NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
June
30, 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 has no revenue, the new guidance is not expected to have a material impact on its financial
statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases
(“ASU
2016-02”), which relates to the accounting for leasing transactions. This standard requires a lessee to record on the
balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than twelve
months. In addition, this standard requires both lessees and lessors to disclose certain key information about lease transactions.
This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. We are evaluating the impact the adoption of ASU 2016-02 will have on our consolidated financial statements.
Other
new pronouncements issued but not effective until after June 30, 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 June 30, 2018,
of $14,248,407. 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 approximately $10,720,000 paid to GulfSlope through June 30, 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 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. Delek made a second payment of $405,000 to the Company
during May 2018. 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 June 30, 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 and the second $405,000 payment during May 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
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’.
|
|
●
|
Southeast
of San Antonio, we are acquiring leases with working interest partners covering approximately 4,000 acres or more for horizontal
projects above 6,000’ in the Austin Chalk, Eagle Ford, 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 the Wilinda
prospect to be paid by the Company at the time it pays its associated costs with respect to its ownership interests in such oil
and gas prospects.
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 became 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 (May 17, 2018).
On August 1, 2018 the Company filed a preliminary
proxy statement requesting shareholders to vote on increasing the authorized shares of common stock from 1,350,000,000 to 1,500,000,000.
Within a few days of filing this report, we expect to file a definitive proxy statement. The results of the vote will not be available
until early September.
As of June 30, 2018, the Company had 903,130,943
shares of common stock issued and outstanding. During the six months ended June 30, 2018 the Company sold 30,850,000 shares of
stock at a price of $.02 per share for a total of $617,000. During the six months ended June 30, 2018 the Company issued 20,000,000
shares in exchange for consulting fees valued at $400,000, issued 25,000,000 shares in exchange for the conversion of $600,000
of debt and issued 5,490,273 shares to two employees and a consultant for services rendered for $77,068.
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 June 30, 2018, the Company has accrued $595,000 for Mr. Askew’s consulting expenses. This
accrual is reported on the balance sheet under current liabilities as “Accrued liabilities – 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. The note payable balances as of June 30,
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 June 30, 2018 is $6,228 payable to Sydson
and $4,182 payable to Mr. Mayell.
During the six months ended June 30, 2018,
the Company has paid Mr. Mayell a total of $169,000 toward the outstanding accounts payable balance. As of June 30, 2018, the
Company owes Sydson $17,084 and Mr. Mayell $630 which are reported on the balance sheet as “Accounts payable - related party”.
During the six months ended June 30, 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 $130,000. The Company made a payment to Sydson for $14,963 so the balance owed to
Sydson as of June 30, 2018 was $115,037 and is included in the $132,751 reported as “Accounts payable – related party”.
During July 2018 the Company converted the accounts payable balance into a convertible note payable.
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 $40,278 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. The total interest expense of $55,986 has
been accrued as of June 30, 2018. JTB Energy LLC is a related party of Mr. Mayell.
Also discussed in Note 8, Mr. Mayell loaned
the Company amounts of $170,000 and $50,000 for a total of $220,000 during October 2017. The accrued interest on these notes payable
total $16,021 as of June 30, 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.
As discussed in Note 8, an accredited
investor loaned the Company $1,700,000 which has been partially converted into shares of the Company’s common stock. Since
the investor is now a shareholder of the Company, we are reporting this now as a related party transaction.
Listed
below is a table summarizing the amounts owed to Mr. Mayell and his related parties.
Name of Related Party
|
|
Original
Amount
|
|
|
Amount
repaid
|
|
|
Balance
owed 6/30/18
|
|
|
Accrued
Interest
|
|
|
Interest
paid
|
|
|
Interest
rate
|
|
|
Convertible
into Shares
of Stock
|
Mr. Michael Mayell
|
|
|
686,630
|
|
|
|
(187,000
|
)
|
|
|
499,630
|
|
|
|
48,134
|
|
|
|
0
|
|
|
|
10
|
%
|
|
Partial
|
Sydson Energy, Inc.
|
|
|
325,354
|
|
|
|
(238,270
|
)
|
|
|
87,084
|
|
|
|
6,228
|
|
|
|
0
|
|
|
|
10
|
%
|
|
Partial
|
Sydson Resources, LP
|
|
|
380,000
|
|
|
|
(14,963
|
)
|
|
|
365,037
|
|
|
|
40,278
|
|
|
|
0
|
|
|
|
10
|
%
|
|
No
|
JTB Energy, LLC
|
|
|
250,000
|
|
|
|
0
|
|
|
|
250,000
|
|
|
|
28,056
|
|
|
|
0
|
|
|
|
10
|
%
|
|
Yes
|
Total
|
|
$
|
1,641,984
|
|
|
($
|
440,233
|
)
|
|
$
|
1,201,751
|
|
|
$
|
122,696
|
|
|
$
|
0
|
|
|
|
|
|
|
|
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 $21,081 as of June 30, 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 transaction was broken down as follows, 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. The outstanding principal balance is $518,355 as of June
30, 2018 and is reported as “Convertible Notes Payable – Related Party” now that the investor is a shareholder
of the Company. The accrued interest through June 30, 2018 totaled $433,812. Effective July 20, 2018, the remaining principal
balance plus the accrued interest was converted into 38,198,147 shares of the Company’s common stock at a conversion rate
of $0.025 per share.
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 2018 the Company paid $18,000 on
one of Mr. Mayell’s notes payable, leaving a balance of $107,000 as of June 30, 2018.
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 six months ended June 30, 2018, however they are now reported as long term on the balance
sheet.
In April 2018, the employment agreements
for Mr. Mayell and Mr. Connally were amended, whereby all or a portion of the compensation owed to Mr. Mayell and Mr. Connally
for the period from January 2017 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 valued at $0.02 per share. As of the filing date of this report, neither has elected
to convert the compensation owed into common stock. If all of the compensation owed was converted into shares of stock, Mr. Mayell
would receive 28,000,000 shares and Mr. Connally would receive 27,500,000 shares.
In July 2018, the consulting agreement for
Mr. Askew was amended, whereby all or a portion of the compensation owed to Mr. Askew for the period from February 2017 through
April 30, 2018 can be paid by the Company, at the option of the consultant, in restricted shares of the Company’s common
stock valued at $0.02 per share. The total owed to Mr. Askew for that period was $525,000. If all of the compensation owed was
converted into shares of stock, Mr. Askew would receive 26,250,000 shares of common stock. Mr. Askew has not elected to convert
the currently owed compensation.
NOTE
11 - SUBSEQUENT EVENTS
On
July 6, 2018 the Company paid $10,000 of the Note Payable to Mr. Mayell dated April 11, 2017. The remaining balance of the note
payable is $97,000.
In connection with the Company’s January
2017 asset acquisition transaction with Sydson Energy, Inc., an affiliate of Mr. Mayell (“Sydson”), the Company acquired
a 75% working interest in the Wilinda prospect, with Sydson retaining a 25% working interest. The Company is in the process
of farming out its 75% working interest in Wilinda, and Sydson is also farming down its interest on a pro-rata basis.
The Company and Sydson expect to farm-out an aggregate of 66.67% of the Wilinda working interest to investors, with the Company
ultimately retaining a 25% working interest and Sydson an 8.33% working interest. In connection with the farm-out, the investors
will purchase up to 33,333,350 shares of Company common stock for a purchase price of $666,667, or $0.02 per share.
To date, the Company and Sydson have agreed to farm down an aggregate of 61%, and in connection with the farm out, the Company
has sold 30,500,000 shares for $610,000. Of the total shares sold to date, 4,500,000 shares were purchased after June 30, 2018
for cash proceeds of $90,000. None of the cash proceeds were paid to Sydson, and effective July 2018 the Company has issued Sydson
an unsecured demand promissory note in the amount of up to $166,667 that is convertible into Company common stock at a price of
$0.02 per share.
During July 2018 the Company issued an aggregate
of 20,600,000 shares of common stock to two third-parties who had entered into participation agreements with the Company, related
to the farm-outs of the Shallow Prospects discussed in Note 4, in settlement and extinguishment of all rights and claims in
connection therewith.
As discussed in Note 10, Mr. Askew’s
consulting agreement was amended, allowing him to convert $525,000 of the consulting fees owed to him into 26,250,000 shares of
the Company’s common stock. The conversion has not been requested as of the filing date of this report..
As
discussed in Note 8, effective July 20, 2018, the remaining principal balance of $518,355 plus the accrued interest as of July
20
th
was converted into 38,198,147 shares of the Company’s common stock at a conversion rate of $0.025 per share.
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis summarizes
the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods
presented below. The following discussion and analysis should be read in conjunction with (i) the accompanying unaudited financial
statements and notes thereto for the six months ended June 30, 2018 and 2017, and with our audited financial statements and notes
thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K (the “2017 Annual
Report”) and (ii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” of the 2017 Annual Report.
Forward Looking Statements
This report on Form 10-Q contains certain
forward-looking statements. All statements other than statements of historical fact are “forward-looking statements”
for purposes of these provisions, including any projections of earnings, revenues, or other financial items; any statements of
the plans, strategies, and objectives of management for future operation; any statements concerning proposed new products, services,
or developments; any statements regarding future economic conditions or performance; statements of belief; and any statement of
assumptions underlying any of the foregoing. Such forward-looking statements are subject to inherent risks and uncertainties, and
actual results could differ materially from those anticipated by the forward-looking statements.
Business Overview
Our business plan as an oil and gas company
is to focus primarily on properties in the Gulf Coast Region. We plan to obtain and manage working and non-working interests in
oil and gas properties.
We are currently in the business of exploring
for, drilling and producing oil and gas. Our business is subject to multiple factors effecting the production of oil and gas, including,
but not limited to: market prices; national and international economic conditions; import and export quotas; availability of drilling
rigs, casing, pipe, and other equipment and supplies; availability of and proximity to pipelines and other transportation facilities;
the supply and price of competitive fuels; and the regulation of prices, production, transportation, and marketing by domestic
and foreign governmental authorities. Additionally, we may not have control over whether the owner or operator of the lease will
elect to explore for oil and gas on such properties, or to develop them following discoveries that may occur. Each of these factors
may affect the rate at which oil and gas are produced, if ever, on properties in which we may have an interest.
Our Current Mineral Interests
In March 2014, we entered into a farm
out letter agreement with GulfSlope Energy, Inc. 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
and have paid approximately $10,720,000 to GulfSlope through June 30, 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 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. Delek made a second payment of $405,000 to the Company during May 2018. 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 June 30, 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 and the second $405,000 payment during May 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:
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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.
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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 above 3,700’.
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Southeast of San Antonio, we are acquiring leases with working interest partners covering approximately 4,000 acres or more for horizontal projects above 6,000’ in the Austin Chalk, Eagle Ford, 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.
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Business and Acquisition Strategy
Our primary business strategy includes
acquiring both working and non-working interests in oil and gas properties throughout the Gulf Coast Region and Texas, including
offshore prospects. We will consider acquisitions that serve as a platform for complementary operations. In January, 2017 the Company
acquired assets from Sydson Energy, Inc. and Sydson Resources, LP.
The cost of implementing the forgoing programs
will depend on what oil and gas interests are identified and available on terms acceptable to us. Even if we identify oil and gas
interests that are available, the cost of pursuing and acquiring them could be significant. Our ability to pursue any such opportunities
will be dependent on our ability to obtain financings through private equity, debt financings or agreements with joint venture
partners. We can provide no assurance that we have the necessary cash available or will be able to successfully obtain the necessary
financing or joint venture partners to pursue such opportunities.
We have incurred losses since our inception
and expect to incur losses in future periods. We rely primarily upon the sale of our equity securities to fund operations.
Liquidity and Capital Resources
As of June 30, 2018, we had a cash balance
of $1,838,551 and a working capital deficit of $1,646,481. Our accumulated deficit from inception (March 15, 2010) to June 30,
2018 was $14,248,407. For the six months ended June 30, 2018, our net loss of $1,371,647 was mostly funded by proceeds raised from
equity financings. During the six months ended June 30, 2018, our cash position increased by $1,838,096 as a result of the sale
of some of our interests in our prospects, receiving prepaid costs from our participation agreement on the Wilinda project, and
the sale of the Company’s common stock.
During the six months ended June 30, 2018,
we issued 81,340,273 shares of common stock, of which 30,850,000 shares were issued for cash in the amount of $617,000, 20,000,000
shares were issued for lease brokerage fees valued at $400,000, 25,000,000 shares were issued to convert $600,000 of a note payable
balance into common stock and 5,490,273 shares were issued to two employees and a consultant for services rendered in lieu of cash
for $77,068.
We will need additional financing to carry
out our business plan. Specifically, we will need cash to fund our obligations with respect to (i) drilling the Canoe and Tau Prospects
in Phase I of the offshore program (ii) funding our drilling obligations with respect to the Wilinda project, and (iii) funding
our contingent liabilities under the Sydson agreement. Obtaining additional financing will be subject to a number of factors including
market conditions, investor acceptance of our business plan, and other conditions outside of our control. These factors may make
the timing, amount, terms and conditions of additional financing unattractive or unavailable to us. If we cannot raise additional
funds, we will not be able to carry out our business plans and may cease operations.
Results of Operations for the Three
months Ended June 30, 2018 compared to the Three months ended June 30, 2017
We earned revenue of $0 during the three
months ended June 30, 2018 and 2017. Impairment expenses for $25,079 were recorded during the three months ended June 30, 2018
and zero for the three months ended June 30, 2017. General and administrative expenses were $664,725 for the three months ended
June 30, 2018, compared to $642,481 for the three months ended June 30, 2017. Interest expense was $42,784 for the three months
ended June 30, 2018, compared to $51,788 for the three months ended June 30, 2017.
We had a net loss of $734,161 for the three
months ended June 30, 2018, compared to $695,513 for the three months ended June 30, 2017.
The basic and diluted loss per share for
the three months ended June 30, 2018 and 2017 was $(0.00).
Results of Operations for the Six months
Ended June 30, 2018 compared to the Six months ended June 30, 2017
We earned revenue of $0 during the six
months ended June 30, 2018 and 2017. Included in “Other income” is the write off of the shareholder note payable for
$42,324 during the quarter ended March 31, 2017 and $9,828 during the quarter ended March 31, 2018. General and administrative
expenses were $1,262,152 for the six months ended June 30, 2018, compared to $2,216,668 for the six months ended June 30, 2017,
of which $845,710 were non-cash expenses. Interest expense was $91,166 for the six months ended June 30, 2018, compared to $96,208
for the six months ended June 30, 2017. The decrease in interest expense is primarily a result of the decrease in the note payable
balances as a result of the conversion of $600,000 of debt into shares of common stock.
Off-Balance Sheet Arrangements
As of June 30, 2018, we had no off balance
sheet transactions that have or are reasonably likely to have a current or future effect on our financial condition, changes in
our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
As of June 30, 2018, our exposure to market
risk is limited. We do not expect unfavorable changes in concentration of credit risk and interest rates impacting our current
balances as of June 30, 2018.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and
Procedures
We carried out an evaluation, under the
supervision and with the participation of our management, including our principal executive officer (who also serves as our principal
financial officer) of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of the period covered by this Form 10-Q. Based upon that evaluation, our principal executive officer (who also serves
as our principal financial officer) concluded that, as of the end of the period covered in this report, our disclosure controls
and procedures were effective to ensure that information required to be disclosed in reports filed by us under the Exchange Act
is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management
as appropriate to allow timely decisions regarding required disclosure.
Our management, including our principal
executive officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors
or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have
been detected. Accordingly, management believes that the financial statements included in this report fairly present in all material
respects our financial condition, results of operations and cash flows for the periods presented.
Management’s Interim Report on
Internal Control over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in
the United States.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective
can provide only reasonable assurance of achieving their control objectives.
Changes in Internal Control over Financial
Reporting
There have been no changes in internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
Management
is not aware of any legal proceedings contemplated by any governmental authority or any other party against us. None of our directors,
officers or affiliates are (i) a party adverse to us in any legal proceedings, or (ii) have an adverse interest to us in any legal
proceedings. Management is not aware of any other legal proceedings that have been threatened against us.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The
Company sold shares of stock for cash and/or converted note payable balances that were not reported on a Current Report on Form
8-K or in Part II, Item 5 of the Annual report on Form 10-K and such transactions are being reported hereby, as follows.
During April 2018, $200,000 of a note
payable balance was converted into 10,000,000 shares of common stock at $0.02 per share.
In April 2018, the employment agreements
for Mr. Mayell and Mr. Connally were amended, whereby all or a portion of the compensation owed to Mr. Mayell and Mr. Connally
for the period from January 2017 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 valued at $0.02 per share. As of the filing date of this report, neither has exercised
their option to be paid in common stock. If all of the compensation owed was converted into shares of stock, Mr. Mayell would receive
28,000,000 shares and Mr. Connally would receive 27,500,000 shares.
In July 2018, the consulting agreement for
Mr. Askew was amended, whereby all or a portion of the compensation owed to Mr. Askew for the period from February 2017 through
April 30, 2018 can be paid by the Company, at the option of the consultant, in restricted shares of the Company’s common
stock valued at $0.02 per share. The total owed to Mr. Askew for that period was $525,000. If all of the compensation owed was
converted into shares of stock, Mr. Askew would receive 26,250,000 shares of common stock. Mr. Askew has not elected to convert
the currently owed compensation.
During April 1 through May 11, 2018 third party
investors purchased 4,700,000 shares of common stock for a purchase price of $0.02 per share totaling $94,000.
During May 12, 2018 through August 13, 2018
third party investors purchased 9,750,000 shares of common stock for a purchase price of $0.02 per share totaling $195,000.
During June 2018 the Company issued a total
of 2,467,793 shares of common stock to certain employees and a consultant for services rendered through June 2018.
During July 2018 the Company issued an aggregate
of 20,600,000 shares of common stock to two third-parties who had entered into participation agreements with the Company, in settlement
and extinguishment of all rights and claims in connection therewith.
As discussed in Note 8, effective July 20,
2018, the remaining principal balance of $518,355 plus the accrued interest as of July 20, 2018 owed to an accredited investor,
was converted into 38,198,147 shares of the Company’s common stock at a conversion rate of $0.025 per share.
Under the terms of our participation agreement
with Delek, the parties have committed to initially drill two of the Company’s prospects in 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. Delek made a second payment of $405,000 to the Company during May 2018. Also, each party will be responsible
for its pro rata share (based on working interest) of delay rentals associated with the prospects. 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. As of the date hereof, Delek is not a beneficial holder of Company Common
Stock as the future performance event has not occurred to date. 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.
In connection with the Company’s January
2017 asset acquisition transaction with Sydson Energy, Inc., an affiliate of Mr. Mayell (“Sydson”), the Company acquired
a 75% working interest in the Wilinda prospect, with Sydson retaining a 25% working interest. The Company is in the process
of farming out its 75% working interest in Wilinda, and Sydson is also farming down its interest on a pro-rata basis.
The Company and Sydson expect to farm-out an aggregate of 66.67% of the Wilinda working interest to investors, with the Company
ultimately retaining a 25% working interest and Sydson an 8.33% working interest. In connection with the farm-out, the investors
will purchase up to 33,333,350 shares of Company common stock for a purchase price of $666,667, or $0.02 per share.
To date, the Company and Sydson have agreed to farm down an aggregate of 61%, and in connection with the farm out, the Company
has sold 30,500,000 shares for $610,000. Of the total shares sold to date, 4,500,000 shares were purchased after June 30, 2018
for cash proceeds of $90,000. None of the cash proceeds were paid to Sydson, and effective July 2018, the Company has issued Sydson
an unsecured demand promissory note in the amount of up to $166,667 that is convertible into Company common stock at a price of
$0.02 per share.
The issuances of these securities did
not involve the payment of any sales commissions and were exempt pursuant to Section 4(a)(2) of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER
INFORMATION
None.
ITEM 6. EXHIBITS
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Exchange Act, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned
thereunto duly authorized.
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TEXAS SOUTH ENERGY, INC.
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Date: August 13, 2018
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By:
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/s/ Michael J. Mayell
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Michael J. Mayell
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Chief Executive Officer and
Principal Financial Officer
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8