ITEM 1. BUSINESS
The Company’s Business
Beginning in September 2013, we changed our business plan from performing traditional Peruvian dances to an oil and gas company focused primarily on properties in the Gulf Coast Region. We plan to obtain and manage: (1) existing royalty interests and other passive interests or rights in oil and gas properties; (2) mineral rights, which we intend to lease to oil and gas operators in exchange for a royalty payment, and (3) working interests in oil and gas properties.
Although we are not currently in the business of exploring, drilling and producing oil and gas, our business is still subject to multiple factors effecting the production of oil and gas, including, but not limited to: market prices; national and international economic conditions; import and export quotas; availability of drilling rigs, casing, pipe, and other equipment and supplies; availability of and proximity to pipelines and other transportation facilities; the supply and price of competitive fuels; and the regulation of prices, production, transportation, and marketing by domestic and foreign governmental authorities. Additionally, the Company may not have control over whether the owner or operator of the lease will elect to explore for oil and gas on such properties, or to develop them following discoveries that may occur. Each of these factors may affect the rate at which oil and gas are produced, if ever, on properties in which the Company has or may have an interest.
Our Current Onshore Mineral Interests
In January 2014, we acquired a 37.5% interest in mineral rights covering 86.69 acres in Lavaca County. Our acreage is included in the Eagle Ford Shale located in South Texas. To date, no economically viable oil and gas reserves have been discovered on our acreage, and there is no assurance that viable oil and gas reserves will ever be discovered on our acreage.
Our mineral rights are currently subject to an existing oil, gas and mineral lease with an independent producer of oil and gas in the Eagle Ford Shale. Pursuant to the lease, Texas South is entitled to a royalty payment equal to 37.5% of 0.1875% of the sale proceeds, if any, actually received from the production of oil and gas from our acreage. As of October 31, 2014, one well has been drilled on the acreage and no definitive plans were announced as to when, if ever, the lessee would commence drilling on the remaining acreage. The lease on the undrilled acreage expired in December 2014. The results of the drilled well are not yet known.
In addition, in connection with this acquisition, we acquired the right to lease 100% of the mineral rights underlying the 86.69 acres to any third party; so long as such lease requires a royalty payment of at least 1/6 of the oil and gas produced from the property to the holders of the mineral rights. We believe this right may provide us with additional leverage when entering into any potential future leases.
Our Current Offshore Contractual Interests and Investment
On March 10, 2014, the Company entered into a farm out letter agreement with GulfSlope Energy, Inc. ("GulfSlope"), relating to five prospects GulfSlope bid on at the Central Gulf of Mexico Lease Sale 231 conducted by the BOEM, of which four of the prospects were awarded to GulfSlope. These prospects are located within 2.2 million acres of 3D seismic licensed and interpreted by GulfSlope. Under the terms of the farm-out letter agreement, the Company may acquire up to a 20% working interest in the prospects for up to $10,000,000 payable by the Company to GulfSlope. As of October 31, 2014, the Company had funded $8,200,000. The transfer of the contractual rights to the working interests is expected to occur in 2015. In addition, the Company has agreed to pay its proportionate share of the net rental costs related to the prospects. GulfSlope will be the operator of record and shall have the right to negotiate all future joint operating agreements. Mr. Askew is a beneficial owner in excess of 5% of the common stock of GulfSlope and was a director of GulfSlope when the Company entered into the farm-out agreement.
Business and Acquisition Strategy
Our primary business strategy includes:
· Continuing to grow our interests in mineral rights through additional investments in prospective property in the Eagle Ford Shale. The Eagle Ford Shale is one of the fastest growing unconventional shale trends in North America. The Eagle Ford Shale is a geological formation located in South Texas that lies directly beneath the Austin Chalk formation and above the Buda Limestone formation. It is considered to be the "source rock," or the original source of hydrocarbons that are contained in the Austin Chalk formation. The Eagle Ford Shale produces from various depths between 4,000 and 14,000 feet.
· Pursuing royalty opportunities. We will consider opportunities to expand our interest through acquisitions of oil and gas reserves, existing royalty interests or other passive investments in oil and gas properties. We will consider opportunities that we believe will maximize income from royalty based arrangements. We plan to pursue royalty opportunities that are complementary to our business plan.
· Expand and diversify our interests to property located outside the Eagle Ford Shale. We intend to acquire both working and non-working interests in oil and gas properties throughout the Gulf Coast Region, including off-shore prospects. We entered into a farm-out letter agreement with GulfSlope in March 2014. We will consider acquisitions that serve as a platform for complementary acquisitions.
The cost of implementing the forgoing programs will depend on what oil and gas interests are identified and available on terms acceptable to us. Even if we identify oil and gas interests that are available, the cost of pursuing and acquiring them could be significant. Our ability to pursue any such opportunities will be dependent on our ability to obtain financings through private equity, debt financings or agreements with joint venture partners. We can provide no assurance that we have the necessary cash available or will be able to successfully obtain the necessary financing or joint venture partners to pursue such opportunities.
We have incurred losses since our inception and expect to incur losses in future periods. We rely upon the sale of our securities or loans from our President to fund our operations. We are not involved in any bankruptcy, receivership or similar proceedings.
Oil and Gas Industry
The oil and gas industry is a complex, multi-disciplinary sector that varies greatly across geographies. As a heavily regulated industry, operating conditions are subject to political regimes and changing legislation. Governments can either induce or deter investment in exploration and production, depending on legal requirements, fiscal and royalty structures and regulation. Beyond political considerations, exploration and production for hydrocarbons is an extremely risky business with multiple failure modes. Exploration and production wells require substantial investment and are long-term projects, sometimes exceeding twenty to thirty years. Regardless of the effort spent on an exploration or production prospect, success is difficult to attain. Even though modern equipment, including seismic equipment and advanced software, has helped geologists find producing structures and map reservoirs, they do not guarantee any outcome. Drilling is the only method to ultimately determine whether a prospect will be productive, and even then, many complications can arise during drilling (e.g., those relating to drilling depths, pressure, porosity, weather conditions, permeability of the formation and rock hardness) .
Typically, there is a significant chance that exploratory wells will result in non-producing holes, leaving investors with the cost of seismic data and a dry well which can total millions of dollars. Even if oil or gas is produced from a particular well, there is always the possibility that treatment, at additional cost, may be required to make production commercially viable. Further, production profiles decline over time. In summary, oil and gas exploration and production is an industry with high risks and high entry barriers, but it is also potentially lucrative.
Oil and gas prices determine the commercial feasibility of a project. Certain projects may become feasible with higher prices or, conversely, may falter with lower prices. Volatility in the price of oil, gas and other commodities has increased during the last few years, complicating the assessment of revenue projections. Most governments have enforced strict regulations to uphold high standards of environmental awareness; thus, holding companies to a high degree of responsibility vis-à-vis protecting the environment. Aside from such environmental factors, oil and gas drilling is often conducted near populated areas. For a company to be successful in its drilling endeavors, working relationships with local communities are crucial to promote business strategies and to avoid the repercussions of disputes that might arise over local business operations. At this time, the Company does not have any production or proved oil or gas reserves.
Governmental Regulation
The operator of the oil and gas operations will be subject to various federal, state, and local governmental regulations. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, pooling of properties, and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. The production, handling, storage, transportation, and disposal of oil and gas, by-products thereof, and other substances and materials produced or used in connection with oil and gas operations are also subject to regulation under federal, state, and local laws and regulations relating primarily to the protection of human health and the environment. State and local laws and regulations may affect the prices at which royalty owners are paid for their leases by requiring more stringent disclosure and certification requirements, adjusting interest rates for late payments, raising legal and administrative costs and imposing more costly default contractual terms. The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their ultimate effect, if any, on the lessee to pay royalties.
Environmental laws provide for, among other things, restrictions and prohibitions on spills, releases, or emissions of various substances produced in association with oil and gas operations. The laws also require that wells and facility sites be operated, maintained, abandoned, and reclaimed to the satisfaction of the applicable regulatory authorities. Compliance with such laws can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability, and potentially increased capital expenditures and operating costs. The discharge of oil or gas or other pollutants into the air, soil, or water may give rise to liabilities to governments and third parties and may require the operator to incur costs to remedy such discharge. In addition, the operator could incur fines, penalties or significant liability for damages, clean-up costs, and penalties in the event of discharges into the environment, environmental damage caused by the operator or previous owners of the property, or non-compliance with environmental laws or regulations. In addition to actions brought by governmental agencies, the operator could face actions brought by private parties or citizens groups. There can be no assurance that the forgoing will not increase the cost of production, development, or exploration activities for the operator or otherwise adversely affect the payment of royalties on the property.
Environmental Regulation
The operator of our future oil and gas interests will be subject to numerous federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Applicable U.S. federal environmental laws include, but are not limited to, the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), the Clean Water Act (“CWA”) and the Clean Air Act (“CAA”). These laws and regulations govern environmental cleanup standards, require permits for air, water, underground injection, solid and hazardous waste disposal and set environmental compliance criteria. In addition, state and local laws and regulations set forth specific standards for drilling wells, the maintenance of bonding requirements in order to drill or operate wells, the spacing and location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells, and the prevention and cleanup of pollutants and other matters. Typically, operators maintain insurance against costs of clean-up operations, but may not be fully insured against all such risks. Additionally, Congress and federal and state agencies frequently revise the environmental laws and regulations, and any changes that result in delay or more stringent and costly permitting, waste handling, disposal and clean-up requirements for the oil and gas industry could have a significant impact on the operator’s costs, resulting in a negative impact on payment of royalties.
The environmental laws and regulations that could have a material impact on the oil and natural gas exploration and production industry, including on the operators of our future oil and gas interests, thereby indirectly impacting our business, including the following:
Hazardous Substances and Wastes. CERCLA, also known as the “Superfund law,” imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that transported or disposed or arranged for the transport or disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file corresponding common law claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.
Waste Discharge. The CWA and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances, into waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the United States Environmental Protection Agency (“EPA”) or an analogous state agency. The CWA and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. Spill prevention, control and countermeasure requirements of federal laws require appropriate containment beams and similar structures to help prevent the contamination of navigable waters by a petroleum hydrocarbon tank spill, rupture or leak. In addition, the CWA and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. Federal and state regulatory agencies can impose administrative, civil and criminal penalties as well as other enforcement mechanisms for noncompliance with discharge permits or other requirements of the CWA and analogous state laws and regulations.
Air Emissions. The CAA and associated state laws and regulations restrict the emission of air pollutants from many sources, including oil and gas operations. New facilities may be required to obtain permits before construction can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. More stringent regulations governing emissions of toxic air pollutants and greenhouse gases (“GHGs”) have been developed by the EPA and may increase the costs of compliance for some facilities.
Oil Pollution Act. The Oil Pollution Act of 1990, as amended (“OPA”) and regulations thereunder impose a variety of requirements on “responsible parties” related to the prevention of oil spills and liability for damages resulting from such spills in United States waters. A “responsible party” includes the owner or operator of an onshore facility, pipeline or vessel, or the lessee or permittee of the area in which an offshore facility is located. OPA assigns liability to each responsible party for oil cleanup costs and a variety of public and private damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction or operating regulation. If the party fails to report a spill or to cooperate fully in the cleanup, liability limits likewise do not apply. Few defenses exist to the liability imposed by OPA. OPA imposes ongoing requirements on a responsible party, including the preparation of oil spill response plans and proof of financial responsibility to cover environmental cleanup and restoration costs that could be incurred in connection with an oil spill.
National Environmental Policy Act. Oil and natural gas exploration and production activities on federal lands are subject to the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions having the potential to significantly impact the environment. The process involves the preparation of either an environmental assessment or environmental impact statement depending on whether the specific circumstances surrounding the proposed federal action will have a significant impact on the human environment. The NEPA process involves public input through comments which can alter the nature of a proposed project either by limiting the scope of the project or requiring resource-specific mitigation. NEPA decisions can be appealed through the court system by process participants. This process may result in delaying the permitting and development of projects, increase the costs of permitting and developing some facilities and could result in certain instances in the cancellation of existing leases.
Worker Safety. The Occupational Safety and Health Act (“OSHA”) and comparable state statutes regulate the protection of the health and safety of workers. The OSHA hazard communication standard requires maintenance of information about hazardous materials used or produced in operations and provision of such information to employees. Other OSHA standards regulate specific worker safety aspects. Failure to comply with OSHA requirements can lead to the imposition of penalties.
Safe Drinking Water Act. The Safe Drinking Water Act and comparable state statutes restrict the disposal, treatment or release of water produced or used during oil and gas development. Subsurface emplacement of fluids (including disposal wells or enhanced oil recovery) is governed by federal or state regulatory authorities that, in some cases, includes the state oil and gas regulatory authority or the state’s environmental authority. These regulations may increase the costs of compliance for some facilities.
Offshore Drilling. In 2011, the U.S. Department of Interior issued new rules designed to improve drilling and workplace safety in the U.S. Gulf of Mexico, and various congressional committees began pursuing legislation to regulate drilling activities and increase liability. The Bureau of Ocean Energy Management, BSEE and Office of National Resources Revenue are expected to continue to issue new safety and environmental guidelines or regulations for drilling in the U.S. Gulf of Mexico, and other regulatory agencies could potentially issue new safety and environmental guidelines or regulations in other geographic regions, and may take other steps that could increase the costs of exploration and production, reduce the area of operations and result in permitting delays. We are monitoring legislation and regulatory developments; however, it is difficult to predict the ultimate impact of any new guidelines, regulations or legislation. A prolonged suspension of drilling activity or permitting delays in the U.S. Gulf of Mexico and new regulations and increased liability for companies operating in this sector, whether or not caused by a new incident in the region, could adversely affect the business and planned operations of oil and gas companies.
Effect of Existing or Probable Governmental Regulations on our Business
We are subject to the following regulations of the SEC and applicable securities laws, rules and regulations:
Smaller Reporting Company. We are subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and subject to the disclosure requirements of Regulation S-K of the SEC, as a “smaller reporting company.” That designation will relieve us of some of the informational requirements of Regulation S-K applicable to larger companies.
Sarbanes/Oxley Act. Except Section 302 and 404, we are also subject to the Sarbanes/Oxley Act of 2002. The Sarbanes/Oxley Act created a strong and independent accounting oversight board to oversee the conduct of auditors of public companies and strengthens auditor independence. It also requires steps to enhance the direct responsibility of senior members of management for financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates guidelines for audit committee members’ appointment, compensation and oversight of the work of public companies’ auditors; management's assessment of our internal controls; prohibits certain insider trading during pension fund blackout periods; requires companies to evaluate internal controls and procedures; and establishes a federal crime of securities fraud, among other provisions. Compliance with the requirements of the Sarbanes/Oxley Act has and will continue to substantially impact our legal and accounting costs.
Jumpstart Our Business Startups Act of 2012. As a company with less than $1 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:
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Only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure.
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Reduced disclosure about our executive compensation arrangements.
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Not having to obtain non-binding advisory votes on executive compensation or golden parachute arrangements.
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Exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.
We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1 billion in annual revenue, we have more than $700 million in market value of our stock held by non-affiliates, or we issue more than $1 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced burdens. We have taken advantage of these reduced reporting burdens in this prospectus, and the information that we provide may be different than what you might get from other public companies in which you hold stock.
Exchange Act Reporting Requirements. We are not subject to the reporting requirements of Section 14 or 16 of the Exchange Act. We are required to file Annual Reports on SEC Form 10-K and Quarterly Reports on SEC Form 10-Q with the SEC on a regular basis, and will be required to timely disclose certain material events (e.g., changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report on SEC Form 8-K.
Competition
The Company is competing with other oil companies for oil and gas leases and concessions. The oil and gas industry is highly competitive in all of its phases, with competition for favorable producing royalties, overriding royalties, and good oil and gas leases being particularly intense. The Company believes that the exploration program, promised expenditures, geological and geophysical skill, and familiarity with an area of operations are the primary competitive factors in the identification, selection, and acquisition of desirable leases. When attempting to purchase interests in such properties, the Company competes with independent operators and major oil companies, any of companies that possess and employ financial resources that allow them to obtain substantially greater technical and personnel resources than ours. Competitors may be able to evaluate and purchase a greater number of mineral rights or royalty interests than our financial or personnel resources permit. Competitors may also be able to pay more for prospects than we are able or willing to pay. If we are unable to compete successfully in these areas in the future, our future growth may be diminished or restricted.
Employees
Our chief executive officer is our sole employee.
Historical Background
The Company was incorporated under the laws of the State of Nevada on March 15, 2010, as “Inka Productions Corp.” The Company became an SEC reporting company in 2012, when a registration statement for its common stock was declared effective under the Exchange Act. At that time, the Company was engaged in the business of producing and performing traditional Peruvian dances in Peru and the United States.
In September 2013, certain shareholders of the Company sold an aggregate of 7,900,000 shares of the Company’s common stock at a price of $0.001 per share to certain accredited investors, which resulted in a change of control and management. Following the change of control, in November 2013 the Company amended its certificate of incorporation to: (i) increase the Company’s authorized shares of common stock from 75,000,000 shares to 950,000,000 shares; (ii) authorize the issuance of 50,000,000 shares of blank check preferred stock; (iii) effect a 3-for-1 forward stock split of the Company’s common stock; and (iv) change the name of the Company from “INKA Productions, Corp.” to “Texas South Energy, Inc.”
General
Our address is 3 Riverway, Suite 1800, Houston, TX 77056 and our telephone number is (713) 209-2950. We currently do not have a corporate website. You may access and read our SEC filings through the SEC’s web site (http:www.sec.gov). This site contains reports, proxy and information statements and other information regarding registrants, including us, that file electronically with the SEC.
ITEM 1A.
ITEM 1A. RISK FACTORS
Risks Related to Our Business and Financial Condition
We have no proved reserves and areas that we decide to drill may not yield oil and natural gas in commercial quantities or quality, or at all.
We have no proved reserves. We currently own (i) a 37.5% interest in mineral rights covering 86.69 acres in Lavaca County, Texas. and (ii) the contractual right to up to a 20% working interest in 5 prospects awarded to GulfSlope at the Central Gulf of Mexico Lease Sale 231 conducted by the BOEM. The prospects in the Gulf of Mexico were identified based on available seismic and geological information that indicates the potential presence of oil and natural gas. However, the areas we decide to drill may not yield oil and natural gas in commercial quantities or quality, or at all. Even when properly used and interpreted, 3-D seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not enable the interpreter to know whether hydrocarbons are, in fact, present in those structures. We have only drilled one exploratory well on our prospects and the results of drilling are not yet known. Accordingly, we do not know if any of our prospects will contain oil and natural gas in sufficient quantities or quality to recover drilling and completion costs or to be economically viable. Even if oil and natural gas is found on our prospects in commercial quantities, construction costs of pipelines and other transportation costs may prevent such prospects from being economically viable. If one or more of our prospects do not prove to be successful, our business, financial condition and results of operations will be materially adversely affected.
Our business plan is dependent upon our ability to identify and acquire interests in mineral rights or existing royalties.
Our plan requires us to identify and acquire interests in mineral rights or existing royalties that are economically recoverable. Our success will depend upon our ability to acquire mineral rights and/or royalty interests in properties upon which oil and gas reserves are ultimately discovered in commercial quantities, and which the operator is able to develop the oil and gas reserves to the point of production. Without successful acquisition and exploration of the properties in which we hold mineral rights and/or royalty interests, we will not be able to receive revenues from royalties. We cannot provide you with any assurance that we will be able to identify and acquire mineral rights and/or royalty interests on acceptable terms, that oil and gas reserves will be discovered in commercial viable quantities, or that the operator will develop the oil and gas reserves at costs that will require payment of royalties to us.
Our business plan requires substantial additional capital, which we may be unable to raise on acceptable terms, if at all, in the future, which may in turn limit our ability to execute our business strategy.
We expect our capital outlays and operating expenditures to increase substantially over at least the next several years as we expand our operations and fund our contractual rights to working interests in our Gulf of Mexico prospects. Prospect acquisition costs are very expensive, and we will need to raise substantial additional capital, through equity offerings, strategic alliances or debt financing in calendar 2015 to develop our current prospects and to identify and acquire additional mineral rights, existing royalty interests or other passive interests in oil and gas properties.
Future equity financings may be dilutive to our stockholders. Alternative forms of future financings may include preferences or rights superior to our common stock. Debt financings may involve a pledge of assets and will rank senior to our common stock. We have historically financed our operations through best efforts private equity and debt financings. We do not have any credit or equity facilities available with financial institutions, stockholders or third party investors, and will continue to rely on best efforts financings. There is no assurance that we can raise the capital necessary to fund our business plan. Failure to raise the required capital to fund operations, on favorable terms or at all, will have a material adverse effect on our operations, and will likely cause us to curtail or cease operations.
Our fiscal 2014 audited financial statements contain a going-concern qualification, raising questions as to our continued existence.
The Company’s financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern. This contemplates the realization of assets and the liquidation of liabilities in the normal course of business. Currently, the Company does not have sufficient cash, nor does it have operations or a source of revenue sufficient to cover its operation costs and allow it to continue as a going concern. The Company has accumulated a net loss since inception (March 15, 2010) through October 31, 2014, of $5,839,291. Further losses are anticipated as we continue in the development stage of our business. The Company will be dependent upon the raising of additional capital through placement of our equity and/or debt securities in order to implement its business plan, or merge with an operating company. There can be no assurance that the Company will be successful in either situation in order to continue as a going concern. Failure to raise the required capital to fund operations (including the exploitation of our contractual rights to working interests in the Gulf of Mexico), on favorable terms or at all, will have a material adverse effect on our operations, and will likely cause us to curtail or cease operations.
The Company will continue to fund its operations by way of issuing common shares for cash and in exchange for debt. During the year ended October 31, 2014, the Company issued 63,938,004 and 35,277,666 shares of common stock at prices ranging from $0.003 to $0.20 per share, for cash of $2,142,900 and settlement of $7,054,222 in debt, respectively.
As a result, in their audit report contained in this Annual Report, our independent auditors expressed substantial doubt about our ability to continue as a going concern. As of the date of this Annual Report, we believe we have sufficient cash on hand to fund operations through the first quarter of our current fiscal year. We will require additional funds for the balance of fiscal 2015. If we cannot raise these funds, we may be required to cease business operations or alter our business plan. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
We are dependent on Mr. Askew, our sole officer and director.
Investors in our common stock must rely upon the ability, expertise, judgment and discretion of Mr. Askew, our sole officer and director. The loss of Mr. Askew could be detrimental to our future success. In making a decision to invest in our common stock, you must be willing to rely to a significant extent on our management’s discretion and judgment. The loss of Mr. Askew would have a material adverse effect on our results of operations and financial condition, as well as on the market price of our common stock. We may not be able to find replacement personnel with comparable skills. If we are unable to attract and retain key personnel, our business may be adversely affected. We do not currently maintain key-man insurance on the life of Mr. Askew.
We are a development stage company with limited operating history, and there can be no assurance that we will be successful in executing our business plan. We may never attain profitability.
We commenced our business activity in September 2013 and acquired our first interest in mineral rights in January 2014. We intend to acquire additional mineral interests and to engage in the drilling, development, and production of oil and natural gas in the future. As we are a relatively new business, we are subject to all the risks and uncertainties which are characteristic of a new business enterprise, including the substantial problems, expenses and other difficulties typically encountered in the course of its business, in addition to normal business risks, as well as those risks that are specific to the oil and gas industry. Investors should evaluate us in light of the delays, expenses, problems and uncertainties frequently encountered by undercapitalized companies in the oil and gas sector. We may never overcome these obstacles. Failure to raise the required capital to fund operations, on favorable terms or at all, will have a material adverse effect on our operations, and will likely cause us to curtail or cease operations.
We may be unable to access the capital markets to obtain additional capital that we will require to implement our business plan, which would restrict our ability to grow.
Our current capital on hand is insufficient to enable us to fully execute our business strategy. We will need to raise additional funds in order to fully execute our business strategy. We currently have capital on hand to maintain the Company’s operations through the first quarter of our current fiscal year. Because we are a development stage company with limited resources, we may not be able to compete in the capital markets with much larger, established companies that have ready access to capital. Our ability to obtain needed financing may be impaired by conditions and instability in the capital markets (both generally and in the oil and gas industry in particular), our status as a new enterprise without a demonstrated operating history, the location of any prospect we may acquire an interest in, and/or the loss of key consultants and management. Further, if oil and/or natural gas prices on the commodities markets decrease, then potential revenues, if any, will decrease, this may increase our requirements for capital. Some of the future contractual arrangements governing our operations may require us to maintain minimum capital (both from a legal and practical perspective), and we may lose our contractual rights if we do not have the required minimum capital. If the amount of capital we can raise is not sufficient, we may be required to curtail or cease our operations.
We have a limited operating history with significant losses and expect losses to continue for the foreseeable future.
We have incurred annual operating losses since our inception. As a result, at October 31, 2014, we had an accumulated deficit of approximately $5.8 million. We had no revenues in fiscal 2014 and do not anticipate receiving revenues in fiscal 2015, or in subsequent periods unless we are successful in farming into prospects and discovering economically recoverable oil or gas reserves or acquiring mineral interests that provide revenue. We expect that our operating expenses will increase in future periods. We expect continued losses in fiscal 2015 and thereafter.
Our lack of diversification increases the risk of an investment in our common stock.
Our business will focus on the oil and gas industry in commercially advantageous areas of the United States and select international areas. Larger companies have the ability to manage their risk by diversification. However, we lack diversification, in terms of both the nature and geographic scope of our business. As a result, factors affecting our industry, or the regions in which we operate, will likely impact us more acutely than if our business was diversified.
Strategic relationships upon which we rely are subject to change, which may diminish our ability to conduct our operations.
Our ability to successfully bid on and acquire interests in prospects, to discover resources, to participate in drilling opportunities through farm-in arrangements and to identify and enter into commercial arrangements with customers and partners, depends on developing and maintaining close working relationships with industry participants and on our ability to select and evaluate suitable properties. Further, we must consummate transactions in a highly competitive environment. These realities are subject to change and may impair our ability to grow.
To develop our business, we will endeavor to use the relationships of our management and to enter into strategic relationships, which may take the form of joint ventures with other private parties or with local government bodies or contractual arrangements with other oil and gas companies, including those that supply equipment and other resources that we will use in our business. We may not be able to establish these strategic relationships, or if established, we may not be able to maintain them. In addition, the dynamics of our relationships with strategic partners may require that we incur expenses or undertake activities we would not otherwise incur or undertake in order to fulfill our obligations to these partners or maintain our relationships. If our strategic relationships are not established or maintained, our business prospects may be limited, which could diminish our ability to conduct our operations.
Competition in obtaining interests in mineral rights and existing royalties may impair our business.
The oil and gas industry is extremely competitive. Present levels of competition for mineral rights and existing royalty interests are high worldwide. Other oil and gas companies with greater resources may compete with us in acquiring mineral rights and existing royalties. Additionally, other companies may compete with us in obtaining capital from investors. Competitors include larger, established exploration and production companies, which have access to greater financial and other resources than we have currently, and may be more successful in the recruitment and retention of qualified employees. In addition, actual or potential competitors may be strengthened through the acquisition of additional assets and interests. Because of some or all of these factors, we may not be able to compete.
We may not be able to effectively manage our growth, which may harm our profitability.
Our strategy envisions building and expanding our business. If we fail to effectively manage our growth, our financial results will be adversely affected. Growth may place a strain on our management systems and resources. We must continue to refine and expand our business development capabilities, our systems, processes, and our access to financing sources. As we grow, we must continue to hire, train, supervise and manage new employees. We cannot assure you that we will be able to:
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expand our systems effectively or efficiently or in a timely manner;
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optimally allocate our human resources; or
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identify and hire qualified employees or retain valued employees.
If we are unable to manage our growth and our operations, our financial results could be adversely affected, which could prevent us from ever attaining profitability.
Risks Related to the Industry in Which We Intend to Compete
Current volatile market conditions and significant fluctuations in energy prices may continue indefinitely, negatively affecting our business prospects and viability.
The oil and gas markets are very volatile, and we cannot predict future oil and natural gas prices. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control. Any substantial decline in the price of oil and natural gas will likely have a material adverse effect on our planned operations and financial condition. The amount of any royalty payment we receive, if any, from the production of oil and gas from our oil and gas interests will depend on numerous factors beyond our control. These factors include, but are not limited to, the following:
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changes in global supply and demand for oil and natural gas by both refineries and end users;
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the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;
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the price and volume of imports of foreign oil and natural gas;
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political and economic conditions, including embargoes, in oil-producing countries or affecting other oil-producing activity;
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the level of global oil and gas exploration and production activity;
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the level of global oil and gas inventories;
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weather conditions;
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technological advances affecting energy consumption;
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domestic and foreign governmental regulations and taxes;
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proximity and capacity of oil and gas pipelines and other transportation facilities;
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the price and availability of competitors’ supplies of oil and gas in captive market areas;
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the introduction, price and availability of alternative forms of fuel to replace or compete with oil and natural gas;
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import and export regulations for LNG and/or refined products derived from oil and gas production from the US;
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speculation in the price of commodities in the commodity futures market;
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the availability of drilling rigs and completion equipment; and
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the overall economic environment.
Further, oil and natural gas prices do not necessarily fluctuate in direct relationship to each other. The price of oil has been extremely volatile, and we expect this volatility to continue for the foreseeable future. Recent volatility in 2014 has seen WTI oil prices drop from a high of $107.26 on June 20, 2014, to a low of $57.81 on December 14, 2014. This near term volatility may affect future prices in 2017 and beyond. The volatility of the energy markets makes it difficult to predict future oil and natural gas price movements with any certainty.
Exploration for oil and natural gas is risky and may not be commercially successful, impairing our ability to generate revenues.
Oil and natural gas exploration involves a high degree of risk. These risks are more acute in the early stages of exploration. We may not discover oil or natural gas in commercially viable quantities, if at all. It is difficult to project the costs of implementing an exploratory drilling program due to the inherent uncertainties of drilling in unknown formations, the costs associated with encountering various drilling conditions, such as over pressured zones and tools lost in the hole, and changes in drilling plans, locations as a result of prior exploratory wells or additional seismic data and interpretations thereof, and final commercial terms negotiated with partners. Developing exploratory oil and gas properties requires significant capital expenditures and involves a high degree of financial risk. The budgeted costs of drilling, completing, and operating exploratory wells are often exceeded and can increase significantly when drilling costs rise. Drilling may be unsuccessful for many reasons, including title problems, weather, cost overruns, equipment shortages, and mechanical difficulties. There is no assurance that we will successfully complete any wells or if successful, that the wells would be economically successful. Moreover, the successful drilling or completion of any oil or gas well does not ensure a profit on investment. Exploratory wells bear a much greater risk of loss than development wells. We cannot assure you that our exploration, exploitation and development activities will result in profitable operations, the result of which will materially adversely affect our business.
Oil and gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays in excess of those anticipated, causing an adverse effect on the Company.
Oil and gas operations are subject to national and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to national and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Environmental standards imposed by national or local authorities may be changed and any such changes may have material adverse effects on our potential royalties. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on any potential revenue to us.
We will be dependent upon the third party operator of our oil and gas interests.
If and when our prospects proceed to drilling, third parties will act as the operators of our oil and gas wells, and control the drilling and operating activities to be conducted on our properties. Therefore, we may have limited control over certain decisions related to activities on our properties relating to the timing, costs, procedure, and location of drilling or production activities, which could affect the Company’s results.
We may not be able to develop oil and gas reserves on an economically viable basis.
To the extent that we succeed in discovering oil and/or natural gas reserves on our prospects, we cannot assure that these reserves will be capable of production levels we project or in sufficient quantities to be commercially viable. Our future reserves, if any, will depend not only on our ability to develop then-existing properties, but also on our ability to identify and acquire additional suitable producing properties or prospects, to find markets for the oil and natural gas we develop and to effectively distribute our production into markets.
Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-downs of wells resulting from extreme weather conditions, problems in storage and distribution and adverse geological and mechanical conditions. While we will endeavor to effectively manage these conditions, we cannot be assured of doing so optimally, and we will not be able to eliminate them completely in any case. Therefore, these conditions could adversely impact our operations.
Risks Related to our Common Stock
There is not now, and there may never be, an active market for our common stock.
Shares of our common stock have historically been thinly traded. Currently there is no market for our common stock and no market for our common stock may develop in the future. As a result, our stock price as quoted by the OTCBB or OTCQB may not reflect an actual or perceived value. Moreover, several days may pass before any shares are traded; meaning that the number of persons interested in purchasing our common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including, but not limited to:
·
we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume; and
·
stock analysts, stock brokers and institutional investors may be risk-averse and reluctant to follow a company such as ours that faces substantial doubt about its ability to continue as a going concern or to purchase or recommend the purchase of our shares until such time as we become more viable.
As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations of the price of our common stock. Accordingly, investors must assume they may have to bear the economic risk of an investment in our common stock for an indefinite period of time, and may lose their entire investment. There can be no assurance that a more active market for our common stock will develop, or if one should develop, there is no assurance that it will be sustained. This severely limits the liquidity of our common stock and would likely have a material adverse effect on the market price of our common stock and on our ability to raise additional capital.
We cannot assure that our common stock will become liquid or that it will be listed on a national securities exchange.
Until our common stock is listed on a national securities exchange such as the NASDAQ Capital Market or the NYSE, we expect our common stock to remain eligible for quotation on the OTCBB and OTCQB. If we fail to meet the criteria set forth in SEC regulations, various requirements govern the conduct of broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock. This would also make it more difficult for us to raise capital.
We may issue preferred stock.
Our Certificate of Incorporation authorizes the issuance of up to 50 million shares of “blank check” preferred stock with designations, rights and preferences determined from time to time by the Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting, or other rights which could adversely affect the voting power or other rights of the holders of the common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although we have no present intention to issue any shares of its authorized preferred stock, there can be no assurance that we will not do so in the future.
Future sales of our common stock could lower our stock price.
We will likely sell additional shares of common stock to fund working capital obligations in future periods. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock, or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock. Moreover, sales of our common stock by existing shareholders could also depress the price of our common stock.
Our common stock is subject to the “penny stock” rules of the SEC, which makes transactions in our common stock cumbersome and may reduce the value of an investment in the stock.
The SEC has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
·
that a broker or dealer approve a person’s account for transactions in penny stocks; and
·
the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
·
obtain financial information and investment experience and objectives of the person; and
·
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form sets forth:
·
the basis on which the broker or dealer made the suitability determination; and
·
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of common stock and cause a decline in the market value of stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
The price of our common stock will remain volatile, which could lead to losses by investors and costly securities litigation.
The trading price of our common stock is likely to be highly volatile and could fluctuate in response to factors such as:
·
actual or anticipated variations in our operating results including but not limited to leasing, drilling, and discovery of oil and gas;
·
announcements of developments by us, our strategic partners or our competitors;
·
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
·
adoption of new accounting standards affecting our Company’s industry;
·
additions or departures of key personnel;
·
sales of our common stock or other securities in the open market;
·
our ability to acquire seismic data and other intellectual property on commercially reasonable terms and to defend such intellectual property from third party claims;
·
litigation; and
·
other events or factors, many of which are beyond our control.
The stock market is subject to significant price and volume fluctuations. In the past, following periods of volatility in the market price of companies’ securities, securities class action litigation has often been initiated against those companies. Litigation initiated against us, whether or not successful, could result in substantial costs and diversion of our management’s attention and resources, which could harm our business and financial condition.
We do not anticipate paying any dividends on our common stock.
Cash dividends have never been declared or paid on our common stock, and we do not anticipate such a declaration or payment for the foreseeable future. We cannot assure stockholders of a positive return on their investment when they sell their shares, nor can we assure that stockholders will not lose the entire amount of their investment in the Company.
ITEM 2.
ITEM 2. PROPERTIES
Office Space
We utilize an office on a rent-free, month-to-month basis, at 3 Riverway, Suite 1800, Houston, Texas 77056. We own limited office equipment, office furniture, and computer equipment.
Oil and Gas Properties -Eagle Ford Shale
Our oil and gas property consists entirely of a 37.5% interest in mineral rights covering 86.69 acres in Lavaca County. Our acreage is included in the Eagle Ford Shale located in South Texas. To date, no economically viable oil and gas reserve have been discovered on our acreage, and there is no assurance that viable oil and gas reserves will ever be discovered on our acreage.
Our mineral rights are currently subject to an oil, gas and mineral lease with an independent oil and gas operator in the Eagle Ford Shale. Pursuant to the lease, Texas South is entitled to a royalty payment equal to 37.5% of 0.1875% of the sale proceeds, if any, actually received from the production of oil and gas from our acreage. As of October 31, 2014, one well has been drilled on the acreage. The lease on the undrilled acreage expired in December 2014. The results of the drilled well are not yet known.
The Eagle Ford Shale is one of the fastest growing unconventional shale trends in North America. The Eagle Ford Shale is a geological formation located in South Texas that lies directly beneath the Austin Chalk formation and above the Buda Limestone formation. It is considered to be the "source rock," or the original source of hydrocarbons that are contained in the Austin Chalk formation. The Eagle Ford Shale produces from various depths between 4,000 and 14,000 feet. The Eagle Ford Shale has a carbonate content as high as 70%, which makes it more similar to a traditional carbonate than to a shale. The high carbonate content and subsequently lower clay content make the Eagle Ford Shale more brittle and easier to stimulate through hydraulic fracturing.
In geological terms, the Eagle Ford Shale dips toward the Gulf of Mexico and is up to 300 feet thick in some areas, but averages 250 feet across the trend. Thermal maturity is impacted by the location and depth of the shale across the trend. Generally in shallower areas the Eagle Ford Shale is less thermally mature and therefore tends to be more oil prone. The deeper, more thermally mature, areas of the Eagle Ford Shale are more gas prone, which is where our current acreage is located.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course of business. No legal proceedings, government actions, administrative actions, investigations or claims are currently pending against us or involve the Company.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common shares are quoted on the OTCBB under the symbol “TXSO”. Shares of our common stock have historically been thinly traded, and currently there is no active trading market for our common stock. As a result, our stock price as quoted by the OTCBB may not reflect an actual or perceived value.
On October 7, 2013, the Board of Directors of the Company approved a 3-for-1 stock split of the Company’s common stock. Pursuant to the 3-for-1 stock split each shareholder received two additional shares for every share outstanding. The 3-for-1 stock split was effective and trading began on a split-adjusted basis on November 12, 2013. For purposes of this Item 5, all references made to share or per share amounts have been restated to reflect the effect of this 3-for-1 stock split for all periods presented.
Our common stock became eligible for quotation on the OTCBB on March 1, 2012; however, our common stock did not begin to trade until March 28, 2013. The following table sets forth the approximate high and low bid prices for our common stock as reported by the OTCBB for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Holders
The number of record holders of the Company’s common stock, as of February 12, 2015, is approximately 99.
Dividends
The Company has not declared any dividends with respect to its common stock and does not intend to declare any dividends in the foreseeable future. The future dividend policy of the Company cannot be ascertained with any certainty. There are no material restrictions limiting the Company’s ability to pay cash dividends on its common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
None.
Recent Sales of Unregistered Securities
During the past three years, the registrant has sold the following securities which were not registered under the Securities Act:
In September 2013, we issued 69,000,000 shares of our common stock to our chief executive officer for services rendered valued at $23,000.
In October 2013, we sold 105,000,000 shares of our common stock to certain investors for gross proceeds of $35,000.
In November 2013, we issued 3,000,000 shares of our common stock to a third-party consultant valued at $1,000.
In November 2013, we issued 60,000,000 shares of our common stock to a principal stockholder pursuant to a consulting agreement valued at $3,000,000.
In November 2013, we issued 23,480,004 shares of our common stock to certain investors at a purchase price of $0.05 per share for gross proceeds of $1,174,000. The shares were unissued as of October 31, 2013, and were reflected in the financial statements as “Additional paid-in capital - shares to be issued”. The shares were subsequently issued in November 2013.
In January, 2014, we issued 2,000,000 shares valued at $100,000 in connection with the acquisition of certain mineral rights in the Eagle Ford Shale.
In January, 2014, we issued an aggregate of 9,050,000 shares of our common stock to certain investors at a purchase price of $0.05 per share receiving gross proceeds of $452,500.
During February and March 2014, we received cash of $1,530,400 for the sale of 30,608,000 shares of common stock to certain investors at $0.05 per share.
In March and April 2014, we received $6,508,000 in cash from certain investors in exchange for convertible notes.
In April 2014, we received cash of $50,000 for the issuance of 250,000 shares at $0.20 per share. The shares were issued in August 2014.
In June 2014, we received cash of $110,000 for the issuance of 550,000 shares at $0.20 per share. The shares were issued in August 2014.
In June 2014, we received $485,000 cash from certain investors in exchange for convertible notes.
In August 2014, in connection with the Company’s convertible note agreement, dated March 10, 2014, the Company received notice of conversion from the holders of an aggregate principal amount of $6,992,950, plus accrued interest of $27,437. The holders converted the total outstanding principal and interest under the agreement into 35,102,181 shares of common stock.
The sales and issuances of the securities described above were made pursuant to the exemptions from registration contained in to Section 4(a)(2) of the Securities Act, Regulation D under the Securities Act and Regulation S under the Securities Act. Each purchaser represented that such purchaser’s intention to acquire the shares for investment only and not with a view toward distribution. We requested our stock transfer agent to affix appropriate legends to the stock certificate issued to each purchaser and the transfer agent affixed the appropriate legends. Each purchaser was given adequate access to sufficient information about us to make an informed investment decision. Except as described in this prospectus, none of the securities were sold through an underwriter and accordingly, there were no underwriting discounts or commissions involved.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not required for smaller reporting companies.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements. Please see “Forward-Looking Statements” above for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. The following discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared on the accrual basis of accounting, whereby revenues are recognized when earned, and expenses are recognized when incurred. You should read this management's discussion and analysis of our financial condition and results of operations in conjunction with our historical financial statements included elsewhere in this Annual Report. In addition to the impact of the matters discussed in "Risk Factors," our future results could differ materially from our historical results due to a variety of factors, many of which are out of our control.
Overview
Prior to September 2013, we had not been engaged in any substantive business activity. In September 2013, our chief executive officer was appointed and began to focus the Company’s interest on acquiring mineral rights and royalty interests, which we believe will generate royalty or other income without significant ongoing expense to the Company. In January 2014, we acquired a 37.5% interest in mineral rights covering 86.69 acres in Lavaca County. Our acreage is included in the Eagle Ford Shale located in South Texas. On March 10, 2014, the Company entered into a farm out letter agreement with GulfSlope relating to five prospects located within 2.2 million acres of 3D seismic licensed and interpreted by GulfSlope. Under the terms of the farm-out letter agreement, the Company will acquire up to a 20% working interest in the prospects for up to $10,000,000 payable by the Company to GulfSlope, of which the Company has funded $8.2 million. In addition, the Company has also agreed to pay its proportionate share of the net rental costs related to the prospects. GulfSlope will be the operator of record and shall have the right to negotiate all future joint operating agreements. To date, no economically viable oil and gas reserve have been discovered on our acreage in the Eagle Ford Shale or our prospects in the Gulf of Mexico, and there is no assurance that viable oil and gas reserves will ever be discovered on our acreage or our prospects.
Our mineral rights are currently subject to an oil, gas and mineral lease with an independent producer of oil and gas in the Eagle Ford Shale. Pursuant to the lease, Texas South is entitled to a royalty payment equal to 37.5% of 0.1875% of the sale proceeds, if any, actually received from the production of oil and gas from our acreage. As of October 31, 2014, one well has been drilled on the acreage and no definitive plans were announced as to when, if ever, the lessee would commence drilling on the remaining acreage. The lease on the undrilled acreage expired in December 2014. The results of the drilled well are not yet known.
The Company has incurred accumulated losses for the period from inception to October 31, 2014 of approximately $5.8 million. Further losses are anticipated in developing its business. As a result, the Company’s auditors have expressed substantial doubt about our ability to continue as a going concern. As of October 31, 2014, the Company had $84,482 of cash on hand. The Company believes that it has sufficient funds through the first quarter of the current fiscal year. The Company plans to finance the Company through best-efforts equity and/or debt financings. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Significant Accounting Policies
Investment Securities
Investment securities are composed of common stock of GulfSlope Energy, Inc. (“GulfSlope), and are classified as "available-for-sale". Available-for-sale securities are adjusted to their fair market value with unrealized gains and losses, net of tax, recorded as a component of accumulated other comprehensive income. Upon disposition of these investments, the specific identification method is used to determine the cost basis in computing realized gains or losses, which are reported in other income and expense. Declines in value that are judged to be other than temporary are reported in other comprehensive income and expense. During the year ended October 31, 2014, the Company recorded an unrealized gain of $682,000 to adjust the investment securities to fair market value.
Use of Estimates and Assumptions
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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that such estimates are reasonable when considered in conjunction with the financial position and results of operations taken as a whole, actual results could differ from those estimates, and such differences may be material to the financial statements.
Basic and Diluted Net Loss per Share
The Company computes loss per share in accordance with “ASC-260”, “Earnings per Share” which requires presentation of both basic and diluted earnings per share on the face of the statement of operations. Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of outstanding common shares during the period. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive loss per share excludes all potential common shares if their effect is anti-dilutive. The Company has no potential dilutive instruments and accordingly basic loss and diluted loss per share are the same.
Fair Value
In accordance with the requirements of ASC 825 and ASC 820, the Company has determined the estimated fair value of financial instruments using available market information and appropriate valuation methodologies. The fair value of financial instruments classified as current assets or liabilities approximate their carrying value due to the short-term maturity of the instruments.
Income Taxes
The Company has adopted ASC 740 for reporting purposes. As of October 31, 2014 the Company had net operating loss carry forwards of approximately $2,816,000 that may be available to reduce future years’ taxable income and will expire beginning in 2028. Availability of loss usage is subject to change of ownership limitations under Internal Revenue Code 382. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the tax loss carryforwards.
Stock-based Compensation
The Company has not adopted a stock option plan and has not granted any stock options. Common stock has been granted to numerous third parties for services (see Note 6 - Common Stock).
In December 2004, the Financial Accounting Standards Board (“FASB”) issued ASC 718 "Compensation - Stock Compensation" and 505-50 “Equity-Based Payments to Non-Employees.” This statement requires a public entity to expense the cost of services received in exchange for an award of equity instruments. This statement also provides guidance on valuing and expensing these awards, as well as disclosure requirements of these equity arrangements. The Company adopted ASC 718 and 505-50 upon creation of the company and expenses share based costs in the period incurred.
Accounting for Oil and Gas Properties
The Company utilizes the full cost method to account for its investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, professional fees incurred for the lease acquisitions, capitalized interest costs relating to properties, geological expenditures, and tangible and intangible development costs (including direct internal costs), are capitalized into the full cost pool. When the Company commences production from established proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, will be depleted on the units-of-production method using estimates of proven reserves. Investments in unproved properties and major development projects, including capitalized interest if any, are not depleted until proven reserves associated with the projects can be determined. If the future exploration of unproven properties is determined to be uneconomical, the amount of such properties is added to the capital costs to be depleted. As of October 31, 2014, the Company's oil and gas properties consisted of capitalized acquisition costs for unproved mineral rights.
RESULTS OF OPERATIONS
Results of Operations for the Year Ended October 31, 2014 compared to October 31, 2013
We had no sales during the years ended October 31, 2014 and October 31, 2013. General and administrative expenses were approximately $1.8 million for the year ended October 31, 2014, compared to $3.9 million for the year ended October 31, 2013. The decrease in general and administrative expenses of approximately $2.1 million for the year ended October 31, 2014 compared to the year ended October 31, 2013 was primarily attributed to a decrease in management and stock compensation of $3.3 million and an increase in consulting fees, legal and accounting professional fees, and travel expenses of approximately $1.2 million.
We had a net loss of approximately $1.9 million for the year ended October 31, 2014, compared to a net loss of $3.9 million for the year ended October 31, 2013. The decrease in net loss of approximately $2.0 million was due to the aforementioned activity in general and administrative expenses.
The basic and diluted loss per share for the year ended October 31, 2014 was $0.01, compared to a net loss per share of $0.10 for the year ended October 31, 2013.
We recorded other comprehensive income of $682,000 for the year ended October 31, 2014. This represents an unrealized gain on the 5,000,000 shares of GulfSlope common stock our Company purchased from James Askew in March 2014. No other comprehensive income was recorded during the year ended October 31, 2013.
As of October 31, 2014, the Company’s cash balance was $84,482, compared to a cash balance of $374,086 as of October 31, 2013. At October 31, 2014, the Company’s assets consisted of cash of $84,482 cash, investment securities of $950,000 and mineral interests and oil and gas property of $8,570,000. At October 31, 2013, the Company’s assets consisted of $374,086 cash and $10,838 prepaid assets.
Cash flow from Operating Activities
During the year ended October 31, 2014, we used cash of $1,770,614 for operating activities as compared to cash of $855,652 used during the year ended October 31, 2013. The increase in cash used for operating activities during the year was primarily due to payment of normal general and administrative expenses incurred during the year.
Cash flow from Investing Activities
During the year ended October 31, 2014, we used $270,000 cash to acquire oil and gas property, $268,000 to acquire common stock in GulfSlope, and $8,200,000 to acquire up to a 20% working interest in various prospects in an agreement with GulfSlope. During the year ended October 31, 2013, we used no cash in investing activities.
Cash flow from Financing Activities
During the year ended October 31, 2014, we received proceeds of $10,219,010 from financing activities compared with $1,229,198 during the year ended October 31, 2013. The increase is attributed to approximately $2.1 million in funds raised in the sale of the Company’s common stock and $8.1 million from the issuance of convertible and non-convertible notes.
Liquidity and Capital Resources
As at October 31, 2014, we had a cash balance of $84,482 and a working capital surplus of $8,066,920. Our accumulated deficit from inception (March 15, 2010) to October 31, 2014 was $5,839,291. Our net loss of $1,876,420 for the year ended October 31, 2014 was mostly funded by proceeds raised from equity financings since September 2013. During the year ended October 31, 2014, our cash position decreased by $289,604.
In March 2014, the Company entered into a credit agreement to raise up to $10,000,000 in connection with the issuance of 1% unsecured convertible promissory notes (the “Notes”), convertible into shares of the Company’s common stock at a conversion price of $0.20 per share. The noteholders funded a principal amount of $6,992,950 as of July 31, 2014 and in August 2014, the principal amount and accrued interest on these notes were converted in the entirety into 35,102,181 shares of common stock.
Effective June 2014, Texas South Energy, Inc. entered into a subscription agreement with an accredited investor under which the Company issued (i) a promissory note in the original principal amount of $1,000,000, and (ii) a one-year warrant to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share with a fair value of $58,367. The promissory note matures on June 30, 2015 and bears interest at a fixed rate of 10% per annum.
In August and September 2014, the Company issued 36,077,666 shares of common stock for aggregate gross consideration of $7,214,222 (including debt conversion).
We will need additional financing to carry out our business plan. Obtaining additional financing will be subject to a number of factors including market conditions, investor acceptance of our business plan, and investor sentiment. These factors may make the timing, amount, terms and conditions of additional financing unattractive or unavailable to us. If we cannot raise additional funds, we will not be able carry out our business plans and may cease operations.
Off-Balance Sheet Arrangements
As of October 31, 2014, we had no off balance sheet transactions that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
The Company has reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its results of operation, financial position or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its financial statements, with the exception of the adopted standard below.
The Company has elected to adopt early application of Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements; it no longer presents or discloses inception-to-date information and other remaining disclosure requirements of Topic 915.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Texas South Energy, Inc.
(An Exploration Stage Company)
Financial Statements
October 31, 2014
LBB & ASSOCIATES LTD., LLP
10260 Westheimer Road, Suite 310
Houston, TX 77042
Phone: (713) 800-4343 Fax: (713) 456-2408
Report of Independent Registered Public Accounting Firm
To the Board of Directors of
Texas South Energy, Inc.
(An Exploration Stage Company)
Houston, Texas
We have audited the accompanying balance sheets of Texas South Energy, Inc. (the “Company”) as of October 31, 2014 and 2013, and the related statements of operations and comprehensive income, stockholders' equity (deficit), and cash flows for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Texas South Energy, Inc. as of October 31, 2014 and 2013, and the results of its operations and its cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the financial statements, the Company's absence of significant revenues, recurring losses from operations, and its need for additional financing in order to fund its projected loss in 2015 raise substantial doubt about its ability to continue as a going concern. The 2014 financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ LBB & Associates Ltd., LLP
LBB & Associates Ltd., LLP
Houston, Texas
February 12, 2015
Texas South Energy, Inc.
(An Exploration Stage Company)
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements
Texas South Energy, Inc.
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
The accompanying notes are an integral part of these financial statements
Texas South Energy, Inc.
(An Exploration Stage Company)
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
The accompanying notes are an integral part of these financial statements
Texas South Energy, Inc.
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements
Texas South Energy, Inc.
(An Exploration Stage Company)
NOTES TO THE AUDITED FINANCIAL STATEMENTS
October 31, 2014
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Texas South Energy, Inc., (the “Company”) was incorporated pursuant to the laws of the State of Nevada on March 15, 2010. The Company had initially intended to commence business operations by producing and performing traditional Peruvian dances both in Peru and the United States. On September 24, 2013, there was a change in control of the Company. The Company is engaged in the oil and gas business.
The Company is an exploration stage company that has limited operating history and has earned no revenues. Since September 2013, the Company has devoted its activities to the acquisition of oil and gas assets. The Company is in the initial exploration stage and has incurred losses since inception of $5,839,291.
The Company has established a fiscal year end of October 31.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents.
Use of Estimates and Assumptions
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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that such estimates are reasonable when considered in conjunction with the financial position and results of operations taken as a whole, actual results could differ from those estimates, and such differences may be material to the financial statements.
Basic and Diluted Net Loss per Share
The Company computes loss per share in accordance with ASC 260, “Earnings per Share” which requires presentation of both basic and diluted earnings per share on the face of the statement of operations. Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of outstanding common shares during the period. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive loss per share excludes all potential common shares if their effect is anti-dilutive. The Company has no potential dilutive instruments and accordingly basic loss and diluted loss per share are the same.
Fair Value
In accordance with the requirements of ASC 825 and ASC 820, the Company has determined the estimated fair value of financial instruments using available market information and appropriate valuation methodologies. The fair value of financial instruments classified as current assets or liabilities approximate their carrying value due to the short-term maturity of the instruments.
Income Taxes
The Company has adopted ASC 740 for reporting purposes. As of October 31, 2014 the Company had net operating loss carry forwards of approximately $2,816,000 that may be available to reduce future years’ taxable income and will expire beginning in 2028. Availability of loss usage is subject to change of ownership limitations under Internal Revenue Code 382. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the future tax loss carryforwards. The Company believes that its’ income tax filing positions and deductions will more-likely-than-not be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations or cash flows. Therefore, no reserves for uncertain income tax positions have been recorded. The Company is subject to income tax examinations by the U.S federal, state, or local tax authorities for years since inception to date.
Stock-based Compensation
The Company has not adopted a stock option plan and has not granted any stock options. Common stock has been granted to third parties for services rendered (see Note 6 - Common Stock).
In December 2004, the Financial Accounting Standards Board (“FASB”) issued ASC 718 "Compensation - Stock Compensation" and 505-50 “Equity-Based Payments to Non-Employees.” This statement requires a public entity to expense the cost of services received in exchange for an award of equity instruments. This statement also provides guidance on valuing and expensing these awards, as well as disclosure requirements of these equity arrangements. The Company adopted ASC 718 and 505-50 upon creation of the company and expenses share based costs in the period incurred.
Accounting for Oil and Gas Properties
The Company utilizes the full cost method to account for its investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, professional fees incurred for the lease acquisitions, capitalized interest costs relating to properties, geological expenditures, and tangible and intangible development costs (including direct internal costs), are capitalized into the full cost pool. When the Company commences production from established proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, will be depleted on the units-of-production method using estimates of proven reserves. Investments in unproved properties and major development projects, including capitalized interest if any, are not depleted until proven reserves associated with the projects can be determined. If the future exploration of unproven properties is determined to be uneconomical, the amount of such properties is added to the capital costs to be depleted. As of October 31, 2014, the Company's oil and gas properties consisted of capitalized acquisition costs for unproved mineral rights.
Investment Securities
Investment securities are composed of common stock of GulfSlope Energy, Inc. (“GulfSlope), and are classified as "available-for-sale". Available-for-sale securities are adjusted to their fair market value with unrealized gains and losses, net of tax, recorded as a component of accumulated other comprehensive income. Upon disposition of these investments, the specific identification method is used to determine the cost basis in computing realized gains or losses, which are reported in other income and expense. Declines in value that are judged to be other than temporary are reported in other comprehensive income and expense. During the year ended October 31, 2014, the Company recorded an unrealized gain of $682,000 to adjust the investment securities to fair market value.
Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). The amendments in ASU 2014-08 change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. The new guidance is effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. Because the Company has no revenues, the new guidance is not expected to have a material impact on its financial statements and related disclosures.
The Company has elected to adopt early application of Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements; it no longer presents or discloses inception-to-date information and other remaining disclosure requirements of Topic 915.
NOTE 3 - GOING CONCERN
The Company’s financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern. This contemplates the realization of assets and the liquidation of liabilities in the normal course of business. Currently, the Company does not have sufficient cash, nor does it have operations or a source of revenue sufficient to cover its operation costs and allow it to continue as a going concern. The Company has accumulated losses since Inception (March 15, 2010) through October 31, 2014, of $5,839,291. The Company will be dependent upon the raising of additional capital through placement of our common and/or preferred stock in order to implement its business plan, or merge with an operating company. There can be no assurance that the Company will be successful in either situation in order to continue as a going concern. The Company is funding its initial operations by way of issuing common shares. During the year ended October 31, 2014, the Company issued 63,938,004 and 35,277,666 shares of common stock, at prices ranging from $0.003 to $0.20 per share, for cash of $2,142,900 and settlement of $7,054,222 in debt, respectively. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
NOTE 4 - OIL & GAS PROPERTY
On January 22, 2014, the Company entered into a contract for sale with the owner of mineral interests in 86.69 acres in Lavaca County, Texas (the “Acreage”) pursuant to which the Company acquired a 37.5% interest in the Acreage’s mineral rights, including the oil and gas rights (the “Acquired Interest”). In exchange for the Acquired Interest, the Company paid the seller $270,000 in cash and issued the seller 2,000,000 shares of the Company’s common stock, valued at $100,000.
NOTE 5 - ADVANCES - MINERAL INTERESTS
On March 10, 2014, the Company entered into a farm out letter agreement with GulfSlope Energy, Inc. (“GulfSlope”), relating to five prospects (the “Prospects”) located within 2.2 million acres of 3D seismic licensed and interpreted by GulfSlope. At the time the farm out agreement was entered into, the Company’s chief executive officer and sole director, Mr. Askew, was also a director of GulfSlope. Mr. Askew resigned as a director of GulfSlope effective March 27, 2014. Under the terms of the farm-out letter agreement, the Company may acquire up to a 20% working interest in the Prospects for up to $10,000,000 payable by the Company to GulfSlope. As of October 31, 2014, the Company had paid $8,200,000 of the $10,000,000 resulting in a farm-out investment asset of $8,200,000. The transfer of the contractual rights to the working interests is expected to occur in 2015. In addition, the Company has agreed to pay its proportionate share of the net rental costs related to the Prospects. GulfSlope will be the operator of record and shall have the right to negotiate all future joint operating agreements.
NOTE 6 - COMMON STOCK
On September 24, 2013, the Company issued 69,000,000 shares of common stock to James Askew, the Company’s chief executive officer and sole director, for services rendered. The stock was valued at $23,000.
On October 4, 2013, the Company sold 105,000,000 shares of common stock at $0.0003 for $35,000 cash.
On October 7, 2013, the Company’s board of directors and majority shareholders approved increasing the number of the Company’s authorized common shares from 75,000,000 to 950,000,000, the authorization of 50,000,000 shares of blank check preferred stock, and effecting a 3-for-1 forward stock split of the Company’s common stock. Pursuant to the 3-for-1 common stock split, the Company issued two additional shares of common stock for each issued share of the Company’s common stock outstanding prior to the forward split. The 3-for-1 forward split became effective November 12, 2013. The forward split has been shown retroactively. No preferred shares have been issued.
During October 2013, the Company received cash and subscriptions to purchase 23,480,004 shares of common stock at $0.05 per share for $1,174,000 cash. The shares were unissued as of October 31, 2013, and are reflected in the financial statements as “Additional Paid in Capital - Shares to be issued”. The shares were subsequently issued in November 2013.
During November 2013 through January 2014, the Company received cash and subscriptions to purchase 9,050,000 shares of common stock at $0.05 per share for $452,500 cash. The shares were issued in February and March 2014.
In November 2013, the Company issued 3,000,000 shares of common stock to a third party for services rendered. The stock was valued at $1,000. In the same month, the Company issued 60,000,000 shares of common stock valued at $3,000,000 to John B. Connally III, pursuant to the aforementioned consulting agreement (see Note 11 - Commitments and Contingencies).
In January 2014, the Company entered into a contract for sale with the owner of mineral interests in 86.69 acres in Lavaca County, Texas pursuant to which the Company acquired a 37.5% interest in the Acreage’s mineral rights, including the oil and gas rights. In exchange for the Acquired Interest, the Company paid the seller $270,000 in cash and issued the seller 2,000,000 shares of the Company’s common stock, valued at $100,000.
During February and March 2014, the Company received cash of $1,530,400 for the sale of 30,608,000 shares of common stock at $0.05 per share.
In April 2014, the Company received cash of $50,000 for the issuance of 250,000 shares at $0.20 per share. The shares were issued in August 2014.
In June 2014, the Company received cash of $110,000 for the issuance of 550,000 shares at $0.20 per share. The shares were issued in August 2014.
As of July 31, 2014, the Company had a promissory note that was issued by the Company in June 2014 but expired on August 15, 2014. The proceeds of the note were then provided to the Company for the issuance of 175,485 shares of common stock at $.20 per share.
On August 21, 2014, in connection with the Company’s convertible note agreement, dated March 10, 2014, (see Note 8 - Notes Payable), the Company received notice of conversion from the holders of an aggregate principal amount of $6,992,950, plus accrued interest of $27,437. The holders converted the total outstanding principal and interest under the agreement into 35,102,181 shares of common stock.
As of October 31, 2014, the Company has not granted any stock options.
NOTE 7 - RELATED PARTY TRANSACTIONS
As of October 31, 2014 and 2013 the Company had received advances from a prior director in the amount of $52,152. The amounts due to the related party remain outstanding, unsecured due on demand and non-interest bearing with no set terms of repayment. Imputed interest of $2,722 was recorded as donated capital during the year ended October 31, 2013.
On September 27, 2013, the Company entered into a one-year employment agreement with its director and chief executive officer James Askew. The agreement provides for a one-time issuance of 69,000,000 shares of common stock, $75,000 cash signing bonus, and $35,000 cash compensation per month. Per the agreement, Mr. Askew was paid a $75,000 cash bonus in September 2013, and issued 69,000,000 shares of the Company’s common stock in September 2013. The stock was valued at $23,000 based upon the Company’s recent stock sales. In October 2013, the Company awarded a $600,000 cash bonus to Mr. Askew for his success in raising capital for the Company prior to October 31, 2013. On March 17, 2014, the Company and Mr. Askew amended the employment agreement to extend the term for one year, expiring September 2015, and to provide that Mr. Askew is entitled to receive base compensation through the end of the term if such agreement is terminated prior to the end of the term. On March 17, 2014, the Company also entered into an indemnification agreement with Mr. Askew tracking the statutory provisions of the Nevada Statutes.
On March 21, 2014, the Company acquired 5 million shares of restricted GulfSlope common stock from our sole officer and director James M. Askew for a purchase price of $268,000. At the time of the acquisition, Mr. Askew was also a director of GulfSlope. Mr. Askew resigned as a director of GulfSlope effective March 27, 2014. During the year ended October 31, 2014, the Company recorded an unrealized gain of $682,000 to adjust the investment securities to fair market value.
NOTE 8 - NOTES PAYABLE
In connection with the Company’s funding obligations pursuant to the farm-out letter agreement (see Note 5 - Advances - Mineral Interests above), on March 10, 2014, the Company entered into a financing arrangement for up to $10,000,000 in connection with the issuance of 1% unsecured convertible promissory notes (the “Notes”), convertible into shares of the Company’s common stock at a conversion price of $0.20 per share. The conversion occurred in August 2014. The holders converted the total outstanding principal amount of $6,992,950 and accrued interest of $27,437 into 35,102,181 shares of common stock. The Conversion extinguishes the Company’s obligations under the Note Agreement, including the promissory notes underlying the Note Agreement.
Effective June 2014, Texas South Energy, Inc. entered into a subscription agreement with an accredited investor under which the Company issued (i) a promissory note in the original principal amount of $1,000,000, and (ii) a one-year warrant to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share with a fair value of $58,367. The promissory note matures on June 30, 2015 and bears interest at a fixed rate of 10% per annum.
In June 2014, the Company entered into a non-convertible promissory note for $35,000. This note expired on August 15, 2014 when proceeds of the note were then provided to the Company for the issuance of 175,485 shares of common stock at $.20 per share (see Note 6 - Common Stock).
NOTE 9 - INCOME TAXES
The Company follows ASC 740. Deferred income taxes reflect the net effect of (a) temporary difference between carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax reporting purposes, and (b) net operating loss carry-forwards. No net provision for refundable Federal income tax has been made in the accompanying statement of loss because no recoverable taxes were paid previously. Similarly, no deferred tax asset attributable to the net operating loss carry-forward has been recognized, as it is not deemed likely to be realized.
The provision for refundable federal income tax consists of the following for the periods ending:
At October 31, 2014, the Company had an unused net operating loss carry-forward approximating $2,816,000 that is available to offset future taxable income; the loss carry-forward will start to expire in 2028.
NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted the FASB standard related to fair value measurement at inception. The standard defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. The standard applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. The standard clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The recorded values of long-term debt approximate their fair values, as interest approximates market rates. As a basis for considering such assumptions, the standard established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows.
Level 1. Observable inputs such as quoted prices in active markets;
Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company’s financial instruments are cash, accounts payable, and investment securities. The recorded values of cash and accounts payable approximate their fair values based on their short-term nature.
Our Level 2 asset consists of investment securities. The fair value of investment securities (common stock in GulfSlope) is based on $0.19 per share, derived from recent GulfSlope private placement financing transactions. The GulfSlope common stock is thinly traded, resulting in the private placement transactions providing the most reliable measurement.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
In September 2013, the Company entered into a one-year employment arrangement with its director and chief executive officer James Askew. Among other compensation (see Note 7 - Related Party Transactions above), the agreement provides for $35,000 cash compensation per month and a sign-on bonus of $75,000. Mr. Askew was also issued 69,000,000 shares of common stock (after giving effect to the 3-for-1 forward split effected in November 2013) for services rendered. In October 2013, the Company awarded a $600,000 bonus to James Askew, for his success in raising capital for the Company prior to October 31, 2013 (this bonus is in addition to the compensation set forth in section 4 of Mr. Askew’s employment agreement).
On October 11, 2013, the Company entered into a one-year consulting agreement with John B. Connally, III. The agreement provides for a one-time issuance of 60,000,000 shares of common stock, $25,000 cash signing bonus, and $10,000 cash compensation per month. The stock was issued in November 2013.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On January 24, 2014, the Board of Directors, appointed LBB & Associates Ltd., LLP to be the Company’s independent registered public accountant for the fiscal year ending October 31, 2013. Concurrent with the appointment of LBB & Associates Ltd., LLP, the Board of Directors dismissed M&K CPAS, PLLC, which served as the Company’s independent registered public accountant for the fiscal years ended October 31, 2012 and 2011.
The report of M&K CPAS, PLLC on the Company’s financial statements for the two (2) most recent fiscal years ended October 31, 2012 and 2011 and any subsequent interim periods preceding such resignation, declination or dismissal did not contain an adverse opinion or disclaimer of opinion, nor was it modified as to uncertainty, audit scope or accounting principles, other than to state that there is substantial doubt as to the ability of the Company to continue as a going concern. During the Company’s two most recent fiscal years ended October 31, 2012 and 2011, there was no disagreement between the Company and M&K CPAS, PLLC, whether or not resolved, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of M&K CPAS, PLLC, would have caused M&K CPAS, PLLC to make reference thereto in its report on the Company’s audited financial statements. There was a disagreement during the subsequent period through to the date of M&K CPAS, PLLC’s termination.
The disagreement between the Company and M&K CPAS, PLLC is in connection with the audit of the Company’s financial statements for the fiscal year ended October 31, 2013. The disagreement concerned the fair value of (i) shares of common stock issued to an employee for services and (ii) shares of common stock issued to a consultant for services. The view of M&K CPAS, PLLC was that the fair market value of the common stock should be the last sale price of the Company’s common stock on the open-market, which was $0.45 and $0.75, for the Company to obtain a third party valuation or for the Company to obtain pre-clearance from the Securities and Exchange Commission. The Company believes that the last sale price of the Company’s common stock is not a fair valuation of the stock at issue because (i) the Company’s common stock is thinly and sporadically traded with actual trading occurring on less than 20 trading days over the last six month period and an aggregate trading volume for that six-month period was 133,020 shares, and (ii) the share of common stock issued to the employee and the consultant are restricted shares subject to Rule 144. The Company believes that the better valuation is the price a third party investor was willing to pay to acquire the Company’s restricted stock at or near the time of the Company’s decision to issue the shares to the employee and the consultant, thus negating the need for a third party valuation. The Board’s decision to issue shares to the employee occurred on September 24, 2013, at which time the Company was raising funds in an arms-length private placement at $0.00034 per share (giving effect to the Company’s subsequent 3-for-1 forward split), pursuant to which shares were issued upon closing which occurred on October 8, 2013. The Board’s decision to issue shares to the consultant occurred on October 11, 2013, at which time the Company was raising funds in a second arms-length private placement at $0.05 per share (giving effect to the Company’s subsequent 3-for-1 forward split), pursuant to which shares were issued upon the initial closing which occurred on December 2, 2013. Therefore, based upon the price investors were willing to pay to purchase shares of the Company’s restricted stock when the stock was issued to the employee, the Company believes that the value of the shares to the employee should be $0.00034 per share; and the value of the shares to the consultant should be $0.05 per share. The Company's Board of Directors has discussed the subject matter of this disagreement with M&K CPAS, PLLC which, as of the date of this Current Report, remains unresolved. The Company has authorized M&K CPAS, PLLC to communicate and respond fully to the inquiries by LBB & Associates Ltd., LLP concerning the subject matter of this disagreement.
Notwithstanding the foregoing, there were no other disagreements between the Company and M&K CPAS, PLLC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of M&K CPAS, PLLC, would have caused M&K CPAS, PLLC to make reference to the subject matter of the disagreements in connection with its reports on the Company’s financial statements; and there were no other reportable events as that term is described in Item 304(a)(1)(v) of Regulation S-K.
As reported above, on January 24, 2014, the Board of Directors appointed LBB & Associates Ltd., LLP to be the Company’s independent registered public accountant for the fiscal year ending October 31, 2013. During the two most recent completed fiscal years and through January 24, 2014, neither the Company nor anyone on its behalf consulted with LBB & Associates Ltd., LLP regarding any of the following: (i) the application of accounting principles to a specific transaction, either completed or proposed; (ii) the type of audit opinion that might be rendered on the Company’s financial statements, and none of the following was provided to the Company (a) a written report, or (b) oral advice that LBB & Associates Ltd., LLP concluded was an important factor considered by the Company in reaching a decision as to an accounting, auditing, or financial reporting issue; or (iii) any matter that was subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K, or a reportable event, as described in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer (who also serves as our principal financial officer) of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the period covered by this Annual Report. Based upon that evaluation, our principal executive officer (who also serves as our principal financial officer) concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed by us under the Exchange Act is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.
Our management, including our principal executive officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Our management, with the participation of our principal executive officer (who also serves as our principal financial officer) evaluated the effectiveness of our internal control over financial reporting as of October 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control Integrated Framework. Based on this evaluation, our management concluded that, as of October 31, 2014, our internal control over financial reporting was effective.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal controls over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Security and Exchange Commission that permit us to provide only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Identification of Directors and Executive Officers
Our sole executive officer and director and his respective age, position and biographical information is set forth below.
Name
Age
Title
James M. Askew
Chief Executive Officer, Chief Financial Officer and Director
Mr. Askew has served as the sole officer and sole director of the Company since September 2013. From June 2012 until May 2013, Mr. Askew served as sole officer of GulfSlope Energy, Inc. and served as a director of GulfSlope Energy, Inc. from June 2012 to March 2014. Mr. Askew has served as an independent oil and gas investor since March 2008. Prior thereto, Mr. Askew served as president of EnerGulf Resources Inc. (ENG:TSX.V, “EnerGulf”) from November 2003 through March 2008, and as a director of EnerGulf from August 2002 until March 2008. During his service at EnerGulf, Mr. Askew was involved in a variety of oil and gas exploration projects focused in Texas, South America, and Africa. Mr. Askew provides the board with leadership and management knowledge.
Board Committees and Meetings
The Company does not maintain an audit committee, compensation committee or nominating committee, and the Board performs the functions of such committees. Because the Company has one director, the Board has determined that it is not necessary to have a standing nominating committee or procedures for submitting shareholder nominations. Furthermore, we have not designated any member of the Board of Directors as an audit committee financial expert because we are not required to do so at this time.
The Company has no formal policy with regard to Board members' attendance at annual meetings of security holders and the Company did not hold an annual meeting during the year ended October 31, 2014. During the fiscal year ended October 31, 2014, the Board of Directors did not hold any meetings and acted by written consent.
Independent Directors
We currently only have one director who also serves as our sole officer. Therefore, we do not currently have any directors who are considered “independent” as such term is defined in the NASDAQ Global Market listing standards. We believe that retaining an independent director or directors at this time would be overly costly and burdensome and is not warranted in our circumstances given the stage of our development. Moving forward, at such time the Board of Directors deems independent directors desirable, or that we are required to have independent directors, either as a result of our listing on NASDAQ, the NYSE or a similar market or exchange, or that we are otherwise required by applicable law to have independent director, we will promptly take steps to appoint such independent directors.
Code of Ethics
We have adopted a written code of ethics and whistleblower policy (the “Code of Ethics”) that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. We believe that the Code of Ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code. A copy of our Code of Ethics is filed as an exhibit to our Annual Report.
Involvement in Certain Legal Proceedings
There are currently no material pending legal proceedings to which the Company is a party or of which any of its property is the subject, in which any of the above referenced directors or officers is a party adverse to the Company or has a material interest adverse to the Company. Furthermore, during the past ten years, none of the Company's officers or directors described above were involved in any legal proceedings that are material to an evaluation of the ability or integrity of such directors and officers.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation to Officers of the Company
The following tables contain compensation data for our named executive officers as of the fiscal years ended October 31, 2014 and 2013:
Summary Compensation Table
(1)
Mr. Askew became Chief Executive Officer on September 24, 2013 concurrent with the resignation of Mrs. Calixto as Chief Executive Officer.
(2)
Pursuant to Mr. Askew’s employment agreement, the Company issued Mr. Askew 69,000,000 shares of the Company’s common stock valued at $23,000.
Our executive officers and directors did not receive any other compensation as directors or officers.
Employment and Consulting Arrangements
In September 2013, the Company entered into a one-year employment arrangement with Mr. Askew, providing for a monthly salary of $35,000 and a sign-on bonus of $75,000. Mr. Askew was also issued 69,000,000 shares of our common stock for services rendered. In October 2013, the Company awarded a $600,000 bonus to James M. Askew, Chief Executive Officer of the Company for his success in raising capital for the Company prior to October 31, 2013. On March 17, 2014, the Company and Mr. Askew amended the employment agreement to extend the term for one year, expiring September 2015, and to provide that Mr. Askew is entitled to receive base compensation through the end of the term if such agreement is terminated prior to the end of the term. On March 17, 2014, the Company also entered into an indemnification agreement with Mr. Askew tracking the statutory provisions of the Nevada Statutes.
In October 2013, the Company entered into a one-year consulting arrangement with John Connally, providing for a monthly salary of $10,000 and a sign-on bonus of $25,000. Mr. Connally was also issued 60,000,000 shares of our common stock for services rendered.
Grants of Plan-Based Awards
No plan-based awards were granted to any of our named executive officers during the fiscal year ended October 31, 2014.
Outstanding Equity Awards at Fiscal Year End
No unexercised options or warrants were held by any of our named executive officers at October 31, 2014.
Compensation Policies and Practices as they Relate to the Company's Risk Management
We conducted a review of our compensation policies and procedures as they relate to an overall risk management policy. We have concluded that our compensation policies and practices are not reasonably likely to have a material adverse effect on the Company.
Director Compensation
During 2014 and 2013, the directors of the Company were not compensated for their services as directors.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Principal Stockholders
The following table sets forth the number and percentage of outstanding shares of common stock owned by: (a) each person who is known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; (b) each of our directors; (c) the named executive officers as defined in Item 402 of Regulation S-K; and (d) all current directors and executive officers, as a group as of the date of this Annual Report. As of the date of this Annual Report, there were 362,215,670 shares of common stock deemed issued and outstanding.
Unless otherwise stated, beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Under this rule, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares (for example, upon exercise of an option or warrant) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person or group of persons, the number of shares beneficially owned by such person or group of persons is deemed to include the number of shares beneficially owned by such person or the members of such group by reason of such acquisition rights, and the total number of shares outstanding is also deemed to include such shares (but not shares subject to similar acquisition rights held by any other person or group) for purposes of that calculation. As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s actual voting power at any particular date. To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The address for each of the beneficial owners is the Company’s address.
Description of Capital Stock
We are authorized to issue 950,000,000 shares of common stock, par value $0.001, of which 362,215,670 shares are issued and outstanding as of the date of this Annual Report. We are also authorized to issue 50,000,000 shares of blank check preferred stock, none of which have been issued as of the date of this Annual Report.
Common Stock
The holders of common stock are entitled to one vote per share with respect to all matters required by law to be submitted to stockholders. The holders of common stock have the sole right to vote, except as otherwise provided by law or by our certificate of incorporation, including provisions governing any preferred stock. The common stock does not have any cumulative voting, preemptive, subscription or conversion rights. Election of directors requires the affirmative vote of a plurality of shares represented at a meeting, and other general stockholder action requires the affirmative vote of a majority of shares represented at a meeting in which a quorum is represented. The outstanding shares of common stock are validly issued, fully paid and non-assessable.
Subject to the rights of any outstanding shares of preferred stock, the holders of common stock are entitled to receive dividends, if declared by our board of directors, out of funds legally available. In the event of liquidation, dissolution or winding up of the affairs of the Company, the holders of common stock are entitled to share ratably in all assets remaining available for distribution to them after payment or provision for all liabilities and any preferential liquidation rights of any preferred stock then outstanding.
The authorized but unissued shares of our common stock are available for future issuance without stockholder approval. These additional shares may be used for a variety of corporate purposes, including future public offering to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of common stock may enable our Board to issue shares of stock to persons friendly to existing management, which may deter or frustrate a takeover of the Company.
Preferred Stock
We are authorized to issue 50 million shares of “blank check” preferred stock, none of which are issued and outstanding. We have no present plans for the issuance thereof. Our board of directors has the authority, without action by our stockholders, to designate and issue preferred stock in one or more series. Our board of directors may also designate the rights, preferences, and privileges of each series of preferred stock, any or all of which may be greater than the rights of the common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of the common stock until the board of directors determines the specific rights of the holders of the preferred stock. However, these effects might include:
·
restricting dividends on the common stock;
·
diluting the voting power of the common stock;
·
impairing the liquidation rights of the common stock; and
·
delaying or preventing a change in control without further action by the stockholders.
Options, Warrants and Convertible Notes
Effective June 2014, Texas South Energy, Inc. entered into a subscription agreement with an accredited investor under which the Company issued a promissory note in the original principal amount of $1,000,000 and a one-year warrant to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share with a fair value of $58,367. The promissory note matures on June 30, 2015 and bears interest at a fixed rate of 10% per annum.
Indemnification of Directors and Officers
Section 718.7502 of the Nevada Revised Statutes (“NRS”) provides, in general, that a corporation incorporated under the laws of the State of Nevada, as we are, may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative (other than a derivative action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person (a) is not liable pursuant to Section 73.138 of the NRS, and (b) acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. In the case of a derivative action, a Nevada corporation may indemnify any such person against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person (a) is not liable pursuant to Section 73.138 of the NRS, and (b) acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation.
Our Articles of Incorporation and Bylaws provide that we will indemnify our directors, officers, employees and agents to the extent and in the manner permitted by the provisions of the NRS, as amended from time to time, subject to any permissible expansion or limitation of such indemnification, as may be set forth in any stockholders’ or directors’ resolution or by contract. In addition, our director and officer indemnification agreements with each of our directors and officers provide, among other things, for the indemnification to the fullest extent permitted or required by Nevada law. Any repeal or modification of these provisions approved by our stockholders will be prospective only and will not adversely affect any limitation on the liability of any of our directors or officers existing as of the time of such repeal or modification. We are also permitted to maintain insurance on behalf of any director, officer, employee or other agent for liability arising out of his actions, whether or not the NRS would permit indemnification.
Anti-Takeover Effect of Nevada Law
Business Combinations
The “business combination” provisions of Sections 78.411 to 78.444, inclusive, of the Nevada Revised Statutes, or NRS, prohibit a Nevada corporation with at least 200 stockholders from engaging in various “combination” transactions with any interested stockholder: for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the transaction is approved by the board of directors prior to the date the interested stockholder obtained such status; or after the expiration of the three-year period, unless:
·
the transaction is approved by the board of directors or a majority of the voting power held by disinterested stockholders, or
·
the consideration to be paid by the interested stockholder is at least equal to the highest of: (a) the highest price per share paid by the interested stockholder within the three years immediately preceding the date of the announcement of the combination or in the transaction in which it became an interested stockholder, whichever is higher, (b) the market value per share of common stock on the date of announcement of the combination and the date the interested stockholder acquired the shares, whichever is higher, or (c) for holders of preferred stock, the highest liquidation value of the preferred stock, if it is higher.
A “combination” is defined to include mergers or consolidations or any sale, lease exchange, mortgage, pledge, transfer or other disposition, in one transaction or a series of transactions, with an "interested stockholder" having: (a) an aggregate market value equal to 5% or more of the aggregate market value of the assets of the corporation, (b) an aggregate market value equal to 5% or more of the aggregate market value of all outstanding shares of the corporation, or (c) 10% or more of the earning power or net income of the corporation.
In general, an “interested stockholder” is a person who, together with affiliates and associates, owns (or within three years, did own) 10% or more of a corporation’s voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire our company even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.
Control Share Acquisitions
The “control share” provisions of Sections 78.378 to 78.3793, inclusive, of the NRS, which apply only to Nevada corporations with at least 200 stockholders, including at least 100 stockholders of record who are Nevada residents, and which conduct business directly or indirectly in Nevada, prohibit an acquirer, under certain circumstances, from voting its shares of a target corporation’s stock after crossing certain ownership threshold percentages, unless the acquirer obtains approval of the target corporation’s disinterested stockholders. The statute specifies three thresholds: one-fifth or more but less than one-third, one-third but less than a majority, and a majority or more, of the outstanding voting power. Once an acquirer crosses one of the above thresholds, those shares in an offer or acquisition and acquired within 90 days thereof become “control shares” and such control shares are deprived of the right to vote until disinterested stockholders restore the right. These provisions also provide that if control shares are accorded full voting rights and the acquiring person has acquired a majority or more of all voting power, all other stockholders who do not vote in favor of authorizing voting rights to the control shares are entitled to demand payment for the fair value of their shares in accordance with statutory procedures established for dissenters’ rights.
Our Articles of Incorporation state that we have elected not to be governed by the “control share” provisions, therefore, they currently do not apply to us.
Transfer Agent
The transfer agent and registrar for our common stock is Island Stock Transfer, whose address is 15500 Roosevelt Boulevard, Suite 301, Clearwater, Florida 33760.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
In September 2013, we entered into a one-year employment arrangement with Mr. Askew, providing for a monthly salary of $35,000 and a sign-on bonus of $75,000. Mr. Askew was also issued 69,000,000 share of our common stock (after giving effect to the 3-for-1 forward split effected in November 2013) for services rendered. In October 2013, the Company awarded a $600,000 bonus to James M. Askew, Chief Executive Officer of the Company for his success in raising capital for the Company prior to October 31, 2013. On March 17, 2014, the Company and Mr. Askew amended the employment agreement to extend the term for one year, expiring September 2015, and to provide that Mr. Askew is entitled to receive base compensation through the end of the term if such agreement is terminated prior to the end of the term. On March 17, 2014, the Company also entered into an indemnification agreement with Mr. Askew tracking the statutory provisions of the Nevada Statutes.
In October 2013, the Company entered into a one-year consulting arrangement with John Connally, providing for a monthly salary of $10,000 and a sign-on bonus of $25,000. Mr. Connally was also issued 60,000,000 share of our common stock (after giving effect to the 3-for-1 forward split effected in November 2013) for services rendered.
During the fiscal year ended 2013, Roxana Gloria Candela Calixto advanced the Company a total of $52,152. This balance remains at October 31, 2014.
The Company’s legal counsel, Brewer & Pritchard, P.C., and members of that firm were issued an aggregate of 3 million shares of common stock for services rendered to the Company in October 2013, valued at $0.0003 per share.
ITEM 14:
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
The following is a summary of the fees billed to us by our principal accountants during the fiscal years ended October 31, 2014 and 2013. LBB & Associates Ltd., LLP are our principal accountants for the ended October 31, 2014 and 2013.
Audit Fees - Consists of fees for professional services rendered by our principal accountants for the audit of our annual financial statements and review of the financial statements included in our Forms 10-Q or services that are normally provided by our principal accountants in connection with statutory and regulatory filings or engagements.
Audit-related Fees - Consists of fees for assurance and related services by our principal accountants that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit fees.”
Tax Fees - Consists of fees for professional services rendered by our principal accountants for tax compliance, tax advice and tax planning.
All Other Fees - Consists of fees for products and services provided by our principal accountants, other than the services reported under “Audit fees,” “Audit-related fees,” and “Tax fees” above.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
We have not adopted an Audit Committee; therefore, there is no Audit Committee policy in this regard. All services rendered by our principal accountant are performed pursuant to a written engagement letter between us and the principal accountant.
PART IV
ITEM 15:
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibits. The following exhibits are filed as part of this Annual Report:
* Management contract or compensatory plan or arrangement.
(1)
Filed herewith.
(2)
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Texas South Energy, Inc.
Date:
February 12, 2015
By:
/s/ James M. Askew
James M. Askew
Chief Executive Officer,
Principal Financial Officer, and Sole Director