Notes to The Consolidated Financial Statements
June 30, 2017
(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. Effective October 29, 2014, the Company authorized 50,000,000 shares of preferred stock in addition
to its common stock and completed a reverse split of its common stock, issued and outstanding, on a one (1) new share for three
hundred fifty (350) old shares basis.
The Company has been engaged in the
acquisition, exploration, and development of oil and gas prospects in the Rocky Mountain region of Wyoming.
Cole Creek
On January 15, 2016, T-Rex Oil LLC #3
(“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 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 $133,311 for a total purchase price of $383,311. 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.
Nexfuels Spin Off
On July 11, 2016, Nexfuels, Inc. was
incorporated as a wholly-owned subsidiary of the Company in the State of Colorado (“Nexfuels”). Nexfuels was created
to develop the Company’s Carbon Dioxide Recovery Project. The Carbon Dioxide Recovery Project (“the Project”)
is focused on the development of exhaust stack supplies of carbon dioxide for use in enhanced oil recovery. The project involves
the development, build out and operation of a commercial scale carbon capture systems on existing coal fueled electric power plants
in the United States, specifically in Wyoming.
The Company’s Board of Directors
determined that to focus and better implement these strategies necessary to financing and build the Project, the Board of Directors
approved the spin-off of Nexfuels on July 15, 2016.
Shareholders of T-Rex, as of the Record
Date of August 19, 2016, received one share of Nexfuels common stock for every two shares (2) of T-Rex common stock owned. The
stock dividend was based upon 17,097,622 shares of the Company’s common stock that were issued and outstanding as of the
Record Date.
As part of the spin-off of Nexfuels,
the Company’s Chief Executive Officer and Chairman, Mr. Donald Walford and a director of the Company Mr. Sears were appointed
to the Board of Directors of Nexfuels.
On August 19, 2016, the Company assigned
to Nexfuels the following:
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1.
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The idea, concept and plan to capture and sell CO2 generated by the Dave Johnston power plant located in Converse County, Wyoming and/or any other power plants owned by PacifiCorp.
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2.
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The Memorandum of Understanding (“MOU”) by and between T-Rex and PacifiCorp Energy the owner/operator of the power plant.
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3.
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The existing contract by and between Sargent Lundy LLC to perform the feasibility study.
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4.
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Any and all other valid and subsisting contracts, agreement, and instruments, rights or other interest that the Company may have in the Project.
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5.
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All valid and subsisting easements, permits, licenses, servitudes, rights of way and other surface rights that directly relate to or are otherwise directly applicable to the Project.
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An analysis of the properties assigned
to Nexfuels by the Company showed that the Company in accordance with its accounting policies had not capitalized any of the direct
or indirect costs associated with the MOUs, the feasibility study or any of the other interests in the project. As such, the Company
did not recognize a gain or loss in connection with the Nexfuels spin-off.
Note 2 – Summary of Significant
Accounting Policies
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of T-Rex Oil, Inc. and its wholly owned subsidiaries. All intercompany balances have been eliminated
during consolidation.
The Company owns a 14.29% interest in
T-Rex Oil, LLC #3, a Colorado limited liability company (LLC #3”) and the remaining 85.71% economic interest is held by a
former director and shareholder of the Company. The Company has identified LLC #3 as a variable interest entity (VIE). The Company
holds current rights that gives it the power to direct the activities of the VIE which most significantly impact the VIE’s
economic performance including provisions that give the Company the right to receive potentially significant benefits. As member
manager of LLC #3, the Company continuously evaluates whether it has a controlling interest in LLC#3. Therefore, the Company has
included LLC #3 as a wholly owned subsidiary eliminating all intercompany balances during consolidation.
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.
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, 2017 and 2016,
two purchasers accounted for all of the total revenues.
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 $11,679,817 and $10,281,659
at June 30, 2017 and 2016, 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, 2017 and 2016, 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 $4,758,798 and $4,754,620 at June 30, 2017 and 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, 2017 and 2016, no capitalized developmental 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, 2017 and 2016, the Company recorded depreciation, depletion and amortization expense
on oil and gas properties in the amount of $24,938 and $35,123, respectively.
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. For the three months ended June 30, 2017 and 2016, there
was no impairment to proved properties.
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, 2017 and 2016 was $4,560 and $10,284, respectively.
Asset Retirement Obligations
The Company records estimated future
asset retirement obligations ("ARO") related to its oil and gas properties. The Company records the estimated fair value
of a liability for ARO in the period in which it is incurred with a corresponding increase in the carrying amount of the related
long-lived asset. The increased carrying value is depleted using the units-of-production method, and the discounted liability is
increased through accretion over the remaining life of the respective oil and gas properties.
The estimated liability is based on
historical industry experience in abandoning wells, including estimated economic lives, external estimates as to the cost to abandon
the wells in the future, and federal and state regulatory requirements.
The Company's liability is discounted
using management's best estimate of its credit-adjusted, risk-free rate. Revisions to the liability could occur due to changes
in estimated abandonment costs, changes in well economic lives, or if federal or state regulators enact new requirements regarding
the abandonment of wells.
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For the Three Months Ended
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June 30,
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2017
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2016
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ARO - beginning of period
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$
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1,420,247
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$
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1,197,143
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Additions
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—
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133,311
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Deletions
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—
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—
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Accretion expense
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20,272
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22,323
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1,440,519
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1,352,777
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Less current portion
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204,444
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176,587
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ARO - end of period
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$
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1,236,075
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$
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1,176,190
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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.
Revenue Recognition
The Company recognizes oil revenues
when production is sold to the purchaser, delivery occurs and title is transferred and recognizes natural gas revenues when the
title and risk of loss pass to the purchaser. The Company records its share of revenues based on its net revenue interest. The
Company sells the majority of its products soon after production at various locations, including the wellhead.
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 March 31, 2017 and 2016, there were no uncertain tax positions that required accrual.
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:
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For the Three Months Ended
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June 30,
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2017
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2016
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Dilutive
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—
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—
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Anti Dilutive
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3,511,001
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2,644,462
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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,
2017 and 2016, two purchasers accounted for all of the Company’s revenues.
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 was 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 $0 and $37,805 to the Series A Shares of preferred stock was recorded during
the three months ended June 30, 2017 and 2016, respectively. As the Company is in an accumulated deficit position, the deemed dividends
were 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, 2017, the Company has not been involved in any unconsolidated SPE transactions.
Recent Accounting Pronouncements
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.
In March 2016, the FASB issued ASU No.
2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU
2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income
tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
ASU 2016-09 is effective for the Company beginning April 1, 2017 and early adoption is permitted. The Company is currently evaluating
the effect that the adoption will have on the Company’s Consolidated Financial Statements.
In August 2016, the FASB issued ASU
No. 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”). ASU 2016-15 clarifies the classification of
certain cash receipts and cash payments within the statement of cash flows to reduce diversity in practice. ASU 2016-15 is effective
for the Company beginning January 1, 2018 and early adoption is permitted. The Company is currently evaluating the effect that
the adoption will have on the Company’s Consolidated Financial Statements.
There were other accounting standards
and interpretations issued during the year ended March 31, 2017, 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, 2017 and 2016 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 $358,446 and $786,161 for the three months ended June 30, 2017 and 2016, respectively, and an accumulated deficit
of $31,364,695 as of June 30, 2017. At June 30, 2017, the Company had a working capital deficit of $2,827,416.
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.
There was no measure at fair value on
a non-recurring basis as of June 30, 2017 and 2016 and there was no impairment for the three months then ended.
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, 2017 by level within
the fair value hierarchy:
Description
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Level 1
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Level 2
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Level 3
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Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Oil and gas properties
|
|
$
|
—
|
|
|
$
|
—
|
|
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$
|
307,948
|
|
|
$
|
307,948
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Investment in limited liability company
|
|
$
|
—
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|
|
$
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—
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|
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$
|
425,000
|
|
|
$
|
425,000
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|
Effective March 31, 2017, the Company’s
oil and gas properties were tested under ASC 360 as to their recoverability to determine if impairment is required under the accounting
guidance. The Company used Level 3 inputs to measure the fair value of the oil and gas properties. As such, there was an impairment
of $307,948 to the oil and gas properties during the year ended March 31, 2017.
Effective August 18, 2016, the Company
acquired 100% of the outstanding membership interest in T-Rex Oil LLC #1, a Colorado limited liability company (“LLC #1”)
as part of a put agreement with the members of LLC #1, and recorded the investment in LLC #1 at $425,000 as per the put agreement.
Thus, due to the significance of this event, the investment was tested under ASC 360 as to its recoverability and recorded at fair
value if impairment was required under the accounting guidance. The Company used Level 3 inputs and after reviewing the assets
of LLC #1, there was no recoverability in the Company’s investment. As such, there was an impairment of $425,000 during the
year ended March 31, 2017.
Note 5 – Significant Acquisitions
Effective as of January 1, 2016, the
Company acquired 82% of the working interest in certain leases located in the state of Wyoming known as the Cole Creek properties.
The following table presents the allocation
of the consideration given to the assets acquired and liabilities assumed, based on their fair values at January 1, 2016:
Consideration Given
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Cash
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$
|
1,200,000
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|
|
|
|
|
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Total purchase price
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$
|
1,200,000
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|
|
|
|
|
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Allocation of Consideration Given
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|
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|
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Oil and gas properties
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|
|
|
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Proved
|
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$
|
2,033,382
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|
|
|
|
|
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Total assets
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|
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2,033,382
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|
|
|
|
|
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Current liabilities
|
|
|
111,522
|
|
Long-term liabilities
|
|
|
721,860
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|
|
|
|
|
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Total liabilities
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|
|
833,382
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
1,200,000
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|
Effective April 29, 2016, the Company
acquired the remaining 18% of the leases known as Cole Creek properties.
The following table presents the allocation
of the consideration given to the assets acquired and the liabilities assumed:
Consideration Given
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Cash
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$
|
250,000
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|
|
|
|
|
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Total purchase price
|
|
$
|
250,000
|
|
|
|
|
|
|
Allocation of Consideration Given
|
|
|
|
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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
|
|
Note 6 – Nexfuels Warrant
On October 15, 2016, Nexfuels issued
a warrant to the Company exercisable for 1,056,000 shares of Nexfuels shares of common stock in return for the Company performing
staff services and office space over a six-month period (“Nexfuels Warrant”). The Nexfuels Warrant has an exercise
price of $1.25 per share. The Nexfuels Warrant is both assignable and transferable. The Company valued the warrant at $45,000 or
$7,500 per month.
In November 2016, the Company assigned
part of the warrant to acquire 50,000 shares of Nexfuels shares of common stock to a third party as part of the issuance of a convertible
promissory note in the amount of $300,000. The Nexfules warrant expired on February 15, 2017.
Note 7 – Debt
Promissory Notes
On February 28, 2017, the Company
borrowed $55,000 from the former operator of its Cole Creek properties in exchange for a promissory note including interest at
the rate of 8% per annum with accrued and unpaid interest due at August 31, 2017. The proceeds from the loan were used to acquire
a bond from the State of Wyoming for purposes of the Company to continue to operate the Cole Creek properties. At June 30, 2017,
the Company owes $55,000 on the promissory note plus accrued interest of $1,471. On November 1, 2018, the Company paid the note
holder $58,000 in complete satisfaction of the debt.
On November 3, 2016, the Company borrowed
$300,000 in exchange for a convertible promissory note at the rate of 12% per annum with accrued and unpaid interest and principal
due January 31, 2017. The due date of the promissory note was extended to May 1, 2017. The promissory note is convertible into
shares of the Company’s common stock at $0.80 per share. In addition, the Company issued the holder of the promissory note
75,000 shares of the Company’s common stock valued at $49,752 and a warrant to acquire 50,000 shares of Nexfuels shares of
common stock. At June 30, 2017, the Company owes $300,000 on the promissory note plus accrued interest of $23,573. On November
1, 2018, the Company paid the note holder $275,000 in complete satisfaction of the debt.
On August 11, 2016, the Company
borrowed $100,000 from a former director of the Company, who owns a 85.71% interest in LLC#3 in exchange for a promissory note
including interest at the rate of 15% per annum with accrued and unpaid interest and principal due on August 11, 2017. During the
term of the promissory note the Company agreed to pay the holder 30% of the net revenues received from the sale of oil from the
Cole Creek properties, starting August 2016. At June 30, 2017, the Company owes $100,000 on the promissory note plus accrued interest
of $11,199. On November 1, 2018, the Company paid the note holder $1,600,000 as complete satisfaction of the debt including repayment
of the $1,400,000 that the note holder contributed to LLC #3.
On April 25, 2016, the Company
borrowed $50,000 from a director of the Company in exchange for an unsecured promissory note including interest at the rate of
5% per annum with accrued and unpaid interest and principal due at December 31, 2016. On September 15, 2016, the holder of the
note agreed to extend the due date of the promissory note to March 31, 2017, with all other terms remaining in effect. At June
30, 2017, the Company owes $50,000 on the promissory note plus accrued interest of $7,068. On November 5, 2018, the Company paid
the note holder $68,000 in complete satisfaction of the debt.
During the year ended March 31,
2016, the Company 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. At June 30, 2017, the Company owes $488,298 on a promissory note plus
accrued interest at the rate of 3.5% per annum of $34,134. The During the year ended March 31, 2019, the Company transferred certain
oil and gas properties in complete satisfaction of the debt.
On January 14, 2016, the Company borrowed
$50,000 from a director and officer of the Company who resigned from the Company on September 14, 2016 in exchange for a secured
promissory note including interest at the rate of 5% per annum with accrued and unpaid interest and principal due at September
30, 2016. The note is currently in default. The default interest rate is 8%. The promissory note is collateralized by certain oil
and gas properties located in the State of Wyoming. The Holder may, at any time prior to payment of the promissory notes elect
to convert all or any portion of the promissory note, including accrued interest, into common shares of the Company at a price
determined by the average ten consecutive day trading closing price less 30%. On October 2016, the holder of the promissory note
filed suit against the Company for payment of the promissory. At June 30, 2017, the Company owes $50,000 on the promissory note
plus accrued interest of $3,649. In August 2017, the Company settled with the former director and officer of the Company by transferring
certain oil and gas properties in complete satisfaction of the debt.
On January 14, 2016, the Company borrowed
$50,000 from a then director, in exchange for a secured promissory note including interest at the rate of 5% per annum with accrued
and unpaid interest and principal due at September 30, 2016. On September 15, 2016, the holder of the note agreed to extend the
due date of the promissory note to December 31, 2016, with all other terms remaining in effect. The note is currently in default.
The default interest rate is 8%. The
promissory note is collateralized by
certain oil and gas properties located in the State of Wyoming. The Holder may, at any time prior to payment of the promissory
notes elect to convert all or any portion of the promissory note, including accrued interest, into common shares of the Company
at a price determined by the average ten consecutive day trading closing price less 30%. At June 30, 2017, the Company owes $50,000
on the promissory note plus accrued interest of $3,649. On November 5, 2018, the Company paid the note holder $50,000 in complete
satisfaction of the debt.
Line-of-Credit
The Company has a line-of-credit with
a bank in the original amount of $350,000 collateralized by certain oil and gas properties of the Company. Annual interest is at
prime plus 2.50% with a floor of 7%. At June 30, 2017, the Company owes $111,914 plus accrued interest of $6,795. The line-of-credit
matured in November 2016 and is in default.
Note 8 – Stockholders’
Equity
The Company’s capital stock at
June 30, 2017 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.
Preferred Shares
At June 30, 2017 and 2016, there are
a total of 0 and 409,019 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.
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 a 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 to the Series A Shares of preferred stock has been recorded during the three
months ended June 30, 2017 and 2016 in its statement of operations of $0 and $37,805, respectively. As the Company is in an accumulated
deficit position, the deemed dividend has been charged accordingly 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 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 "Debt" 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.
On August 18, 2016, the Board of Directors
approved a conversion of the Series A Preferred Shares at a conversion price of $1.43, based upon the 5-day average. The 409,019
shares of Series A Preferred Shares were converted for 572,055 shares of the Company’s common stock.
Common Shares
At June 30, 2017 and 2016, there are
a total of 17,697,621 and 15,866,099 shares of common stock issued and outstanding, respectively.
During the three months ended June 30,
2017, the Company neither sold or issued any of its shares of common stock.
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 of
$0.10 per share.
Additional Paid-in Capital
During the three months ended June 30,
2017 and 2016, as the Company is in an accumulated deficit position, the deemed dividends in the amount of $0 and $37,805, respectively
were charged against additional paid-in-capital as there being no retained earnings from which to declare a dividend.
During the three months 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 9 – 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 has a fair value of $207,200. Assumptions used in the pricing were:
Expected Option/Warrant Term
|
1 year
|
Risk-free interest rate
|
.25%
|
Expected dividend yield
|
0.00%
|
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.
The following table summarizes the non-qualified
stock option and warrant activity at June 30, 2017:
|
|
2017
|
|
|
Number of
|
|
|
|
|
Options/
|
|
Weighted Average
|
|
|
Warrants
|
|
Exercise Price
|
Outstanding at
|
|
|
|
|
|
|
|
|
beginning of year
|
|
|
|
|
|
|
|
|
Options
|
|
|
1,982,750
|
|
|
$
|
0.491
|
|
Warrants
|
|
|
1,851,877
|
|
|
$
|
1.610
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
Options
|
|
|
—
|
|
|
$
|
—
|
|
Warrants
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Options
|
|
|
—
|
|
|
$
|
—
|
|
Warrants
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Expired
|
|
|
|
|
|
|
|
|
Options
|
|
|
(387,500
|
)
|
|
$
|
0.010
|
|
Warrants
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30,
|
|
|
|
|
|
|
|
|
Options
|
|
|
1,595,250
|
|
|
$
|
0.585
|
|
Warrants
|
|
|
1,851,877
|
|
|
$
|
1.610
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30,
|
|
|
|
|
|
|
|
|
Options
|
|
|
985,250
|
|
|
$
|
0.585
|
|
Warrants
|
|
|
1,851,877
|
|
|
$
|
1.462
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
|
|
remaining contractual
|
|
|
|
|
|
|
Aggregate
|
|
life
|
|
|
Life
|
|
|
|
Intrinsic Value
|
|
Options
|
|
|
2.86
|
|
|
$
|
—
|
|
Warrants
|
|
|
1.64
|
|
|
$
|
—
|
|
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 10 – Commitments and Contingencies
Operating Lease
The Company currently leases an office
space in Colorado on a month to month basis at the rate of $5,451 plus expenses. In addition, the Company leased an office space
in Wyoming at the rate of $5,838 per month and the Company terminated from the lease as of March 31, 2017. Total rent expense under
these leases was $36,903 and $35,527 for the three months ended June 30, 2017 and 2016, respectively.
The Company has no minimum future rental
annual payments.
Employment Agreements
In August 2014, Terex entered into an
Employment Agreement for services with its Chief Executive Officer, President and director. The Employment Agreement had a term
of 3 years and provided for an annual compensation of $204,000 and a monthly car allowance of $600. It also provided for an annual
bonus as determined by the board of directors. As of November 30, 2017, the parties entered into a settlement agreement where the
Company issued 750,000 shares of its common stock to Terex’s former CEO, President and director towards effectuating a full
compromise, settlement and release of any and all claims between the parties.
In November 2014, Terex entered into
an Employment Agreement for services with its Vice President of Operations and director. The Employment Agreement had a term of
3 years and provided for an annual compensation of $150,000. It also provided for an annual bonus as determined by the board of
directors. As of November 30, 2017, the parties entered into a settlement agreement where the Company issued 750,000 shares of
its common stock to Terex’s former Vice President and director towards effectuating a full compromise, settlement and release
of any and all claims between the parties.
In January 2015, T-Rex entered
into an Employment Agreement for services with its Vice President of Operations and director. The Employment Agreement had a term
of 3 years and provided for an annual compensation of $150,000. It also provided for an annual bonus as determined by the board
of directors. In September 2016, the Employment Agreement was terminated.
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 an auto allowance of $600 per month. As of August 1, 2016, the parties entered into a revised three-year
agreement to perform services at the base rate of $195,000 per year. In addition, the consultant had 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.
Litigation
BMO Holdings Litigation
On October 31, 2016, BMO Holding, LLC
(“BMO Holding”) filed suit against the Company in the Supreme Court of the State of New York, New York County, alleging
a breach of alleged contract resulting from certain business negotiations with the Company revolving around the purchase of oil
and gas properties in Wyoming by an affiliated entity of BMO Holding. The suit seeks the fulfillment of the alleged contract and
unspecified damages to be determined by jury. At the time of this filing, the Company has filed a Motion to Dismiss due to a lack
of jurisdiction and failure to state a claim. The suit was dismissed on August 21, 2017. Subsequently, BMO Holding filed suit against
the Company in the District Court of the County of Broomfield, Colorado and such suit was dismissed in April 2019.
Note 11 – Related Party Transactions
T-Rex Oil LLC #1
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 Company issued to the members of LLC #1 a total of 425,000 shares of its restricted common stock
at an exercise price of $1 per share valued at $425,000.
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 three months
ended March 31, 2017 and 2016. See Note 2 –
Summary of Significant Accounting Policies
– Principles of Consolidation.
Note 12 – Subsequent Events
Cole Creek
Effective September 1, 2018, the Company
sold its 100% working interest in the Cole Creek properties for $3,500,000 in cash.