UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 June 30, 2017

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

 

For the transition period from ______________to _____________

Commission File Number:  333-178251

(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  o

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 x  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes    r No      x

 

As of September 29, 2017, 7,192,585 shares of common stock, $0.00001 par value per share, were outstanding.

NORTH TEXAS ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

NTE Balance

See notes to the unaudited consolidated financial statements.

 

NORTH TEXAS ENERGY, INC.

 CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

See notes to the unaudited consolidated financial statements.

 NORTH TEXAS ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 (UNAUDITED)

 

See notes to the unaudited consolidated financial statements.

NORTH TEXAS ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 – Business and Organization

 

North Texas Energy, Inc. ("the Company") was incorporated in the State of Nevada on January 12, 2011. The Company intends to focus on re-entering non-producing oil fields and re-starting production with existing oil and gas wells located in Milam County, Texas.

Note 2 – Summary of Significant Accounting Policies

The accompanying unaudited interim consolidated financial statements of North Texas Energy, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company's annual report on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for the most recent fiscal year ended December 31, 2016 have been omitted.

Cash equivalents are highly liquid investments with an original maturity of three months or less. 

The Company uses the full cost method of accounting for exploration and development activities as defined by the SEC. Under this method of accounting, the costs for unsuccessful, as well as successful, exploration and development activities are capitalized as oil and gas properties. Capitalized costs include lease acquisition, geological and geophysical work, delay rentals, costs of drilling, completing and equipping the wells and any internal costs that are directly related to acquisition, exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities. Proceeds from the sale or other disposition of oil and gas properties are generally treated as a reduction in the capitalized costs of oil and gas properties, unless the impact of such a reduction would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas attributable to a country.

The Company categorizes its full cost pools as costs subject to amortization and costs not being amortized. The sum of net capitalized costs subject to amortization, including estimated future development and abandonment costs, are amortized using the unit-of-production method.

Oil and gas properties include costs that are excluded from capitalized costs being amortized. These amounts represent costs of investments in unproved properties. The Company excludes these costs on a country-by-country basis until proved reserves are found or until it is determined that the costs are impaired. All costs excluded are reviewed annually to determine if impairment has occurred. The amount of any impairment is transferred to the costs subject to amortization. The Company currently only owns unproved properties. As of June 30, 2017, management believes that there is no impairment for the Company's unproved oil and gas properties.

 

Under the full cost method of accounting, a ceiling test is performed each quarter for proved properties. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X. The ceiling test determines a limit, on a country-by-country basis, on the book value of oil and gas properties. The capitalized costs of proved oil and gas properties, net of accumulated depreciation, depletion, amortization and impairment("DD&A") and the related deferred income taxes, may not exceed the estimated future net cash flows from proved oil and gas reserves, calculated using the average oil and natural gas sales price received by the Company as of the first trading day of each month over the preceding twelve months (such prices are held constant throughout the life of the properties) with consideration of price change only to the extent provided by contractual arrangement, discounted at 10%, net of related tax effects. If capitalized costs exceed this limit, the excess is charged to expense and reflected as additional accumulated DD&A.  The Company has no proved properties subject to the full cost ceiling test as of June 30, 2017.

 

Asset retirement obligations ("ARO") represent the future abandonment costs of tangible assets such as platforms, wells, service assets, pipelines, and other facilities. The fair value of a liability for an asset's retirement obligation is recorded in the period in which it is incurred if a reasonable estimate of fair value can be made, and that the corresponding cost is capitalized as part of the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, an adjustment is made to the full cost pool, with no gain or loss recognized, unless the adjustment would significantly alter the relationship between capitalized costs and proved reserves. The ARO assets, which are carried on the balance sheet as part of the full cost pool, will be included in our amortization base for the purposes of calculating depreciation, depletion and amortization expense. For the purposes of calculating the ceiling test, the future cash outflows associated with settling the ARO liability is included in the computation of the discounted present value of estimated future net revenues. The liability is adjusted for any changes in the estimate of the liability and for the disposal of previously held oil and gas leases net of accretion expense.

The Company recognizes sales revenues for crude oil based on the amount sold to purchasers when delivery to the purchaser has occurred and title has transferred. This occurs when a tanker lifting has occurred.

Deferred income taxes are provided on a liability method whereby deferred tax assets and liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities as well as operating loss and tax credit carry forwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry-forwards are expected to be available to reduce taxable income. At June 30, 2017 and December 31, 2016 the Company has recorded a 100% valuation allowance as management has no assurance that deferred tax assets will be realized.

At June 30, 2017, the Company had net operating loss carry forwards of approximately $1.7 million that will expire between 2031 through 2037.

Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants using the treasury stock and "if converted" method. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect. For the three months ended June 30, 2017 and 2016, there are no potentially dilutive shares outstanding.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the year and the reported amount of proved natural gas and oil reserves. Management bases its estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments that are not readily apparent from other sources. Actual results could differ from these estimates and changes in these estimates are recorded when known.

The Company has evaluated all transactions through the date the consolidated financial statements were issued for subsequent event disclosure consideration.

 

In May 2014, the FASB issued guidance for revenue recognition for contracts, superseding the previous revenue recognition requirements along with most existing industry-specific guidance. The guidance requires an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue. The new standard will result in enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue arising from contracts with customers. In August 2015, the FASB issued guidance approving a one-year deferral, making the standard effective for reporting periods beginning after December 15, 2017, with early adoption permitted only for reporting periods beginning after December 15, 2016. In March 2016, the FASB issued guidance to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross rather than net, with the same deferred effective date. In April 2016, the FASB issued guidance to clarify the implementation guidance on identifying performance obligations and the accounting for licenses of intellectual property, with the same deferred effective date. In May 2016, the FASB issued guidance rescinding SEC paragraphs related to revenue recognition, pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force meeting. In May 2016, the FASB also issued guidance to clarify the implementation guidance on assessing collectability, presentation of sales tax, noncash consideration, and contracts and contract modifications at transition, with the same effective date. The Company is currently evaluating the impact, if any, that this guidance will have on the financial statements. Because the Company does not have existing significant revenue arrangements, management believes the impact of adoption will not be material to its financial statements.

The Company does not believe that any other recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.

Note 3 – Going Concern

As shown in the accompanying financial statements, the Company has incurred losses from operations, has not generated significant revenue and has not secured continuous funding for the operation of its oil and gas producing activities. These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. In addition to the offering of securities for sale to the public, the Company currently is diligently searching for other short-term and long-term sources of liquidity for its producing operations.

Note 4 – Oil and Gas Properties

 

The Company's oil and gas properties at June 30, 2017 and December 31, 2016 were located adjacent to each other in the State of Texas in the United States and all in Milam County.

During the six months ended June 30, 2017, the Company invested $156,063 in the development of its oil and gas infrastructure and wells.

Note 5 – Accrued Lease Obligations

The Company has an accrued lease liability to KADs Oil, Inc., the lessor of the leases in Milam County, Texas which the Company currently owns. As a result of the Purchase and Sale Agreement with Remington, the Company assumed the leasehold obligation of $50,000. Payments are to be made when oil and gas is recovered and delivered to market at the rate of 25% of the sale price after all operating expenses.

 

On May 10, 2011, the Company entered into an oil, gas and mineral lease agreement for its oil and gas properties located in Milam County, Texas. Pursuant to the lease agreement, the Company will pay the lessor $15,881 for the lease which is recorded as an accrued leasehold liability on the Company's balance sheets at June 30, 2017 and December 31, 2016.

Note 6 – Commitments and Contingencies 

On September 21, 2016, the Securities and Exchange Commission declared effective a registration statement that the Company had filed for shelf offering. The registration statement on Form S-1 filed on December 1, 2011 went effective on March 29, 2013 and expired on March 29, 2016. From March 30, 2016 until the date of this report, 2017, the Company sold 329,095 shares pursuant to Rule 506(b) in private placements, which the Company believes it would qualify for a Section 4(a) (2) exemption. The Company filed a Form D on November 18, 2016 to report the private offering of restricted securities. The private placements may have violated Section 5 of the Securities Act of 1933, as amended, and, as a result, regulatory authorities could take the position that the Company violated applicable Federal and State securities laws and, as a result, impose penalties and that the purchasers of those shares may have rescission rights or claims for damages.

Note 7 – Equity

During the six months ended June 30, 2017, the Company issued 101,420 common shares for $202,840.

During the six months ended June 30, 2017, the Company issued 65,000 common shares for geological services. The Company recorded $130,000 addition to its oil and gas properties based on the fair value of the shares issued on the grant date.

During the six months ended June 30, 2017, the Company canceled 7,500 common shares that was returned to the Company. The Company agreed to return $15,000 previously received from the investor and recorded $15,000 as stock payable.

As of June 30, 2017 and December 31, 2016, the Company has stock payable of $55,500 and $40,500, respectively, for shares subscribed but not issued and fund to be returned.

Note 8 – Subsequent Events

Subsequent to June 30, 2017, the Company issued 18,500 shares of common stock for $37,000.

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

Overview

North Texas Energy, Inc. is in its exploration stage. The results of operations show how capital intensive and profitless the oil and gas production business is at start up. The progress so far has been limited by severely limited access to working capital. One of the most important economic factors in the U.S economy is the successful exploration and production of crude oil and natural gas. North Texas Energy, Inc. is committing its business and resources to the production of crude oil and natural gas that remains in geological formations in oil fields that have been previously explored and have produced significant amounts of crude oil already. Data and research produced by the Department of Energy indicates that additional significant reserves of crude oil and natural gas remain in fields that were once productive in the past. In recent years and with the price of crude oil steady at about seventy-four dollars per barrel (since 2008), new production methods have emerged as cost-effective in recovering the substantial remaining oil that has not been recovered using standard methods. North Texas Energy, Inc. entered into the business of recovering oil in previously drilled and producing fields in 2009 by acquiring oil and natural gas leases in north Texas. The Company's predecessor operated in year 2010 for a short period of time. During that time, the Company had access to private capital from sales of common stock to shareholders. The capital from investment by private shareholders was limited and sales were terminated late in 2010. The funds invested at that time were used mainly to begin the process of refurbishing wells and preparing well head installations for re-use. The short operations history shows that without on-going sources of working capital, the initial cost of getting wells and drill bores functional to begin the process of recovering oil that remains in the geological formation will not be met and significant delays in recovering the remaining oil would occur.

Results of Operations

Three Months ended June 30, 2017 Compared to Three Months ended June 30, 2016

For the three months ended June 30, 2017 and 2016, the Company had net losses of $90,248 and $83,827, respectively.

Revenues

The total production value of the oil for the three months ended June 30, 2017, is $8,159 compared to a value of $5,809 for the three months ended June 30, 2016. The increase is mainly due to the Company brought several additional wells into production during the last quarter of 2016.

Operating Expenses

For the three months ended June 30, 2017, the Company had an operating expenses of $98,407 compared to $89,636 for the three months ended March 31, 2016. For the three months ended June 30, 2017 and 2016, the Company has lease operating expense of $33,256 and $6,317, respectively. The increase of lease operating expense is mainly because the Company had more activities in 2017. For the three months ended June 30, 2017 and 2016, the Company has legal and professional fees of $6,200 and $29,646, respectively. The decrease in legal and professional expense was mainly due to the decrease of professional services in 2017. For the three months ended June 30, 2017 and 2016, the Company has general and administrative expenses of $51,637 and $53,673, respectively.

Six Months ended June 30, 2017 Compared to Six Months ended June 30, 2016

For the six months ended June 30, 2017 and 2016, the Company had net losses of $169,909 and $126,308, respectively. The reason for the increase is because the Company restarted operating the wells which were shut down in the prior period due to damages caused by the severe weather conditions. Additionally, the Company brought several additional wells into production during the last quarter of 2016.

Revenues

The total production value of the oil for the six months ended June 30, 2017, is $23,276 compared to a value of $6,676 for the six months ended June 30, 2016.

Operating Expenses

For the six months ended June 30, 2017, the Company had an operating expenses of $193,185 compared to $132,984 for the six months ended March 31, 2016. For the six months ended June 30, 2017 and 2016, the Company has lease operating expense of $61,938 and $9,017, respectively. The increase of lease operating expense is mainly because the Company had more activities in 2017. For the six months ended June 30, 2017 and 2016, the Company has legal and professional fees of $17,400 and $32,741, respectively. The decrease in legal and professional expense was mainly due to the decrease of professional services in 2017. For the six months ended June 30, 2017 and 2016, the Company has general and administrative expenses of $106,533 and $91,226, respectively. The Company incurred more travel expense related to the trips the Company's management made to manage the wells and sell the Company's shares in 2017.

Liquidity

The Company began selling its common shares in accordance with its registration statement which became effective on March 29, 2013. On March 29, 2014, the Company filed an amendment of its Prospectus that relates to the common stock sales extending the time past the original one year sales period. The Company will continue to sell shares as allowed and use those funds for the further development of its oil and gas properties. The Company believes that it can continue to sell its common stock and use those funds as well as the funds it generates from crude oil production to continue its operations.

The Company has no immediate sources of debt or equity funding that is not related to the offering of its shares. The Company believes it can avoid accumulating debt or using other non-traditional forms of financing to provide liquidity.

At June 30, 2017, our cash balance was $89,936.

Net cash used in operating activities was $161,592 for the six months ended June 30, 2017, compared to net cash used in operating activities of $147,296 for the six months ended June 30, 2016.  The change is mainly due to more payments made to the vendors during the current year.

Net cash used in investing activities was $26,063 for the six months ended June 30, 2017, compared to $11,645 for the six months ended June 30, 2016.  The change is mainly due to more drilling activities during the current period.

Net cash provided by financing activities during the six months ended June 30, 2017 was $202,840 compared to $465,200 for the six months ended June 30, 2016.  The change is mainly due the Company's receipt of $337,200 for subscriptions of common stock during the prior period.

 

Without additional investment capital from shareholders or other sources, the Company has no short term source of liquidity. In order to bring wells on-line and produce crude oil and natural gas to bring to market, significant amounts of working capital will be needed to continue. Accordingly, the Company plans to systematically bring wells on-line that have the greatest initial production possibility as capital is available. The Company's illiquid financial position could cause it to not be able to start producing oil in the near future unless working capital from the offering or some other source of short term liquidity is developed.

Management does not believe that the Company's current capital resources will be sufficient to fund its operating activity and other capital resource demands during the next year. Our ability to continue as a going concern is contingent upon our ability to obtain capital through the sale of equity or issuance of debt, and ultimately attaining profitable operations. There is no assurance that we will be able to successfully complete any one of these activities.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

As a smaller reporting company, we are not required to provide disclosure under this Item 3.

 

Item 4. Controls and Procedures.

Evaluation of Effectiveness of disclosure controls and procedures

The management of the Company (CEO/CFO) have undertaken to establish a system of internal controls that are designed to assure that the Company prepares financial reports or statements that are published are prepared by applying the highest standard of compliance to the rules and regulations that guide their preparation in accordance with generally accepted accounting principles in the United States. Specifically, the management has implemented and enforces controls that:

Provide that a system of record keeping is maintained and used to accurately and in sufficient detail record the transactions and assets of the Company and any disposition of the Company's assets.

 

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's Principal Executive Officer and Principal Financial Officer of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e)) under the Exchange Act.Based on that evaluation, the certifying officers have concluded that, as of June 30, 2017, the disclosure controls and procedures in place were not effective as of the end of and for the period covered by this report due to the material weaknesses described in Management's Report on Internal Control over Financial Reporting as reported in our Form 10-K for the year ended December 31, 2016.

Changes in internal control over financial reporting

The Certifying Officers reviewed our internal control over financial reporting (as defined in rules 13a-15(f) and 15d-15(f)) under the Exchange Act as of the Evaluation Date and concluded that no changes occurred in such control or in other factors during the quarter ended June 30, 2017 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.

The Company is not currently enjoined in any legal proceeding and no previous legal proceedings exist.

Item 1A.   Risk Factors

As a smaller reporting company, we are not required to provide disclosure under this Item 1A.

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

From March 30, 2016 to September 29, 2017, the Company sold 329,095 shares for $658,190 cash and issued 65,000 shares for services.

Item 3.   Defaults upon Senior Securities.

No default on any senior, subordinated or other debt has occurred.

Item 4.   Mine Safety Disclosures

Not applicable.

Item 5.  Other Information.

None.

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