NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2017
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 audited consolidated financial statements have been prepared in all material respects in accordance with United States
generally accepted accounting principles (“U.S. GAAP”) for financial information. Intercompany accounts and transactions
are eliminated. The accompanying audited consolidated financial statements have been prepared on the same basis as the audited
financial statements for the transition report ended 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.
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.
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 consolidated 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 December 31, 2017, the Company had net operating loss carryforwards
of approximately $9,700,000 that may be available to reduce future years’ taxable income and will begin to expire 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 employees
and third parties for services rendered (see Note 5 – Common Stock).
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued ASC 718 “Compensation - Stock Compensation”
and 505-50 “Equity-Based Payments to Non-Employees.” This statement requires a public entity to expense the cost of
services received in exchange for an award of equity instruments. This statement also provides guidance on valuing and expensing
these awards, as well as disclosure requirements of these equity arrangements. The Company adopted ASC 718 and 505-50 upon creation
of the Company and expenses share based costs in the period incurred.
Accounting
for Oil and Gas Properties
The
Company utilizes the full cost method to account for its investment in oil and gas properties. Accordingly, all costs associated
with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, professional
fees incurred for the lease acquisitions, capitalized interest costs relating to properties, geological expenditures, and tangible
and intangible development costs (including direct internal costs), are capitalized into the full cost pool. When the Company
commences production from established proven oil and gas reserves, capitalized costs, including estimated future costs to develop
the reserves and estimated abandonment costs, will be depleted on the units-of-production method using estimates of proven reserves.
Investments in unproved properties and major development projects, including capitalized interest if any, are not depleted until
proven reserves associated with the projects can be determined. If the future exploration of unproven properties is determined
to be uneconomical, the amount of such properties is added to the capital costs to be depleted. As of December 31, 2017, the Company’s
oil and gas properties consisted of capitalized acquisition costs for unproved mineral rights.
Investment
Securities
The
Company previously owned investment securities composed of 5 million shares of GulfSlope common stock, which were 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 December 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. The Company no
longer owns any investment securities.
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
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 December 31, 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 consolidated 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 December 31, 2017, of $12,876,760.
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 consolidated 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 – PROPERTY & EQUIPMENT
The Company has $11,779,201 of undeveloped
oil and gas properties. The majority of the assets are offshore leases in the Gulf of Mexico. Included are onshore properties which
were acquired during the Sydson acquisition.
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. Sydson is a private oil and gas company with land operations in Texas and Louisiana that has been in business since
1982.
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.
The purchase price of this asset acquisition
is summarized below:
Furniture & Fixtures, Software, Equipment
|
|
$
|
35,556
|
|
Deposit – office rent
|
|
|
8,340
|
|
Prepaid expenses
|
|
|
27,616
|
|
Note Payable – insurance
|
|
|
(6,822
|
)
|
Leasehold rights
|
|
|
1,030,310
|
|
Total purchase price
|
|
$
|
1,095,000
|
|
At
December 31, 2017, the properties were evaluated
for impairment
and the Company recorded $156,082 to impairment expense.
The Company has $39,712 of furniture and
fixtures, software and equipment. The majority of the assets were acquired during the Sydson acquisition in January 2017. The accumulated
depreciation as of December 31, 2017 is $6,936. Depreciation is being recorded using the straight line method of depreciation.
NOTE
5 – COMMON STOCK
The Company has 950,000,000 shares of common
stock authorized with a par value of $0.001. As of December 31, 2017 the Company has 821,790,670 shares of common stock issued
and outstanding. During the year ended December 31, 2017, the Company sold 33,250,000 shares of stock at a price of $.02 per share
for a total of $665,000, and issued 22,500,000 shares of common stock upon conversion of $450,000 of convertible debt. 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.
As
of December 31, 2017, the Company has not granted any stock options.
NOTE
6 – RELATED PARTY TRANSACTIONS
During
the year ended December 31, 2016, the Company made cash payments and issued Mr. James Askew (former CEO) 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
as of December 31, 2016.
Mr.
Askew, our former chief executive officer and director for over three years, is currently a consultant to the Company. He resigned
effective January 3, 2017 and signed a consulting agreement which is discussed in more detail in footnote 12 “Commitments
and Contingencies”. As of December 31, 2017, the Company has accrued eleven months of Mr. Askew’s consulting agreement
totaling $385,000. This accrual is reported on the balance sheet as “Accrued expenses – related party”.
The
Company had received unsecured advances prior to 2014 from a former 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 year ended December 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 Managing Partner of the General Partner of Sydson
Resources, LP (“Sydson”). During the year ended December 31, 2017, Sydson and Mr. Mayell paid invoices on behalf of
the Company and advanced loans to the Company. On August 11, 2017 the Company signed a note payable agreement with Sydson for
$70,000 which represents a portion of the balance owed to Sydson, with the remainder reported as “Accounts Payable –
related party” on the balance sheet. Also on August 11, 2017 the Company signed a note payable agreement with Mr. Mayell
for $47,000 which represents some of the advances Mr. Mayell made to the Company. As of December 31, 2017, the Company owes Sydson
$42,759 and Mr. Mayell $159,053 which are reported on the balance sheet as “Accounts payable - related party” for
a total of $201,812. The note payable balances as of December 31, 2017 are $70,000 to Sydson and $47,000 to Mr. Mayell and are
reported on the balance sheet under current liabilities as “Convertible notes payable – related party”. The
accrued interest on these notes is $4,560 as of December 31, 2017, $2,728 payable to Sydson and $1,832 payable to Mr. Mayell.
The
Company has $420,000 of compensation accrued to Mr. Mayell and $410,000 to Mr. Connally as of December 31, 2017 totaling
$830,000. Payroll taxes totaling $64,272 related to the accrued compensation have been accrued. These accruals total $894,272
and are reported within “Accrued expenses – related party” as long term liabilities 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.
The Company has paid Mr. Connally approximately $100,000 for expense reimbursements.
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 10 “Commitments and contingencies” for additional information.
As
discussed in Note 7, the Company owes Sydson $250,000 plus accrued interest – long term totaling $26,178 on a note related
to the acquisition of Sydson assets.
Also
discussed in Note 8, Mr. Mayell and JTB Energy LLC, a company managed by Mr. Mayell, have each loaned the Company $250,000. Interest
expense of $15,556 to each has been accrued as of December 31, 2017. JTB Energy LLC is a related party of Mr. Mayell.
Also
discussed in Note 8, Mr. Mayell loaned the Company a total of $220,000 during October 2017. The accrued interest on these notes
payable total $5,022 as of December 31, 2017.
During
December 2017, the Company received a loan of $50,000 from a shareholder. The note and interest is due January 1, 2019 with an
interest rate of 10% per annum. During the outstanding period, the note is convertible at the option of the investor up to the
outstanding principal and unpaid interest into common shares at $0.02 per share. The note is reported as “Convertible Notes
Payable – related party” under long term liabilities on the balance sheet.
NOTE
7 – NOTES PAYABLE
The
Company had received unsecured advances prior to 2014 from a former 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 as a current liability.
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.
The
company financed the current year insurance premiums and that note has a balance of $9,620 as of December 31, 2017. This note
is reported as “Notes payable” under current liabilities on the balance sheet.
NOTE
8 – CONVERTIBLE 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. On September 18, 2017 the Company converted $450,000 of the principal amount of the note into 22,500,000 shares
of the Company’s common stock at a conversion price of $0.02 per share. As of December 31, 2017 the outstanding principal
balance is $1,118,355 and is reported as “Convertible Notes Payable” under long term liabilities on the balance sheet. Subsequent
to yearend the Company converted an additional $400,000 of the principal balance into 15,000,000 shares of the Company’s
common stock. The principal balance of $200,000 was converted at a conversion price of $0.02 and the principal balance of $200,000
was converted at a conversion price of $0.04. The amended note agreement now states that the note is convertible into common shares
at $0.04 per share at the option of the investor up to $600,000 of the outstanding principal and accrued interest. The due date
of the note payable was also extended to January 1, 2020.
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 a 5% interest in 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. The notes are reported
as “Convertible notes payable – related party” under current liabilities. The notes are convertible up to the
outstanding principal and accrued interest into common shares at $0.02 per share.
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 a 5% interest in 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. The notes
are reported as “Convertible notes payable – related party” under current liabilities. The notes are convertible
up to the outstanding principal and accrued interest into common shares at $0.02 per share.
During
August 2017, the Company converted a portion of the accounts payable balances owed to Sydson and Mr. Mayell to note payable agreements,
charging interest at 10% per annum. Both Sydson and Mr. Mayell had advanced money to the Company and paid invoices on behalf of
the Company, which had previously been reported as “Accounts payable – related party”. The Company converted
$70,000 into a note payable to Sydson and $47,000 into a note payable to Mr. Mayell. The remaining balances owed to them will
continue to be reported as “Accounts payable – related party”. The notes are reported as “Convertible
notes payable – related party” under current liabilities. The notes are convertible up to the outstanding principal
and accrued interest into common shares at $0.02 per share.
During
October 2017, the Company received loans of $170,000 and $50,000 from Mr. Mayell. Both loans are secured by a 5% interest in 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 and are reported as “Convertible notes payable –
related party under current liabilities.
During December 2017, the Company received a loan of $50,000 from a shareholder. The note
and interest is due January 1, 2019 with an interest rate of 10% per annum. During the outstanding period, the note is convertible
at the option of the investor up to the outstanding principal and unpaid interest into common shares at $0.02 per share. The note
is reported as “Convertible Notes Payable – related party” under long term liabilities on the balance sheet.
NOTE
9 – 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 and rentals. Subsequent to October 2016, the note was further increased to $68,498
as of December 31, 2016. During March 2017, the note was further increased to $131,645 and then assigned to an investor as a reduction
in the note payable balance leaving a notes receivable balance of zero as of December 31, 2017. See note 8 for further information.
NOTE
10 – 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:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Federal income tax benefit at the statutory rate:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(693,000
|
)
|
|
$
|
(715,000
|
)
|
Effect of rate change
|
|
|
715,000
|
|
|
|
—
|
|
Change in valuation allowance
|
|
|
(22,000
|
)
|
|
|
715,000
|
|
Net benefit
|
|
$
|
—
|
|
|
$
|
—
|
|
The cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Deferred tax attributed:
|
|
|
|
|
|
|
Net operating loss carryover
|
|
$
|
3,300,000
|
|
|
$
|
2,041,000
|
|
Effect of rate change
|
|
|
(2,607,000
|
)
|
|
|
—
|
|
Less: valuation allowance
|
|
|
(693,000
|
)
|
|
|
(2,041,000
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
At
December 31, 2017, the Company had an unused net operating loss carryforward approximating $9,700,000 that is available
to offset future taxable income; the loss carryforward will start to expire in 2028. The Company’s tax returns are open
to audit under the statute of limitations for the years ending 2014 through 2016 for federal tax purposes.
Effect of New Federal Tax Reform Legislation
On December 22, 2017, new federal tax reform legislation was enacted in the United States (the “2017
Tax Act”), resulting in significant changes from previous tax law. The 2017 Tax Act reduces the federal corporate income
tax rate to 21% from 35% effective January 1, 2018. The rate change, along with certain immaterial changes in tax basis resulting
from the 2017 Tax Act, resulted in a reduction of the Company’s deferred tax assets of $7,947,029 and a corresponding reduction
in the valuation allowance.
NOTE
11 – 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 and accounts payable. The recorded values of cash and accounts payable approximate
their fair values based on their short-term nature.
NOTE
12 – 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, 2020, and such term shall be extended for an additional one-year period upon December 31 of
each calendar year, 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, 2020.
Upon December 31 of each calendar year, 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, 2020. Upon December 31 of each calendar year, 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
employment 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, 2020. These liabilities are accrued in the financial statements for the
year ended December 31, 2017 however they are now reported as long term on the balance sheet.
NOTE
13 – SUBSEQUENT EVENTS
On
January 12, 2018 the Company converted $400,000 of the principal amount of a long-term note payable into 15,000,000 shares of
the Company’s common stock at a conversion price of $200,000 principal amount at $0.02 per share and $200,000 principal
amount at $0.04 per share. (See footnote 8 “Convertible notes payable” for additional information.)
During
January 2018 Mr. Mayell loaned the Company $7,250 which is recorded as accounts payable.
On January 8, 2018, the Company entered
into a participation agreement dated effective January 1, 2018 (the “Agreement”) with Delek GOM Investments, LLC, a
subsidiary of Delek Group Ltd. (“Delek”), and GulfSlope (collectively, the “Parties”) for the partial farm-out
of the Company’s interests in its Gulf of Mexico oil and gas leases (the “Farm-out”). The Agreement sets out
the terms and conditions of the Parties participation in the drilling of up to a nine well multi-phase exploration program targeting
the Company’s prospects (the “Prospects”) located on the Company’s existing leases (the “Leases”).
Under the terms of the agreement, the parties
have committed to initially drill the Company’s “Canoe” and “Tau” prospects (the “Initial Phase”)
with Delek having the option to participate in two additional two-well drilling phases and a final, three-well drilling phase (collectively,
the “Phases”). In August 2017, the Company acquired a 20% working interest in Ship Shoal Block 351 and in Ship Shoal
Block 336, which are collectively referred to as the Tau Prospect from GulfSlope and in January 2018, the Company acquired a 20%
working interest in the Vermilion South Addition Block 378 (“Canoe Prospect”) from GulfSlope. In each Phase, Delek
will earn a 75% working interest upon paying 90% of the exploratory costs associated with drilling each exploratory well. The Company
will thus retain a 5% working interest while paying 2% of the exploratory costs associated with drilling each well. In addition,
Delek will pay the Company $405,000 upon the filing of each exploration plan with BOEM and/or BSEE on a Prospect in each Phase.
Also, each Party will be responsible for its pro rata share (based on working interest) of delay rentals associated with the Prospects.
GulfSlope will be the Operator during exploratory drilling of a Prospect, however, subsequent to a commercial discovery, Delek
will have the right to become the Operator. Delek will have the right to terminate this Agreement at the conclusion of any drilling
Phase. Delek will also have the option to purchase up to 5% of the Company’s common stock upon fulfilling its obligation
for each Phase (maximum of 20% in the aggregate) at a price per share equal to a 10% discount to the 30-day weighted average closing
price for the Company’s common stock preceding the acquisition. This option will expire on January 8, 2020. The foregoing
description of the Agreement does not purport to be a complete description of the terms, provisions and conditions of such document,
and represents only a summary of certain of the principal terms, provisions and conditions thereof.
The Company will assign a two-tenths of one percent of 8/8ths net profits interest in certain of the Company’s
oil and gas leases to include Vermilion Area, South Addition 378, Ship Shoal Area, South Addition 336, and Ship Shoal Area, South
Addition 351, to Hi-View in consideration for consulting services provided pursuant to a non-exclusive consulting engagement dated
October 25, 2017, by and between Hi-View, the Company, and GulfSlope. Hi-View will be entitled to additional assignments on the
same terms and conditions as described above related to any of Leases in which Delek elects to participate in the drilling of an
exploratory well. In addition, the Company issued an aggregate of twenty million shares of its common stock to Hi-View in consideration
for those consulting services provided pursuant to the Advisory Agreement. In the event that Delek has not funded the $405,000
payment referenced above within six months of execution of this Agreement, then the common stock will be returned by Hi-View to
the Company.
During January 1, 2018 through March 27, 2018
the Company sold an aggregate of 19,900,000 shares of common stock for $398,000 at a purchase price of $0.02 per share.
During
January 2018, the Company issued 20,000,000 shares of common stock to Hi-View for consulting services provided pursuant to the
Advisory Agreement dated October 25, 2017. These shares were issued in reliance upon the exemption from registration provided
by Section 4(a)(2) of the Securities Act of 1933 (“Securities Act”).
During February and March 2018 the Company
sold interests in the Wilinda prospect located in Texas. The Company’s share of the proceeds totaled $251,250. Leases are
being acquired and the Company hopes to begin drilling in late 2018.
On
March 15, 2018, the Company issued an aggregate of 3,022,480 shares to certain employees and a consultant for services rendered.
During
January 1, 2018 through March 27, 2018 the Company paid Mr. Mayell $80,000 of the accounts payable balance owed to him as of December
31, 2017.