UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

☒  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: October 31, 2016

 

Commission File No. 333-171064

TEXAS SOUTH ENERGY, INC.

(Exact name of the issuer as specified in its charter)

 

Nevada 99-0362471
(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)  

 

4550 Post Oak Place Dr., Suite 300 

Houston, Texas 77027

(Address of Principal Executive Offices)

 

(713) 820-6300

(Issuer’s Telephone Number)

 

Securities registered pursuant to Section 12(b) of the Exchange Act: None

 

Securities registered pursuant to Section 12(g) of the Exchange Act: None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No  ☒

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐  No  ☒

 

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

(1) Yes ☒  No  ☐ (2) Yes ☒  No  ☐

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company:

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company

 

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

 

State the aggregate market value of the voting and non-voting common stock held by non-affiliates computed by reference to the price at which the common stock was last sold, or the average bid and asked price of such common stock, as of the last business day of the Registrant’s most recently completed second fiscal quarter: $14,554,600 on April 30, 2016.

 

Indicate the number of shares outstanding of each of the Registrant’s classes of common equity, as of the latest practicable date:

 

Class   Outstanding as of February 6, 2017
Common Capital Voting Stock, $0.001 par value per share   766,040,670

 

Documents incorporated by reference: None

 

 

 

 

TABLE OF CONTENTS

 

PART 1  
ITEM 1. Business  1
ITEM 1A. Risk Factors  6
ITEM 2. Properties  13
ITEM 3. Legal Proceedings  13
ITEM 4. Mine Safety Disclosures  14
PART II  
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  15
ITEM 6. Selected Financial Data  15
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations  16
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk  19
ITEM 8. Financial Statements and Supplementary Data  F-1
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure  19
ITEM 9A. Controls and Procedures  19
ITEM 9B. Other Information  19
PART III  
ITEM 10. Directors, Executive Officers and Corporate Governance  21
ITEM 11. Executive Compensation  22
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  23
ITEM 13. Certain Relationships and Related Transactions, and Director Independence  25
ITEM 14. Principal Accounting Fees and Services  26
PART IV  
ITEM 15. Exhibits, Financial Statement Schedules  27
Signatures  28

 

 

 

PART I

 

FORWARD LOOKING STATEMENTS

 

In this Annual Report, references to “Texas South Energy,” the “Company,” “we,” “us,” and “our” refer to “Texas South Energy, Inc.,” the Registrant.

 

This Annual Report contains certain forward-looking statements and for this purpose any statements contained in this Annual Report that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “projects,” “expects,” “may,” “goal,” “estimates,” “should,” “plans,” “targets,” “intends,” “could,” or “anticipates,” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy or objectives. Forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include but are not limited to economic conditions generally and in the markets in which the Company may participate, competition within the Company’s chosen industry, technological advances and failure by us to successfully develop business relationships. Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Annual Report on Form 10-K to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

ITEM 1. BUSINESS

 

The Company

 

We are engaged in the onshore and offshore oil and gas business.

 

In March 2014, we entered into a farm out letter agreement with GulfSlope Energy, Inc. (“GulfSlope”) relating to certain prospects GulfSlope bid on at the Central Gulf of Mexico Lease Sale 231, located within 2.2 million acres of 3-D seismic licensed and interpreted by GulfSlope. Under the terms of the farm-out letter agreement, as amended in September 2015, we acquired contractual rights to a 20% working interest in five prospects for $10,000,000. We have agreed to pay our 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. GulfSlope conducted extensive seismic work on the prospects focusing on the high potential subsalt play at depths of 15,000’ to 25,000’ prior to acquiring them in the Federal Lease Sale.

 

In May 2016, we entered into a letter of intent with GulfSlope that sets out the terms and conditions of a farm-out arrangement to develop certain shallow-depth oil and gas prospects located on offshore Gulf of Mexico blocks currently leased by GulfSlope. The shallow prospects are located above 5,100 feet vertical depth on the Vermilion Area, South Addition Block 378 (“Canoe Shallow”) and Vermilion Area, South Addition Block 375 (“Selectron Shallow”, and collectively with Canoe Shallow, “Shallow Prospects”). We own a 70.7% working interest in the Shallow Prospects (with a third party owning a 16.8% working interest for which it has paid $400,000 to date and GulfSlope retaining a 12.5% working interest) which we acquired in exchange for (i) cash payments of $400,000, (ii) the payment of annual rental obligations of $63,147, and (iii) the agreement to fund, or cause to be funded, the costs for the drilling of two shallow wells to be commenced no later than December 31, 2017. GulfSlope is currently the Operator of the first two wells. We may farm-down our 70.7% working interests. Consummation of the transactions is subject to further negotiation, the execution and delivery by the parties of mutually acceptable definitive agreements to include a participation agreement and the joint operating agreement, and the satisfaction of certain additional conditions.

 

In January 2017, the Company entered into an asset purchase agreement with Sydson Energy, Inc. (“Sydson Energy”) and Sydson Resources, L.P. (“Sydson Resources” and collectively with Sydson Energy, “Sydson”), where Sydson assigned to us certain onshore oil and gas assets and interests and certain tangible assets and additionally, certain employees and a consultant of Sydson have agree to become employees and a consultant of the Company. Sydson is a private oil and gas company with land operations in Texas and Louisiana that has been in business since 1982. The oil and gas assets include the following:

 

In the Bayou Bouillon Field, St. Martin and Iberville Parishes, Louisiana, we acquired a 37.5% working interest in the Sugarberry South Project comprising 420 acres with a net revenue interest of 70%. The property has two existing wells which have tested at over 400 BOPD combined from two (2) productive zones above 2,100’ with an additional shallower zone behind pipe believed to contain approximately 30’ of oil pay and almost 60’ of gas pay. We expect to install production facilities and drill additional development wells in this fault block and to drill up to three exploratory wells in adjacent fault blocks targeted in the same zones. Through the Sydson transaction, we also are a party to letters of intent to acquire up to a 45% working interest in an additional 1,000+ acres in the Bayou Bouillon area based on a proprietary 55 square mile 3-D seismic survey that demonstrates updip potential in existing reservoirs at about 10,000’. The downdip wells in these same reservoirs have produced over 20 MMBO and 21 BCFG from 59 completions. Our partner in the Bayou Bouillon project, and the owner of a 50% working interest in the Bayou Bouillon acreage, is Thyssen Petroleum, USA, a privately held independent oil and gas exploration and production company based in Houston, Texas and Monaco, France.

 

1

 

 

In Texas, we acquired a 50% working interest in the undrilled acreage above 4,500’ in the West Tuleta Field, Bee County, Texas comprised of approximately 1,800 gross acres and 900 net acres with a net revenue interest of approximately 75%. The primary drilling objectives are the Vicksburg and Hockley sands which are structurally high on this acreage to historic downdip production from these sands totaling over 500,000 BO.

 

In the adjacent Ray Field, also in Bee County, Texas, we acquired a 50% working interest in the undrilled, acreage on the Walton, Campbell, and Ray leases comprising approximately 75 gross acres with a net revenue interest of approximately 75%. The primary drilling objectives on this acreage are also the Vicksburg and Hockley sands updip to prior production, also above 3,700’.

 

In other areas of Southeast Texas, we acquired an interest in a proprietary 85 square mile 3-D seismic survey targeting Lower Wilcox Sands at approximately 10,000’. There are eight currently defined and mapped prospects in which we intend to acquire leases that are apparent on the seismic data and match the geologic setting of three existing Lower Wilcox fields within the boundaries of the survey.

 

Northwest of that survey, we intend to acquire leases covering approximately 1,000 acres for horizontal projects above 6,000’ in the Austin Chalk and Buda Lime formation. These projects are adjacent to substantial prior production and contain both conventional and unconventional oil targets.

 

In connection with the asset acquisition, certain officers and employees of Sydson have become officers, a consultant and employees of the Company, including Michael J. Mayell as chief executive officer, James L. Gunderson as manager of land, Robert L. Goldstein as a geological consultant, and Lecia Alexander as controller. Certain other non-executive employees and consultants of Sydson became at-will employees of the Company. John B Connally III joined our board as chairman.

 

Mr. Mayell has over 45 years of experience in the oil and gas business. He began his career with Shell Oil Company in New Orleans, Louisiana in the drilling and production engineering groups responsible for drilling and producing fields both onshore and offshore South Louisiana. Mr. Mayell founded Sydson in 1982 and this entity has been in operation since that time. In 1985, Mr. Mayell co-founded The Meridian Resource Corporation (NYSE) and served as the president and chief operating officer of Meridian for over 20 years. Mr. Mayell received his Bachelor of Science degree in mechanical engineering from Clarkston University.

 

Mr. Connally presently serves as chairman of the Texas Lt. Governor’s Energy Advisory Board. Mr. Connally has significant oil and gas experience, both as a practicing lawyer and as an executive. Mr. Connally was a founding shareholder of Texas South and GulfSlope, and a founding director of Nuevo Energy, Inc, Endeavor International Corp, and Pure Energy Group (where he also served as chief executive officer) and Pure Gas Partners. Mr. Connally was a law partner with Baker Botts, and received both his Bachelor of Arts and JD degrees from the University of Texas.

 

Mr. Gunderson has held land positions in Chevron, Murphy, Cities, Ladd and Meridian. Mr. Gunderson has been with Sydson since 2009. Mr. Gunderson received a BBA degree in petroleum land management from the University of Oklahoma.

 

Mr. Goldstein has served as a consultant to Sydson for over 10 years and has over 40 years of experience in Gulf Coast geology interpretation. Mr. Goldstein has served as a geologist with Amerada Hess, Houston Oil and Minerals and Meridian. Mr. Goldstein received his Bachelor of Arts – Geology degree from Rutgers University and received his Master’s degree in Geology from Florida State University.

 

Mrs. Alexander began her career in accounting with Arthur Anderson before moving into corporate accounting in 1985. She later opened her consulting practice focusing on the healthcare and oil and gas industries and has been Sydson’s lead accountant since 2010. Mrs. Alexander received her Bachelor in Accountancy degree from the University of Mississippi in 1980.

 

In connection with the asset acquisition, the Company acquired a variety of proprietary seismic data, computer equipment, furniture and fixtures and other office equipment.

 

The consideration payable by the Company to Sydson and affiliates was (i) 100 million shares of Company common stock to Michael J. Mayell, (ii) (A) $250,000 through a promissory note due March 5, 2017 and (B) $1,250,000 through the payment by the Company of Sydson’s obligations attributable to retained working interests in the oil and gas prospects conveyed to the Company, to be paid by the Company at the time it pays its associated costs with respect to its ownership interests in such oil and gas prospects, (iii) carried interests to casing point for its working interests on the first well in each of the West Tuleta prospect, Ray Field prospect, one prospect under negotiation, and up to four wells in the Bayou Bouillon prospect to be paid by the Company at the time it pays its associated costs with respect to its ownership interests in such oil and gas prospects (such costs to the Company are estimated to be approximately $968,000, depending upon many factors outside of our control), and (iv) a payment of $500,000 for the seismic data at one prospect under negotiation after completion of the first well in such prospect.

 

2

 

 

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 capital 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, and the porosity and 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.

 

For any given rate of production and volume of hydrocarbons recovered, 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-а-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 (October 31, 2016), 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 materials used in 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 oil and gas interests (we intend to operate many of our prospects) 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.

 

3

 

 

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 liabilities 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.

 

4

 

 

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 (“BOEM”), 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 relieves 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:

 

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.

 

Reduced disclosure about our executive compensation arrangements.

 

Not having to obtain non-binding advisory votes on executive compensation or golden parachute arrangements.

 

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 subject to the reporting requirements of Section 14 and 16 of the Exchange Act, 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 and acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business) 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 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, many of which companies 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.

 

5

 

 

Employees

 

As of February 13, 2017, we have five employees and three consultants.

 

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, we changed our business to an oil and gas company focused primarily on properties in the Gulf Coast Region.

 

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 change of 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.”

 

In January 2017, we issued Mr. Mayell 100,000,000 shares of common stock in connection with the Sydson transaction, and Mr. Mayell was appointed president, chief executive officer and a director. Mr. Connally was appointed as chairman of the board and entered into an employment agreement whereby we issued him 65,100,000 shares of common stock. Mr. Askew resigned as an executive officer and as a director and entered into a consulting agreement pursuant to which he was issued 27,000,000 shares of common stock.

 

General

 

Our address is 4550 Post Oak Place Dr., Suite 300, Houston, TX 77027 and our telephone number is (713) 820-6300. As of February 13, 2017, our corporate website is under construction at Texasouth.com and is expected to be online in March 2017. Our SEC filings are accessible 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.  RISK FACTORS

 

Risks Related to Our Business and Financial Condition

 

We have no proved reserves as of October 31, 2016, and our planned drilling operations may not yield any oil or gas in commercial quantity or quality.

 

We have no proved reserves as of October 31, 2016. While, based on available seismic and geological information, we believe the potential presence of oil or gas exists, to date we have not commenced drilling on our prospects. Some of our current prospects may require additional seismic data, including reprocessing and interpretation. Even when properly used and interpreted, seismic data and visualization techniques are only tools used to assist geoscientists in identifying structures and hydrocarbon indicators and do not enable the interpreter to have certainty as to whether hydrocarbons are, in fact, present in those structures. We do not know if any such prospect will contain oil or gas in sufficient quantities or quality to recover drilling and completion costs or to be economically viable. Even if oil or gas is found on our prospects, development, facility construction and transportation costs may prevent such prospects from being economically viable. Accordingly, there is no assurance we will ever report proved reserves in our SEC filings.

 

Areas that we decide to drill may not yield oil and natural gas in commercial quantities or quality, or at all.

 

As of October 31, 2016, we currently own seven offshore prospects in the Gulf of Mexico in conjunction with GulfSlope, in water depths between 300’ and 1,000’. The Company owns 20% working interest in five of the offshore prospects and currently a 70.7% working interest in two of the prospects that have shallow oil potential above 5,000’. 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. Additionally, as of February 13, 2017, we own onshore oil and gas interests in Louisiana and Texas and have certain rights to acquire more interests. 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. 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 and we may be forced to curtail operations.

 

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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.

 

As of February 13, 2017, we believe that we have sufficient cash on hand (or expected to be available) to fund near-term operations. We have budgeted required capital expenditures and other operating expenses during calendar 2017 of approximately $6 million. These estimates are projections only and will vary depending upon a number of factors, including timing of and actual drilling operations commenced and maintained, completion and transportation costs, bonding and insurance costs, seismic expenses, other customary and ordinary drilling costs that are difficult to estimate, farm-in and farm-out arrangements, and ability to attract partners that are willing to bear some or all of our portion of the costs of conducting exploration drilling activities on offshore prospects. Additionally, depending upon the execution of our business plan, we may determine to acquire additional leasehold interests and fund the acquisition of additional seismic data and seismic processing. All of these expenditures will be funded through future best-efforts equity offerings, debt offerings or a combination of both.

 

Of the $6 million of budgeted expenditures in calendar 2017, approximately $2.5 million are expected to cover salaries, consulting and professional services, and required working capital needs.

 

The proposed expenditures for the calendar year 2017 are subject to change based on the execution of our business plan, any potential competition for leasehold interests and our ability to obtain additional funding. This represents our current best estimate of our capital needs through December 31, 2017. We currently do not anticipate that any drilling activity will commence on any offshore prospects until late calendar year 2017.

 

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 2016 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, 2016, of $8,602,570. Further losses are anticipated as we continue in the development stage of our business. We will be dependent upon the raising of additional capital through placement of our equity and/or debt securities in order to implement our business plan. There can be no assurance that we 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 and our working interests onshore), 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 debt or equity securities for cash. During the fiscal year ended October 31, 2016, the Company received funds of $1,417,500 for stock subscriptions at $0.02 per share. Subsequent to October 31, 2016 through February 6, 2017, the Company sold 11,500,000 shares of its common stock at $0.02 per share for cash proceeds of $230,000.

 

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 will require additional funds for fiscal 2017. 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. Mayell, our sole officer and director.

 

Investors in our common stock must rely upon the ability, expertise, judgment and discretion of Mr. Mayell, our chief executive officer. The loss of Mr. Mayell 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. Mayell 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. Mayell.

 

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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 we intend to engage in the drilling, development, and production of oil and natural gas from our working interests onshore and our contractual rights to working interests offshore. 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 in calendar 2017. We will need to raise significant additional funds in order to fully execute our business strategy. 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 our prospects 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 working interests and/or contractual rights to working interests 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, 2016, we had an accumulated deficit of $8,602,570. We had nominal revenues in fiscal year 2016 and do not anticipate receiving significant revenues in fiscal year 2017, unless we are successful in developing economically recoverable oil or gas reserves with respect to certain of our onshore working interests. We expect that our operating expenses will increase in future periods. We expect continued but diminishing losses in fiscal year 2017.

 

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 Texas, Louisiana, and the Gulf of Mexico. Larger companies have the ability to manage their risk by diversification. However, we lack substantial 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 more 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 to enter into strategic relationships, which may take the form of working interest acquisitions, joint ventures with other private parties 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 oil and gas interests are high worldwide. Other oil and gas companies with greater resources may compete with us in acquiring oil and gas interests. 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 effectively.

 

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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. While our recent transaction with Sydson is an intended step in this direction, we still cannot assure that we will be able to:

 

expand our systems effectively or efficiently or in a timely manner;

 

optimally allocate our human resources; or

 

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.

 

Any change to government regulation/administrative practices may have a negative impact on our ability to operate and profitability.

 

The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency impacting any jurisdiction where we might conduct our business activities, including the BOEM, may be changed, applied or interpreted in a manner which may fundamentally alter the ability of the Company to conduct business. The actions, policies or regulations, or changes thereto, of any government body or regulatory agency or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate profitably. Additionally, certain bonding and/or insurance may be required in jurisdictions in which we chose to have operations, increasing our costs to operate.

 

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 revenue 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:

 

changes in global supply and demand for oil and natural gas by both refineries and end users;

 

the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;

 

the price and volume of imports of foreign oil and natural gas;

 

political and economic conditions, including embargoes, in oil-producing countries or affecting other oil-producing activity;

 

the level of global oil and gas exploration and production activity;

 

the level of global oil and gas inventories;

 

weather conditions;

 

technological advances affecting energy consumption;

 

domestic and foreign governmental regulations and taxes;

 

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;

 

the introduction, price and availability of alternative forms of fuel to replace or compete with oil and natural gas;

 

import and export regulations for LNG and/or refined products derived from oil and gas production from the US;

 

speculation in the price of commodities in the commodity futures market;

 

the availability of drilling rigs and completion equipment; and

 

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 during the last three years has seen WTI oil prices drop from a high of $107.26 on June 20, 2014, to a price dipping below $27 in intra-day trading on January 20, 2016. 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 our 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 developmental and 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 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 offshore oil and gas interests.

 

While we intend to be the operator with respect to our onshore drilling operations, if and when our offshore prospects proceed to drilling, third parties will act as the operators and control the drilling and operating activities to be conducted on our offshore properties. Therefore, we may have limited control over certain decisions related to activities on our offshore 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.

 

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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 a limited market for our common stock and no increased market for our common stock may develop in the future. As a result, our stock price as quoted in the over-the-counter market 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 over-the-counter market. 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 Articles 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

 

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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.

 

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ITEM 2.  PROPERTIES

 

Office Space

 

We lease 4,360 square feet of office space pursuant to a lease that expires in December 2019, with lease obligations at market rate. We own limited office equipment, office furniture, and computer equipment.

 

Oil and Gas Properties

 

In March 2014, we entered into a farm out letter agreement with GulfSlope relating to certain prospects GulfSlope bid on at the Central Gulf of Mexico Lease Sale 231, located within 2.2 million acres of 3-D seismic licensed and interpreted by GulfSlope. Under the terms of the farm-out letter agreement, as amended in September 2015, we acquired contractual rights to a 20% working interest in five prospects for $10,000,000. We have agreed to pay our 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 future joint operating agreements with the eventual participants in the prospects, including us.

 

In May 2016, we entered into a letter of intent with GulfSlope that sets out the terms and conditions of a farm-out arrangement to develop certain Shallow Prospects located on offshore Gulf of Mexico blocks currently leased by GulfSlope. We own a 70.7% working interest in the Shallow Prospects (with a third party owning a 16.8% working interest and GulfSlope owning a 12.5% working interest) which we acquired in exchange for (i) cash payments of $400,000, (ii) the payment of annual rental obligations of $63,147, and (iii) the agreement to fund, or cause to be funded, the costs for the drilling of two shallow wells to be commenced no later than December 31, 2017. GulfSlope is currently the Operator of the first two wells. Consummation of the transactions is subject to further negotiation, the execution and delivery by the parties of mutually acceptable definitive agreements to include a participation agreement and the joint operating agreement, and the satisfaction of certain additional conditions.

 

In January 2017, the Company entered into an asset purchase agreement with Sydson, where Sydson assigned to us certain onshore oil and gas assets and interests, including:

 

In the Bayou Bouillon Field, St. Martin and Iberville Parishes, Louisiana, we acquired a 37.5% working interest in the Sugarberry South Project comprising 420 acres with a net revenue interest of 70%. The property has two existing wells which have tested at over 400 BOPD combined from two (2) productive zones above 2,100’ with an additional shallower zone behind pipe containing approximately 30’ of oil pay and almost 60’ of gas pay. We expect to install production facilities and drill additional development wells in this fault block and to drill up to three exploratory wells in adjacent fault blocks targeted in the same zones. Through the Sydson transaction, we also are a party to letters of intent to acquire up to a 45% working interest in an additional 1,000+ acres in the Bayou Bouillon area based on a proprietary 55 square mile 3-D seismic survey that demonstrates updip potential in existing reservoirs at about 10,000’. Our partner in the Bayou Bouillon project, and the owner of a 50% working interest in the Bayou Bouillon acreage, is Thyssen Petroleum, USA, a privately held independent oil and gas exploration and production company based in Houston, Texas and Monaco, France.

 

In Texas, we acquired a 50% working interest in the undrilled acreage above 4,500’ in the West Tuleta Field, Bee County, Texas comprised of approximately 1,800 gross acres and 900 net acres with a net revenue interest of approximately75%. The primary drilling objectives are the Vicksburg and Hockley sands which are structurally high on this acreage.

 

In the adjacent Ray Field, also in Bee County, Texas, we acquired a 50% working interest in the undrilled, acreage on the Walton, Campbell, and Ray leases comprising approximately 75 gross acres with a net revenue interest of approximately 75%. The primary drilling objectives on this acreage are also the Vicksburg and Hockley sands updip to prior production, also above 3,700’.

 

In other areas of Southeast Texas, we acquired an interest in a proprietary 85 square mile 3-D seismic survey targeting Lower Wilcox Sands at approximately 10,000’. There are eight currently defined and mapped prospects in which we intend to acquire leases that are apparent on the seismic data and match the geologic setting of three existing Lower Wilcox fields within the boundaries of the survey.

 

Northwest of that survey, we intend to acquire leases covering approximately 1,000 acres for horizontal projects above 6,000’ in the Austin Chalk and Buda Lime formation. These projects are adjacent to substantial prior production and contain both conventional and unconventional oil targets.

 

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.

 

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ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

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 OTCPK 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 OTCPK may not reflect an actual or perceived value.

 

The following table sets forth the approximate high and low bid prices for our common stock as reported by the OTCPK for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

Period   High Bid     Low Bid  
                 
August 1, 2016 through October 31, 2016   $ 0.07     $ 0.04  
May 1, 2016 through July 31, 2016     0.04       0.03  
February 1, 2016 through April 30, 2016     0.05       0.04  
November 1, 2015 through January 31, 2016     0.08       0.05  
                 
August 1, 2015 through October 31, 2015   $ 0.08     $ 0.03  
May 1, 2015 through July 31, 2015     0.26       0.08  
February 1, 2015 through April 30, 2015     0.28       0.20  
November 1, 2014 through January 31, 2015     0.40       0.25  

 

Holders

 

The number of record holders of the Company’s common stock, as of February 6, 2017, is approximately 131.

 

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

 

On January 3, 2017, the Company issued an aggregate of 14,250,000 shares of common stock for services.

 

On January 4, 2017, the Company issued 100,000,000 shares of common stock pursuant to the Asset Purchase Agreement to Mr. Mayell.

 

On January 5, 2017, the Company issued an aggregate of 92.1 million shares of common stock pursuant to an executive officer and consultant.

 

On January 18, 2017, the Company issued an aggregate of 6,200,000 shares to certain employees and two consultants.

 

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.  SELECTED FINANCIAL DATA

 

Not required for smaller reporting companies.

 

15

 

 

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. This management’s discussion and analysis of our financial condition and results of operations should be read 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

 

In March 2014, we entered into a farm out letter agreement with GulfSlope relating to certain prospects GulfSlope bid on at the Central Gulf of Mexico Lease Sale 231, located within 2.2 million acres of 3-D seismic licensed and interpreted by GulfSlope. Under the terms of the farm-out letter agreement, as amended in September 2015, we acquired contractual rights to a 20% working interest in five prospects for $10,000,000. We have agreed to pay our proportionate share of the net rental costs related to the prospects.

 

In May 2016, we entered into a letter of intent with GulfSlope that sets out the terms and conditions of a farm-out arrangement to develop certain Shallow Prospects located on offshore Gulf of Mexico blocks currently leased by GulfSlope. We own a 70.7% working interest in the Shallow Prospects (with a third party owning a 16.8% working interest and GulfSlope owning a 12.5% working interest) in exchange for (i) cash payments of $400,000, (ii) the payment of annual rental obligations of $63,147, and (iii) the agreement to fund or cause to be funded the costs for the drilling of two shallow wells to be commenced no later than December 31, 2017. GulfSlope is currently the Operator of the first two wells. Consummation of the transactions is subject to further negotiation, the execution and delivery by the parties of mutually acceptable definitive agreements to include a participation agreement and the joint operating agreement, and the satisfaction of certain additional conditions.

 

In January 2017, the Company entered into an asset purchase agreement with Sydson, where Sydson assigned to us certain onshore oil and gas assets and interests and certain tangible assets and additionally, certain employees and a consultant of Sydson have agreed to become employees and a consultant of the Company. The oil and gas assets include the following:

 

In the Bayou Bouillon Field, St. Martin and Iberville Parishes, Louisiana, we acquired a 37.5% working interest in the Sugarberry South Project comprising 420 acres with a net revenue interest of 70%. The property has two existing wells which have tested at over 400 BOPD combined from two (2) productive zones above 2,100’ with an additional shallower zone behind pipe containing approximately 30’ of oil pay and almost 60’ of gas pay. We expect to install production facilities and drill additional development wells in this fault block and to drill up to three exploratory wells in adjacent fault blocks targeted in the same zones. Through the Sydson transaction, we also are a party to letters of intent to acquire up to a 45% working interest in an additional 1,000+ acres in the Bayou Bouillon area based on a proprietary 55 square mile 3-D seismic survey that demonstrates updip potential in existing reservoirs at about 10,000’. Our partner in the Bayou Bouillon project, and the owner of a 50% working interest in the Bayou Bouillon acreage, is Thyssen Petroleum, USA, a privately held independent oil and gas exploration and production company based in Houston, Texas and Monaco, France.

 

In Texas, we acquired a 50% working interest in the undrilled acreage above 4,500’ in the West Tuleta Field, Bee County, Texas comprised of approximately 1,800 gross acres and 900 net acres with a net revenue interest of approximately75%. The primary drilling objectives are the Vicksburg and Hockley sands which are structurally high on this acreage to historic downdip production from these sands totaling over 500,000 BO.

 

In the adjacent Ray Field, also in Bee County, Texas, we acquired a 50% working interest in the undrilled, acreage on the Walton, Campbell, and Ray leases comprising approximately 75 gross acres with a net revenue interest of approximately 75%. The primary drilling objectives on this acreage are also the Vicksburg and Hockley sands updip to prior production, also above 3,700’.

 

In other areas of Southeast Texas, we acquired an interest in a proprietary 85 square mile 3-D seismic survey targeting Lower Wilcox Sands at approximately 10,000’. There are eight currently defined and mapped prospects in which we intend to acquire leases that are apparent on the seismic data and match the geologic setting of three existing Lower Wilcox fields within the boundaries of the survey.

 

Northwest of that survey, we intend to acquire leases covering approximately 1,000 acres for horizontal projects above 6,000’ in the Austin Chalk and Buda Lime formation. These projects are adjacent to substantial prior production and contain both conventional and unconventional oil targets.

 

There is no assurance that viable oil and gas reserves will ever be discovered on our acreage or our prospects.

 

16

 

 

The Company has incurred accumulated losses for the period from inception to October 31, 2016 of approximately $8,602,570. 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, 2016, the Company had $502,893 of cash on hand. As of the date of this Annual Report, we will require additional funds for the balance of fiscal year 2017. 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 GulfSlope common stock, 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, 2016, the Company recorded a realized loss of $218,000 to adjust the investment securities to fair market value. The GulfSlope shares were sold in February 2016 to a third party for $50,000.

 

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, 2016, the Company had net operating loss carryforwards of approximately $5,576,000 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.

 

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.

 

17

 

 

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, 2016, 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, 2016 compared to October 31, 2015

 

We had revenues of $7,299 and $0 during the years ended October 31, 2016 and October 31, 2015. General and administrative expenses were $1,024,672 for the year ended October 31, 2016, compared to $759,490 for the year ended October 31, 2015. The increase in general and administrative expenses of approximately $300,000 was primarily attributed to an increase in consulting fees, compensation, professional fees, and travel expenses.

 

We had a net loss of $1,817,592 for the year ended October 31, 2016, compared to a net loss of $945,687 for the year ended October 31, 2015. The increase in net loss of approximately $900,000 was due to a $300,000 increase in general and administrative expenses, and increase in interest expense of approximately $200,000, a $200,000 impairment recorded on the mineral interests sold, and an approximate $200,000 loss realized on the 5 million shares of GulfSlope common stock sold in February 2016. For the year ended October 31, 2015, we recorded other comprehensive loss of $715,000 for a decrease in the market value of the 5 million shares of GulfSlope common stock.

 

The basic and diluted loss per share for the years ended October 31, 2016 and October 31, 2015 was $(0.00) each year.

 

As of October 31, 2016, the Company’s cash balance was $502,893, compared to a cash balance of $2,135 as of October 31, 2015. As of October 31, 2016, the Company’s assets consisted of cash of $502,893, prepaid expenses of $21,050, a note receivable of $47,138 and mineral interests and oil and gas property of $10,206,064. As of October 31, 2015, the Company’s assets consisted of cash of $2,135, prepaid expenses of $3,948, investment securities of $235,000 and mineral interests and oil and gas property of $10,375,955.

 

Cash flow from Operating Activities

 

During the year ended October 31, 2016, we used cash of $838,539 for operating activities as compared to a use of cash of $291,310 during the year ended October 31, 2015. The increase in cash used for operating activities during the year was primarily due to the increase in general and administrative expenses incurred during the year.

 

Cash flow from Investing Activities

 

During the year ended October 31, 2016, we received $50,000 on the sale of the GulfSlope common stock and used $63,147 to pay leases on mineral interests. During the year ended October 31, 2015, we used $1,805,955 to purchase contractual rights for working interests in various prospects in an amended farm-out agreement with GulfSlope entered into in September 2015.

 

Cash flow from Financing Activities

 

During the year ended October 31, 2016, we received $1,352,444 related to the sale of the Company’s common stock and financing activities compared with $2,014,918 from financing activities during the year ended October 31, 2015.

 

Liquidity and Capital Resources

 

As of October 31, 2016, we had a cash balance of $502,893 and a working capital deficit of $1,616,323. Our net loss of $1,817,592 in the year ended October 31, 2016 was mostly funded by proceeds raised from equity financings.

 

As of February 13, 2017, we believe that we have sufficient cash on hand (or expected to be available) to fund near-term operations. We have budgeted required capital expenditures and other operating expenses during calendar year 2017 of approximately $6 million. These estimates are projections only and will vary depending upon a number of factors, including timing of and actual drilling operations commenced and maintained, completion and transportation costs, bonding and insurance costs, seismic expenses, other customary and ordinary drilling costs that are difficult to estimate, farm-in and farm-out arrangements, and ability to attract partners that are willing to bear some or all of our portion of the costs of conducting exploration drilling activities on offshore prospects. Additionally, depending upon the execution of our business plan, we may determine to acquire additional leasehold interests and fund the acquisition of additional seismic data and seismic processing. All of these expenditures will be funded through future best-efforts equity offerings, debt offerings or a combination of both.

 

18

 

 

Of the $6 million of budgeted expenditures for calendar 2017, approximately $2.5 million are expected to cover salaries, consulting and professional services, and required working capital needs.

 

The proposed expenditures for the calendar year 2017 are subject to change based on the execution of our business plan, any potential competition for leasehold interests and our ability to obtain additional funding. This represents our current best estimate of our capital needs through December 31, 2017. We currently anticipate onshore drilling activity to commence on or before May 1, 2017. We currently do not anticipate that any drilling activity will commence on any offshore prospects until late calendar year 2017.

 

We will need to raise additional funds to cover planned 2017 expenditures, as well as any additional expenditures that we may encounter in those years. 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. The failure to raise sufficient capital could cause us to cease operations.

 

Off-Balance Sheet Arrangements

 

As of October 31, 2016, 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

 

We have reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on our results of operation, financial position or cash flows. With the exception of the pronouncements listed below, these recently issued pronouncements are not expected to have a material impact on our financial position, results of operations, or cash flows.

 

In May 2014, the FASB issued its final standard on revenue from contracts with customers. The standard, issued as ASU No. 2014-09: Revenue from Contracts with Customers (Topic 606) by the FASB, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” ASU 2014-09 becomes effective for reporting periods (including interim periods) beginning after December 15, 2017. Early application is permitted for reporting periods (including interim periods) beginning after December 15, 2016. This new standard permits the use of either the retrospective or cumulative effect transition method. Because we have no active revenues, the new guidance is not expected to have a material impact on our financial statements and related disclosures.

 

In August 2014, the FASB issued Accounting Standard Update No. 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) which requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, this standard provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early application is permitted. We are currently evaluating the accounting impact that this pronouncement will have on our financial statements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required for smaller reporting companies.

 

19

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Texas South Energy, Inc.

Financial Statements

October 31, 2016

 

TABLE OF CONTENTS

 

  Page
Report of Independent Registered Public Accounting Firm F-2
   
Balance Sheets as of October 31, 2016 and 2015 F-3
   
Statements of Operations and Comprehensive Loss for the Years Ended October 31, 2016 and 2015 F-4
   
Statements of Stockholders’ Equity for the Years ended October 31, 2016 and October 31, 2015 F-5
   
Statements of Cash Flows for the Years Ended October 31, 2016 and 2015 F-6
   
Notes to the Financial Statements F-7

 

 F- 1

 

 

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 and Stockholders of

Texas South Energy, Inc.

Houston, Texas

 

We have audited the accompanying balance sheets of Texas South Energy, Inc. (the “Company”) as of October 31, 2016 and 2015, and the related statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year period ended October 31, 2016 and 2015. 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, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the two-year period ended October 31, 2016 and 2015 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 2017 raise substantial doubt about its ability to continue as a going concern. The 2016 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 13, 2017

 

 F- 2

 

 

Texas South Energy, Inc.

BALANCE SHEETS

 

  October 31,
2016
    October 31,
2015
 
ASSETS                
                 
CURRENT ASSETS                
Cash   $ 502,893     $ 2,135  
Prepaid expenses     21,050       3,948  
Investment securities – available for sale           235,000  
Note receivable     47,138        
TOTAL CURRENT ASSETS     571,081       241,083  
                 
Oil and gas properties, undeveloped     10,206,064       10,375,955  
TOTAL ASSETS   $ 10,777,145     $ 10,617,038  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                 
CURRENT LIABILITIES                
Accounts payable   $ 20,002     $ 5,479  
Accrued expenses     399,344       191,831  
Accrued expenses – related party     15,906       475,125  
Notes payable     1,700,000       1,100,000  
Due to related party     52,152       70,070  
TOTAL CURRENT LIABILITIES     2,187,404       1,842,505  
                 
 Notes payable – long term           700,000  
                 
TOTAL LIABILITIES   $ 2,187,404     $ 2,542,505  
                 
COMMITMENTS AND CONTINGENCIES                
                 
STOCKHOLDERS’ EQUITY                
Preferred stock                
50,000,000 shares preferred stock authorized, none issued and outstanding            
Common stock                
950,000,000 shares common stock authorized, $0.001 par value, 541,990,670 and 362,215,670 shares of common stock issued and outstanding, for October 31, 2016 and 2015, respectively     541,990       362,215  
Additional paid-in capital     16,650,321       13,233,296  
Additional paid-in capital – shares to be issued           1,297,000  
Accumulated other comprehensive income           (33,000 )
Accumulated deficit     (8,602,570 )     (6,784,978 )
Total stockholders’ equity     8,589,741       8,074,533  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 10,777,145     $ 10,617,038  

 

The accompanying notes are an integral part of these financial statements

 

 F- 3

 

 

Texas South Energy, Inc.

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

    Year ended
October 31,
2016
    Year ended
October 31,
2015
 
                 
REVENUE   $ 7,299     $  
                 
EXPENSES                
Impairment on mineral interests     200,000      
General & administrative expenses     1,024,672     759,490
                 
LOSS FROM OPERATIONS     (1,217,373 )     (759,490 )
                 
Interest expense     382,219     186,197
Loss on securities     218,000      
NET LOSS   $ (1,817,592 )   $ (945,687 )
                 
Other comprehensive loss:                
Unrealized loss on securities available for sale           715,000
Total comprehensive loss   $ (1,817,592 )   $ (1,660,687 )
                 
NET LOSS PER COMMON SHARE                
Basic and diluted   $ (0.00 )   $ (0.00 )
                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING                
Basic and diluted     457,426,462       362,215,670  

 

The accompanying notes are an integral part of these financial statements

 

 F- 4

 

 

Texas South Energy, Inc.

STATEMENTS OF STOCKHOLDERS’ EQUITY

 

    Common Stock                                          
    Shares     Amount    

Additional
Paid-in Capital

   

Additional Paid-in
Capital Shares
to be issued

   

Accumulated Other
Comprehensive
Income

   

Accumulated
Deficit

    Total  
                                                         
Balance, October 31, 2014     362,215,670     $ 362,215     $ 13,231,996     $     $ 682,000     $ (5,839,291 )   $ 8,436,920  
                                                         
Imputed Interest                 1,300                         1,300  
                                                         
Stock to be issued                       1,297,000                   1,297,000  
Securities available for sale - marked to fair value                             (715,000 )           (715,000 )
Net loss for the year ended October 31, 2015                                   (945,687 )     (945,687 )
Balance, October 31, 2015     362,215,670       362,215       13,233,296       1,297,000       (33,000 )     (6,784,978 )     8,074,533  
                                                         
Imputed Interest                 1,300                         1,300  
Stock issued for cash     135,725,000       135,725       2,578,775       (1,297,000 )                 1,417,500  
Stock issued for services     16,550,000       16,550       314,450                         331,000  
Stock issued for accrued compensation     14,000,000       14,000       266,000                         280,000  
Stock issued to extinguish other debt     13,500,000       13,500       256,500                         270,000  
Securities available for sale – marked to fair value                             (121,500 )           (121,500 )
Securities sold                             154,500             154,500  
Net loss for the year ended October 31, 2016                                   (1,817,592 )     (1,817,592 )
Balance, October 31, 2016     541,990,670     $ 541,990     $ 16,650,321     $     $     $ (8,602,570 )   $ 8,589,741  

 

The accompanying notes are an integral part of these financial statements

 

 F- 5

 

 

Texas South Energy, Inc.

STATEMENTS OF CASH FLOWS

                 
    Year ended October 31,  
    2016     2015  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net loss   $ (1,817,592 )   $ (945,687 )
Adjustments to reconcile net loss to net cash used in operating activities                
Loss on securities available for sale     218,000        
Impairment expense     200,000        
Non-cash interest     1,300       101,300  
Amortization of debt discount           36,479  
Common stock paid for rent expense     11,000        
Common stock paid for interest expense     200,000        
Stock compensation     120,000        
Changes in operating assets and liabilities:                
Change in prepaid expenses     (17,102 )     (3,948 )
Change in accounts payable and accrued expenses     255,063       45,421  
Change in accrued expenses – related party     (9,208 )     475,125  
NET CASH USED IN OPERATING ACTIVITIES     (838,539 )     (291,310 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Sale of marketable securities     50,000        
Purchase of mineral interests           (1,805,955 )
Payments on mineral interests leases     (63,147 )      
NET CASH USED IN INVESTING ACTIVITIES     (13,147 )     (1,805,955 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from issuance of notes payable     153,000       700,000  
Repayment of notes payable     (153,000 )      
Proceeds from issuance of notes payable - related party     46,734       82,918  
Repayment of notes payable - related party     (64,652 )     (65,000 )
Issuance of demand promissory note receivable     (47,138 )      
Proceeds from sale of common stock (issued)     1,417,500        
Proceeds from sale of common stock (to be issued)           1,297,000  
NET CASH PROVIDED BY FINANCING ACTIVITIES     1,352,444       2,014,918  
                 
NET INCREASE/(DECREASE) IN CASH     500,758       (82,347 )
                 
CASH, BEGINNING OF PERIOD     2,135       84,482  
                 
CASH, END OF PERIOD   $ 502,893     $ 2,135  
                 
Supplemental cash flow information and noncash financing activities:                
Cash paid for:                
Interest   $     $  
Income taxes   $     $  
                 
Non-cash activity:                
Acquisition of oil and gas property   $ 400,000        
Sale of interest in oil and gas property   $ (400,000 )      
Issuance of common stock for related party debt   $ 280,000        
Issuance of common stock for accrued expense   $ 170,000        
Issuance of common stock for convertible debt   $ 100,000        
Sale of mineral property for debt, related party   $ (170,000 )      
Accruals for capital expenditures   $ 136,962        
Reclassification of advances to oil & gas property   $       8,200,000  
Unrealized loss on securities – available for sale   $     $ (715,000 )

 

The accompanying notes are an integral part of these financial statements

 

 F- 6

 

 

Texas South Energy, Inc.

NOTES TO THE FINANCIAL STATEMENTS

October 31, 2016

 

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 is engaged in the oil and gas business. The Company has limited operating history and has earned nominal revenues to date. The Company has devoted its activities to the acquisition of oil and gas assets. The Company has incurred losses since inception of $8,602,570 as of October 31, 2016.

 

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, 2016, the Company had net operating loss carryforwards of approximately $5,576,000 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 5 – Common Stock).

 

F- 7

 

 

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, 2016, the Company’s oil and gas properties consisted of capitalized acquisition costs for unproved mineral rights.

 

Investment Securities

 

Investment securities are composed of 5 million shares of GulfSlope common stock, 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, 2016, the Company recorded a realized loss of $218,000 to adjust the investment securities to fair market value. In February 2016, the GulfSlope shares were sold to a third party for $50,000.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued its final standard on revenue from contracts with customers. The standard, issued as ASU No. 2014-09: Revenue from Contracts with Customers (Topic 606) by the FASB, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” ASU 2014-09 becomes effective for reporting periods (including interim periods) beginning after December 15, 2017. Early application is permitted for reporting periods (including interim periods) beginning after December 15, 2016. This new standard permits the use of either the retrospective or cumulative effect transition method. Because the Company has no revenues, the new guidance is not expected to have a material impact on its financial statements and related disclosures.

 

In August 2014, the FASB issued Accounting Standard Update No. 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) which requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, this standard provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early application is permitted. The Company is currently evaluating the accounting impact that this pronouncement will have on its financial statements.

 

Other new pronouncements issued but not effective until after October 31, 2016 are not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.

 

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 as of October 31, 2016, of $8,602,570. The Company will be dependent upon the raising of additional capital through the best- efforts placement of its equity and/or debt securities in order to implement its business plan. There can be no assurance that the Company will be successful in either situation in order to continue as a going concern. 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.

 

F- 8

 

 

NOTE 4 – OIL & GAS PROPERTIES

 

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. In June 2016, the Company sold the Acreage and Acquired Interest to Mr. Askew, former director and chief executive officer, for $170,000, paid through the reduction of $170,000 owed to Mr. Askew by the Company.

 

On March 10, 2014, the Company entered into a farm out letter agreement with GulfSlope, relating to certain 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 as amended in September 2015, the Company acquired contractual rights to a 20% working interest in six prospects for aggregate consideration of $10,000,000, of which the last installment of $1,800,000 was paid in September 2015. During the year ended October 31, 2015, the Company had advanced $8,200,000 towards the acquisition of the mineral interests. The Company 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. The mineral interests are unproved as of October 31, 2016.

 

In May 2016, we entered into a letter of intent with GulfSlope that sets out the terms and conditions of a farm-out arrangement to develop certain shallow-depth oil and gas prospects located on offshore Gulf of Mexico blocks currently leased by GulfSlope. The shallow prospects are located above 5,100 feet vertical depth on the Vermilion Area, South Addition Block 378 (“Canoe Shallow”) and Vermilion Area, South Addition Block 375 (“Selectron Shallow”, and collectively with Canoe Shallow, “Shallow Prospects”). We own a 70.7% working interest in the Shallow Prospects (with a third party owning a 16.8% working interest and GulfSlope owning a 12.5% working interest) which we acquired in exchange for (i) cash payments of $400,000, (ii) the payment of annual rental obligations of $63,147, and (iii) the agreement to fund, or cause to be funded, the costs for the drilling of two shallow wells to be commenced no later than December 31, 2017. GulfSlope is currently the Operator of the first two wells. Consummation of the transactions is subject to further negotiation, the execution and delivery by the parties of mutually acceptable definitive agreements to include a participation agreement and the joint operating agreement, and the satisfaction of certain additional conditions.

 

NOTE 5 – COMMON STOCK

 

During September and October 2015, the Company received cash of $1,297,000 for the issuance of 64,850,000 shares at $0.02 per share. The shares were issued in December 2015.

 

In December 2015, the Company received cash of $105,000 for the issuance of 5,250,000 shares at $0.02 per share. The shares were issued in December 2015. In the same month, the Company issued 550,000 shares of common stock to a third party for services rendered. The stock was valued at $11,000.

 

In June 2016, (i) John B. Connally III forgave $170,000 in accrued consulting fees for 8.5 million shares of Company common stock, valued at $.02 per share, (ii) James M. Askew forgave $280,000 owed to him by the Company for 14.0 million shares of Company common stock, valued at $.02 per share, and (iii) the Company issued a third party 10.0 million shares of Company common stock in connection with a short-term line of credit.

 

In July 2016, the Company issued 11,500,000 shares of common stock, of which 6,000,000 was issued for services rendered valued at $0.02 per share, and 5,500,000 was issued for cash of $110,000 which proceeds from the private placement will be used for general corporate purposes.

 

In August 2016, the Company issued an aggregate of 50 million shares of its common stock at a purchase price of $0.02 per share receiving gross proceeds of $1 million. The Company used the proceeds from the private placement for general corporate purposes.

 

On June 17, 2016, the Company issued 625,000 shares of its common stock at a purchase price of $0.02 per share receiving gross proceeds of $12,500, which proceeds were used for general corporate purposes.

 

Effective July 29, 2016, the Company issued 7,000,000 shares of common stock at a purchase price of $0.02 per share receiving gross proceeds of $140,000, which proceeds were used for general corporate purposes.

 

Effective July 29, 2016, the Company issued 5,000,000 shares of common stock upon conversion of $100,000 principal amount of outstanding indebtedness at a conversion price of $0.02 per share.

 

On August 24, 2016, the Company issued 2,500,000 shares of common stock at a purchase price of $0.02 per share receiving gross proceeds of $50,000, which proceeds were used for general corporate purposes.

 

As of October 31, 2016, the Company has not granted any stock options.

 

F- 9

 

 

NOTE 6 – RELATED PARTY TRANSACTIONS

 

See Note 4 for a description of the sale of Acreage and Acquired Interest by the Company in June 2016 to Mr. Askew.

 

In October 2015, the Company entered into related party promissory note payable agreement with its director and chief executive officer James Askew for $82,918. The principal and related accrued interest is payable on demand and bears interest at a fixed rate of 5% per annum. As of October 31, 2015, the outstanding principal balance was $17,918 and is included in ‘Due to related party’ on the Company’s balance sheet. This amount was paid in full in fiscal 2016.

 

As of October 31, 2016 and 2015, 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. These advances are recorded within the ‘Due to related party’ line on the balance sheet.

 

In September 2013, the Company entered into an employment agreement with its chief executive officer James Askew that was amended to extend the term of the agreement to September 30, 2018. As of October 31, 2015, the Company had not paid Jim Askew $385,000 in accordance with his employment agreement and this amount is accrued within ‘Accrued expenses – related party’ on the balance sheet. During the year ended October 31, 2016, the Company made cash payments and issued Mr. Askew 14 million shares of common stock in exchange for $280,000 of the accrued compensation. Additionally, in accordance with the employment agreement, the Company paid Mr. Askew $420,000 for compensation and a $50,000 bonus for the fiscal year ended October 31, 2016,

 

During the years-ended October 31, 2015 and 2016, the Company’s chief executive officer and sole director paid numerous vendors on behalf of the Company. As of October 31, 2015 and 2016, the Company had $90,125 and $15,906, respectively, accrued within the ‘Accrued expenses – related party’ line on the balance sheet. This amount was paid in full in November 2016.

 

NOTE 7 – NOTES PAYABLE

 

Effective June 2014, we borrowed a principal amount of $1,000,000 from a third party, which promissory note bears interest at a fixed rate of 10% per annum. In June 2015, the maturity date was extended from June 30, 2015 to June 30, 2016 and the principal amount of the note was increased to $1,100,000. On March 11, 2016, the maturity date the of the $1,100,000 note payable balance was extended from June 31, 2016 to October 1, 2017. As of October 31, 2016 and 2015, the outstanding principal balance was $1,100,000 and $1,100,000 respectively and is included in ‘Notes payable’ as a current liability on the Company’s balance sheet.

 

In October 2015, the Company entered into a note payable agreement with an accredited investor for $700,000, and in July 2016 a principal amount of $100,000 of the note was converted into 5,000,000 shares of common stock. The note expires on October 1, 2017 and bears interest at a fixed rate of 10% per annum. As of October 31, 2015, the outstanding principal balance of $700,000 is included in ‘Notes payable – long term’ and as of October 31, 2016, the outstanding principal balance of $600,000 is included in “Notes payable” as a current liability on the Company’s balance sheet.

 

In October 2015 and November 2015, the Company entered into related party promissory notes payable agreements with its director and chief executive officer James Askew. In December 2015, the principal balances were paid in full by the Company (see Note 6 - Related Party Transactions).

 

NOTE 8 – NOTES RECEIVABLE

 

In October 2016, the Company loaned the principal amount of $47,138 to a third party under an interest free, demand promissory note agreement for the purpose of travel expenses. Subsequent to October 31, 2016, the note was further increased to $131,645.

 

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 carryforwards. 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 carryforward 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:

 

    October 31, 2016     October 31, 2015  
Federal income tax benefit at the statutory rate:                
Net loss   $ (616,000 )   $ (296,000 )
Change in valuation allowance     616,000       296,000  
Net benefit   $     $  

 

F- 10

 


The cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows:

 

  October 31, 2016     October 31, 2015  
Deferred tax attributed:                
Net operating loss carryover   $ 1,896,000     $ 1,280,000  
Less: valuation allowance     (1,896,000 )     (1,280,000 )
Net deferred tax asset   $     $  

 

At October 31, 2016, the Company had an unused net operating loss carryforward approximating $5,576,000 that is available to offset future taxable income; the loss carryforward 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 $0.01 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. In February 2016, the Company sold 5,000,000 shares of GulfSlope common stock with a cost value of $268,000 for cash proceeds of $50,000 and recorded a realized loss of $218,000.

 

NOTE 11 – COMMITMENTS AND CONTINGENCIES

 

See Note 6 for a discussion of Mr. Askew’s employment agreement and the Company’s financial obligations with respect thereto.

 

On October 11, 2013, the Company entered into a consulting agreement with John B. Connally, III providing $10,000 cash compensation per month, which expired in December 2016. As of October 31, 2015, the Company owed Mr. Connally $110,000 in accrued compensation, which was paid as of October 31, 2016. During the fiscal year ended October 31, 2016 Mr. Connally was paid $120,000 in consulting fees and a $5,000 bonus.

 

NOTE 12 – SUBSEQUENT EVENTS

 

In December 2016, the Company issued an aggregate of 11,500,000 shares of its common stock at a purchase price of $0.02 per share receiving gross proceeds of $230,000, which proceeds were used for general corporate purposes.

 

In January 2017, the Company issued (i) an aggregate of 14,250,000 shares of common stock for services rendered, (ii) 100,000,000 shares of common stock pursuant to the asset purchase agreement to Mr. Mayell, (iii) an aggregate of 92.1 million shares of common stock pursuant to an executive officer and consultant, and (iv) an aggregate of 6,200,000 shares were issued to certain employees and two consultants.

 

F- 11

 

 

In January 2017, the Company entered into an asset purchase agreement with Sydson Energy, Inc. (“Sydson Energy”) and Sydson Resources, L.P. (“Sydson Resources” and collectively with Sydson Energy, “Sydson”), where Sydson assigned to us certain onshore oil and gas assets and interests and certain tangible assets and additionally, certain employees and a consultant of Sydson have agree to become employees and a consultant of the Company. Sydson is a private oil and gas company with land operations in Texas and Louisiana that has been in business since 1982. The oil and gas assets include the following:

  

In the Bayou Bouillon Field, St. Martin and Iberville Parishes, Louisiana, we acquired a 37.5% working interest in the Sugarberry South Project comprising 420 acres with a net revenue interest of 70%. The property has two existing wells which have tested at over 400 BOPD combined from two (2) productive zones above 2,100’ with an additional shallower zone behind pipe believed to contain approximately 30’ of oil pay and almost 60’ of gas pay. We expect to install production facilities and drill additional development wells in this fault block and to drill up to three exploratory wells in adjacent fault blocks targeted in the same zones. Through the Sydson transaction, we also are a party to letters of intent to acquire up to a 45% working interest in an additional 1,000+ acres in the Bayou Bouillon area based on a proprietary 55 square mile 3-D seismic survey that demonstrates updip potential in existing reservoirs at about 10,000’. The downdip wells in these same reservoirs have produced over 20 MMBO and 21 BCFG from 59 completions. Our partner in the Bayou Bouillon project, and the owner of a 50% working interest in the Bayou Bouillon acreage, is Thyssen Petroleum, USA, a privately held independent oil and gas exploration and production company based in Houston, Texas and Monaco, France.

 

In Texas, we acquired a 50% working interest in the undrilled acreage above 4,500’ in the West Tuleta Field, Bee County, Texas comprised of approximately 1,800 gross acres and 900 net acres with a net revenue interest of approximately75%. The primary drilling objectives are the Vicksburg and Hockley sands which are structurally high on this acreage to historic downdip production from these sands totaling over 500,000 BO.

 

In the adjacent Ray Field, also in Bee County, Texas, we acquired a 50% working interest in the undrilled, acreage on the Walton, Campbell, and Ray leases comprising approximately 75 gross acres with a net revenue interest of approximately 75%. The primary drilling objectives on this acreage are also the Vicksburg and Hockley sands updip to prior production, also above 3,700’.

 

In other areas of Southeast Texas, we acquired an interest in a proprietary 85 square mile 3-D seismic survey targeting Lower Wilcox Sands at approximately 10,000’. There are eight currently defined and mapped prospects in which we intend to acquire leases that are apparent on the seismic data and match the geologic setting of three existing Lower Wilcox fields within the boundaries of the survey.

 

Northwest of the survey, we intend to acquire leases covering approximately 1,000 acres for horizontal projects above 6,000’ in the Austin Chalk and Buda Lime formation. These projects are adjacent to substantial prior production and contain both conventional and unconventional oil targets.

 

The consideration payable by the Company to Sydson and affiliates was (i) 100 million shares of Company common stock to Michael J. Mayell, (ii) (A) $250,000 through a promissory note due March 5, 2017 and (B) $1,250,000 through the payment by the Company of Sydson’s obligations attributable to retained working interests in the oil and gas prospects conveyed to the Company, to be paid by the Company at the time it pays its associated costs with respect to its ownership interests in such oil and gas prospects, (iii) carried interests to casing point for its working interests on the first well in each of the West Tuleta prospect, Ray Field prospect, one prospect under negotiation, and up to four wells in the Bayou Bouillon prospect to be paid by the Company at the time it pays its associated costs with respect to its ownership interests in such oil and gas prospects, and (iv) a payment of $500,000 for the seismic data at one prospect under negotiation after completion of the first well in such prospect.

 

The Company entered into an employment agreement with Mr. Mayell on January 4, 2017 that terminates on December 31, 2019. Upon December 31 of each calendar year, commencing on December 31, 2017, the term shall be extended for one additional year, provided that neither the Company nor Mr. Mayell notify the other on or prior to 90 days before the applicable December 31 st date that either party does not intend to extend this agreement. The Company shall pay to Mr. Mayell a base salary of $420,000 per annum and Mr. Mayell shall be entitled to standard and customary benefits. Mr. Mayell has agreed to standard non-disclosure and non-competition provisions. Upon termination of Mr. Mayell by the Company other than for cause, Mr. Mayell is entitled to receive three years of his then compensation as severance.

 

The Company entered into an employment agreement with John B. Connally III to serve as chairman of the board that began on January 5, 2017 and terminates on December 31, 2019. Upon December 31 of each calendar year, commencing on December 31, 2017, the term shall be extended for one additional year, provided that neither the Company nor Mr. Connally notify the other on or prior to 90 days before the applicable December 31 st date that either party does not intend to extend this agreement. The Company shall pay to Mr. Connally a base salary of $420,000 per annum, issued him 65.1 million shares, and Mr. Connally shall be entitled to standard and customary benefits. Mr. Connally has agreed to standard non-disclosure provisions. Upon termination of Mr. Connally by the Company other than for cause, Mr. Connally is entitled to receive three years of his then compensation as severance.

 

James M. Askew resigned as an executive officer and director of Texas South in January 2017 and entered into a consulting agreement with the Company that began on January 5, 2017 and terminates on December 31, 2019, and such term shall be extended for an additional one-year period upon December 31 of each calendar year, commencing on December 31, 2017, provided that neither the Company nor consultant notify the other on or prior to 90 days before the applicable December 31 st that either party does not intend to extend this agreement. The Company shall pay to Mr. Askew $35,000 net per month and issued Mr. Askew 27 million shares of Company common stock. Upon termination of Mr. Askew by the Company other than for cause, Mr. Askew is entitled to receive three years of his then consulting compensation as severance.

 

F- 12

 

 

In November and December 2016, the Company paid Mr. Askew a bonus of $9,000 cash and $105,000 cash for compensation.

 

In November and December 2016, the Company paid bonuses and compensation to Mr. Connally aggregating $164,000.

 

F- 13

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

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, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 (“COSO”) in Internal Control Integrated Framework. Based on this evaluation, our management concluded that, as of October 31, 2016, 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. OTHER INFORMATION

 

On January 3, 2017, the Company issued an aggregate of 14,250,000 shares of common stock for services rendered, (reported in the Form 8-k filed on January 10, 2017 as 14,725,000 shares issued on January 3, 2016).

 

On January 4, 2017, the Company issued 100,000,000 shares of common stock pursuant to the Asset Purchase Agreement to Mr. Mayell, (reported in the Form 8-k filed on January 10, 2017 as occurring on January 4, 2016).

 

On January 5, 2017, the Company issued an aggregate of 92.1 million shares of common stock pursuant to an executive officer and consultant, (reported in the Form 8-k filed on January 10, 2017 as occurring on January 5, 2016).

 

On January 18, 2017, the Company issued an aggregate of 6,200,000 shares to certain employees and two consultants for services rendered.

 

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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.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

Identification of Directors and Executive Officers

 

Our executive officer and directors as of January 5, 2017, and their respective ages, position and biographical information are set forth below.

 

Name Age Title
Michael J. Mayell 69 Chief Executive Officer, Chief Financial Officer and Director
John B. Connally, III 70 Chairman of the Board

 

Mr. Mayell has served as our chief executive officer and director since January 2017 and he has over 45 years of experience in the oil and gas business. Mr. Mayell founded Sydson in 1982 and has served as an officer and director of Sydson since 1987. In 1985, Mr. Mayell co-founded the Meridian Resource Corporation (NYSE) and served as the president and chief operating officer of Meridian for over 20 years. Mr. Mayell began his career with Shell Oil Company in New Orleans, La. in the drilling and production engineering groups responsible for drilling and producing fields both onshore and offshore South Louisiana. Mr. Mayell received his Bachelor of Science degree in mechanical engineering from Clarkston University.

 

Mr. Connally presently serves as chairman of the Texas Lt. Governor’s Energy Advisory Board. Mr. Connally was a founding shareholder of Texas South and GulfSlope Energy, Inc., and a founding director of Nuevo Energy, Inc, Endeavor International Corp, and Pure Energy Group (where he also served as chief executive officer) and Pure Gas Partners. Mr. Connally was a law partner with Baker Botts, and received both his Bachelor of Arts and JD from the University of Texas. Mr. Connally has been involved in private business endeavors for over the last five years.

 

Key Employees and Consultants

 

Key employees and consultants as of January 5, 2017 are:

 

Mr. Gunderson has held land positions with public and independent producers including Chevron, Murphy, Cities, Ladd and Meridian Resources. Mr. Gunderson has been with Sydson since 2009. Mr. Gunderson received a BBA degree in petroleum land management from the University of Oklahoma. Mr. Gunderson is paid $180,000 per year and was issued 500,000 shares of common stock pursuant to his employment arrangement.

 

Mrs. Alexander began her career in accounting with Arthur Anderson before moving into corporate accounting in 1985. She later opened her consulting practice focusing on the healthcare and oil and gas industries and has been Sydson’s lead accountant since 2010. Mrs. Alexander received her Bachelor in Accountancy degree from the University of Mississippi in 1980. Ms. Alexander is paid $132,000 per year and was issued 500,000 shares of common stock pursuant to her employment arrangement.

 

Mr. Goldstein has served as a consultant to Sydson for over 10 years and has over 40 years of experience in Gulf Coast geology interpretation. Mr. Goldstein has served as a geologist with Amerada Hess, Houston Oil and Minerals and Meridian Resources. Mr. Goldstein received his Bachelor of Arts – Geology degree from Rutgers University and received his Master’s degree in Geology from Florida State University. Mr. Goldstein is paid $88.75 per hour for his consulting services and was issued 100,000 shares of common stock pursuant to his employment arrangement.

 

Mr. Askew, our former chief executive officer and director for over three years, is currently a key consultant to the Company.

 

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. 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, 2016. During the fiscal year ended October 31, 2016, the Board of Directors did not hold any meetings and acted by written consent.

 

Independent Directors

 

We currently do not 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.

 

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Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our directors, executive officers and beneficial owners of more than 10% of our common stock to file with the SEC reports of their holdings of, and transactions in, our common stock. Based solely upon our review of copies of such reports and written representations from reporting persons that were provided to us, we believe that our officers, directors and 10% stockholders complied with these reporting requirements with respect to our fiscal year ended October 31, 2016.

 

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.

 

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. EXECUTIVE COMPENSATION

 

Compensation to Officers of the Company

 

The following table contains compensation data for our named executive officers as of the fiscal years ended October 31, 2016 and 2015:

 

Summary Compensation Table
 

Name and Principal Position 

    Year   Salary     Bonus     Stock Awards     Stock Option Awards     All Other Compensation     Total  
James Askew     2016   $ 420,000     $ 50,000     $     $     $     $ 470,000  
CEO     2015   $ 420,000     $     $     $     $     $ 420,000  

 

Employment and Consulting Arrangements

 

The Company entered into an employment agreement with Mr. Mayell on January 4, 2017 that terminates on December 31, 2019. Upon December 31 of each calendar year, commencing on December 31, 2017, the term shall be extended for one additional year, provided that neither the Company nor Mr. Mayell notify the other on or prior to 90 days before the applicable December 31 st date that either party does not intend to extend this agreement. The Company shall pay to Mr. Mayell a base salary of $420,000 per annum and Mr. Mayell shall be entitled to standard and customary benefits. Mr. Mayell has agreed to standard non-disclosure and non-competition provisions. Upon termination of Mr. Mayell by the Company other than for cause, Mr. Mayell is entitled to receive three years of his then compensation as severance.

  

The Company entered into an employment agreement with John B. Connally III to serve as chairman of the board that began on January 5, 2017 and terminates on December 31, 2019. Upon December 31 of each calendar year, commencing on December 31, 2017, the term shall be extended for one additional year, provided that neither the Company nor Mr. Connally notify the other on or prior to 90 days before the applicable December 31 st date that either party does not intend to extend this agreement. The Company shall pay to Mr. Connally a base salary of $420,000 per annum, issued him 65.1 million shares, and Mr. Connally shall be entitled to standard and customary benefits. Mr. Connally has agreed to standard non-disclosure provisions. Upon termination of Mr. Connally by the Company other than for cause, Mr. Connally is entitled to receive three years of his then compensation as severance.

 

Mr. Askew resigned as an executive officer and director of Texas South in January 2017 and entered into a consulting agreement with the Company that began on January 5, 2017 and terminates on December 31, 2019, and such term shall be extended for an additional one-year period upon December 31 of each calendar year, commencing on December 31, 2017, provided that neither the Company nor consultant notify the other on or prior to 90 days before the applicable December 31 st that either party does not intend to extend this agreement. The Company shall pay to Mr. Askew $35,000 net per month and issued Mr. Askew 27 million shares of Company common stock. Upon termination of Mr. Askew by the Company other than for cause, Mr. Askew is entitled to receive three years of his then consulting compensation as severance.

 

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In January 2017, the Company entered into a two-year agreement with Ernest Miller to provide financial consulting services to the Company for up to 20 hours per month pursuant to which the Company paid Mr. Miller 5 million shares of Company common stock.

 

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, 2016.

 

Outstanding Equity Awards at Fiscal Year End

 

No unexercised options or warrants were held by any of our named executive officers at October 31, 2016.

 

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 the years ended 2016 and 2015, the director of the Company was not compensated for his services as director.

 

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 February 6, 2017, there were 766,040,670 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.

 

Name of Beneficial Owner   Number of Shares of Common Stock Beneficially
Owned
    Percentage of Class
Beneficially Owned
 
                 

Named Executive Officers and Directors: 

               
Michael J. Mayell     101,000,000       13.2 %
John B. Connally III     101,000,000       13.2 %
All directors & executive officers as a group (2 persons)     202,000,000       26.4 %
                 
5% or Greater Shareholders                
James M. Askew     101,000,000       13.2 %

 

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Description of Capital Stock

 

We are authorized to issue 950,000,000 shares of common stock, par value $0.001, of which 766,040,670 shares are issued and outstanding as of February 6, 2017. 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 articles 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.

 

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.

 

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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: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

In connection with the Sydson transaction, as disclosed in detail in Item 1, “Business – The Company,” the Company entered into employment agreements with Messrs. Mayell and Connally, and a consulting agreement with Mr. Askew, as disclosed in Item 11, “Executive Compensation-Employment and Consulting Agreements.”

 

In December 2016, the Company paid Mr. Askew a bonus of $9,000 cash. In November and December 2016, Mr. Askew was paid $105,000 in compensation pursuant to his employment agreement for the months of November 2016 through January 2017.

 

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In November and December 2016, the Company paid aggregate bonuses to Mr. Connally in the amount of $144,000 and consulting fees of $20,000. Mr. Connally was paid aggregate consulting fees of $120,000 per year for fiscal years 2015 and 2016 and a bonus of $5,00 during fiscal year 2016.

 

In October 2015, the Company entered into related party promissory note payable agreement with its director and chief executive officer James Askew for $82,918. The principal and related accrued interest is payable on demand and bears interest at a fixed rate of 5% per annum. As of October 31, 2015, the outstanding principal balance was $17,918 and is included in ‘Due to related party’ on the Company’s balance sheet. As of October 31, 2016, the note and accrued interest was paid in full.

 

During the year-ended October 31, 2015 and 2016, the Company’s chief executive officer and sole director paid numerous vendors on behalf of the Company. As of October 31, 2015 and 2016, the Company had $90,124 and $15,906, respectively, accrued within the ‘Accrued expenses – related party’ line on the balance sheet.

 

During the fiscal year ended 2013, Roxana Gloria Candela Calixto, a prior director, advanced the Company a total of $52,152. This balance remains at October 31, 2016.

 

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. In June 2016, the Company sold the Acreage and Acquired Interest to Mr. Askew for $170,000, paid through the reduction of $170,000 owed to Mr. Askew by the Company.

 

Members of the Company’s legal counsel, Brewer & Pritchard, P.C., own an aggregate of 6 million shares of common stock, issued for nominal consideration.

 

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, 2016 and 2015. LBB & Associates Ltd., LLP are our principal accountants for the years ended October 31, 2016 and 2015.

 

    2016     2015  
             
Total audit fees   $ 45,900     $ 42,000  

 

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.

 

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PART IV

 

ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

Exhibits. The following exhibits are filed as part of this Annual Report:

 

Exhibit No. Description
   
3.1 Amended and Restated Articles of Incorporation of Texas South Energy, Inc. incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 27, 2013.
3.2 Amended and Restated Bylaws of Texas South Energy, Inc. incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K filed November 12, 2013.
4.1 Common Stock Specimen incorporated by reference to Exhibit 10.1 of the Company’s Form 10-K filed February 13, 2014.
10.1* Employment Agreement, by and between the Company and James M. Askew incorporated by reference to Exhibit 10.1 of the Company’s Form 10-K filed February 13, 2014.
10.2 Consulting Agreement by and between the Company and John Connally incorporated by reference to Exhibit 10.1 of the Company’s Form 10-K filed February 13, 2-14.
10.3 Contract For Sale, dated effective January 22, 2014, incorporated by reference to Exhibit 10.1 of Form 8-K filed January 27, 2014.
10.4 Form of Subscription Agreement, incorporated by reference to Exhibit 10.1 of the Company’s Form 10-K filed February 13, 2014.
10.5 Farm-Out Letter Agreement, incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q filed March 21, 2014.
10.6 Note Agreement, as amended, incorporated by reference to Exhibit 10.2 of the Company’s Form 10-Q filed March 21, 2014.
10.7 Amendment No. 1 to Employment Agreement, incorporated by reference to Exhibit 10.3 of the Company’s Form 10-Q filed March 21, 2014.
10.8 Indemnification Agreement, incorporated by reference to Exhibit 10.4 of the Company’s Form 10-Q filed March 21, 2014.
10.9 Amendment No. 2 to Employment Agreement, incorporated by reference to Exhibit 10.3 of the Company’s Form 10-Q filed March 21, 2014
10.10 Amendment to Consulting Agreement by and between the Company and John Connally, incorporated by reference to Exhibit 10.1 of the Company’s Form 10-K filed February 13, 2014.
10.11 Purchase Agreement by and between the Company and Littleton E. Walker dated February 18, 2016.
10.12 Amendment of $1,100,000 Note to Extend Maturity.
10.13 Asset Purchase Agreement by and among Texas South Energy, Inc., Sydson Resources, L.P., and Sydson Energy, Inc., dated January 4, 2017, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed January 10, 2017
10.14* Employment Agreement by and between the Company and Michael J. Mayell dated January 4, 2017, incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed January 10, 2017.
10.15* Consulting Agreement by and between the Company and James M. Askew dated January 5, 2017, incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed January 10, 2017.
10.16* Employment Agreement by and between the Company and John B. Connally, III dated January 5, 2017, incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed January 10, 2017.
14.1 Code of Ethics, incorporated by reference to Exhibit 14.1 of the Company’s Form 10-K filed February 13, 2014.
31.1 (1) Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
32.1 (1) Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 18 U.S.C. Section 1350, adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 The following financial information from our Annual Report on Form 10-K for the year ended September 30, 2013 formatted in Extensible Business Reporting language (XBRL); (i) Condensed Balance Sheets, (ii) Condensed Statements of Operations, (iii) Condensed Statements of Cash Flows and (iv) Notes to the Condensed Financial Statements (2)
   
* 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.

 

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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 13, 2017 By: /s/ Michael J. Mayell
      Michael J. Mayell
     

Chief Executive Officer,

President, and Director 

 

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