The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(UNAUDITED)
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,
generating or acquiring oil and gas projects, drilling and operating the wells and producing the oil and gas reserves.
On January 11, 2017, pursuant to the laws of the State of Texas,
the Company formed Texas South Operating Company, Inc.as a wholly owned subsidiary of the Company. Texas South Energy, Inc. and
Texas South Operating Company, Inc. (collectively, the “Company”) now file consolidated financial statements effective
with the March 31, 2017 filing. The consolidated financial statements reflect our accounts after elimination of all significant
intercompany transactions and balances.
While the Company had previously established
a fiscal year end of October 31, on March 3, 2017 the Company adopted a year end of December 31. A transition 10-K was filed for
the period November 2016 through December 2016 to report the change in our year end.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Presentation
The accompanying unaudited consolidated
financial statements have been prepared in all material respects in accordance with United States generally accepted accounting
principles (“U.S. GAAP”) for interim financial information. Intercompany accounts and transactions are eliminated.
Pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), certain information and
footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed
or omitted. The accompanying unaudited consolidated financial statements have been prepared on the same basis as the audited financial
statements for the year ended October 31, 2016 and the transition report for November 1, 2016 through December 31, 2016. The exception
being that the 2016 financial statements were not consolidated with Texas South Operating Company, Inc. since the Company had not
yet been organized.
Because certain information and footnote
disclosures have been condensed or omitted, these unaudited consolidated financial statements should be read in conjunction with
the audited financial statements and notes thereto as of and for the year ended October 31, 2016, which are included in the Company’s
annual report for the year ended October 31, 2016 (the “2016 Annual Report”) and the transition report for the period
of November 1 through December 31, 2016. In management’s opinion, all normal and recurring adjustments considered necessary
for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included.
Management believes that the disclosures made in these unaudited consolidated financial statements are adequate to make the information
not misleading. Interim period operating results do not necessarily indicate the results that may be expected for any other interim
period or for the full fiscal year.
There have been no changes in the Company’s
significant accounting policies from those that were disclosed in the Company’s 2016 Annual Report or the transition report
for the two months ended December 31, 2016.
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.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued its final standard on revenue from contracts with customers. The standard, issued as Accounting
Standards Update (“ASU”) No. 2014-09:
Revenue from Contracts with Customers (Topic 606)
, 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 currently has such low revenues, the new guidance is not expected to have a material impact on its
financial statements and related disclosures.
In September 2015, FASB issued an accounting
standards update for “Business Combinations,” which requires that an acquirer recognize adjustments to provisional
amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.
We adopted this new guidance prospectively in the first quarter of 2016.
Other new pronouncements issued but not
effective until after June 30, 2017 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 operational costs in order to allow it to continue
as a going concern. The Company has accumulated losses as of June 30, 2017 of $11,307,403. The Company will be dependent upon the
raising of additional capital through the sale of its existing projects and/or 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.
NOTE 4 - OIL & GAS PROPERTIES
In January 2014, the Company entered into
a contract for sale with the owner of mineral interests in 86.69 acres in Lavaca County, Texas (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. During the six months ended June 30, 2016, the Company earned revenues
of $6,664 associated with these interests. In June 2016, the Company entered into a contract for sale with James M. Askew, an affiliate,
to sell its mineral interests in 86.69 acres in Lavaca County, Texas in which the Company owns a 37.5% interest in the Acreage’s
mineral rights, in consideration of Mr. Askew, former chief executive officer and sole director, forgiving $170,000 of indebtedness
owed to him. The Company recorded impairment expense of $200,000 associated with these interests.
In March 2014, the Company entered into
a farm out letter agreement with GulfSlope Energy, Inc. (“GulfSlope”), relating to certain 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.
In accordance with the agreement, the Company has paid its proportionate share of the net rental costs related to the prospects.
GulfSlope is the operator of record. The mineral interests are unproved as of June 30, 2017.
In May 2016, the Company entered into a
letter agreement with GulfSlope and paid $400,000 for the right to enter into mutually agreeable future definitive agreements to
provide for the participation by the Company in drilling one well on Vermilion Area, South Addition Block 378 (“Canoe Prospect”)
and one well on Vermilion Area South Addition Block 375 (“Selectron Prospect”). In June 2016, EnerGulf Resources Inc.
(“EnerGulf”) paid the Company $400,000 to participate in the Canoe Prospect and the Selectron Prospect. Subject to
the negotiation of future definitive agreements with GulfSlope and EnerGulf and financing being raised by the Company, it is expected
that operations shall commence on these prospects and the Company and EnerGulf shall participate in the drilling of one or more
wells to approximately 5,000’ MD/TVD on each of the Canoe Prospect and Selectron Prospect by the end of 2017.
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 agreed 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:
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In the Bayou Bouillon Field, St. Martin and Iberville Parishes, Louisiana, we were to acquire a 37.5% working interest in the Sugarberry South Project comprising 420 acres. However, Texas South was unable to obtain sufficient capital to fulfill certain requirements of the Purchase and Sale Agreement with Thyssen Petroleum for the Sugarberry South project related to earning additional acreage rights beyond the Sugarberry No. 6 well. The agreement has now been terminated except for Texas South’s rights to a 50% working interest in the Sugarberry No. 6 well. The Company is in discussion with Thyssen Petroleum on other farmout activity related to deeper zones at Bayou Bouillon.
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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.
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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’.
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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.
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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.
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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 F. 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.
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 valued at $845,000 and (ii) $250,000 through a promissory note originally due March 5, 2017, and was
amended to January 1, 2019.
In conjunction with the acquisition, the
Company agreed to pay $1,250,000 of Sydson’s future development costs attributable to its retained working interests in
the oil and gas prospects conveyed to the Company and carried interests to casing point for Sydson’s working interests
on the first well in each of the West Tuleta prospect, Ray Field prospect and the Wilinda prospect.
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The purchase price of this asset acquisition is summarized below:
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Furniture & Fixtures, Software, Equipment
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|
$
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35,556
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Deposit – office rent
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|
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8,340
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Prepaid expenses
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27,616
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Note Payable – insurance
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(6,822
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)
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Leasehold rights
|
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1,030,310
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|
Total purchase price
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|
$
|
1,095,000
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NOTE 5 - COMMON STOCK
The Company has 950,000,000 shares of common
stock authorized with a par value of $0.001. As of June 30, 2017 the Company has 781,290,670 shares of common stock issued and
outstanding. During the six months ended June 30, 2017, the Company sold 15,250,000 shares of stock at a price of $.02 per share
for a total of $305,000. The Company issued 112,550,000 shares of stock for services rendered valued between $0.005 and $0.00845,
including 65.1 million shares to Mr. Connally and 27 million shares to Mr. Askew. Mr. Mayell was issued 100,000,000 shares in January,
2017 in connection with the asset purchase from Sydson.
NOTE 6 - RELATED PARTY TRANSACTIONS
In September 2013, the Company entered
into a one-year employment agreement with its former director and chief executive officer James Askew. The agreement provided for
a one-time issuance of 69,000,000 shares of common stock, $75,000 cash signing bonus, and $35,000 cash compensation per month.
Per the agreement, Mr. Askew was paid a $75,000 cash bonus in September 2013, and issued 69,000,000 shares of the Company’s
common stock in September 2013. In March 2014, Company entered into an indemnification agreement with Mr. Askew tracking the statutory
provisions of the Nevada Statutes and extended the term of the agreement for one year. In September 2015, James Askew’s employment
agreement was further amended to extend the term of the agreement to September 30, 2018. 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 two month period ending December 31, 2016, the Company paid him $105,000
in compensation, $9,000 in bonuses and $38,030 for expense reimbursements. A prepayment of the January 2017 consulting agreement
of $35,000 was included in the $105,000 compensation payments.
Mr. Askew, our former chief executive officer
and director for over three years, is currently a key consultant to the Company. He resigned effective January 3, 2017 and signed
a consulting agreement which is discussed in more detail in footnote 9 “Commitments and Contingencies”.
The Company had received unsecured advances during 2013 and prior from a prior director in the amount of $52,152.
The amount of $42,324 due to the related party was written off during the quarter ended March 31, 2017 and recorded as “Other
Income” as a result of the expiration of the applicable statute of limitations. The remaining balance of $9,828 is recorded
within the ‘Due to related party’ line on the balance sheet.
In March 2014, the Company acquired 5,000,000
shares of restricted GulfSlope common stock from the Company’s former sole officer and director James Askew for a purchase
price of $268,000. At the time of the acquisition, Mr. Askew was also a director of GulfSlope. Mr. Askew resigned as a director
of GulfSlope effective March 27, 2014. During the fiscal year ended October 31, 2016, the Company recorded an unrealized loss of
$185,000 to adjust the investment securities to fair market value.
In February 2016, the Company sold the
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.
Mr. Mayell, our current chief executive
officer and director effective January 4, 2017, is President of Sydson Energy, Inc. and Sydson Resources, LP (“Sydson”).
During the six months ended June 30, 2017, Sydson and Mr. Mayell paid invoices on behalf of the Company. As of June 30, 2017, the
Company owes Sydson $93,464 and Mr. Mayell $1,299 which are reported on the balance sheet as “Accounts payable - related
party”.
As of June 30, 2017, the Company has accrued
five months of Mr. Askew’s consulting agreement totaling $175,000. This accrual is reported on the balance sheet as “Accrued
expenses – related party”.
The Company has $210,000 of compensation
accrued to Mr. Mayell and $150,000 to Mr. Connally as of June 30, 2017. Payroll taxes totaling $32,136 related to the accrued compensation
has been accrued. These accruals total $392,136 and are reported within “Accrued expenses – related party – long
term” on the balance sheet. The due dates for these liabilities are December 31, 2019 as a result of amendments dated March
1, 2017 to the compensation agreements.
In January 2017, the Company issued shares
of stock to the following related parties: Mr. Askew 27 million shares, Mr. Mayell 100 million shares and Mr. Connally 65.1 million
shares. See note 9 “Commitments and contingencies” for additional information.
As discussed in Note 7, the Company owes
Sydson $250,000 plus accrued interest – long term totaling $12,763 on a note related to the acquisition of Sydson assets.
Also discussed in Note 7, Mr. Mayell and
JTB Energy LLC have loaned the Company $500,000, plus accrued interest – long term totaling $6,111. JTB Energy LLC is a related
party of Mr. Mayell.
NOTE 7 - NOTES PAYABLE
Effective March 23, 2017 the Company extended an unsecured promissory note with an accredited investor in
the amount of $1,700,000 to a payment date of January 1, 2019. The note was reduced by the assignment of a $131,645 note receivable
from EnerGulf Resources to the investor. As of June 30, 2017 the outstanding principal balance was $1,568,355 and is included in
“Notes Payable – long term” on the balance sheet. During the outstanding period, the note is convertible at the
option of the investor up to $800,000 of the outstanding principal and accrued interest into common shares at $0.04 per share.
The Company had received unsecured
advances during 2013 and prior from a prior director in the amount of $52,152. The amount of $42,324 due to the related party
was written off during the quarter ended March 31, 2017 and recorded as “Other Income” as a result of the
expiration of the applicable statute of limitations. The remaining balance of $9,828 is recorded within the ‘Due to
related party’ line on the balance sheet.
In connection with the Sydson asset acquisition, part of the consideration was an unsecured $250,000 note
payable to Sydson due March 1, 2017. The note has been amended effective March 23, 2017 to extend the due date to January 1, 2019
and to charge a fixed rate of 10% interest on the note. The balance of $250,000 is included in “Notes payable-related party”
in the long term section of the balance sheet.
During April 2017, the Company received a loan
of $125,000 from Mr. Mayell and a loan of $125,000 from JTB Energy, LLC. Both loans are secured by the $10,000,000 offshore leases,
payable upon demand with interest rates of 10% per annum. During the outstanding period, the notes are convertible at the option
of the investor up to the outstanding principal and accrued interest into common shares at $0.02 per share. These loans are both
considered related party transactions.
During June 2017, the Company received an additional loan of $125,000 from Mr. Mayell and an additional loan
of $125,000 from JTB Energy, LLC. Both loans are secured by the $10,000,000 offshore leases, all payable upon demand with interest
rates of 10% per annum. During the outstanding period, the notes are convertible at the option of the investor up to the outstanding
principal and accrued interest into common shares at $0.02 per share. These loans are both considered related party transactions.
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments
are cash and accounts payable. The recorded values of cash and accounts payable approximate their fair values based on their short-term
nature.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
See Note 6 for a discussion of Mr. Askew’s
employment agreement and the Company’s financial obligations with respect thereto. 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.
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.
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.
Effective March 1, 2017 the above mentioned
agreements with Mr. Connally and Mr. Mayell were amended to extend the due dates. The payments are now due at the end of the terms
of the agreements, which is December 31, 2019. These liabilities are accrued in the financial statements for the six months ended
June 30, 2017, however they are now reported as long term on the balance sheet.