T-REX OIL, INC. - FORM 10-Q - February 14, 2017

Attached files

file	filename
EX-32.2 - T-REX OIL, INC.	ex32-2.htm
EX-32.1 - T-REX OIL, INC.	ex32-1.htm
EX-31.2 - T-REX OIL, INC.	ex31-2.htm
EX-31.1 - T-REX OIL, INC.	ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2016

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to ___________________.

Commission file number: 000-51425

T-Rex Oil, Inc.

(Exact name of registrant as specified in its charter)

Colorado

98-0422451

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

520 Zang Street, Suite 250

Broomfield, CO 80021

(Address of principal executive offices)

(720) 502-4483

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer [ ]	Accelerated filer [ ]
	Non-accelerated filer [ ]	Smaller reporting company [X]
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes [X] No [ ]

As of February 10, 2017, T-Rex Oil, Inc. has 17,305,825 shares of $0.001 par value common stock outstanding.

Table of Contents

		Page
	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Balance Sheet – December 31, 2016 (Unaudited) and Balance Sheet – March 31, 2016 (Audited)	3

	Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended December 31, 2016 and 2015	4

	Consolidated Statement of Cash Flows (Unaudited) for the Nine Months Ended December 31, 2016 and 2015	5

	Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the Nine Months Ended December 31, 2016	6

	Notes to Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.	Defaults Upon Senior Securities	33

Item 4.	Mine Safety Disclosures	33

Item 5.	Other Information	33

Item 6.	Exhibits	34

SIGNATURES		35

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

T-Rex Oil, Inc. and Subsidiaries

Consolidated Balance Sheets

	December 31, 2016			March 31, 2016
	(Unaudited)			(Audited)
ASSETS
Current assets
Cash and cash equivalents	$	130,051		$	428,204
Accounts receivable, trade		175,522			132,391
Prepaids		100,168			50,370
Total current assets		405,741			610,965
Property and equipment
Oil and gas properties, successful efforts method of accounting
Proved		11,754,817			11,368,626
Unproved		4,761,535			4,745,917
Other		404,514			404,514
Total property and equipment		16,920,866			16,519,057
Less accumulated depreciation, depletion, amortization and valuation allowance		14,722,114			14,621,873
Net property and equipment		2,198,752			1,897,184
Other assets
Deposits and other assets		569,797			275,658
Total other assets		569,797			275,658
Total assets	$	3,174,290		$	2,783,807
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
Accounts payable and accrued liabilities	$	1,450,389		$	758,832
Asset retirement obligations, current		176,587			176,587
Notes payable		1,171,401			783,210
Total current liabilities		2,798,377			1,718,629
Long-term liabilities
Asset retirement obligations, net of current		1,218,298			1,020,556
Total liabilities		4,016,675			2,739,185
Commitments and Contingencies		-			-
STOCKHOLDERS' (DEFICIT) EQUITY
Preferred shares, $0.001 par value, 50,000,000 shares authorized; 0 and 409,019 shares issued and outstanding at December 31, 2016 and March 31, 2016, respectively		-			409
Common shares, $0.001 par value, 275,000,000 shares authorized; 17,305,825 and 15,480,882 shares issued and outstanding at December 31, 2016 and March 31, 2016, respectively		17,306			15,481
Additional paid in capital		29,017,385			26,785,705
Accumulated deficit		(29,877,076	)		(26,756,973	)
Stockholders' (deficit) equity		(842,385	)		44,622
Total liabilities and stockholders' (deficit) equity	$	3,174,290		$	2,783,807

The accompanying notes are an integral part of these financial statements.

T-Rex Oil, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	For the Three Months Ended December 31,						For the Nine Months Ended December 31,
	2016			2015			2016			2015
Revenues
Oil and gas sales	$	300,015		$	102,612		$	1,020,403		$	390,705
Total revenues		300,015			102,612			1,020,403			390,705

Operating expenses:
Lease operating expense		167,960			143,356			571,349			280,654
Production taxes		11,919			50,025			112,622			98,640
Forgiveness of debt		(24,502	)		-			(24,502	)		-
General and administrative expense		946,525			1,124,821			2,532,032			2,267,604
Asset impairment		-			-			425,000			-
Exploration expense		31,739			(18,842	)		148,954			(59,464	)
Depreciation, depletion, amortization and accretion		60,286			297,367			164,672			762,948
Total operating expenses		1,193,927			1,596,727			3,930,127			3,350,382

Loss from operations		(893,912	)		(1,494,115	)		(2,909,724	)		(2,959,677	)

Other income (expense)
Interest expense		(179,411	)		(10,364	)		(210,491	)		(79,739	)
Gain of disposition of asset		-			-			-			44,100
Interest income		19			74			112			211

Total other income (expense)		(179,392	)		(10,290	)		(210,379	)		(35,428	)

Loss before income taxes		(1,073,304	)		(1,504,405	)		(3,120,103	)		(2,995,105	)

Income taxes		-			-			-			-

Net loss		(1,073,304	)		(1,504,405	)		(3,120,103	)		(2,995,105	)

Deemed dividend for beneficial conversion feature of preferred stock		-			-			(56,988	)		-

Net loss attributable to common shareholders	$	(1,073,304	)	$	(1,504,405	)	$	(3,177,091	)	$	(2,995,105	)

Net loss per common share	$	(0.06	)	$	(0.09	)	$	(0.19	)	$	(0,19	)
Basic and diluted

Weighted average number of common shares		17,142,510			15,942,466			16,449,206			15,702,037

The accompanying notes are an integral part of these financial statements.

T-Rex Oil, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	For the Nine Months Ended December 31,
	2016			2015
OPERATING ACTIVITIES
Net loss attributable to common stockholders	$	(3,120,103	)	$	(2,995,105	)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation, depletion, amortization and accretion		164,672			762,948
Gain on disposition of asset		-			(44,100	)
Asset impairment		425,000			-
Issuance of shares and warrants for services		313,437			-
Issuance of shares with convertible promissory note		49,753			-
Equity based compensation		264,589			650,568
Gain on disposition of assets		(24,502	)
Changes in:
Accounts receivable, trade		(43,131	)		18,179
Prepaids		(661	)		11,658
Accounts payable and accrued liabilities		691,557			(69,627	)
Net cash (used in) operating activities		(1,279,389	)		(1,665,479	)
INVESTING ACTIVITIES
Additions to oil and gas properties		(268,498	)		(171,192	)
Additions to non oil and gas properties		-			(9,539	)
Loans to affiliates, net of repayments		-			22,000
Proceeds from sale of mineral interest		-			30,000
Additions to other assets		(37	)		39,188
Net cash (used in) investing activities		(268,535	)		(89,599	)
FINANCING ACTIVITIES
Sale of shares and exercise of options		659,277			1,922,500
Shareholder cash contribution		200,000			-
Repayment of notes payable		(35,506	)		(444,173	)
Proceeds from notes payable		426,000			-
Net cash provided by financing activities		1,249,771			1,478,327
NET CHANGE IN CASH		(298,153	)		(276,751	)
CASH, Beginning		428,204			636,542
CASH, Ending	$	130,051		$	359,791
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Issuance of shares for debt	$	2,000		$	20,000
Transfer of property for debt	$			$	393,795
Subscription receivable	$	-		$	53,038
Beneficial conversion on feature of preferred stock	$	56,988		$	-
Deemed dividend for beneficial conversion feature of preferred stock	$	(56,988	)	$	-
Beneficial conversion feature on convertible promissory note	$	(39,278	)	$	-
Issuance of Shares with convertible promissory note	$	49,752		$	-
Interest paid	$	65,114		$	71,170
Income taxes paid	$	-		$	-

The accompanying notes are an integral part of these financial statements.

T-Rex Oil, Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders’ (Deficit) Equity

(Unaudited)

	Preferred Shares						Common Shares				Additional						Total Stockholders’
	$0.001 Par Value						$0.001 Par Value				Paid-in			Accumulated			(Deficit)
	Shares			Amount			Shares		Amount		Capital			(Deficit)			Equity
BALANCES, April 1, 2016		409,019		$	409			15,480,882	$	15,481	$	26,785,705		$	(26,756,973	)	$	44,622
Sale of shares for cash at $0.75 per share		-			-			99,378		99		74,514			-			74,613
Sale of shares for cash at $1.50 per share		-			-			378,510		379		566,785			-			567,164
Shareholder cash contribution		-			-			-		-		200,000			-			200,000
Issuance of shares for property - exercise of options		-			-			425,000		425		424,575			-			425,000
Issuance of shares for services at $1.79 per share		-			-			50,000		50		89,450						89,500
Issuance of shares for exercise of options/warrants		-			-			225,000		225		19,275			-			19,500
Equity based compensation		-			-			-		-		207,200			-			207,200
Conversion of preferred shares for common shares		(409,019	)		(409	)		572,055		572		(163	)		-			-
Beneficial conversion feature of preferred stock												56,988			-			56,988
Deemed dividend for preferred stock’s
beneficial conversion feature		-			-			-		-		(56,988	)		-			(56,988	)
Issuance of common shares in connection with convertible note		-			-			75,000		75		49,677			-			49,752
Beneficial conversion feature of convertible note		-			-			-		-		39,278			-			39,278
Issuance of warrants for services		-			-			-		-		296,500			-			296,500
Equity compensation		-			-			-		-		264,589						264,589
Net loss for the period		-			-			-		-		-			(3,120,103	)		(3,120,103	)
BALANCES, December 31, 2016		-		$	-			17,305,825	$	17,306	$	29,017,385		$	(29,877,076	)	$	(842,385	)

The accompanying notes are an integral part of these financial statements.

T-REX OIL, INC. AND SUBSIDIARIES

Notes To The Consolidated Financial Statements

December 31, 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.

Western Interior Acquisition

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.

Cole Creek

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.

Nexfuels Spin Off

On July 11, 2016, Nexfuels, Inc. (“Nexfuels”), as a wholly-owned subsidiary of the Company in the State of Colorado. 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 in July 15, 2016.

Shareholders of T-Rex, as of the Record Date of August 19, 2016, will receive one share of Nexfuels common stock for every two shares (2) of T-Rex common stock owned. The stock dividend will be based upon 17,097,622shares of T-Rex 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.

T-REX OIL, INC. AND SUBSIDIARIES

Notes To The Consolidated Financial Statements

December 31, 2016

(Unaudited)

On August 19, 2016, the Company assigned to Nexfuels the following:

	1.	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.

	2.	The Memorandum of Understanding (“MOU”) by and between T-Rex and PacifiCorp Energy the owner/operator of the power plant.

	3.	The existing contract by and between Sargent Lundy LLC to perform the feasibility study.

	4.	Any and all other valid and subsisting contracts, agreement, and instruments, rights or other interest that the Company may have in the Project.

	5.	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.

An analysis of the items assigned to Nexfuels by the Company showed that the Company in accordance with its accounting policies had not capitalized none 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 balance sheets at December 31, 2016 and 2015 and the consolidated statement of operations and cash flows for the nine months ended December 31, 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 former 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.

T-REX OIL, INC. AND SUBSIDIARIES

Notes To The Consolidated Financial Statements

December 31, 2016

(Unaudited)

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 December 31, 2016, the Company did not have cash deposits in excess of FDIC insured limits.

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 nine months ended December 31, 2016, we sold oil from our fields to two different purchasers, accounted for 55.01% of our sales, while the other accounted for 44.99%.

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 December 31, 2016 and 2015.

Prepaid Expenses

Prepaid Expenses consisted of the following, at December 31, 2016:


Deposits	$	57,501
Insurance		27,667
Retainers		15,000
	$	100,168

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 $11,368,626 at December 31, 2016 and March 31, 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 nine months ended December 31, 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 $4,761,535 and $4,745,917 at December 31, 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 December 31, 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 nine months ended December 31, 2016 and 2015, the Company recorded depreciation, depletion and amortization expense on oil and gas properties in the amount of $142,551 and $709,844, respectively; $30,725 and $279,945 for the three months ended December 31, 2016 and 2015, respectively.

T-REX OIL, INC. AND SUBSIDIARIES

Notes To The Consolidated Financial Statements

December 31, 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 nine months ended December 31, 2016 and 2015, respectively.

During the nine months ended December 31, 2016, the Company instituted the first stages of its Recompletion Program, which has included geologic survey work, such seismic reinterpretations and environmental work. In December 31, 2016, the Company began it first recompletion work on an existing well bore. The Company has recognized an exploration expense of $ 148,954 and $(59,464) during the nine months ended December 31, 2016 and 2015, respectively as a result of these activities.

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 nine months ended December 31, 2016 and 2015 was $29,282 and $29,197, respectively ($31,947 and $9,404 for the three months ended December 31, 2016 and 2015, 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 Nine Months Ended
	December 31,
	2016		2015
ARO - beginning of period	$	1,197,143	$	459,294
Additions		133,311		-
Deletions		-		(15,190	)
Accretion expense		64,431		23,906
		1,394,885		468,010

Less current portion		176,587		173,878
ARO - end of period	$	1,218,298	$	294,132

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

December 31, 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. As a result of this analysis, the deferred tax asset in the amount of $4,944,484has been fully reserved at December 31, 2016.

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 December 31, 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

December 31, 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 Nine months Ended
	December 31,
	2016		2015
Dilutive		-		-
Anti Dilutive		3,942,300		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 nine months ended December 31, 2016 and 2015, we sold oil from our fields to two different purchasers, Rocky Mountain Crude Oil accounted for 55.01% of our purchasers, while Sinclair Oil accounted for 44.99%.

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. In July 2016, the Series A shares were converted into shares of the Company’s common stock. The offsetting amount was amortized to over the period from the issue date to the first conversion date or 9 months. As a result of the conversion, the Company has amortized the full amount of the deemed dividend recognizing, $56,988 during the nine months ended December 31, 2016 and $69,829 during the year ended March 31, 2015. As the Company is in an accumulated deficit position, the deemed dividend of 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 December 31, 2016, the Company has not been involved in any unconsolidated SPE transactions.

T-REX OIL, INC. AND SUBSIDIARIES

Notes To The Consolidated Financial Statements

December 31, 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 December 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.

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.

T-REX OIL, INC. AND SUBSIDIARIES

Notes To The Consolidated Financial Statements

December 31, 2016

(Unaudited)

There were other accounting standards and interpretations issued during the nine months ended December 31, 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 nine months ended December 31, 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 $3,120,103 and $2,995,105 for the nine months ended December 31, 2016 and 2015 ($1,073,304 and $1,504,405 for the three months ended December 31, 2016 and 2015, respectively), respectively, and an accumulated deficit of $29,877,076 as of December 31, 2016. At December 31, 2016, the Company had a working capital deficit of $(2,392,636).

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 December 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

T-REX OIL, INC. AND SUBSIDIARIES

Notes To The Consolidated Financial Statements

December 31, 2016

(Unaudited)

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.

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. As a result, the Company became the sole equity holder in LLC#1, a review of LLC#1’s operational status has lead management to take an immediate impairment on the value of the equity of $425,000 which has been expensed as an asset impairment charge at December 31, 2016.

Description	Level 1		Level 2		Level 3		Total
Assets
Oil and gas properties	$	-	$	22,632	$	-	$	22,632

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 nine months ended December 31, 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

T-REX OIL, INC. AND SUBSIDIARIES

Notes To The Consolidated Financial Statements

December 31, 2016

(Unaudited)

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 and 82.5% of the WI in the leases specific to the Shannon formation in the properties.

Note 6- Nexfuels Warrant

On October 15, 2016, Nexfuels issued a warrant exercisable for 1,056,000 shares of the common stock of Nexfuels to the Company in return for staff services and office space over a six-month period (“Nexfuels Warrant”). The Nexfuels Warrant has an exercise price of $1.25 per share and an expiration date of February 15, 2017. The Nexfuels Warrant is both assignable and transferable.

The Company has valued the warrant at $45,000 or $7,500 per month. In November 2016, the Company assigned 50,000 warrants to a third party as part of the issuance of a $300,000 convertible promissory note. At December 31, 2016, the Company holds 1,006,000 in warrants of Nexfuels valued at $43,513.

Note 7 – 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 December 31, 2016 owes a balance in the amount of $488,298 on one of the promissory notes plus accrued interest of $25,659 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 in to 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.

T-REX OIL, INC. AND SUBSIDIARIES

Notes To The Consolidated Financial Statements

December 31, 2016

(Unaudited)

Convertible Promissory Note

On November 3, 2016, the Company in exchange for $300,000 cash issued a convertible promissory note. The promissory note has an interest rate of 12% per annum and a due date of January 31, 2017, which has been 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 its restricted common stock and agreed to transfer to the holder 50,000 warrants from Nexfuels warrant held by the Company. At December 31, 2016, the Company has recognized accrued interest of $5,720.

Pursuant to ASC 470-20, the Company recognized the difference from the conversion price of the $0.80 per share from the market price on the date of issuance of $0.95 per share (the 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 $56,250 was recorded as additional paid-in-capital. In addition to the Beneficial Conversion Feature, the 75,000 shares of restricted common stock were valued at $71, 250 and the Nexfuels warrant was valued at $2,128. The Company has recognized a total expense of $90,516 in connection with the discount of the note.

Secured Convertible Promissory Notes

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. The Company, 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 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, requested an extension of the due date of the promissory note. On October 2016, the holder of the promissory note filed suit against the Company for payment of the promissory note (See Note 11). The Company at December 31, 2016 owes $50,000 on the promissory note plus accrued interest of $2,788.

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 December 31, 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 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 December 31, 2016 owes $50,000 on the promissory note plus accrued interest of $2,410.

On August 11, 2016, the Company borrowed $100,000 from a former director of the Company, who owns the 85.71% equity 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 has agreed to pay the holder 30% of the net revenues received from the sale of the oil from the Cole Creek properties, starting August 2016. The Company at December 31, 2016 owes $100,000 on the promissory note plus accrued interest of $5,836.

On April 25, 2016, LLC#3 borrowed $50,000 from a director of the Company, in exchange for a 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, 2016, with all other terms remaining in effect. The LLC#3 at December 31, 2016 owes $50,000 on the promissory note plus accrued interest of $4,110.

T-REX OIL, INC. AND SUBSIDIARIES

Notes To The Consolidated Financial Statements

December 31, 2016

(Unaudited)

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. Annual interest is at prime plus 2.50% with a floor of 7%). The line-of-credit had a maturity of date of November 30, 2016. The Company owes $106,103 on the line-of-credit at December 31, 2016, and is in default.

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 notes were paid in full in September 2016.

In December 2016, the Company borrowed $26,000 from an unrelated party to finance their insurance policy. The unsecured notes are to be repaid month during the year at a rate of 8.29%.

Note 8 – Stockholders’ Equity

The Company’s capital stock at December 31, 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.

Preferred Shares

At December 31, 2016 and 2015, there are no shares of preferred stock issued and outstanding.

Series A Preferred Shares

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 $56,988 to the Series A Shares of preferred stock has been recorded during the nine months ended December 31, 2016 in its statement of operations and cash flows. As the Company is in an accumulated deficit position, the deemed dividend of $56,988 has been charged against additional paid-in-capital for common shares as there being no retained earnings from which to declare a dividend.

T-REX OIL, INC. AND SUBSIDIARIES

Notes To The Consolidated Financial Statements

December 31, 2016

(Unaudited)

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 “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.

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.

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 common stock.

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 has been recorded as additional paid-in-capital for common shares. In July 2016, the Series A shares were converted into shares of the Company’s common stock. The offsetting amount was amortized to over the period from the issue date to the first conversion date or 9 months. As a result of the conversion, the Company has amortized the full amount of the deemed dividend recognizing, $56,988 during the nine months ended December 31, 2016 and $69,829 during the year ended March 31, 2015. As the Company is in an accumulated deficit position, the deemed dividend of has been charged against additional paid-in-capital for common shares as there being no retained earnings from which to declare a dividend.

Common Shares

At December 31, 2016 and March 31, 2016, there are a total of 17,305,825 and 15,480,882 shares of common stock issued and outstanding, respectively.

During the nine months ended December 31, 2016, the Company issued 175,000 shares of common stock in connection with the cash exercise of warrants at an exercise price $0.10 per share.

During the nine months ended December 31, 2016, the Company issued 50,000 shares of common stock in the connection with the exercise of an option as payment on outstanding debt of $2,000.

During the nine months ended December 31, 2016, the Company issued 572,055 shares of common stock in connection with the conversion of 409,019 shares of its Series A Preferred Shares at a price of $1.43 per share. As a result of the conversion, the remaining deemed dividend on our Series A Preferred Shares in the amount of $56,988 was charged against additional paid- in-capital as there being no retained earnings from which to declare a dividend.

The Company in December 2014 entered into put agreements with the members of T-Rex Oil, LLC#1 (“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, INC. AND SUBSIDIARIES

Notes To The Consolidated Financial Statements

December 31, 2016

(Unaudited)

During the nine months ended December 31, 2016, the Company issued 75,000 shares of restricted common stock in connection with the issuance of a $300,000 Convertible Promissory Note. The shares were valued at $71,250 or $0.95 per share.

Additional Paid-in Capital

During the nine months ended December 31, 2016, as the Company is in an accumulated deficit position, the remaining deemed dividend on our Series A Preferred Shares in the amount of $56,988 was charged against additional paid-in-capital as there being no retained earnings from which to declare a dividend.

During the nine months ended December 31, 2016, the Company realized additional paid in capital relative to the fair value of equity based payments in the total amount of $503,700 of which $223,937 was expensed and $279,762 was capitalized. The $279,762 is the valuation of warrants issued for payment in full for services as part of agreements with a term of one year and the Company will amortize the value of the warrants over the term of the life of the agreements. See – Note 9 Equity Based Payments.

The Company also recognized $264,589 in equity compensation as part of the issuance of stock options to officers, directors and employees. 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.

T-REX OIL, INC. AND SUBSIDIARIES

Notes To The Consolidated Financial Statements

December 31, 2016

(Unaudited)

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.

During the nine months ended December 31, 2016, the Company granted options exercisable for a total of 1,480,000 shares of restricted common stock to officers, directors and employees of the Company. The options are exercisable at a price based upon using a valuation of the Company’s common stock under 409A of the Internal Revenue Code and therefore management has estimated the exercise price to be $.25 per share at the date of the grant, based upon and internal review of the 409A criteria. It was management’s intention to utilize an outside firm in the near future to otherwise perform an independent valuation of the Company’s common stock under 409A and to adjust the price as necessary. The options have a life of 3 years. Options exercisable for 540,000 shares granted to employees and directors are fully vested at December 31, 2016 where options exercisable for 940,000 shares granted to officers, directors and employees have vesting rates over the remaining life of the options.

Using the Black-Scholes option-pricing model, the vested options at the date of grant have a fair value of $211,337. Significant assumptions used in the valuation are:

Volatility	89.00 – 99.00	%
Expected Option Term	3 year
Risk-free interest rate	.57	%
Expected dividend yield	0.00	%

The Company is amortizing the fully vested options and the vested options over a period of 3 years and therefore for the nine and three months ended December 31, 2016, recognized an expense of $264,589 and $222,788, respectively.

Subsequent to the quarter ended December 31, 2016, the Company determined that it would be unable to get a valuation under 409A within the allotted timeframe, so options exercisable for 1,480,000 shares were cancelled. During January 2017, the Company issued new options to these individuals with the exercise price set at the current market price of $0.62 per share on the grant date. The Company intends to recognize the expenses in connection with the issuance during the 4^th fiscal quarter.

T-REX OIL, INC. AND SUBSIDIARIES

Notes To The Consolidated Financial Statements

December 31, 2016

(Unaudited)

Warrants

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 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 and the Company was amortizing over the period of the agreement. In December 31, 2016, the Consulting Agreement was cancelled at that time the Company recognized the remaining $165,054 as consulting expense.

During December 2016, the Company issued warrants exercisable for 500,000 shares of the Company’s common stock in exchange for business development services pursuant to Consulting Agreements. The warrants have terms of 3 years and an exercise price of $0.55 per share.

Using the Black-Scholes option-pricing model, the warrants were found to have a fair value of $296,500. Assumptions used in the pricing were:

Volatility	100.00	%
Expected Warrant Term	1 year
Risk-free interest rate	.85	%
Expected dividend yield	0.00	%

As the warrants were issued for services to be rendered under a 1 year Consulting Agreement, the Company is amortizing them over a 1 year period and has recognized $16,737 in equity compensation for the three months ended December 31, 2016.

The following table summarizes the non-qualified stock option and warrant activity as of and for the nine months ended December 31, 2016:

	Number of			Weighted
	Options/			Average
	Warrants			Exercise Price
Outstanding at
beginning of year
Options		1,127,750		$	0.018
Warrants		1,351,877		$	0.080

Granted
Options		1,812,500		$	0.25
Warrants		850,000		$	0.871

Exercised
Options		(225,000	)	$	0.100
Warrants		-		$	-

Cancelled
Options		-		$	-
Warrants				$	-

Outstanding at December 31,
Options		2,290,250		$	0.80
Warrants		2,201,877		$	1.23

Exercisable at December 31,
Options		1,663,583		$	0.21
Warrants		2,201,877		$	1.34

Weighted average			Aggregate
remaining contractual			Intrinsic
life	Life		Value
Options		2.63	$	5,300,680
Warrants		2.67	$	2,638,671

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 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 was terminated in January 2017. Total rent expense under these leases for the nine months ended December 31, 2016 is $111,600.

T-REX OIL, INC. AND SUBSIDIARIES

Notes To The Consolidated Financial Statements

December 31, 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		49,108
3/31/2018		83,111
3/31/2019		62,940
3/31/2020		15,735
	$	210,894

Employment Agreements

In August 2016, the Company entered in to an Employment Agreement for services with its Chief Executive Officer, and director. The Employment Agreement has a term of 3 years and provides for an annual compensation of $265,000 and a monthly car allowance of $600. It also provides for an annual bonus as determined by the board of directors.

In August 2016, the Company entered in to an Employment Agreement for services with its Vice President of Geology and director. The Employment Agreement has a term of has a term of 3 years and provides for an annual compensation of $195,000 and a monthly car allowance of $600. It also provides for an annual bonus as determined by the board of directors.

In August 2016, the Company’s subsidiary Terex Energy entered in to an Employment Agreement for services with its Vice President of Operations and director. The Employment Agreement has a term of has a term of 3 years and provides for an annual compensation of $195,000 and a monthly car allowance of $600. It also provides for an annual bonus as determined by the board of directors

Consulting Agreement

The Company entered in to a three-year agreement effective August 1, 2016 with a consultant to perform services at the base rate of $195,000 per year under certain terms and conditions including with an auto allowance of $600 per month.

Farmout Agreement

On June 25, 2015, the Company entered into a Farmout Agreement with Red Hawk Oil Exploration, Inc., an entity in which a then officer and director was an officer of, to drill 3 new wells in the Shannon Formation of the Cole Creek Unit in Natrona and Converse Counties, Wyoming. The farmout has a provision that within 6 months of the farmout, drilling locations would be identified and Applications for Permit and Drill (APDs) for 3 wells filed. The farmout further provided for the new drills to commence within 24 months.

In January 2016, the Company entered into a new Farmout Agreement with Red Hawk with essentially the same terms which require the commencement of drilling by January 2018. Subsequently, our former Executive Vice President, who was also a principal with Red Hawk, advised that we should wait to file the APD’s until we had the benefit of the reprocessed seismic data. In December 2016, the Company filed 3 APD’s with the State of Wyoming as a part of the process to secure the permits required to drill.

Litigation

Debt Litigation

On October 26, 2016, a former officer and director of the Company filed suit with the District Court, City and County of Denver for payment of the $50,000 borrowed on January 14, 2016. The Company, in exchange for $50,000 issued a secured promissory note including interest at the rate of 5% per annum with accrued and unpaid interest and principal due at December 31, 2016. The promissory note is collateralized by certain oil and gas properties located in the State of Wyoming. The Holder had the right at any time prior to payment of the promissory note to 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, requested an extension of the due date of the promissory note. The Company at December 31, 2016 owes $50,000 on the promissory note plus accrued interest of $2,788. The Company has accounted for both the note and continues to accrue interest on the note pursuant to the terms of the note.

The Company has filed a counterclaim in the suit.

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.

We have not accrued any liability because the range of possible loss, if any, cannot be determined at this early stage of the litigation. We intend to defend this lawsuit vigorously, but the outcome of this matter is inherently uncertain and may have a material adverse effect on our financial position, results of operations and cash flows.

T-REX OIL, INC. AND SUBSIDIARIES

Notes To The Consolidated Financial Statements

December 31, 2016

(Unaudited)

Note 11 – 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 purposes 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.

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.

As a result, the Company became the sole equity holder in LLC#1, a review of LLC#1’s operational status has lead management to take an immediate impairment on the value of the equity of $425,000 which has been expensed as an asset impairment charge. The Company, as part of the dissolution of LLC#1, has forgiven $24,502 of intercompany debt.

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 nine months ended December 31, 2016. See Note 1 – Organization and History.

Note 12 – Subsequent Events

Option Cancellation and Issuance

The Company has evaluated events up to the filing date of these interim financial statements and determined that no subsequent event activity required disclosure.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward-looking statements.

Unless the context requires otherwise, references in this document to “T-Rex Oil”, “we”, “our”, “us” or the “Company” are to T-Rex Oil, Inc. and our subsidiaries.

The independent registered public accounting firm’s report on the Company’s financial statements as of March 31, 2016, and for each of the years in the two-year period then ended, includes a “going concern” explanatory paragraph, that describes substantial doubt about the Company’s ability to continue as a going concern.

PLAN OF OPERATIONS

We are an energy company, focused on the acquisition, exploration, development and production of oil and natural gas. We have acquired oil and natural gas properties located in the western United States, mainly in the Rocky Mountain region. Our goal is to drill and produce oil and gas cost effectively by concentrating our efforts in proven oil rich areas where we have in-house geologic and operating experience.

We are focusing on the acquisition of proven properties that we believe can be economically enhanced in this current commodity price environment. In certain market conditions, we believe there could be additional upside realized through the development of deeper productive horizons, or applying tertiary recovery applications to these acquired fields.

To date, we have focused our activities in Eastern Wyoming along the Salt Creek/Big Muddy trend. Starting with the Salt Creek field in Natrona County, following the Salt Creek/Big Muddy trend down to the South Glenrock field in Converse County, we believe there are a series of analogous fields that could provide ideal targets for us to execute this business strategy.

In December 2016, we started our recompletion program in its Cole Creek Field, in the Powder River Basin, Wyoming. The recompletion program encompasses the identification of additional production from formations in existing well bores and then gaining such production through re-work methods. We performed re-work on the first of such well bores, moving from the Second Frontier Formation to the First Frontier Formation. The Company is awaiting final results of pumping efforts.

Our acquisition strategy includes taking older wells that are shut in or have lower production results and applying new and existing technologies to work-over and/or recomplete those wells so as to increase production and ultimate recovery. Technologies to be deployed include 3-D seismic imaging to target undeveloped areas of the reservoir that contain remaining primary reserves and horizontal drilling to increase recoveries, as well as secondary and tertiary recovery methods to increase produced reserves.

Nexfuels Spin-off

On August 19, 2016, the Company assigned to Nexfuels the following:

	1.	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.

	2.	The Memorandum of Understanding (“MOU”) by and between T-Rex and PacifiCorp Energy the owner/operator of the power plant.

	3.	The existing contract by and between Sargent Lundy LLC to perform the feasibility study.

	4.	Any and all other valid and subsisting contracts, agreement, and instruments, rights or other interest that the Company may have in the Project.

	5.	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.

Nexfuels Warrant

On October 15, 2016, Nexfuels issued a warrant exercisable for 1,056,000 shares of the common stock of Nexfuels to the Company in return for accounting and staff services over a six-month period (“Nexfuels Warrant”). The Nexfuels Warrant has an exercise price of $1.25 per share and an expiration date of February 15, 2017. The Nexfuels Warrant is both assignable and transferable. The Company has valued the warrant at $45,000 or $7,500 per month for services.

In November 2016, the Company assigned 50,000 warrants to a third party as part of the issuance of a $300,000 convertible promissory note. At December 31, 2016, the Company holds 1,006,000 in warrants of Nexfuels valued at $43,513.

Promissory Note and Stock Sale

We will require substantial additional capital to support our existing and proposed future operations. We have no committed source for any additional funds as of the date hereof. No representation is made that any funds will be available when needed. In the event funds cannot be raised when needed, we may not be able to carry out our business plan, may never achieve sales or royalty income and could fail in business as a result of these uncertainties.

RESULTS OF OPERATIONS

For the Three Months Ended December 31, 2016 and December 31, 2015

Overview. During the three months ended December 31, 2016, the Company recognized a net loss of $1,073,304 compared to a net loss of $1,504,405 for the three months ended December 31, 2015. The decrease of $431,101 is primarily the result of an increase in oil sales, resulting from an increase in production and price and a decrease in general and administrative expenses and an increase in other income and expense. Discussions of individually significant line items follow:

Revenues: During the three months ended December 31, 2016, the Company recognized revenues of $300,015 compared to $102,612 during the three months ended December 31, 2015. Management expects to see continued increases in its production numbers as it begins to institute re-work plans during the year and from the Company’s purchase of outstanding working interests in these properties during April 2016.

Operating Expenses: During the three months ended December 31, 2016, the Company had a decrease of $402,800 in total operating expenses as a result of the following:

General and administrative expenses decreased by $178,296 primarily as a result of increases in staffing and costs associated with reporting requirements. Depletion, depreciation, amortization and accretion decreased by $237,081 and production taxes decreased by $38,106. Amortization of $89,032 in connection with the issuance of 1,480,000 options to officers, directors and employees was also recognized during the three months ended December 31, 2016.

Other Income (Expense): The Company recorded interest expense of $179,411 for the three months ended December 31, 2016 compared to $10,364 for the three months ended December 31, 2015. This increase of $169,047 was primarily due to the recognition of $90,516 discount to the issuance of a $300,000 convertible promissory note. The $300,000 convertible promissory note had the following associated costs allocated to it a beneficial conversion feature of $39,278 was recorded as additional paid-in-capital. In addition to the Beneficial Conversion Feature, 75,000 shares of restricted common stock were valued at $71, 250, but allocated $49,752 to the note and the Nexfuels warrant was valued at $1,486.

For the Nine Months Ended December 31, 2016 and December 31, 2015

Overview. During the nine months ended December 31, 2016, the Company recognized a net loss of $3,120,103 compared to a net loss of $2,995,105 for the nine months ended December 31, 2015. The decrease of $124,998 is primarily the result of an increase in oil sales offset by an decrease in operational activities. Discussions of individually significant line items follow:

Revenues: During the nine months ended December 31, 2016, the Company recognized revenues of $1,020,403 compared to $390,705 during the nine months ended December 31, 2015. Increases were a result of increases in production and pricing during the quarter ended December 31, 2016. Management expects to see continued increases in its production numbers as it begins to institute re-work plans during the year.

Operating Expenses: During the nine months ended December 31, 2016, the Company had an increase of $579,745 in total operating expenses as a result of the following:

An increase in costs of $968,289 related to its oil and gas operational activities as a result of its take over of the operations of the T-Rex Oil LLC#3 properties. General and administrative expenses increased by $264,428 primarily as a result of increases in staffing and costs associated with reporting requirements. Depletion, depreciation, amortization and accretion decreased by $598,276 and production taxes increased by $13,982 and amortization of $130,832, in connection with the issuance of 1,480,000 options to officers, directors and employees.

The Company is the manager of T-Rex Oil LLC #1 (“T-Rex #1”) that was formed during December 2014 for the purpose of drilling and producing oil and gas wells in western Nebraska. 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. As a result, the Company became the sole equity holder in LLC#1, a review of LLC#1’s operational status has lead management to take an immediate impairment on the value of the equity of $425,000 which has been expensed as an asset impairment charge.

Other Income (Expense): The Company recorded interest expense of $210,491 for the nine months ended December 31, 2016 compared to $79,739 for the nine months ended December 31, 2015. This increase of $130,752 was primarily due to the recognition of $90,516 discount to the issuance of a $300,000 convertible promissory note, discussed previously.

LIQUIDITY

We have incurred a net loss of $3,120,103 for the nine months ended December 31, 2016 and have had a limited operating history.

During the nine months ended December 31, 2016, the Company as part of a private placement sold 99,378 shares of its restricted common stock for $74,613 in cash and 378,510 shares for $567,164 in cash. During the nine months ended December 31, 2016, the Company issued 175,000 shares or restricted common stock in connection with the cash exercise of $17,500 and 50,000 shares in connection with the exercise of an option as payment of debt of $2,000. Further, during the nine months ended December 31, 2016, the Company issued shares and warrants for services valued at $313,437.

On November 3, 2016, the Company in exchange for $300,000 cash issued a convertible promissory note. The convertible promissory note has an interest rate of 12% per annum and a due date of January 31, 2017, which has been extended to May 1, 2017. The $300,000 convertible promissory note is discussed in further detail below.

The Company will need substantial additional capital to support its proposed future energy operations. While we recognize revenues from our oil operations, they are not sufficient to support operations. The Company has no committed source for any funds, but as of December 31, 2016, we have $130,051 in cash. No representation is made that any funds will be available when needed. In the event funds cannot be raised when needed, we may not be able to carry out our business plan and we may never achieve sales sufficient to support our operations.

Decisions regarding future participation in oil and gas development or geophysical studies or other activities will be made on a case-by-case basis. We may, in any particular case, decide to participate or decline participation. If participating, we may pay our proportionate share of costs to maintain our proportionate interest through cash flow or debt or equity financing. If participation is declined, we may elect to farmout, non-consent, sell or otherwise negotiate a method of cost sharing in order to maintain some continuing interest in the prospect.

The Company used cash flows in operations of $1,279,389 during the nine months ended December 31, 2016 that was adjusted by non-cash items including: depreciation, depletion, amortization and accretion of $164,672, equity based compensation of $264,589, common stock and warrants issued for services of $313,437, issuance of shares with convertible promissory note of $49,753, gain on forgiveness of debt of $24,502 and an asset impairment of $425,000.

The Company used cash flows in investing activities of $268,535 during the nine months ended December 31, 2016 that was primarily comprised of: additions to oil and gas properties of $268,498 and additions to other assets of $37.

The Company was provided cash flows from financing activities of $1,249,771 during the nine months ended December 31, 2016 through $659,277 from the sale of restricted common stock, the cash exercise of options and the cash contribution of a director and shareholder of $200,000 and net proceeds from notes payable of $390,494.

Promissory Notes

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.

$300,000 Convertible Promissory Note

Secured Convertible Promissory Notes

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. Annual interest is at prime plus 2.50% with a floor of 7%). The Company owes $106,103 on the line-of-credit at December 31, 2016.

Short Term

On a short-term basis, we have not generated revenues sufficient to cover operations. Based on prior history, we will continue to have insufficient revenue to satisfy current and recurring liabilities as the Company continues exploration activities.

Capital Resources

The Company has only equity as its capital resource.

We have no material commitments for capital expenditures within the next year; however, our plans to develop our existing oil properties are capital intensive and capital will be needed to pay for participation, investigation, exploration, acquisition and working capital.

Need for Additional Financing

We do not have capital sufficient to meet our cash needs. The Company will have to seek loans or equity placements to cover such cash needs. Recompletions and re-works on existing wells, along with exploration activities will spur the need for additional financing and are likely to increase such needs.

No commitments to provide additional funds have been made by the Company’s management or other shareholders. Accordingly, there can be no assurance that any additional funds will be available to us to allow us to cover the Company’s expenses as they may be incurred.

The Company will need substantial additional capital to support its proposed future energy operations. We have insufficient revenues to cover our corporate costs. The Company has no committed source for any funds as of the date hereof. No representation is made that any funds will be available when needed. In the event funds cannot be raised when needed, we may not be able to carry out our business plan, may never achieve sufficient sales or royalty income and could fail in business as a result of lack of capital.

Decisions regarding future participation in exploration wells or geophysical studies or other activities will be made on a case-by-case basis. The Company may, in any particular case, decide to participate or decline participation. If participating, we may pay the proportionate share of costs to maintain the Company’s proportionate interest through cash flow or debt or equity financing. If participation is declined, the Company may elect to farmout, non-consent, sell or otherwise negotiate a method of cost sharing in order to maintain some continuing interest in the prospect.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements nor do we have any unconsolidated subsidiaries.

Critical Accounting Policies

Critical accounting policies and estimates are provided in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016, in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8 – Financial Statements and Supplementary Data. Additional disclosures are provided in Notes to Consolidated Financial Statements (unaudited) which are included in Item 1 – Consolidated Financial Statements to this Quarterly Report.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.

Item 4. Controls and Procedures

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Acting Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. We identified multiple material weaknesses in our internal control over financial reporting and, as a result of this material weakness, we concluded as of December 31, 2016, that our disclosure controls and procedures were not effective.

Internal Control-Integrated Framework

A material weakness is a control deficiency, or combination of control deficiencies, that result in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. As of December 31, 2016 and as determined in the fiscal year ended March 31, 2016, the Company identified the following material weakness:

The Company did not adequately segregate the duties of different personnel within our accounting department due to an insufficient complement of staff and inadequate management oversight.

We have limited accounting personnel with sufficient expertise in generally accepted accounting principles to enable effective segregation of duties with respect to recording journal entries and to allow for appropriate monitoring of financial reporting matters and internal control over financial reporting. Specifically, the Acting Chief Accounting Officer has involvement in the creation and review of journal entries and note disclosures without adequate independent review and authorization. This control deficiency is pervasive in nature and impacts all significant accounts. This control deficiency also affects the financial reporting process including financial statement preparation and the related note disclosures. Other significant control deficiencies at this time are lack of independent review and approval of journal entries before they are entered into the general ledger, not effectively implementing comprehensive entity-level controls, and the Company has not implemented procedures for timely review and approval of bank reconciliations.

As a result of the aforementioned material weakness, management concluded that the Company’s internal control over financial reporting as of December 31, 2016 was not effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Debt Litigation

The Company has filed a counterclaim in the suit.

BMO Holdings Litigation

We have not accrued any liability because of the range of possible loss, if any, cannot be determined at this early stage of the litigation. We intend to defend this lawsuit vigorously, but the outcome of this matter is inherently uncertain and may have a material adverse effect on our financial position, results of operations and cash flows.

ITEM 1A. RISK FACTORS

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item. However, our current risk factors are set forth in our Annual Report on Form 10-K for the year ended March 31, 2016, which risk factors are incorporated herein by this reference.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the period of October 1, 2016 through December 31, 2016, the Company made the following issuances of its equity securities.

DATE OF
SALE

TITLE OF
SECURITIES

NO. OF
SHARES

CONSIDERATION

CLASS OF PURCHASER

November 2016

Convertible Promissory Note

300,000

Business Associate

November 2016

Common Shares

75,000

300,000 Convertible Promissory Note

Business Associate

December 2016

Warrants

500,000

Services

Business Associates

December 2016

Common Shares

125,000

Exercise of Warrant

Business Associate

Exemption from Registration Claimed

The above issuances by the Company of its unregistered securities were made by the Company in reliance upon Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended (the “1933 Act”). The parties that purchased the unregistered securities was known to the Company and its management, through pre-existing business relationships and as a long standing business associate. The purchasers were provided access to all material information, which they requested, and all information necessary to verify such information and was afforded access to management of the Company in connection with their purchase. The purchasers of the unregistered securities acquired such security for investment and not with a view toward distribution, acknowledging such intent to the Company. The certificate or agreement representing such securities that was issued contained a restrictive legend, prohibiting further transfer of the certificate or agreement representing such security, without such security either being first registered or otherwise exempt from registration in any further resale or disposition.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

NONE.

ITEM 4. MINE AND SAFETY DISCLOSURE

NOT APPLICABLE.

ITEM 5. OTHER INFORMATION

NONE.

ITEM 6. EXHIBITS

The following is a complete list of exhibits filed as part of this Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K.

Exhibit No		Description of Exhibits

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.*

31.2		Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act.*

32.1		Certification of Chief Executive Officer pursuant to 18 U.S. C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.*

32.2		Certification of Chief Accounting Officer pursuant to 18 U.S. C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.*

101.INS		XBRL Instance Document^(*)

101.SCH		XBRL Taxonomy Extension Schema Document^(*)

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document^(*)

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document^(*)

101.LAB		XBRL Taxonomy Extension Label Linkbase Document^(*)

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document^(*)

*	Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	T-REX OIL, INC.

Dated: February 14, 2017	By:	/s/ Donald Walford
		Donald Walford, Chief Executive Officer

	By:	/s/ Kristi J. Kampmann
		Kristi J. Kampmann, Chief Accounting Officer

T-REX OIL, INC. - FORM 10-Q - February 14, 2017

Attached files

T-REX OIL, INC. Reports