NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2016
AND 2015
1.
Organization and Summary of Significant Accounting Policies
Organization and business
West Texas Resources, Inc. (the “Company”)
was incorporated under the laws of Nevada on December 9, 2010 under the name Texas Resources Energy, Inc., a Texas corporation.
On June 30, 2011, the Company changed its name to West Texas Resources, Inc. The Company intends to engage in the acquisition,
exploration and development of oil and gas properties in North America. From its inception, the Company has devoted its activities
to developing a business plan, raising capital and acquiring operating assets. On August 5, 2016, the Company formed a wholly owned
subsidiary in the State of Texas, WTXR Operating (Texas) Inc., to operate oil and gas wells in Texas. This subsidiary was incorporated
to operate oil and gas wells in which West Texas Resources, Inc. owns interests. The subsidiary will begin with the operation of
several leases in South Texas and a lease in East Texas, with operations to begin after the year ended September 30, 2016.
Going concern
The accompanying consolidated financial statements
have been prepared in conformity with accounting principles generally accepted in the United States (GAAP) that contemplate continuation
of the Company as a going concern. The Company has not earned any significant revenues since inception. During the three months
ended December 31, 2016 and 2015, the Company incurred a net loss of $63,518 and $66,441, respectively. In addition, the Company
had an accumulative deficit of $2,668,238 and $2,446,773, as of September 30, 2016 and September 30, 2015, respectively. These
factors raise substantial doubt about the Company’s ability to continue as a going concern.
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.
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.
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.
Except for the Eastland County investment,
the asset retirement obligations for the other properties are recognized by the operators of these properties and deducted against
the revenue interest of the Company.
Cash, cash equivalents, and other cash flow
statement supplemental information
Cash is commonly considered to consist of currency
and demand in deposits. 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 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.
Use of estimates
The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United States of America 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 2013 to the present,
generally for three years after they are filed.
The Company has not filed its income tax return
for fiscal year 2016. The Company plans to file this tax return in the second quarter 2017. The Company believes that it should
not have a material impact on the financials because the Company did not have any tax liabilities due to net loss incurred in fiscal
year 2016.
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 three months ended December 31, 2016 and 2015, all common stock equivalents were anti-dilutive.
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.
Revenue recognition
In accordance with the requirements ASC topic
605 “Revenue Recognition”, revenues are recognized at such time as (1) persuasive evidence of an arrangement exists,
(2) delivery has occurred or services have been rendered, (3) the seller’s price to the buyer is fixed or determinable and
(4) collectability is reasonably assured.
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 December 31, 2016 and December 31, 2015,
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.
New Accounting Pronouncements
In August 2016, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments. This update addresses a diversity in practice in how certain cash receipts
and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other
Topics. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We adopted
this ASU in 2016 and the implementation did not have a material impact on our financial position or statement of operations.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”), which simplified certain aspects of the accounting
for share-based payment transactions, including income taxes, classification of awards and classification in the statement of cash
flows. ASU 2016-09 will be effective for the Company beginning in its first quarter of 2018. We are currently evaluating the impact
of adopting the new stock compensation standard on our consolidated financial statements.
In August 2014, the FASB issued Accounting
Standards Update No. 2014-15, “
Presentation of Financial Statements – Going Concern”
, Subtopic 205-40,
“
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.”
The
amendments in this ASU apply to all entities and require management to assess an entity’s ability to continue as a going
concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the
amendments (1) provide a definition of the term
substantial doubt,
(2) require an evaluation every reporting period
including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require
certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require
an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period
of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update
are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early
application is permitted. We adopted this ASU in 2016 and the implementation did not have a material impact on our financial position
or results of operations.
In May 2014, the FASB issued ASU No. 2014-09
“
Revenue from Contracts with Customers
” (Topic 606). This ASU was subsequently amended by ASU No. 2016-10 and
2016-12. As amended, Topic 606 supersedes the revenue recognition requirements in Topic 605,
“Revenue Recognition”
including
most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments
create a new Subtopic 340-40,
“Other Assets and Deferred Costs—Contracts with Customers”.
In
summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. For a public entity, the amendments in this update are effective for annual reporting periods beginning after December
15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting
periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are currently evaluating
the impact this guidance will have on our financial position and statement of operations.
2.
Oil and Gas Properties
Eastland County Field
In September 2011, we acquired our initial
property consisting of a 31.25% working interest in an explanatory oil and gas drilling prospect covering 120 acres in Eastland
County, Texas. After explanatory work was performed, we determined that, as of the three months ended June 30, 2013, our investment
in the Eastland County prospect was impaired due to an unsuccessful fracture stimulation. The value of this property, subsequent
the impairment, was $20,449. The operator has undertaken no further activity on the Eastland County prospect as of the date of
this report.
Sunshine Prospect, Landry Parish, Louisiana
On August 1, 2014, the Company entered into
an agreement with Restech Resources, LLC to purchase a 15% (14.25% net revenue interest) in an oil and gas prospect located in
Landry Parish, Louisiana. The working interest concerns 248 gross acres and net acres in the Sunshine Prospect. Our purchase price
for the working interest was $76,500.
Birnie Field, Motley County, Texas
On September 17, 2014, the Company entered
into an agreement with Escopeta Oil and Gas Corporation to purchase a 10% working interest (7.5% net revenue interest) in a natural
gas prospect located in the Birnie field in Motley County, Texas. The working interest concerns 5,760 leased acres in the Palo
Duro Basin prospect. Our purchase price for the working interest was $70,000. In 2014, the operator drilled an initial well on
the prospect, however the drilling was unsuccessful and resulted in a dry hole. The operator agreed to provide us, for no additional
consideration, a 1% working interest in the Stansell field prospect described below.
Stansell Field, Floyd County, Texas
We hold a 1% working interest in an oil prospect
located in Floyd County, Texas. The working interest comprises 15,000 leased acres in the southern section of the Palo Duro basin.
The initial project will be the re-entry of the Stansell #1-A well, an existing wellbore that was drilled in 2006. The original
drilling encountered oil shows in three separate reservoirs and the operator intends to re-enter and recomplete the Stansell #1-A
the Companying current fracture stimulation technology. We have a carried 1% working interest in the Stansell #1-A well through
the tanks. In April 2015, the operator has started the re-entry of the Stansell #1-A well.
Wolfcamp Field, Hale County, Texas
In June and July 2014, the Company acquired
non-operating leases covering approximately 1,070 gross mineral acre 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 the Company option to
extend the term for another five years. The leased properties constitute the surface acreage comprising a natural gas prospect,
for which we hold 50% of the working interest and 40% net revenue interest. The leased properties are subject to a 20% royalty
interest held by the owners and a third party. The Company is currently evaluating the Company options for the exploitation of
the leased properties, including the Company sale of the leases or the Company farm-out of the leases to a natural gas operator.
Leased Properties from Kiowa Oil Company
On September 30, 2015, the Company entered
into an agreement with Kiowa Oil Company to lease 100% of interests, for a period of five years, of properties in North Dakota,
Florida, Illinois, and Kentucky. The total price for the subject interests under this lease agreement is $5,000 and a 15% royalty
interest in all the subject interests leased. The total price will be paid in the Company’s common shares at the per share
price of $0.50.
TW Lee Field, Gregg County, Texas
On March 3, 2016, the Company entered into
an agreement with Two Eagle Resources, a Texas corporation, to purchase 25% working interest (18.75% net revenue interest) in the
properties located in Gregg County, Texas. The property is known as T.W. Lee. The purchase price for the subject interests under
this agreement is $25,000, which will be paid in the Company’s common shares at the per share price of $0.25.
T.A. Greer Lease
On May 10, 2016, the Company acquired a 25%
working interest (19.5% net revenue interest) in an East Texas oil and gas property. The property is known as the T.A. Greer lease
and includes two tracts of land totaling approximately 407 acres in Panola County, Texas. We acquired the property from an unaffiliated
party in consideration of our payment of $10,000 and issuance of 60,000 shares of our common stock at $0.25 per share for a total
consideration of $25,000.
Origin Acquisition
On November 10, 2016, the Company acquired
from Origin Production Co. Inc. interests in various producing and non-producing leases; primarily in Gonzales, Caldwell, and Wilson
County, Texas. We acquired the property from an unaffiliated party in for the purchase of 500,000 units of the Company’s
securities for a purchase price of $0.30 per unit for a total of $150,000. Each Unit consists of one share of the Company’s
common stock and one common stock warrant that entitles its holder to purchase one share of the Company’s common stock at
an exercise price of $0.50 per share over a three year period ending November 1, 2019.
As of December 31, 2016 and December 31, 2015,
total oil and gas properties amounted to $417,433 and $217,433, respectively.
3.
Shareholder Advances
During the year ended September 30, 2014 and
2013, a shareholder made advances to the Company to support its daily operations. These advances were due on demand and do not
bear any interest.
During the year ended September 30, 2015, a
shareholder paid a total amount of $15,000 for payment of legal fees on behalf of the Company through his personal credit line.
The outstanding balance was due on demand and bears variable interest of 25.99%. As of September 30, 2015, the total outstanding
amount due to the shareholder was $45,000.
The Company repaid $6,558 during the six months
ended March 31, 2016. In January 2016, the Company issued 450,000 shares of its common stock upon conversion of the outstanding
amount of $45,000. In addition, the shareholder retired 30,000 shares in exchange for $3,000 overpayment made to him.
During the year ended September 30, 2016,
a shareholder paid a total amount of $17,000 for payment of legal fees on behalf of the Company through his personal credit line.
The outstanding balance was due on demand and did not bear any interest. As of September 30, 2016, the total outstanding amount
due to the shareholder was $13,442.
During the quarter ended December 31, 2016,
a shareholder paid a total amount of $23,660 for payment of legal fees on behalf of the Company through his personal credit line.
The outstanding balance was due on demand and did not bear any interest. As of December 31, 2016, and September 30, 2016 the total
outstanding amount due to the shareholder was $37,102 and $13,442 respectively.
4.
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.
In January 2016, the Company issued 450,000
shares of its common stock upon conversion of the outstanding amount of shareholder advances of $45,000. In addition, the shareholder
retired 30,000 shares in exchange for $3,000 overpayment made to him.
During the quarter ended March 31, 2016, the
Company entered into subscription agreements with various accredited investors to sell 191,000 shares of the Company’s common
stock at $0.25 per share. The total amount of $47,750 was received and shares were issued during May 2016.
On March 3, 2016, the Company entered into
an agreement with Two Eagle Resources, a Texas corporation, to purchase 25% working interest / 18.75% net revenue interest in the
properties known as T.W. Lee located in Gregg County, Texas. The purchase price for the subject interests under this agreement
is $25,000, which will be paid in the Company’s common shares at the per share price of $0.25. As of September 30, 2016,
the shares had not been issued and were recorded as common stock issuable.
On May 10, 2016, the Company entered into an
agreement with Two Eagle Resources, a Texas corporation, to purchase 25% working interest in the properties know as T.A. Greer
located in Panola County, Texas. The purchase price for the subject interests under this agreement is $10,000 in cash and $15,000,
which will be paid in the Company’s common shares at the per share price of $0.25. The cash portion was paid May 12, 2016
and the shares were issued in August 2016.
During the quarter ended June 30, 2016 the
Company entered into subscription agreements with various accredited investors to sell 100,000 shares of the Company’s common
stock at $0.25 per share. The total amount of $25,000 was received and the shares were issued August 2016.
During the quarter ended December 31, 2016, the Company entered
into subscription agreements with various accredited investors to sell 98,000 shares of the Company’s common stock at $0.30
per share. The total amount of $29,400 was received and 55,000 of the 98,000 shares were issued; 43,000 shares to be issued; $12,900
in common stock issuable.
During the quarter ended December 31, 2016,
the Company exchanged 500,000 units of WTXR securities Each Unit consists of one share of the Company’s common stock and
one common stock warrant that entitles its holder to purchase one share of the Company’s common stock at an exercise price
of $0.50 per share over a three year period ending November 1, 2019, valued at .30 per unit, for a total consideration of $150,000,
in exchange for various producing and non-producing leases primarily in Gonzales, Caldwell, and Wilson County, Texas.
As of December 31, 2016
and September 30, 2016, the Company had 16,844,908 and 16,289,908 shares of common stock issued and outstanding and had 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.
In 2011, the Company granted options to certain
consultants to purchase 400,000 shares of the Company’s common stock. The options vest immediately and expired 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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On March 7, 2014, the Company granted options
to certain consultants to purchase 1,500,000 shares of the Company’s common stock, of which 200,000 options vested upon the
date of grant and the balance of 1,300,000 options expired in October 2014 in connection with the termination of the consulting
arrangement. The 200,000 vested options expire on March 7, 2019. 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 year ended September 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 year ended September 30, 2014.
The following assumptions were used in the
fair value method calculation:
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Risk free rate of return: 1.5%
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On April 16, 2015, the Company granted options
to Mr. Paul Brogan, the Company’s director, to purchase a total of 200,000 shares of the Company’s common stock. The
options have an exercise price of $0.5 per share and expire on April 16, 2020 and 66,667 shares vest immediately with the rest
vest equally on April 16, 2016 and 2017. The fair value of these options was determined to be $99,712, of which $8,309 was amortized
and included in general and administrative expenses for the three months ended December 31, 2016. As of September 30, 2016, the
unrecognized compensation expense related the non-vested stock options was $9,694 to be amortized over the vesting period.
The following assumptions were used in the
fair value method calculation:
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Risk free rate of return: 1.375%
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The following information applies
to all options outstanding at September 30, 2016:
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Weighted average exercise price: $0.57
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Options outstanding and exercisable: 580,639
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Average remaining life: 2.33 years
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5.
Income Taxes
Based on the available
information and other factors, management believes it is more likely than not that the net deferred tax assets at September 30,
2016 and 2015 will not be fully realizable. Accordingly, management has recorded a full valuation allowance against its net deferred
tax assets at September 30, 2016 and 2015. As of September 30, 2016 and 2015, the Company had federal net operating loss carry-forwards
of approximately
$2,605,000 and $2,380,000, respectively, expiring
beginning in 2032.
Deferred tax assets consist of the following components:
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September 30, 2016
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September 30, 2015
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Net loss carryforward
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$
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920,000
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$
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840,000
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Valuation allowance
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(920,000
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(840,000
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Total deferred tax assets
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$
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–
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$
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–
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6. New CEO’s employment and stock options agreement highlights.
Base Salary:
The base salary is $90,000 per year ($7,500
per month), with $2,000 guaranteed and paid on a monthly basis, with the remaining $5,500 accruing each month until certain benchmarks
are reached. Accrual reduction happens at the one year mark, at which point $4,000 is guaranteed and paid on a monthly basis, with
the remaining $3,500 accruing each month until certain benchmarks are reached. At the two year mark, accrual ends and the balance
at that point is paid out on a monthly basis at $500, with the final lump sum paid at the three year mark.
Option Compensation:
1,500,000 in stock options. The stock
options vest in 375,000 increments based on the CEO’s ability to raise additional capital ($1M and $10M), get company’s
share price to above $2.00 with 10,000 shares daily trading volume for 30 consecutive days, or increase daily production to 500
boepd. All benchmarks must be reached within two years of the Oct. 18, 2016 grant date. If there is a change in control, then all
options vest and become immediately exercisable.
Annual Bonus:
The annual bonus is not guaranteed, however
we will track the performance criteria throughout the year.
Other Perks:
Among the various perks, the CEO gets two weeks
paid vacation each calendar year.
7. Subsequent Event
Events subsequent to September 30, 2016 have been evaluated through
the date these consolidated financial statements were issued to determine whether they should be disclosed to keep the consolidated
financial statements from being misleading. Management noted the following subsequent event that should be disclosed:
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The Company entered into subscription agreements to sell during January and March, 2017, 281,000
units at $0.30 per unit. One unit equals one share at $0.30 per share plus one warrant at $0.50 per share for the amount of $84,300.
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