (bbls)     BOE (bbls)  
Proved developed reserves                                
WC225     –       767,466       1,058       128,969  
Port Hudson     12,510       –       –       12,510  
Subtotal     12,510       767,466       1,058       141,478  
                                 
Proved undeveloped reserves                                
WC225                                
Port Hudson                                
Subtotal     –       –       –       –  
                                 
Total proved reserves     12,510       767,466       1,058       141,478  
                                 
Total Proved Net Developed Reserves                                
            Proved NBOE          
Reserves as of September 30, 2013             146,268                  
Production during the nine month period             4,790                  
Reserves as of June 30, 2014             141,478                  

 

 

8. Subsequent Events

 

Events subsequent to June 30, 2014 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.  Management found no other subsequent events that should be disclosed.

 

 

13
 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Statement

 

The following discussion and analysis should be read in conjunction with our unaudited financial statements and the related notes thereto contained elsewhere in this report. The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other filings with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the fiscal year ended September 30, 2013 filed with the SEC on January 14, 2014 and our subsequently filed periodic reports, which discuss our business in greater detail.

 

In this report we make, and from time to time we otherwise make, written and oral statements regarding our business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the SEC, news releases, written or oral presentations made by officers or other representatives made by us to analysts, stockholders, investors, news organizations and others, and discussions with management and other of our representatives.

 

Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties, including those risks included in the section “Risk Factors” set forth in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013 filed with the SEC on January 14, 2014. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement.

 

General

 

We were formed on December 9, 2010 under the laws of Nevada for the purpose of oil and gas exploration and development in North America. We commenced revenue producing oil and gas operations effective as of April 1, 2013.

 

In September 2011, we acquired our initial property consisting of a 31.25% working interest in an exploratory oil and gas drilling prospect covering 120 acres in Eastland County, Texas. The Eastland County prospect includes two exploratory wells, known as Rutherford #1 and C.M. Knott #1, that had been operating at a minimum level required to maintain the lease rights. In October 2011, the operator reentered the Rutherford #1 well and conducted drilling and casing activities, which were completed in November 2011. In January 2012, a third party conducted the fracture stimulation of the Rutherford #1. In February 2013, the operator placed a pump jack on the Rutherford #1 well, however no meaningful revenue has been derived from the well to date. During the three months ended June 30, 2013, we determined that our investment in the Eastland County prospect was impaired due to an unsuccessful fracture stimulation of the Rutherford #1. Accordingly, during the third fiscal quarter of 2013, we recorded an impairment loss of $108,373 to write off the capitalized fracture stimulation costs. The operator has undertaken no further activity on the Eastland County prospect as of the date of this report.

 

Port Hudson Field

 

In August 2013, we acquired a 7.24625% working interest (5.65158% net revenue interest) in the oil and gas leases, wells and attendant production in the Port Hudson field, Baton Rouge Parish, Louisiana, from Wells Fargo Energy Capital, Inc. for total consideration of $702,900. Our acquisition of the Port Hudson working interest was effective as of April 1, 2013. Accordingly, we have received revenue from the Port Hudson working interest commencing on April 1, 2013.

 

On April 15, 2014, we entered into an agreement with EnTek Partners, LLC for the sale of 44.1% of our working interest in the Port Hudson field for the total consideration of $290,000, less any payments received by us for production from the Port Hudson field occurring after January 1, 2014. Pursuant to our agreement with EnTek Partners, we sold to EnTek an undivided 3.1956% of 8/8ths working interest (2.4926% net revenue interest) out of the working interests in the Port Hudson field owned by us. The transactions under the EnTek Partners agreement closed on April 16, 2014, with an effective date of January 1, 2014. After giving effect to the sale, we continue to hold a 4.0506% working interest (3.1595% net revenue interest) in the Port Hudson field.

 

14
 

 

The Port Hudson field has three producing wells that have produced a total of 1.24 million bbls as of March 31, 2014 with estimated total remaining recoverable proved developed producing reserves of 199,778 bbls (6,312 bbls net to West Texas Resources after giving effect to the transaction with EnTek Partners), and 229,000 bbls of proven developed behind pipe reserves (6,983 bbls net to West Texas Resources after giving effect to the transaction with EnTek Partners) and are currently producing approximately 270 bbls per day. The operator of the Port Hudson field has no current plans for the further development of the property.

 

West Cam 225 Field

 

In September 2013, we acquired 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, from Enovation Resources, LLC for total consideration of $50,000. Concurrent with our purchase of the working interest, we also paid the operator $230,459 as our allocable share of the expenses associated with the West Cam 225 property. Pursuant to our April 15, 2014 agreement with EnTek Partners, LLC, EnTek Partners has also agreed to provide to us $275,000 in non-recourse financing to pay for our share of a dual recompletion in the D-1 well at the West Cam 225 property in exchange for our agreement to provide EnTek Partners with 75% of the net profits derived by us from the West Cam 225 property until such time as EnTek Partners has recouped 100% of the recompletion costs advanced on our behalf and 50% of the net profits thereafter. The transactions under the EnTek Partners agreement closed on April 16, 2014, with an effective date of January 1, 2014.

 

As of March 31, 2014, the West Cam 225 field had proven reserves of 10.7 bcf of gas and 14.7 mbc or 1.8 million net equivalent bbls (61,453 net equivalent bbls net to West Texas Resources after giving effect to the transaction with EnTek Partners) and has two producing wells, the #7 and the D-1, that were previously shut-in and waiting on a sales pipeline connection. The pipeline was completed and tested in August 2013 and now the two wells are currently producing at a combined gross rate of 2 mmcfd. As of March 31, 2014, the D-1 well has overproduced its expected recoverable reserves in its original completion in the 6,800’ Sand and is currently producing at a high water cut. The operator presently intends to perform a dual recompletion on the D-1 well in the fourth quarter of 2014, at which time the two wells will be recompleted uphole into the 2,600’ sand in the short string and the 5,900’ sand in the long string and are expected to produce at a combined rate of 7.5 mmcfd and thereby provide access to 7.93 bcf and 14.7 mbc of gross proved behind pipe reserves.

 

The transactions under the agreement closed on April 16, 2014, with an effective date of January 1, 2014.

 

Wolfcamp Field

 

In June and July 2014, we acquired non-operating leases covering approximately 1,070 gross mineral acres leases in the Wolfcamp field located in Hale County, Texas. The leases were acquired for cash payments of $45,484. The leases have a primary term of five years with our option to extend the term for another five years. The leased properties are a natural gas prospects, for which we hold 50% of the working interest and an 40% net revenue interest. The leased properties are subject to a 20% royalties held by the owners and a third party. We are currently evaluating our options for the exploitation of the leased properties, including our sale of the leases or our farm-out of the leases to a natural gas operator.

 

Results of Operations

 

We commenced revenue producing oil and gas operations effective as of April 1, 2013. From April 1, 2013 to December 2014, all of our revenue was derived from our working interest in the Port Hudson field. Commencing in January 2014, we have derived revenue from our working interest in the West Cam 225 field. During the three month periods ended June 30, 2014 and 2013, we had $103,248 and $127,705 of revenue, respectively. The decrease in revenue was due to our sale of a portion of our working interest in the Port Hudson field in April 2014, offset by our realization of $21,000 of revenue during the three month period ended June 30, 2014 from our working interest in the West Cam 225 field. During the nine month periods ended June 30, 2014 and 2013, we had $272,105 and $127,705 of revenue, respectively. All of our revenue during the nine month period ended June 30, 2013 was oil and gas sales derived from our working interest in the Port Hudson field, whereas our revenue for the nine months ended September 30, 2014 consisted of revenue in the amount of $242,105 from our working interest in the Port Hudson field and revenue in the amount of $30,000 from our working interest in the West Cam 225 field.

 

For the three month period ended June 30, 2014, we had general and administrative expenses of $67,782 compared to general and administrative expenses of $26,397 during the prior year period. The increase in expenses is attributable to the higher level of activity during the 2014 period. For the nine month period ended June 30, 2014, and we had general and administrative expenses of $573,347 compared to general and administrative expenses of $132,833 during the prior year period. The increase in expenses is attributable to the higher level of activity during the 2014 period and our incursion of $232,256 of stock-based compensation during the nine months ended June 30, 2014 compared to nil stock-based compensation during the prior year period.

 

15
 

 

For the three month period ended June 30, 2014, we had other expenses of $37,600 compared to other expenses of $118,373 during the prior year period. The decrease in other expenses is attributable to an impairment charge in the amount of $108,373 relating to our Eastland County prospect taken during the three months ended June 30, 2013. For the nine month period ended June 30, 2014, we had other expenses of $268,796 compared to other expenses of $126,618. The increase in other expenses was due primarily to an increase in interest expense and amortized debt discount in the amount of $188,887 during the period ended June 30, 2014, compared to the prior year period, related to our borrowings conducted during the third and fourth fiscal quarters of 2013.

 

For the three month periods ended June 30, 2014 and 2013, we incurred a net loss of $(2,134) and $(17,056), respectively. We had a net loss of $(570,038) and $(131,746) for the nine month periods ended June 30, 2014 and 2013, respectively. The increase in our net loss was the result of an increase in expenses during the periods ended June 30, 2014 compared to the prior year periods.

 

Subject to our receipt of additional capital, our plan of operations over the next 12 months is to pursue the acquisition of additional equity interests in oil and gas properties to be thereafter exploited by us in conjunction with other oil and gas producers. As of the date of this report, we have no understandings or agreements in place concerning our acquisition of an interest in any other properties.

 

At the present time, we have two employees, our chief executive officer and chief financial officer, Stephen Jones and John Kerr, respectively, each of whom has limited experience in the oil and gas exploration and development business. Subject to our receipt of significant additional capital, we intend to hire senior management and staff with experience in oil and gas exploration. Until such time, we intend to pursue an operating strategy that is based on our participation in exploration prospects as a non-operator. Based on that strategy, our plan of operations over the next 12 months is to pursue the acquisition of oil and natural gas interests in partnership with other companies with exploration, development and production expertise. We will also pursue alliances with partners in the areas of geological and geophysical services and prospect generation, evaluation and prospect leasing. Pursuant to this strategy, we intend to engage and rely on third party geologists and geophysicists, among others, to review the available data concerning each potential acquisition. In each case, we expect that the operator of the prospect will assemble the appropriate data and conduct the appropriate studies and that our consultants will conduct an independent review of the operator’s data and studies for purposes of advising us of the merits of each potential acquisition.

 

The business of oil and gas acquisition, drilling and development is capital intensive and the level of operations attainable by an oil and gas company is directly linked to and limited by the amount of available capital. Therefore, a principal part of our plan of operations is to acquire the additional capital required to finance the acquisition of such properties and our share of the development costs. As explained under “Financial Condition” below, we will seek additional working capital through the sale of our securities and, subject to the successful deployment of our cash on hand, we will endeavor to obtain additional capital through bank lines of credit and project financing.

 

Financial Condition

 

As of June 30, 2014, we had total assets of $1,047,606 and negative working capital of $(83,578). Our ability to achieve commercial success is dependent on our ability to obtain additional capital either through the additional sale of our equity or debt securities, bank lines of credit, project financing or cash generated from oil and gas operations. We seek to obtain additional working capital through the sale of our securities and, subject to the successful deployment of our cash on hand, we will endeavor to obtain additional capital through bank lines of credit and project financing. However, we have no agreements or understandings with any third parties at this time for our receipt of additional working capital and we have a limited history of generating cash from oil and gas operations. We may not be able to obtain access to capital as and when needed and, if so, the terms of any available financing may not be subject to commercially reasonable terms.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet financing arrangements.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risks

 

Not applicable.

 

16
 

 

Item 4. Controls and Procedures

 

(a)   Evaluation of Disclosure Controls and Procedures .

 

Our management, with the participation of our chief executive officer and chief accounting officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 15d-15 of the Securities Exchange Act of 1934.  Based on this evaluation, our management, including our chief executive officer and chief accounting officer, concluded that as of June 30, 2014 our disclosure controls and procedures were not effective due to existing material weaknesses in our internal control over financial reporting, as described below.

 

In connection with our evaluation of our internal control over financial reporting as of September 30, 2013, and included in our annual report on Form 10-K filed with the SEC on January 14, 2014, we determined that there were control deficiencies that constituted material weaknesses which are indicative of many small companies with small staff, including:

 

  · Due to our small size, we do not maintain effective internal controls to assure segregation of duties as we have only two employees who are responsible for initiating and approving of transactions, thereby creating the segregation of duties weakness;
  · Our board of directors does not have an audit committee or a financial expert to maintain effective oversight of our financial reporting process; and
  · Lack of formal policies or procedures to provide assurance that relevant information is identified, captured, processed, and reported in an appropriate and timely fashion.

 

(b)   Changes in Internal Control Over Financial Reporting.

 

There were no changes in our internal control over financial reporting that occurred during the three-month period ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

17
 

 

PART II — OTHER INFORMATION

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

During the fiscal quarter ended June 30, 2014, we conducted the private placement sale of 140,000 shares of our common stock, at the offering price of $0.50 per share, for the gross proceeds of $70,000. The issuances were exempt under Section 4(a)(2) of the Securities Act of 1933 and Rule 506 there under.  The investors were accredited investors, as such term is defined in Rule 501 under the Securities Act.   The offering was conducted by our management.  No sales commissions or finders’ fees were paid by us or anyone else.

 

Item 6. Exhibits

 

Exhibit
No. 		  Description   Method of Filing
         
31.1   Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Filed electronically herewith
         
31.2   Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Filed electronically herewith
         
32.1   Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).   Filed electronically herewith
         
101.INS*   XBRL Instance Document   Filed electronically herewith  
         
101.SCH*   XBRL Taxonomy Extension Schema Document   Filed electronically herewith
         
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document   Filed electronically herewith
         
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document   Filed electronically herewith
         
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document     Filed electronically herewith
         
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document     Filed electronically herewith

* Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

.

18
 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    WEST TEXAS RESOURCES, INC.
     
     
     
Date: August 14, 2014 By: /s/ Stephen E. Jones
      Stephen E. Jones,
      President and Chief Executive Officer
       
       
Date: August 14, 2014 By: /s/ John D. Kerr
      John D. Kerr,
      Chief Financial Officer

 

19

 

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