TEXC - Warrants, derivitive losses. GREAAAT
NOTE 9 – DERIVATIVE INSTRUMENTS
The Company determined that the warrants associated with the purchase of the Eagle Ford shale area disposal well
qualified for accounting treatment as a financial derivative, because the warrant agreement requires that the exercise
price and number of shares be adjusted if the Company sells or issues stock or common-stock equivalents at a price
that is less than the warrant’s strike price. The fair value of $112,020 on these warrants valued in August 2011, the
date of issuance, was classified as a derivative liability. At December 31, 2011, the Company revalued the derivative
at $172,951. At March 31, 2012, the Company again revalued the derivative at $478,910, resulting in a loss of
$305,959. After adjustments for price resets, the warrant provides for the purchase of 1,800,643 shares at an exercise
price of $0.16 per share, expiring in August 2015.
The Company developed a lattice model that values the derivative based on a probability weighted discounted cash
flow model. This model is based on future projections of the various potential outcomes. The following assumptions
were made in valuing the derivative at March 31, 2012:
? Any possible future resets to the exercise price will value the shares at no less than $0.10.
? The stock price will fluctuate with an annual volatility ranging from 201% to 673%.
? The holder will exercise the warrant at a target price equal to 1.75 times the reset price.
? The holder will exercise at maturity if the market value exceeds the exercise price.
? The Company will raise capital through sales of common stock quarterly during the first year at prices
equal to the market value.
"The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamored with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it." - Adam Smith 1723-179
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