NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2018
(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.
In
January 2017, The Company formed Texas South Operating Company, Inc as a wholly owned subsidiary of the Company. It was
incorporated pursuant to the laws of the State of Texas on January 11, 2017.
Texas
South Energy, Inc. and Texas South Operating Company, Inc. (collectively, the “Company”) began filing
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.
The
Company has limited operating history and has devoted its activities to the acquisition of oil and gas assets.
The
Company had established a fiscal year end of October 31; however, 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 December 31, 2017.
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 December 31,
2017, which are included in the Company’s annual report for the year ended December 31, 2017 (the “2017 Annual Report”).
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
2017 Annual Report.
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
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. Because the Company is operating at a loss, it 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 had limited revenue, 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 March 31, 2018 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 March 31, 2018,
of $13,514,246. 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.
NOTE
4 - OIL & GAS PROPERTIES
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, we acquired contractual rights to
a 20% working interest in 12 blocks covered in 9 prospects for $10,000,000 paid to date and $304,062 paid in April 2018. We have
agreed to pay our proportionate share of the net rental costs related to the prospects. GulfSlope has conducted extensive seismic
work on all of the prospects focusing on the high potential subsalt play at depths of 15,000’ to 25,000’ and will
be the operator of record for the initial well on each of the prospects.
In
May 2016, we entered into a letter of intent with GulfSlope that set forth 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 were 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”). At that time we owned a 70.7% working interest in the Shallow Prospects with a third party owning a 16.8% working
interest for which it paid $400,000 and GulfSlope retaining a 12.5% working interest. Texas South acquired the interest in the
two prospects 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 prior to December 31, 2017. The
farmout on both prospects from GulfSlope expired on December 31, 2017.
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 deep
level 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 two of the Company’s prospects in Phase I (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 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. During March 2018 Delek made its first payment of $405,000 to the Company as the
initial plan was filed. 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 Company has not recorded any cost associated with the option due to the future performance obligation of
Delek. If Delek meets the obligation and exercises its option the Company will record the option value at that time as an increase
to Oil and Gas Properties. At March 31, 2018, the potential value of issuing 20% of our outstanding stock is approximately $6,000,000.
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 in the two Phase I prospects to Hi-View
Investment Partners, LLC (“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 (the ”Advisory Agreement”).
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. Delek funded the first $405,000 payment during March
2018.
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:
|
●
|
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%. As of March 31, 2018 the Company only owns a 50% working
interest in the Sugarberry #6 wellbore, which is not currently productive, at Bayou Bouillon Field as a result of concerns
with the presence of H2S in the gas and with difficulties raising funds for our share of the development commitments.
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|
●
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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 compared to the
prior downdip production.
|
|
●
|
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 above 3,700’.
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|
●
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Southeast
of San Antonio, we are acquiring leases with working interest partners covering 2,000 acres or more 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. We expect to begin drilling operations on the first well during
the third quarter of 2018.
|
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, but 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; 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 one prospect
under negotiation 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.
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
|
|
NOTE
5 - COMMON STOCK
The Company had 950,000,000 shares of common
stock authorized with a par value of $0.001, however during April 2018 the holders of a majority of the issued and outstanding
shares of common stock consented to action via written consent to adopt an amendment to our amended and restated articles of incorporation
to increase the number of authorized shares of common stock from 950,000,000 to 1,350,000,000. The Company filed a Schedule 14C
information statement with the Securities and Exchange Commission and mailed a copy to each holder of common stock of record disclosing
this consent to take action without a shareholders’ meeting. The amendment will become effective after (i) 20 days from the
mailing of the information statement to the common stock holders of record (May 15, 2018) and (ii) once it is filed with the Nevada
Secretary of State.
As of March 31, 2018 the Company had 867,440,670
shares of common stock issued and outstanding. During the three months ended March 31, 2018 the Company sold 19,900,000 shares
of stock at a price of $.02 per share for a total of $398,000. A total of 10,650,000 shares were issued during the first quarter
and the remaining 9,250,000 shares were issued during the second quarter of 2018. During the three months ended March 31, 2018
the Company issued 20,000,000 shares in exchange for lease brokerage fees and issued 15,000,000 shares in exchange for the conversion
of $400,000 of debt.
NOTE
6 - RELATED PARTY TRANSACTIONS
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 10 “Commitments
and Contingencies”. As of March 31, 2018, the Company has accrued $490,000 for Mr. Askew’s consulting expenses. This
accrual is reported on the balance sheet under current liabilities 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 was written off during the quarter
ended March 31, 2018, leaving a zero balance reported as ‘Due to related party’ on the balance sheet.
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”). Since the Sydson acquisition on January 4, 2017,
Sydson and Mr. Mayell have 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. During
the three months ended March 31, 2018 the Company has paid Mr. Mayell a total of $95,000 toward the outstanding accounts payable
balance. As of March 31, 2018, the Company owes Sydson $41,212 and Mr. Mayell $73,331 which are reported on the balance sheet
as “Accounts payable - related party”. The note payable balances as of March 31, 2018 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 as of March 31, 2018 is $4,478 payable to Sydson and $3,007 payable to Mr. Mayell.
During
the quarter ended March 31, 2018 the Company sold interests in some prospects to several investors, of which the Company owes
Sydson Resources, LP its 25% share of the proceeds. Sydson’s share totaled $83,750 and is reported as “Accounts payable-related
party”.
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 – short term totaling $33,140 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 $21,806 to each has been accrued as of March 31, 2018. 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 $10,522 as of March 31, 2018.
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 short term liabilities on the balance sheet.
NOTE
7 - NOTES PAYABLE
The
Company had received advances during 2014 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. During the quarter ended March 31, 2018, the remaining balance of
$9,828 was written off and recorded as “Other Income”. These advances were previously recorded within the “Due
to related party” line on the balance sheet and now have a zero balance.
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 short term
section of the balance sheet.
The
company financed the current year insurance premiums and that note has a balance of $3,883 as of March 31, 2018. 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 was $1,118,355 and was reported as “Convertible Notes Payable” under long term liabilities on the balance
sheet. During the quarter ending March 31, 2018, 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. During the second quarter of 2018 another
$200,000 of the principal balance was converted into 10,000,000 share of common stock at a conversion price of $0.02. The amended
note agreement now states that the note is convertible into common shares at an average calculated price not to be below $0.02
or to exceed $0.04 per share. The conversion is at the option of the investor up to the balance 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 short term liabilities on the balance sheet.
NOTE
9 - 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
10 - 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.
During the first quarter of fiscal 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, 2020. These liabilities are accrued in the financial statements
for the three months ended March 31, 2018, however they are now reported as long term on the balance sheet.
On April 26, 2018 by consent of the Board
of Directors of the Company, amendments to the above mentioned agreements were approved. The amendments, effective May 1, 2018,
state that all or a portion of the compensation owed to Mr. Mayell and Mr. Connally for the period from the execution date through
April 30, 2018 can be paid by the Company, at the option of the employee, in restricted shares of the Company’s common stock
at a price of $0.02 per share. As of the filing date of this report, neither has exercised their option to be paid in common stock.
NOTE
11 – SUBSEQUENT EVENTS
During April 2018, the holders of a majority
of the issued and outstanding shares of common stock consented to action via written consent to adopt an amendment to our amended
and restated articles of incorporation to increase the number of authorized shares of common stock from 950,000,000 to 1,350,000,000.
The amendment will become
effective after (i) 20 days from the mailing of the information statement to the common stock holders of record (May 15, 2018)
and (ii) once it is filed with the Nevada Secretary of State.
During
April 2018, the Company converted $200,000 of a long term note payable balance into 10,000,000 shares of common stock. See note
8 “Convertible Notes Payable” for additional details.
During
April 2018 through May 11, 2018, the Company sold an aggregate total of 4,700,000 additional shares of common stock at $0.02 per
share.
During
April 2018, shares totaling 9,250,000 that were purchased during the first quarter were issued and shares totaling 3,022,480 were
issued for shares awarded on March 15, 2018 to certain employees and a contractor.
During
April 2018, the Company amended the compensation agreements of Mr. Mayell and Mr. Connally. See note 10 “Commitments and
Contingencies” for more detailed information.
During
the period from April 1, 2018 through May 11, 2018, the Company has paid Mr. Mayell a total of $62,000 on the outstanding accounts
payable balance owed to him.
During April 2018, the Company paid to
GulfSlope approximately $129,000 for a 20% interest in the Quark Prospect and $175,000 for a 20% interest in the Canoe
Prospect. The Company previously held a farmout of 87.5% interest in the Canoe Prospect down to 5,000’, which expired
at December 31, 2017.