Notes
To The Consolidated Financial Statements
June
30, 2016
(Unaudited)
Note
1 – Organization and History
T-Rex
Oil, Inc. (the “Company”) was incorporated in Colorado on September 2, 2014. Rancher Energy Corp was incorporated
in Nevada on February 2, 2004. Effective October 20, 2014, T-Rex Oil, Inc. and Rancher Energy Corp were merged under the laws
of the State of Colorado and T-Rex Oil, Inc. became the surviving entity.
The
Company is currently engaged in the acquisition, exploration, and development of oil and gas prospects in the Rocky Mountain region
of Wyoming.
On
February 24, 2015, the Company entered into a Share Exchange Agreement with Western Interior Oil & Gas Corporation, a Wyoming
private oil and natural gas company (“Western Interior”) and the shareholders of Western Interior. Under the Share
Exchange Agreement the Company exchanged 7,465,168 shares of its restricted common stock for 170,878 shares of the issued and
outstanding common stock of Western Interior thereby owning 83% of Western Interior. The acquisition was closed on March 27, 2014
and became effective March 31, 2015. On March 31, 2015, the Company entered into an amendment to the Share Exchange Agreement
whereby the Company assumed certain repurchase agreements between Schwaben Kapital GmbH, Western Interior and its dissident shareholders
and as a result acquired the remaining 17% of Western Interior. As part of these agreements, the Company assumed certain promissory
notes issued to the dissenting shareholders in the total amount of $1,770,047 that were secured by Western Interior assets. As
a result, Western Interior became a wholly-owned subsidiary of the Company. See Note 2 – Summary of Significant Accounting
Policies – Principles of Consolidation.
On
January 15, 2016, T-Rex Oil LLC #3 entered into a Purchase and Sale Agreement with Blue Tip Energy Wyoming, Inc. and Cole Creek
Recompletions LLC and acquired approximately 82% of the working interest in certain leases located in the state of Wyoming known
as the Cole Creek properties in exchange for $1,200,000 in cash plus the assumption of liabilities in the amount of $833,382 for
a total purchase price of $2,033,382. On April 20, 2016, the T-Rex Oil LLC #3 entered into a Purchase and Sale Agreement with
Black Hills Exploration & Production, Inc. and acquired the remaining approximately 18% working interest in the Cole Creek
properties in exchange for $250,000 in cash plus the assumption of liabilities in the amount of $182,938 for a total purchase
price of $432,938. These leases are proved developed and undeveloped leaseholds and include producing crude oil wells totaling
approximately 13,328 gross acres. See Note 2 – Principles of Consolidation.
Note
2 – Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated balance sheets at June 30, 2016 and 2015 and the consolidated statement of operations and cash flows
for the three months ended June 30, 2016 include the accounts of Terex Energy Corporation, T-Rex Oil, Inc., Western Interior Oil
and Gas Corporation and T-Rex Oil LLC #3. All intercompany balances have been eliminated during consolidation.
The
Company owns a 14.29% equity interest in T-Rex Oil, LLC #3, the remaining 85.71% is held by a director and shareholder of the
Company. The Company has identified T-Rex Oil LLC #3 as a Variable Interest Entity (VIE). We hold current rights that gives us
the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance convened with
provisions that give us the right to receive potentially significant benefits. As a result, we consolidate the accounts of T-Rex
Oil, LLC #3, eliminating all intercompany balances during consolidation.
We
continuously evaluate whether we have a controlling financial interest in T-Rex Oil LLC#3. Where we are a general partner, we
consider substantive removal rights held by other partners in determining if we hold a controlling financial interest. We reevaluate
whether we have a controlling financial interest in these entities when our voting or substantive participating rights change.
Use
of Estimates in the Preparation of Consolidated Financial Statements
The
preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates include the fair
value of assets and liabilities, oil and natural gas reserves, income taxes and the valuation allowances related to deferred tax
assets, asset retirement obligations and contingencies.
Cash
and Cash Equivalents
The
Company considers all liquid investments purchased with an initial maturity of three months or less to be cash equivalents. Cash
and cash equivalents include demand deposits and money market funds carried at cost which approximates fair value. The Company
maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (“FDIC”), although such deposits
are in excess of the insurance coverage. At June 30, 2016, the Company did not have cash deposits in excess of FDIC insured limits.
T-REX
OIL, INC. AND SUBSIDIARIES
Notes
To The Consolidated Financial Statements
June
30, 2016
(Unaudited)
Concentration
of Credit Risk
The
Company’s producing properties are primarily located in Wyoming and the oil and gas production is sold to various purchasers
based on market index prices. The risk of non-payment by these purchasers is considered minimal and the Company does not generally
obtain collateral for sales. The Company continually monitors the credit standing of the primary purchasers.
During
the three months ended June 30, 2016 and 2015, one purchaser accounted for 100% and 88% of total revenues, respectively.
Accounts
Receivable
Accounts
receivable are stated at their cost less any allowance for doubtful accounts. The allowance for doubtful accounts is based on
the management’s assessment of the collectability of specific customer accounts and the aging of the accounts receivable.
If there is deterioration in a major customer’s creditworthiness or if actual defaults are higher than the historical experience,
the management’s estimates of the recoverability of amounts due to the Company could be adversely affected. Based on the
management’s assessment, there is no reserve recorded at June 30, 2016 and 2015.
Oil
and Gas Producing Activities
The
Company uses the successful efforts method of accounting for oil and gas activities. Under this method, the costs of productive
exploratory wells, all development wells, related asset retirement obligation assets, and productive leases are capitalized and
amortized, principally by field, on a units-of-production basis over the life of the remaining proved reserves. Exploration costs,
including personnel costs, geological and geophysical expenses, and delay rentals for oil and gas leases are charged to expense
as incurred. Exploratory drilling costs are initially capitalized, but charged to expense if and when the well is determined not
to have found reserves in commercial quantities. The sale of a partial interest in a proved property is accounted for as a cost
recovery, and no gain or loss is recognized as long as this treatment does not significantly affect the units-of-production amortization
rate. A gain or loss is recognized for all other sales of producing properties. There were capitalized costs of $11,754,817 and
$10,281,659 at June 30, 2016 and 2015, respectively.
Unproved
oil and gas properties are assessed annually to determine whether they have been impaired by the drilling of dry holes on or near
the related acreage or other circumstances, which may indicate a decline in value. When impairment occurs, a loss is recognized.
When leases for unproved properties expire, the costs thereof, net of any related allowance for impairment, is removed from the
accounts and charged to expense. During the three months ended June 30, 2016 and 2015, there was no impairment to unproved properties.
The sale of a partial interest in an unproved property is accounted for as a recovery of cost when substantial uncertainty exists
as to the ultimate recovery of the cost applicable to the interest retained. A gain on the sale is recognized to the extent that
the sales price exceeds the carrying amount of the unproved property. A gain or loss is recognized for all other sales of unproved
properties. There were capitalized costs of $4,754,620 and $4,745,917 at June 30, 2016 and March 31, 2016, respectively.
Costs
associated with development wells that are unevaluated or are waiting on access to transportation or processing facilities are
reclassified into developmental wells-in-progress (“WIP”). These costs are not put into a depletable field basis until
the wells are fully evaluated or access is gained to transportation and processing facilities. Costs associated with WIP are included
in the cash flows from investing as part of investment in oil and gas properties. At June 30, 2016 and March 31, 2016, no capitalized
development costs were included in WIP.
Depreciation,
depletion and amortization of proved oil and gas properties is calculated using the units-of-production method based on proved
reserves and estimated salvage values. For the three months ended June 30, 2016 and 2015, the Company recorded depreciation, depletion
and amortization expense on oil and gas properties in the amount of $35,123 and $127,046, respectively.
T-REX
OIL, INC. AND SUBSIDIARIES
Notes
To The Consolidated Financial Statements
June
30, 2016
(Unaudited)
The
Company reviews its proved oil and natural gas properties for impairment whenever events and circumstances indicate that a decline
in the recoverability of its carrying value may have occurred. It estimates the undiscounted future net cash flows of its oil
and natural gas properties and compares such undiscounted future cash flows to the carrying amount of the oil and natural gas
properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future
cash flows, the Company will adjust the carrying amount of the oil and natural gas properties to fair value. There was no impairment
to prove properties for the three months ended June 30, 2016 and 2015, respectively.
Other
Property and Equipment
Other
property and equipment, such as computer hardware and software, are recorded at cost. Costs of renewals and improvements that
substantially extend the useful lives of the assets are capitalized. Maintenance and repair costs are expensed when incurred.
When other property and equipment is sold or retired, the capitalized costs and related accumulated depreciation are removed from
their respective accounts. Depreciation expense of other property and equipment for the three months ended June 30, 2016 and 2015
was $10,284 and $9,594, respectively.
Asset
Retirement Obligations
The
Company records estimated future asset retirement obligations (“ARO”) related to its oil and gas properties. The Company
records the estimated fair value of a liability for ARO in the period in which it is incurred with a corresponding increase in
the carrying amount of the related long-lived asset. The increased carrying value is depleted using the units-of-production method,
and the discounted liability is increased through accretion over the remaining life of the respective oil and gas properties.
The
estimated liability is based on historical industry experience in abandoning wells, including estimated economic lives, external
estimates as to the cost to abandon the wells in the future, and federal and state regulatory requirements. The Company’s
liability is discounted using management’s best estimate of its credit-adjusted, risk-free rate. Revisions to the liability
could occur due to changes in estimated abandonment costs, changes in well economic lives, or if federal or state regulators enact
new requirements regarding the abandonment of wells.
|
|
For the Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
ARO - beginning of period
|
|
$
|
1,197,143
|
|
|
$
|
459,294
|
|
Additions
|
|
|
133,311
|
|
|
|
-
|
|
Deletions
|
|
|
-
|
|
|
|
(15,190
|
)
|
Accretion expense
|
|
|
22,323
|
|
|
|
15,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,352,777
|
|
|
|
459,991
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
176,587
|
|
|
|
169,126
|
|
|
|
|
|
|
|
|
|
|
ARO - end of period
|
|
$
|
1,176,190
|
|
|
$
|
290,865
|
|
Impairment
of Long-Lived Assets
In
accordance with authoritative guidance on accounting for the impairment or disposal of long-lived assets, as set forth in Topic
360 of the ASC, the Company assesses the recoverability of the carrying value of its non-oil and gas long-lived assets when events
occur that indicate an impairment in value may exist. An impairment loss is indicated if the sum of the expected undiscounted
future net cash flows is less than the carrying amount of the assets. If this occurs, an impairment loss is recognized for the
amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.
T-REX
OIL, INC. AND SUBSIDIARIES
Notes
To The Consolidated Financial Statements
June
30, 2016
(Unaudited)
Revenue
Recognition
The
Company recognizes revenue when it is realized or realizable and earned. Revenue is realized or realizable and earned when persuasive
evidence of an arrangement exists, delivery has occurred or services have been rendered to the customer, the price to the buyer
is fixed or determinable and collectability is reasonably assured. For goods, this is the point at which title and risk of loss
is transferred and when payment has either been received or collection is reasonably assured. Revenues for services are recorded
when the services have been provided. Revenue that does not meet these criteria is deferred until the criteria are met.
Other
Comprehensive Loss
The
Company has no material components of other comprehensive loss and accordingly, net loss is equal to comprehensive loss for the
period.
Income
Taxes
The
Company uses the liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized
for the future tax consequences of temporary differences between the accounting bases and the tax bases of the Company’s
assets and liabilities. The deferred tax assets and liabilities are computed using enacted tax rates in effect for the year in
which the temporary differences are expected to reverse.
The
Company’s deferred income taxes include certain future tax benefits. The Company records a valuation allowance against any
portion of those deferred income tax assets when it believes, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred income tax asset will not be realized.
The
Company has adopted ASC guidance regarding accounting for uncertainty in income taxes. This guidance clarifies the accounting
for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized
in the consolidated financial statements and applies to all income tax positions. Each income tax position is assessed using a
two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be
sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to
meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount
that is greater than 50% likely to be realized upon its ultimate settlement. At June 30, 2016, there were no uncertain tax positions
that required accrual.
Business
Combination
The
Company accounts for acquisitions in accordance with guidance found in ASC 805, Business Combinations. The guidance requires consideration
given, including contingent consideration, assets acquired and liabilities assumed to be valued at their fair values at the date
of acquisition. The guidance further provides that acquisition costs will generally be expenses as incurred and changes in deferred
tax asset valuations and income tax uncertainties after the acquisition date generally will affect income tax expense.
ASC
805 requires that any excess of purchase price over the fair value of assets acquired, including identifiable intangibles and
liabilities assumed be recognized as goodwill and any excess of fair value of acquired net assets, including identifiable intangible
assets over the acquisition consideration results in a gain from bargain purchase. Prior to recording a gain, the acquiring entity
must reassess whether ass acquired assets and assumed liabilities have been identified and recognized and perform re-measurements
to verify that the consideration paid, assets acquired and liabilities assumed have been properly valued.
T-REX
OIL, INC. AND SUBSIDIARIES
Notes
To The Consolidated Financial Statements
June
30, 2016
(Unaudited)
Net
Loss per Share
Basic
net loss per common share of stock is calculated by dividing net loss available to common stockholders by the weighted-average
number of common shares outstanding during each period.
Diluted
net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding, including
the effect of other dilutive securities. The Company’s potentially dilutive securities consist of in-the-money outstanding
options and warrants to purchase the Company’s common stock. Diluted net loss per common share does not give effect to dilutive
securities as their effect would be anti-dilutive.
The
treasury stock method is used to measure the dilutive impact of stock options and warrants. The following table details the weighted-average
dilutive and anti-dilutive securities related to stock options and warrants for the periods presented:
|
|
For the Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Dilutive
|
|
|
-
|
|
|
|
-
|
|
Anti Dilutive
|
|
|
2,644,462
|
|
|
|
1,878,088
|
|
Equity
Based Payments
The
Company recognizes compensation cost for equity based awards based on estimated fair value of the award and records capitalized
cost or compensation expense over the requisite service period. See Note 9 – Equity Based Payments.
Major
Customers
During
the three months ended June 30, 2016 and 2015, one purchaser accounted for 100% and 88% of total revenues, respectively.
Beneficial
Conversion Feature and Deemed Dividend Related to Series A Shares
Pursuant
to ASC 470-20, when the $558,171 of convertible Series A Shares of preferred stock were issued at a discount from the if-converted
$682,989 fair value as of the issuance date, the Company recognized this difference between the fair value per share of its common
stock and the conversion price, multiplied by the number of shares issuable upon conversion. This total Beneficial Conversion
Feature of $124,818 will be recorded as additional paid-in-capital for common shares. The offsetting amount will be amortizable
over the period from the issue date to the first conversion date or 9 months. Therefore, since the 409,019 Series A Shares of
preferred stock are convertible between July and December of 2016, a deemed dividend of $37,805 to the Series A Shares of preferred
stock has been recorded during the three months ended June 30, 2016 in its statement of operations and cash flows. As the Company
is in an accumulated deficit position, the deemed dividend of $37,805 has been charged against additional paid-in-capital for
common shares as there being no retained earnings from which to declare a dividend.
Off-Balance
Sheet Arrangements
As
part of its ongoing business, the Company has not participated in transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (SPEs),
which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow
or limited purposes. From its incorporation on February 11, 2014 through June 30, 2016, the Company has not been involved in any
unconsolidated SPE transactions.
T-REX
OIL, INC. AND SUBSIDIARIES
Notes
To The Consolidated Financial Statements
June
30, 2016
(Unaudited)
Recent
Accounting Pronouncements
In
June 2014, the FASB issued ASU No. 2014-10,
Development Stage Entities (Topic915) – Elimination of Certain Financial
Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation
. This standard
update is to improve financial reporting by reducing the cost and complexity associated with the incremental reporting requirements
for development stage entities, and as a result removes all incremental financial reporting requirements. This standard update
also eliminates an exception provided to development stage entities in Topic 810, Consolidation, for determining whether an entity
is a variable interest entity on the basis of the amount of the investment equity that is at risk.
ASU 2014-10 is effective
for annual reporting periods beginning after December 15, 2016, and interim reporting periods beginning after December 15, 2017.
Entities are allowed to apply the guidance early for any annual reporting period or interim period for which the entity’s
financial statements have not yet been issued or made available for issuance. The Company adopted these standards and they did
not have a material impact on the Company’s consolidated financial statements.
In
August 2014, the FASB issued
Update No. 2014-15 - Presentation of Financial Statements – Going Concern
that requires
management to evaluate whether there are conditions or events that raise substantial doubt about an entity’s ability to
continue as a going concern within one year after the date that the entity’s financial statements are issued, or within
one year after the date that the entity’s financial statements are available to be issued, and to provide disclosures when
certain criteria are met. This guidance is effective for the annual period ending after December 15, 2016, and for annual periods
and interim periods thereafter. Early application is permitted. The Company is currently evaluating the provisions of this guidance
and assessing its impact, but does not currently believe it will have a material effect on the Company’s consolidated financial
statements or disclosures.
In
November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
ASU 2015-17”). ASU 2015-17 is part of the FASB’s initiative to reduce the complexity in accounting standards. ASU
2015-17 requires entities to present deferred tax assets and deferred tax liabilities as non-current in a classified balance sheet.
The amendments in this ASU simplify current guidance in ASC 740-10-45-4 that requires separate presentation of deferred tax assets
and liabilities as current and non-current in a classified balance sheet based on the classification of the related asset or liability.
ASU 2015-17 is effective for public companies for annual periods beginning after December 15, 2017 and interim periods beginning
after December 15, 2018. Earlier application is permitted as of the beginning of an interim or annual reporting period. The Company
adopted this ASU as of March 31, 2016. The adoption of this ASU did not have a material impact on our consolidated balance sheets
as of March 31, 2016 and 2015.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
ASU 2016-02 requires lessees to recognize all leases,
including operating leases, on the balance sheet as a lease asset or lease liability, unless the lease is a short-term lease.
ASU 2016-02 also requires additional disclosures regarding leasing arrangements. ASU 2016-02 is effective for interim periods
and fiscal years beginning after December 15, 2018, and early application is permitted. The Company is in the process of determining
the method of adoption and the impact this guidance will have on its financial condition, results of operations and cash flows.
There
were other accounting standards and interpretations issued during the three months ended June 30, 2016, none of which are expected
to have a material impact on the Company’s financial position, operations or cash flows.
Subsequent
Events
The
Company evaluates events and transactions after the balance sheet date but before the financial statements are issued.
Note
3 – Going Concern and Managements’ Plan
The
Company’s consolidated financial statements for the three months ended June 30, 2016 and 2015 have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course
of business. The Company reported a net loss of $786,161 and $690,953 for the three months ended June 30, 2016 and 2015, respectively,
and an accumulated deficit of $27,505,329 as of June 30, 2016. At June 30, 2016, the Company had a working capital deficit of
$(1,427,390).
T-REX
OIL, INC. AND SUBSIDIARIES
Notes
To The Consolidated Financial Statements
June
30, 2016
(Unaudited)
The
future success of the Company is dependent on its ability to attract additional capital and ultimately, upon its ability to develop
future profitable operations. There can be no assurance that the Company will be successful in obtaining such financing, or that
it will attain positive cash flow from operations. Management believes that actions presently being taken to revise the Company’s
operating and financial requirements provide the opportunity for the Company to continue as a going concern.
Note
4 – Fair Value Measurements
The
Company applies the authoritative guidance applicable to all financial assets and liabilities required to be measured and reported
on a fair value basis, as well as to non-financial assets and liabilities measured at fair value on a non-recurring basis, including
impairments of proved oil and gas properties and other long-lived assets and AROs initially measured at fair value. The fair value
of an asset or liability is the amount that would be received to sell an asset or paid to transfer a liability (an exit price)
in an orderly transaction between market participants at the measurement date. The Company maximizes the use of observable inputs
and minimizes the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants
would use in valuing the asset or liability based on market data obtained from sources independent of the Company. Unobservable
input are inputs that reflect the Company’s assumptions of what market participants would use in valuing the asset or liability
based on the information available in the circumstances.
Financial
and non-financial assets and liabilities are classified within the valuation hierarchy based upon the lowest level of input that
is significant to the fair value measurement. The Company’s policy is to recognize transfers in and out of the fair value
hierarchy as of the end of the reporting period in which the event or change in circumstances caused the transfer. The Company
has consistently applied the valuation techniques discussed below in all periods presented. The hierarchy is organized into three
levels based on the reliability of the inputs as follows:
Level
1: Quoted prices in active markets for identical assets or liabilities; or
Level
2: Quoted prices in active markets for similar assets and liabilities and inputs, quoted prices for identical or similar assets
or liabilities in markets that are not active and model-derived valuations whose inputs or significant value drivers are observable;
or
Level
3: Unobservable pricing inputs in which there is little or no market data, which requires the reporting entity to develop its
own assumptions.
The
following table presents the Company’s non-financial assets and liabilities that were measured at fair value on a non-recurring
basis at June 30, 2016 by level within the fair value hierarchy:
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas properties
|
|
$
|
-
|
|
|
$
|
930,238
|
|
|
$
|
-
|
|
|
$
|
930,238
|
|
Effective
January 1, 2016, the Company acquired approximately 82% of the working interest in certain leases located in the state of Wyoming
known as the Cole Creek properties and recorded the oil and gas properties at a fair value of $2,033,382. Thus, due to the significance
of this event, the oil and gas properties were tested under ASC 360 as to its recoverability. Therefore, the oil and gas properties
were recorded at fair value if impairment is required under the accounting guidance. The Company uses Level 2 inputs and the income
valuation techniques of undiscounted oil and gas future net cash flows to measure the fair value of the oil and gas properties
and thus the model forecast including discount rates and commodity prices were selected by the independent engineers of Netherland,
Sewell & Associates, Inc. As such, there was an impairment to the oil and gas properties during the year ended March 31, 2016,
the amount of $1,103,144.
T-REX
OIL, INC. AND SUBSIDIARIES
Notes
To The Consolidated Financial Statements
June
30, 2016
(Unaudited)
The
following table presents the Company’s non-financial assets and liabilities that were measured at fair value on a non-recurring
basis at March 31, 2016 by level within the fair value hierarchy:
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas properties
|
|
$
|
-
|
|
|
$
|
930,238
|
|
|
$
|
-
|
|
|
$
|
930,238
|
|
Fair
value in the initial recognition of other equipment is determined based on the quoted fair value of the vehicle using inputs from
valuation techniques used by industry participants. Accordingly, the fair value is based on observable pricing inputs and is considered
a Level 2 value measurement. During the three months ended June 30, 2016 and 2015 there was no impairment.
Note 5 – Significant
Acquisition
Effective January 1, 2016, the
Company acquired approximately 82% of the working interest in certain leases located in the state of Wyoming known as the Cole
Creek properties.
The following table presents
the allocation of the consideration given to the assets acquired and liabilities assumed, based on their fair values at January
1, 2016:
Consideration
Given
|
|
|
|
Cash
|
|
$
|
1,200,000
|
|
|
|
|
|
|
Total
purchase price
|
|
$
|
1,200,000
|
|
|
|
|
|
|
Allocation of
Consideration Given
|
|
|
|
Oil and gas
properties Proved
|
|
$
|
2,033,382
|
|
|
|
|
|
|
Total
assets
|
|
|
2,033,382
|
|
|
|
|
|
|
Current liabilities
|
|
|
111,522
|
|
Long-term liabilities
|
|
|
721,860
|
|
|
|
|
|
|
Total
liabilities
|
|
|
833,382
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
1,200,000
|
|
Effective April 29, 2016, the
Company acquired the remaining 17% of the working interest in the leases known as the Cole Creek properties.
The following table presents
the allocation of the consideration given to the assets acquired and the liabilities assumed,
Consideration Given
|
|
|
|
|
Cash
|
|
$
|
250,000
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
250,000
|
|
|
|
|
|
|
Allocation of Consideration Given
|
|
|
|
|
Oil and gas properties
|
|
|
|
|
Proved
|
|
$
|
383,311
|
|
|
|
|
|
|
Total assets
|
|
|
383,311
|
|
|
|
|
|
|
Current liabilities
|
|
|
-
|
|
Long-term liabilities
|
|
|
133,311
|
|
|
|
|
|
|
Total liabilities
|
|
|
133,311
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
250,000
|
|
As a result the Company owns
approximately 100% of the WI in the Cole Creek properties.
Note
6 – Debt
Promissory
Notes
The
Company during the year ended March 31, 2016 paid $341,405 in principal towards the repayment of promissory notes relative to
the repurchase of 18,717 shares of Western Interior common stock owned by dissident shareholders as part of agreements effective
March 31, 2015 to repurchase a total of 33,085 shares of Western Interior common stock. The Company at June 30, 2016 owes a balance
in the amount of $488,298 on one of the promissory notes plus accrued interest of $17,043.60 with the remaining three promissory
notes being paid in full.
On
August 1, 2015, the Company, relative to the repurchase by the Company on March 31, 2015 of the remaining 14,368 shares of Western
Interior common stock entered into an agreement with the note holder to settle the amount owed under the promissory note. As such,
the parties agreed the amount owed on such promissory note by the Company would be reduced from $768,715 to $393,795 and the difference
of $374,920 be considered a reduction in the purchase price by the Company of the 14,368 shares of Western Interior common stock.
In addition, the $393,795 was paid in full effective August 1, 2015 by the transfer to the note holder of certain oil and gas
properties owned by Western Interior which resulted in the Company reporting a gain on disposal of assets in the amount of $44,100.
On
January 14, 2016, the Company borrowed $50,000 each from two directors in exchange for secured promissory notes including interest
at the rate of 5% per annum with accrued and unpaid interest and principal due at September 30, 2016. The promissory notes are
collateralized by certain oil and gas properties located in the State of Wyoming. Holders may, at any time prior to payment of
the promissory notes elect to convert all or any portion of the promissory notes, including accrued interest, into common shares
of the Company at a price determined by the average ten consecutive day trading closing price less 30%. The Company at June 30,
2016 owes $100,000 on the two promissory notes plus accrued interest of $2,298.50.
Line-of-Credit
The
Company has a line-of-credit with a bank in the amount of $350,000 collateralized by certain oil and gas properties of the Company.
The line-of-credit matures in November 2016. Annual interest is at prime plus 2.50% with a floor of 7%). The Company owes $130,52
on the line-of-credit at June 30, 2016.
Installment
Notes
The
Company during the year ended March 31, 2016, borrowed $34,374 from unrelated parties to finance their insurance policies. The
unsecured notes are repaid during the year ended March at $3,437 per month including interest at the rate of 5.81% per annum.
The Company owed $9,810.94 at June 30, 2016, respectively.
Note
7 – Stockholders’ Equity
The
Company’s capital stock at June 30, 2016 consists of 325,000,000 authorized shares of which 50,000,000 shares are $0.001
par value preferred stock and 275,000,000 shares are $0.001 par value common stock.
T-REX
OIL, INC. AND SUBSIDIARIES
Notes
To The Consolidated Financial Statements
June
30, 2016
(Unaudited)
Preferred
Shares
At
June 30, 2016 and 2015, there are a total of 409,019 and 0 shares of preferred stock issued and outstanding, respectively.
On
October 28, 2015, the Company filed an Amendment to its Articles of Incorporation to designate a class of preferred stock as the
Series A Convertible Preferred Stock.
The
Amendment sets aside 5,000,000 shares of the authorized 50,000,000 shares of the Company’s $0.001 par value preferred stock
as the Series A Convertible Preferred Stock (“the Series A Shares.”) The Series A Shares are convertible at the option
of the Holder into common shares of the Company’s stock 9 months after the date of issuance. Further, the Series A Shares
have a conversion price based upon 80% of the 10 day average of the Company’s closing market price at the time of conversion.
In
October 2015, the Company commenced a private placement financing of $7,000,000 in Units, a Unit consisting of one share of its
Series A Shares and an Unit Warrant. The Unit Warrant has an exercise price of $3.00 per share and a term of 3 years. The Unit
Warrant is exercisable 9 months after issuance and is callable by the Company upon the Company’s common stock closing at
a market price of $5.00 or above for a period of 10 days.
Pursuant
to ASC 470-20, when the $558,171 of convertible Series A Shares of preferred stock were issued at a discount from the if-converted
$682,989 fair value as of the issuance date, the Company recognized this difference between the fair value per share of its common
stock and the conversion price, multiplied by the number of shares issuable upon conversion. This total Beneficial Conversion
Feature of $124,818 will be recorded as additional paid-in-capital for common shares. The offsetting amount will be amortizable
over the period from the issue date to the first conversion date or 9 months. Therefore, since the 409,019 Series A Shares of
preferred stock are convertible between July and December of 2016, a deemed dividend of $37,805 to the Series A Shares of preferred
stock has been recorded during the three months ended June 30, 2016 in its statement of operations and cash flows. As the Company
is in an accumulated deficit position, the deemed dividend of $37,805 has been charged against additional paid-in-capital for
common shares as there being no retained earnings from which to declare a dividend.
During
the year ended March 31, 2016, the Company received $818,038, including cash of $793,037, in exchange for the issuance of 409,019
shares of its Series A Preferred Stock and Unit Warrants exercisable for 419,019 shares of common stock.
We
apply the guidance enumerated in ASC 480 “
Distinguishing Liabilities from Equity
” when determining the classification
and measurement of preferred shares. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments
and are measured at fair value. We classify conditionally redeemable preferred shares (if any), which includes preferred shares
that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of
uncertain events not solely within our control, as equity. At all other times, we classified our preferred shares in stockholders’
equity.
We
have applied the guidance of ASC 470 “
Deb
t” in accounting for the unit warrants and as such have valued the
Unit Warrants using the Black-Scholes option pricing model. The option-pricing model requires a number of assumptions, of which
the most significant are the stock price at the valuation date that was at a range of $1.10 to $1.50 per share as well as the
following assumptions:
Volatility
|
|
|
82%
- 134
|
%
|
Expected Option/Warrant Term
|
|
|
3
years
|
|
Risk-free interest rate
|
|
|
.25
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
The
expected term of the Unit Warrants granted were estimated to be the contractual term. The expected volatility was based on an
average of the volatility disclosed based upon comparable companies who had similar expected option and warrant terms. The risk-free
rate was based on the one-year U.S. Treasury bond rate.
As
a result, the Unit Warrants exercisable for 409,019 shares of our restricted common stock were valued at $135,049 and as such
$67,830 was credited to additional paid in capital during the year ended March 31, 2016.
T-REX
OIL, INC. AND SUBSIDIARIES
Notes
To The Consolidated Financial Statements
June
30, 2016
(Unaudited)
Common
Shares
At
June 30, 2016 and March 31, 2016, there are a total of 15,866,099 and 15,480,882 shares of common stock issued and outstanding,
respectively.
During
the three months ended June 30, 2016, the Company as part of a private placement sold 99,378 shares of its restricted common stock
for $74,613 in cash and 235,839 shares for $353,719 in cash.
During
the three months ended June 30, 2016, the Company issued 50,000 shares of common stock in connection with the cash exercise of
options at an exercise price $0.10 per share.
Additional
Paid-in Capital
During
the year ended March 31, 2016, as the Company is in an accumulated deficit position, the deemed dividend in the amount of $37,805
was charged against additional paid-in-capital as there being no retained earnings from which to declare a dividend.
During
the year ended June 30, 2016, the Company realized additional paid in capital relative to the fair value of equity based payments
in the amount of $207,200 of which $11,520 was expensed and $195,680 was capitalized. See Note 9 – Equity Based Payments.
Note
8 – Equity Based Payments
The
Company accounts for equity based payment accruals under authoritative guidance as set forth in the Topics of the ASC. The guidance
requires all equity based payments to employees and non-employees, including grants of employee and non-employee stock options
and warrants, to be recognized in the consolidated financial statements based at their fair values.
The
Black-Scholes option-pricing model is used to estimate the option and warrant fair values. The option-pricing model requires a
number of assumptions, of which the most significant are the stock price at the valuation date that ranged from $0.01 to $3.50
per share as well as the following assumptions:
Volatility
|
|
|
82.00%
- 134.00
|
%
|
Expected Option/Warrant Term
|
|
|
9
months - 3 years
|
|
Risk-free interest rate
|
|
|
.12%
- .25
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
The
expected term of the options and warrants granted were estimated to be the contractual term. The expected volatility was based
on an average of the volatility disclosed based upon comparable companies who had similar expected option and warrant terms. The
risk-free rate was based on the one-year U.S. Treasury bond rate.
Warrant
During
May 2016, the Company issued a warrant exercisable for 350,000 shares of the Company’s common stock in exchange for business
development services pursuant to a Consulting Agreement. The warrant has a term of 3 years and an exercise price of $2.00 per
share.
Using
the Black-Scholes option-pricing model, the warrant was found to have a fair value of $207,200. Assumptions used in the pricing
were:
Volatility
|
|
|
89.00
|
%
|
Expected Option/Warrant Term
|
|
|
1
year
|
|
Risk-free interest rate
|
|
|
.25
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
As
the warrant was issued for services to be rendered under a 3 year Consulting Agreement, the Company is amortizing the warrant
over the life of the Consulting Agreement.
2014
Stock Incentive Plan
Effective
October 1, 2014, the Company’s 2014 Stock Option and Award Plan (the “2014 Stock Incentive Plan”) was approved
by its Board of Directors. Under the 2014 Stock Incentive Plan, the Board of Directors may grant options or purchase rights to
purchase common stock to officers, employees, and other persons who provide services to the Company or any related company. The
participants to whom awards are granted, the type of awards granted, the number of shares covered for each award, and the purchase
price, conditions and other terms of each award are determined by the Board of Directors, except that the term of the options
shall not exceed 10 years. A total of 2 million shares of the Company’s common stock are subject to the 2014 Stock Incentive
Plan. The shares issued for the 2014 Stock Incentive Plan may be either treasury or authorized and unissued shares.
T-REX
OIL, INC. AND SUBSIDIARIES
Notes
To The Consolidated Financial Statements
June
30, 2016
(Unaudited)
The
following table summarizes the non-qualified stock option and warrant activity at June 30, 2016:
|
|
2016
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
Options/
|
|
|
Average
|
|
|
|
|
Warrants
|
|
|
|
Exercise Price
|
|
Outstanding at
|
|
|
|
|
|
|
|
|
beginning of year
|
|
|
|
|
|
|
|
|
Options
|
|
|
1,127,750
|
|
|
$
|
0.039
|
|
Warrants
|
|
|
1,351,877
|
|
|
$
|
1.462
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
Options
|
|
|
-
|
|
|
$
|
-
|
|
Warrants
|
|
|
350,000
|
|
|
$
|
2.000
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Options
|
|
|
(50,000
|
)
|
|
$
|
0.100
|
|
Warrants
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
Options
|
|
|
-
|
|
|
$
|
-
|
|
Warrants
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30,
|
|
|
|
|
|
|
|
|
Options
|
|
|
1,077,750
|
|
|
$
|
0.316
|
|
Warrants
|
|
|
1,701,877
|
|
|
$
|
1.980
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30,
|
|
|
|
|
|
|
|
|
Options
|
|
|
1,077,750
|
|
|
$
|
0.316
|
|
Warrants
|
|
|
1,701,877
|
|
|
$
|
1.980
|
|
Weighted average
|
|
|
|
|
Aggregate
|
|
remaining contractual
|
|
|
|
|
Intrinsic
|
|
life
|
|
Life
|
|
|
Value
|
|
Options
|
|
|
0.85
|
|
|
$
|
1,115,084
|
|
Warrants
|
|
|
1.70
|
|
|
$
|
511,500
|
|
The
aggregate intrinsic value of outstanding securities is the amount by which the fair value of underlying (common) shares exceed
the amount paid for and the exercise price of the options and warrants issued and outstanding.
Note
9 – Commitments and Contingencies
Operating
Lease
The
Company leases an office space in Colorado at the rate of $4,572 per month and the lease expires in August 2017. In addition,
the Company leases an office space in Wyoming at the rate of $5,838 per month and the lease expires in June 2019. In addition,
the Company leases a corporate apartment at a rate of $1,990 per month and the lease will expire May 2017. Total rent expense
under these leases for June 30, 2016 is $35,527.
T-REX
OIL, INC. AND SUBSIDIARIES
Notes
To The Consolidated Financial Statements
June
30, 2016
(Unaudited)
The
following is a schedule of minimum future rental annual payments under the operating lease for the stated fiscal year ends:
3/31/2017
|
|
|
|
147,333
|
|
3/31/2018
|
|
|
|
83,111
|
|
3/31/2019
|
|
|
|
62,940
|
|
3/31/2020
|
|
|
|
15,735
|
|
|
|
|
$
|
309,119
|
|
Employment
Agreements
In
August 2014, Terex entered into an Employment Agreement for services with its Chief Executive Officer, President and director.
The Employment Agreement has a term of 3 years and provides for an annual compensation of $204,000 and a monthly car allowance
of $600. It also provides for an annual bonus as determined by the board of directors.
In
November 2014, Terex entered into an Employment Agreement for services with its Vice President of Operations and director. The
Employment Agreement has a term of 3 years and provides for an annual compensation of $150,000. It also provides for an annual
bonus as determined by the board of directors.
In
November 2014, Terex entered into an Employment Agreement for services with its Vice President of Geology and director. The Employment
Agreement has a term of 3 years and provides for an annual compensation of $150,000. It also provides for an annual bonus as determined
by the board of directors.
In
January 2015, T-Rex entered into an Employment Agreement for services with its Vice President of Operations and director. The
Employment Agreement has a term of 3 years and provides for an annual compensation of $150,000. It also provides for an annual
bonus as determined by the board of directors.
Consulting
Agreement
The
Company entered into a three-year agreement effective September 1, 2014 with a consultant to perform services at the base rate
of $150,000 per year under certain terms and conditions including with an auto allowance of $600 per month. In addition, the consultant
has been granted cashless options to acquire up to 500,000 shares of T-Rex’s common stock at an option price of $0.10 per
share for a period of three years from April 1, 2014. The options vested ratably over the year ended March 31, 2015. See Note
8 – Equity Based Payments.
Note
10 – Related Party Transactions
T-Rex
Oil LLC #1
The
Company is the manager of T-Rex Oil LLC #1 that was formed during December 2014 for the purpose of drilling and producing oil
and gas wells. During the year ended March 31, 2015, the Company loaned the LLC $50,000 and at March 31, 2016 and 2015, the Company
is owed $0 and $50,000, respectively.
The
Company in December 2014 entered into put agreements with the members of T-Rex #1 whereby the Company granted a right to put the
purchase of their interest of T-Rex #1 in the amount of $425,000 back to the Company at an exercise price of $2.00 per share or
a total of 212,500 shares of the Company’s common stock.
In
August 2016, the members exercised the put at $1.00 per share and a total of 425,000 shares of restricted common stock were issued.
T-Rex
Oil LLC #3
The
Company is the manager of T-Rex Oil LLC #3 that was formed in January 2016 for the purpose of acquiring and developing oil and
gas leases known as the Cole Creek properties in Wyoming. T-Rex Oil LLC #3 is included as part of the consolidated financial statements
as of and for the year ended March 31, 2016. See Note 1 – Organization and History.
Note
11 – Subsequent Events
Sale
of Common Shares
During
the period of July 1, 2016 through August 15, 2016, the Company sold 142,670 shares of its common stock in exchange for $213,443
in cash or at $1.50 per share as part of a private placement.
Exercise
of Option
During
the period of July 1, 2016 through August 15, 2016, an option holder exercised his option for a total of 50,000 shares of restricted
common stock.
T-Rex
Oil, LLC #3
On August
15, 2016, T-Rex Oil, LLC #3 was erroneously dissolved with the Secretary of State of Colorado, the entity was re-instated upon
discovery of this on August 25, 2016.