NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2012
1. Organization and Summary of Significant Accounting
Policies
Organization and business
Texas Resources Energy, Inc. (“TREI”)
was incorporated under the laws of Nevada on December 9, 2010, as a wholly-owned subsidiary of Russian Resources Energy, Inc.,
a Texas corporation (“RREI”), and then spun off to the shareholders of RRIE on the same date. On June 30, 2011, TREI
changed its name to West Texas Resources, Inc. (the “Company”). The Company 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.
The Company is in the development stage, it
has not generated any revenues from operations, it has no assurance of any future revenues or its ability to obtain additional
capital to fund future acquisitions, or, if such funds might be available, that they will be obtainable on terms satisfactory to
the Company.
Basis of presentation
The accompanying unaudited financial statements
have been prepared in accordance with accounting principles generally accepted in the United States (U.S.) for interim financial
information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X promulgated by the Securities and
Exchange Commission (“SEC”) and reflect all adjustments, consisting of normal recurring adjustments and other adjustments,
which management believes are necessary to fairly present the financial position, results of operations and cash flows of the Company,
for the respective periods presented. The results of operations for an interim period are not necessarily indicative of the results
that may be expected for any other interim period or the year as a whole. The accompanying unaudited financial statements should
be read in conjunction with the financial statements and notes for the year ended September 30, 2012.
Liquidity and management’s plans
The Company has not generated any revenues
from oil and gas exploration and there is no assurance that the Company will generate revenues in the future. The Company’s
ability to generate revenue primarily depends on its success in investigation and exploration of oil and gas properties. The
Company incurred a net loss of $54,527 during the three months ended December 31, 2012 and a net loss of $302,944 from inception
to December 31, 2012. Also, the Company had a cash balance of $845, a working capital deficit of $87,915 and a stockholders’
equity of $57,958 at December 31, 2012.
The Company will require up to $1 million of
additional capital in order to fund its proposed operations over the next 12 months. Management plans to continue to seek sources
of financing on favorable terms; however, there are no assurances that any such financing can be obtained on favorable terms, if
at all. Management expects to monitor and control the Company’s operating costs until cash is available through
financing or operating activities. There are no assurances that the Company will be successful in achieving these plans. The
Company anticipates that losses will continue until such time, if ever, as the Company is able to generate sufficient revenues
to support its operations.
WEST TEXAS RESOURCES, INC.
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2012
1. Organization and Summary of
Significant Accounting Policies (continued)
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. The Company believes there has been no impairment of the value of such assets at December 31, 2012.
Asset retirement obligations
ASC 410-20,
Asset Retirement Obligations
,
clarifies that a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional
on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity
is unconditional even though uncertainty exists about the timing and/or method of settlement. ASC 410-20 requires a liability to
be recognized for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably
estimated.
WEST TEXAS RESOURCES, INC.
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2012
1. Organization and Summary of
Significant Accounting Policies (continued)
Cash, cash equivalents, and other cash flow
statement supplemental information
The Company considers all liquid investments
with an original maturity of three months or less that are readily convertible into cash to be cash equivalents. The
Company places its cash equivalents with high credit quality financial institutions. Accounts at these institutions
are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. The Company performs ongoing evaluations of
these institutions to limit its concentration of risk exposure. Management believes this risk is not significant due
to the financial strength of the financial institutions utilized by the Company.
Furniture, fixtures and equipment
Furniture, fixtures and equipment are carried
at cost depreciated using the straight-line method over their estimated useful lives. Gain or loss on retirement or sale or other
disposition of these assets is included in income in the period of disposition.
Use of estimates
The preparation of financial statements in
conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Income taxes
The Company reports certain expenses differently
for financial and tax reporting purposes and, accordingly, provides for the related deferred taxes. Income taxes are
accounted for under the liability method in accordance with ASC 740,
Income Taxes
.
Management has considered its tax positions
and believes that all of the positions taken by the Company in its Federal and State tax returns are more likely than not to be
sustained upon examination. The Company is subject to examination by U.S. Federal and State tax authorities from 2009 to the present,
generally for three years after they are filed.
Basic and diluted net income (loss) per
share
Basic net income (loss) per share is based
upon the weighted average number of common shares outstanding. Diluted net income (loss) per share is based on the assumption
that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying
the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the
period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average
market price during the period. For the three months ended December 31, 2012, all common stock equivalents were anti-dilutive.
WEST TEXAS RESOURCES, INC.
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2012
1. Organization and Summary of
Significant Accounting Policies (continued)
Stock-based payments
Compensation costs for all share-based awards
are measured based on the grant date fair value and are recognized over the vesting period. The Company has no awards with market
or performance conditions. Excess tax benefits will be recognized as an addition to additional paid-in-capital.
Fair value of financial instruments
The accounting standards regarding fair value
of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair
value of financial instruments held by the Company. The Company considers the carrying amount of cash and other current assets
and liabilities to approximate their fair values because of the short period of time between the origination of such instruments
and their expected realization.
The Company has also adopted ASC 820-10 which defines
fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements
for fair value measures. The three levels are defined as follows:
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Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets
or liabilities in active markets.
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Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities
in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially
the full term of the financial instruments.
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Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.
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As of December 31, 2012, 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 December 2011, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update 2011-12, Comprehensive Income (Topic 220): Deferral of
the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income
in Accounting Standards Update (“ASU”) No. 2011-05, in order to defer only those changes in ASU 2011-05 that relate
to the presentation of reclassification adjustments. The amendments are being made to allow the FASB time to redeliberate whether
to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income
on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05
not affected by this ASU are effective for fiscal years beginning after December 15, 2011. The Company does not expect the adoption
of the standard update to impact its financial position or results of operations, as it only requires a change in the format of
presentation.
WEST TEXAS RESOURCES, INC.
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2012
1. Organization and Summary of
Significant Accounting Policies (continued)
Recent Accounting Pronouncements (continued)
In July 2012, the Financial Accounting Standards
Board (“FASB”) issued ASU 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible
Assets for Impairment, to simplify the manner in which entities test indefinite-lived intangible assets for impairment. The ASU
permits an entity to first assess qualitative factors to determine whether events and circumstances indicate that it is more likely
than not that the indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a
quantitative impairment test. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning
after September 15, 2012, with early adoption permitted. The Company does not expect the adoption to have a significant impact
on its financial statements.
2. Risks and Uncertainties
The Company is a startup company subject to
the substantial business risks and uncertainties inherent to such an entity, including the potential risk of business failure.
3. 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 requires the lessee to pay the Company $2,500 per month plus 10% of the revenue collected
by the lessee from its use or sublease of the truck. The lease is for a term of two years and the lessee has the option to
purchase the truck at the end of the lease term for 75% of the Company's purchase price. During the year ended September
30, 2012, the Company terminated the lease and wrote off the lease income receivable of $5,616 as bad debt expense due to the lessee’s
cash flow problems.
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 loss on disposal of $408 and
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.
4. 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 $18,750 cash.
WEST TEXAS RESOURCES, INC.
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2012
4. Oil and Gas Properties (continued)
In October 2011,
West Texas Royalties, Inc., the operator of the Company's Eastland County prospect began drilling and fracturing operations at
the initial well and the Company made additional investment of $83,373 and $43,750 in November 2011 and March 2012, respectively.
As of December 31, 2012, no revenue has yet to be derived from the wells the Company has an interest in and the total amount of
the investment was $145,873 and the investment payable was $18,750.
The Company had a payable balance of $18,750 to West
Texas Royalties as of
December 31
, 2012.
5. 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.
Commencing on January 24, 2011, the Company
began the sale of up to 2,000,000 shares of its common stock at $.25 per share in a private placement. During fiscal
2011, the Company sold 962,000 shares for gross proceeds of $240,500. No commissions were incurred with respect to these sales
of stock.
On November 26, 2012, the Board of Directors
of the Company approved the Private Placement Memorandum for an offering of 3,000,000 shares of the Company’s common stock
at $0.50 per share. The Shares are being offered by the Company’s executive officers on a straight best-efforts basis. However,
in the event the Company engages finders or FINRA member firms, the Company expects to pay finders’ fees or sales commissions
of up to 10% of the gross offering proceeds.
On November 29, 2012, the Company entered into
a subscription agreement with an existing shareholder to sell 100,000 shares of the Company’s common stock at $0.50 per share.
Pursuant to the agreement, the $38,000 recorded as shareholder advances as of October 31, 2012 were converted into 76,000 shares
and the balance of the subscription price in the amount of $12,000 was received upon signing of the subscription agreement.
On December 20, 2012, the Company entered into
a subscription agreement with another accredited investor to sell 10,000 shares of the Company’s common stock at $0.50 per
share. The total amount of $5,000 was received upon signing of the subscription agreement.
As of December 31, 2012, the total of 110,000
shares under the above agreements had not been issued. As a result, the Company recorded common stocks issuable of $55,000 at December
31, 2012.
As of December 31, 2012, the Company had 13,106,500
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.
WEST TEXAS RESOURCES, INC.
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 2012
5. Shareholders’ Equity (continued)
The Company granted options to certain consultants
to purchase 400,000 shares of the Company’s common stock. The options vest immediately and expire on September 15, 2016.
The fair value of each share-based award was estimated using the Black-Scholes option pricing model or a lattice model. The fair
value of these options, determined to be $65,402, was included in general and administrative expenses for the year ended September
30, 2011.
The following assumptions were used in the fair value method calculation:
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Risk free rate of return: 1%
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The following information applies to all options outstanding at
December 31, 2012:
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Weighted average exercise price: $0.25
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Options outstanding and exercisable: 400,000
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Average remaining life: 3.75 years
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6. Subsequent Events
Events subsequent to December 31, 2012 have
been evaluated through the date these financial statements were issued to determine whether they should be disclosed to keep the
financial statements from being misleading. The following events occurred since December 31, 2012:
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In January 2013, the Company entered into subscription agreements with various accredited investors
to sell 140,000 shares of the Company’s common stock at $0.50 per share. Total amount of $70,000 was received upon signing
of the subscription agreements.
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