Item
1. Financial Statements.
TEXHOMA
ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
December
31, 2007 and September 30, 2007
ASSETS
|
|
December
2007
|
|
|
September
2007
|
|
|
|
(unaudited)
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
68,405
|
|
|
$
|
44,785
|
|
Restricted
cash
|
|
|
505
|
|
|
|
219,088
|
|
Accounts
receivable-miscellaneous
|
|
|
46,930
|
|
|
|
185,350
|
|
Accounts
receivable-net oil and gas production
|
|
|
254,286
|
|
|
|
248,882
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
370,126
|
|
|
|
698,105
|
|
|
|
|
|
|
|
|
|
|
Oil
and Gas Properties and related assets, net of depletion and depreciation
of $2,498,672 and $2,333,426 at December 31, 2007 and September
30, 2007, respectively
|
|
|
4,461,953
|
|
|
|
4,556,305
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
431,511
|
|
|
|
615,728
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
5,263,590
|
|
|
$
|
5,870,138
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
564,922
|
|
|
$
|
502,875
|
|
Accrued
expenses
|
|
|
452,868
|
|
|
|
1,202,438
|
|
Notes
payable related parties
|
|
|
50,000
|
|
|
|
453,432
|
|
Convertible
notes payable
|
|
|
250,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
1,317,790
|
|
|
|
2,158,745
|
|
|
|
|
|
|
|
|
|
|
Long
term notes payable
|
|
|
7,935,274
|
|
|
|
8,155,280
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 9)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Deficit
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 1,000,000 shares authorized, 1,000
shares issued and outstanding at December 31, 2007 and September 30,
2007
|
|
|
1
|
|
|
|
1
|
|
Common
stock, $0.001 par value, 300,000,000 shares authorized, 231,412,224 shares
issued and outstanding at December 31, 2007 and September 30,
2007, respectively
|
|
|
231,412
|
|
|
|
231,162
|
|
Additional
paid-in capital
|
|
|
10,241,739
|
|
|
|
10,330,166
|
|
Retained
deficit
|
|
|
(14,462,626
|
)
|
|
|
(15,005,216
|
)
|
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Deficit
|
|
|
(3,989,474
|
)
|
|
|
(4,443,887
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
$
|
5,265,590
|
|
|
$
|
5,870,138
|
|
|
|
|
|
|
|
|
|
|
See
accompanying summary of accounting policies and notes to financial
statements
TEXHOMA
ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
For the
three months ended December 31, 2007 and 2006
|
|
December
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues
|
|
|
|
|
|
|
Oil
and gas interests
|
|
$
|
417,590
|
|
|
$
|
477,665
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
417,590
|
|
|
|
477,665
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Oil
and gas exploration
|
|
|
237,568
|
|
|
|
106,737
|
|
Gross
Margin
|
|
|
180,022
|
|
|
|
370,928
|
|
|
|
|
|
|
|
|
|
|
Depletion
and depreciation
|
|
|
165,246
|
|
|
|
217,465
|
|
General
and administrative expenses
|
|
|
(340,332
|
)
|
|
|
246,061
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
355,108
|
|
|
|
(92,598
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
Gain
(loss) on sale of furniture and equipment
|
|
|
2,000
|
|
|
|
-
|
|
Stock
accretion gain (expense)
|
|
|
89,677
|
|
|
|
529,129
|
|
Loss
on impairment of investments
|
|
|
|
|
|
|
(196,000
|
)
|
Gain
on extinguishment of debt
|
|
|
370,083
|
|
|
|
|
|
Interest
income
|
|
|
1,477
|
|
|
|
4,077
|
|
Interest
expense
|
|
|
(275,755
|
)
|
|
|
(297,268
|
)
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
187,482
|
|
|
|
39,938
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
542,590
|
|
|
|
(52,660
|
)
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
542,590
|
|
|
$
|
(52,660
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
231,333,448
|
|
|
|
181,662,252
|
|
Diluted
weighted average common shares outstanding
|
|
|
231,333,448
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
Basic
diluted earnings per share
|
|
|
0.00
|
|
|
|
-
|
|
See
accompanying summary of accounting policies and notes to financial
statements.
TEXHOMA
ENERGY, INC. AND SUBSIDIARY
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
For
the three months ended December 31, 2007 and for the year ended September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-In
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
Stockholders’
|
|
|
Common
Stock
|
|
Preferred
Stock
|
|
Paid-In
|
|
|
Preferred
|
|
Contributed
|
|
Accumulated
|
|
Equity
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
|
Stock
|
|
Capital
|
|
Deficit
|
|
[Deficit]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2006
|
181,662,252
|
|
$
|
181,662
|
|
|
-
|
|
|
-
|
|
$
|
10,527,155
|
|
|
|
-
|
|
|
-
|
|
$
|
(12,817,295
|
)
|
$
|
(2,108,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued June 7, 2007 at $0.0125 per share
|
18,000,000
|
|
|
18,000
|
|
|
|
|
|
|
|
|
207,000
|
|
|
|
|
|
|
|
|
|
|
|
|
225,000
|
|
Shares
issued June 7,2007 at $0.0125 per share
|
4,800,000
|
|
|
4,800
|
|
|
|
|
|
|
|
|
55,200
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
Shares
issued, June 10, 2007 for management agreement at $0.02 per
share
|
15,200,000
|
|
|
15,200
|
|
|
|
|
|
|
|
|
288,800
|
|
|
|
|
|
|
|
|
|
|
|
|
304,000
|
|
Shares
issued July 1, 2007 for services agreement at $0.02 per
share
|
500,000
|
|
|
500
|
|
|
|
|
|
|
|
|
9,500
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Shares
issued July 9, 2007 at $0.0125 per share
|
1,000,000
|
|
|
1,000
|
|
|
|
|
|
|
|
|
11,500
|
|
|
|
|
|
|
|
|
|
|
|
|
12,500
|
|
Shares
issued August 13, 2007 for management agreement at $0.02 per
share
|
10,000,000
|
|
|
10,000
|
|
|
|
|
|
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
Shares
issued August 13, 2007 for management agreement at $0.001 per
share
|
|
|
|
|
|
|
1,000
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Net
loss at September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,187,921
|
)
|
|
(2,187,921
|
)
|
Stock
accretion for warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
(958,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(958,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2007
|
231,162,252
|
|
|
231,162
|
|
|
1,000
|
|
|
1
|
|
|
10,330,166
|
|
|
|
|
|
|
|
|
|
(15,005,216
|
)
|
|
(4,443,887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued October 30, 2007 for settlement agreement at
$0.006
|
250,000
|
|
|
250
|
|
|
|
|
|
|
|
|
1,250
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
Transfer
agent rounding adjustment
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
542,590
|
|
|
542,590
|
|
Stock
accretion for warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
(89,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(89,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
231,412,224
|
|
|
231,412
|
|
|
1,000
|
|
|
1
|
|
|
10,241,739
|
|
|
|
|
|
|
|
|
|
(14,462,626
|
)
|
|
(3,989,474
|
)
|
See
accompanying summary of accounting policies and notes to financial
statements
TEXHOMA ENERGY,
INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS
OF CASH FLOWS
For the
three months ended December 31, 2007 and 2006
|
|
December
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(unaudited)
|
|
Cash
flows from operating activities:
Net
income (loss)
|
|
$
|
542,590
|
|
|
$
|
(52,660
|
)
|
Adjustments
to reconcile net income (loss) to
net
cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depletion
|
|
|
164,614
|
|
|
|
216,083
|
|
Depreciation
and amortization
|
|
|
80,350
|
|
|
|
81,100
|
|
Stock
issued for services
|
|
|
-
|
|
|
|
-
|
|
Stock
accretion gain
|
|
|
(89,677
|
)
|
|
|
(529,129
|
)
|
|
|
|
|
|
|
|
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
133,016
|
|
|
|
147,532
|
|
Accounts
payable
|
|
|
62,046
|
|
|
|
(68,077
|
)
|
Accrued
expenses
|
|
|
(749,570
|
)
|
|
|
(77,006
|
)
|
Other
|
|
|
104,500
|
|
|
|
(12,000
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
247,869
|
|
|
|
(294,157
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Oil
and gas property investments and related
|
|
|
(70,895
|
)
|
|
|
(8
,900
|
)
|
Decline
in value of Morgan Creek Investment
|
|
|
-
|
|
|
|
196,000
|
|
Net
cash provided by (used in) investing activities
|
|
|
(70,895
|
)
|
|
|
187,100
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Loans
from affiliates
|
|
|
-
|
|
|
|
-
|
|
Loan
repayment to affiliates
|
|
|
(403,432
|
)
|
|
|
(15,000
|
)
|
Notes
payable proceeds
|
|
|
250,000
|
|
|
|
-
|
|
Repayment
of notes payable
|
|
|
(220,005
|
)
|
|
|
(120,257
|
)
|
Issuances
of stock for services
|
|
|
1,500
|
|
|
|
-
|
|
Proceeds
from issuance of common stock
|
|
|
-
|
|
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
(371,937
|
)
|
|
|
(135,257
|
)
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(194,963
|
)
|
|
|
(242,314
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
263,873
|
|
|
|
489,877
|
|
Cash
and cash equivalents at end of period
|
|
$
|
68,910
|
|
|
$
|
247,563
|
|
See
accompanying summary of accounting policies and notes to financial
statements
TEXHOMA
ENERGY, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
three months ended December 31, 2007
1.
Summary of Significant Accounting Policies
Description of Business
-
Texhoma Energy, Inc. was originally incorporated as Pacific Sports Enterprises,
Inc. in 1998. Texhoma is engaged in the exploration for and the
production of hydrocarbons, more commonly known as the exploration and
production of crude oil and natural gas. In March 2006, Texhoma
incorporated a subsidiary, Texaurus Energy, Inc. in Delaware for the same
purposes.
Organization and Basis of
Presentation
– Texhoma’s securities are registered with the Securities and
Exchange Commission in the United States of America and its securities currently
trade under the symbol “TXHE.OB” on the U.S. Over the Counter Bulletin
Board.
The
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America.
Use of Estimates
– Texhoma’s
financial statement preparation requires that management make estimates and
assumptions which affect the reporting of assets and liabilities and the related
disclosure of contingent assets and liabilities in order to report these
financial statements in conformity with accounting principles generally accepted
in the United States of America. Actual results could differ from
those estimates.
The
primary estimates made by management included in these financial statements are
the impairment reserves applied to various long-lived assets and the fair value
of its stock tendered in various non-monetary transactions.
Cash and Cash Equivalents -
Cash includes all highly liquid investments that are readily convertible
to known amounts of cash and have original maturities of three months or
less.
Restricted Cash –
Texaurus
maintained residual cash from the proceeds of the Laurus Fund note in a
restricted account for as long as Texaurus shall have any obligations to
Laurus. Texaurus requested that Laurus apply the excess funds as a
payment of principal on the Laurus Fund note for approximately
$220,000. The remaining balance is comprised of interest earned on
the cash balance and deposited in the account after the payment was
made.
Fair Value of Financial Instruments
-
SFAS No. 107,
Disclosures about Fair Values of
Financial Instruments
(FAS 107), requires disclosing fair values to the
extent practicable for financial instrument, which are recognized or
unrecognized in the balance sheet. For certain financial instruments, including
cash, accounts payable, and accrued expenses and short term debt, it was assumed
that the carrying value does not materially differ from fair
value. The fair value of debt was determined based upon current rates
at which Texhoma could borrow funds with similar maturities
remaining.
Property and Equipment-
Property and equipment are recorded at cost less impairment. Depreciation
is computed using the straight-line basis over the estimated useful lives of the
assets at the rates in the accompanying table.
Asset
Category
|
Depreciation/
Amortization
Period
|
|
|
Building
|
30
Years
|
|
|
Plant
& Equipment
|
7
Years
|
|
|
Production
Tooling
|
$10
per unit
|
|
|
Automotive
Equipment
|
5
Years
|
|
|
Office
Equipment
|
5
to 3 Years
|
Texhoma’s
subsidiary purchased oil and gas property interests on March 28, 2006 with
ownership of their portion of the oil and gas production from the Barnes Creek
and Edgerly properties becoming effective January 1, 2006. Little
White Lakes was purchased effective April 1, 2006. Depletion is
computed based upon the estimated remaining proved reserves as determined by a
third party petroleum and geology consulting firm. Based upon those
estimations, the total proven reserves for the leaseholds were as
follows:
Field
|
Total
Proven Reserves
|
Remaining
at December 31, 2007
|
Depletion
rate for December 31, 2007
|
Depletion
rate for December 31, 2006
|
|
|
|
|
|
Barnes
Creek
|
73,310
|
49,186
|
4.4%
|
5.3%
|
|
|
|
|
|
Edgerly
|
210,574
|
50,596
|
1.3%
|
1.5%
|
|
|
|
|
|
Little
White Lakes
|
27,673
|
8,093
|
20.3%
|
7.2%
|
Oil and Natural Gas Exploration and
Development -
Texhoma records its exploration operations in accordance
with SFAS 19,
Financial
Accounting and Reporting by Oil and Gas Producing Companies
(FAS 19).
Exploration involves identifying areas that may warrant inspection and/or
examination of specific areas that indicate they may possess the presence of oil
and gas reserves, including the drilling of exploration wells and collecting
seismic data.
Texhoma
adopted “Successful Efforts” accounting for exploration costs as defined in FAS
19. Under this method, geological and geophysical costs, the costs of
carrying and retaining undeveloped properties such as delay rentals, ad valorem
taxes on properties, legal costs for the title defense, maintenance of land and
lease records, and dry and bottom hole contributions are charged to expense as
incurred. The cost of drilling exploratory wells is capitalized,
pending determination of whether the well can produce
hydrocarbons. If it is determined the well has no commercial
potential, the capitalized costs, net of any salvage value are
expensed.
If it is
determined subsequent to a financial reporting period and prior to the issuance
of financial statements for that reporting period, that an exploratory well has
not found commercially exploitable hydrocarbons, any costs incurred through the
end of that reporting period, net of salvage value, must be written off in that
prior period under FASB Interpretation No. 36,
Accounting for Exploratory Wells in
Progress at the End of the Period
(FAS 36).
Equity Method of Accounting for
Investments in Common Stock -
The equity method of accounting for
investments in Common Stock when the ownership is 50 percent or less of the
voting stock of the enterprise is governed by APB Opinion No. 18,
The Equity Method of Accounting for
Investments in Common Stock
(APB 18). It states that use of
the equity method of accounting for an investment is required if the investor
exercises significant influence over the operating and financial policies of the
investee. APB 18 includes presumptions, based on the investor’s
percentage of ownership, as to whether the investor has that
ability.
Long-Lived Assets
- The
Company's accounting policy regarding the assessment of the recoverability of
the carrying value of long-lived assets, including property, equipment and
purchased intangible assets with finite lives, is to review the carrying value
of the assets if the facts and circumstances suggest that they may be impaired.
If this review indicates that the carrying value will not be recoverable, as
determined based on the projected undiscounted future cash flows, the carrying
value is reduced to its estimated fair value.
Income Taxes
- Management
evaluates the probability of the realization of its deferred income tax
assets. The Company has estimated a $2, 365,000 deferred income tax
asset at December 31, 2007 relating to net operating loss carryforwards and
deductible temporary differences. Of that amount, an estimated
$184,000 is related to the net operating gain generated for the
quarter ended December 31, 2007. Management determined that because
the Company has not yet generated taxable income, because of the change in
control that has occurred in the past and the fact that certain losses have been
generated outside of the United States, it is more likely than not that a tax
benefit will not be realized from these operating loss carryforwards and
deductible temporary differences. Accordingly, the
deferred income tax asset is offset by a full valuation
allowance.
If the
Company begins to generate taxable income, management may determine that some or
all of the deferred income tax asset may be recognized. Recognition
of the asset could increase after tax income in the future. The net
operating tax loss carry forward of approximately $5,108,000 expires from 2011
to 2025. The future utilization of the net operating losses is
uncertain.
Earnings or
(
Loss) Per Share
- Per SFAS
No. 128,
Earnings per Share
(FAS 128), earnings per share (or loss per share), is computed by
dividing the earnings (loss) for the period by the weighted average number of
common stock shares outstanding for the period. Diluted earnings
(loss) per share reflects the potential dilution of securities by including
other potential common stock, including stock options and warrants, in the
weighted average number of common shares outstanding for the period, if
dilutive. Therefore because including options and warrants issued
would have an anti-dilutive effect on the loss per share, only the weighted
average (loss) per share is reported for periods that report a
loss.
Share-Based Payment
- In
December 2004, the FASB issued SFAS No. 123R,
Accounting for Stock-Based
Compensation
(FAS 123(R)), which supersedes APB 25. Accordingly, Texhoma
is required to measure all stock-based compensation awards using a fair value
method and recognize such expense in its financial statements as services are
performed. In addition, the adoption of FAS No. 123(R) will require additional
accounting related to the income tax effects and additional disclosure regarding
the cash flow effects resulting from share-based payment arrangements. FAS No.
123(R) became effective for small business issuers as of the first interim or
annual reporting period that begins after December 31, 2005.
The
effects of the adoption of FAS No. 123(R) on Texhoma’s results of operations and
financial position are dependent upon a number of factors, including the number
of employee stock options outstanding and unvested, the number of stock-based
awards which may be granted in the future, the life and vesting features of
stock-based awards which may be granted in the future, the future market value
and volatility of Texhoma’s stock, movements in the risk free rate of interest,
award exercise and forfeiture patterns, and the valuation model used to estimate
the fair value of each award.. In addition, Texhoma utilizes restricted stock
units as a key component of its ongoing employee stock-based compensation plan.
These awards generally are recognized at their fair value, equal to the quoted
market price of Texhoma’s common stock on the date of issuance, and this amount
is amortized over the vesting period of the shares of restricted stock held by
the grantee
Accounting Changes and Error
Corrections - In May 2005, the FASB issued SFAS No. 154
, Accounting Changes and Error
Corrections
(FAS 154)
.
This statement
replaces APB Opinion No. 20,
Accounting Changes
, and SFAS
No. 3,
Reporting
Accounting Changes in Interim Financial Statements,
and changes the
requirements for the accounting and reporting of a change in accounting
principle. This statement applies to all voluntary changes in accounting
principles. It also applies to changes required by an accounting pronouncement
in the unusual instance that the pronouncement does not include specific
transition provisions. When a pronouncement includes specific transition
provisions, those provisions should be followed. FAS 154 requires
retrospective application to prior periods’ financial statements of voluntary
changes in accounting principles. FAS 154 is effective for accounting
changes and corrections of errors made during 2007, beginning on January 1,
2007. Texhoma does not believe the adoption of FAS 154 will have a material
impact on its financial statements.
Inventory Cost
- In
November 2004, the FASB issued SFAS No. 151
, Inventory Costs—an Amendment of
ARB No. 43, Chapter 4
(FAS 151)
.
FAS 151 amends Accounting
Research Bulletin (“ARB”) No. 43, Chapter 4, to clarify that abnormal
amounts of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges. In addition,
this statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. The provisions of this statement were effective for inventory costs
incurred beginning in Texhoma’s first quarter of 2006. The adoption of FAS 151
did not have a material impact on our financial statements.
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007),
Business Combinations
,
which replaces SFAS No 141. The statement retains the purchase method of
accounting for acquisitions, but requires a number of changes, including changes
in the manner in which assets and liabilities are recognized in purchase
accounting. It also a) alters the recognition of assets acquired and liabilities
assumed arising from contingencies, b) requires the capitalization of in-process
research and development at fair value, and c) requires expensing
acquisition-related costs as incurred. SFAS No. 141R is effective for us
beginning January 1, 2009 and will apply prospectively to business combinations
completed on or after that date.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 5
, which changes
the accounting and reporting for minority interests. Minority interests will be
recharacterized as noncontrolling interests and will be reported as a component
of equity, separate from the parent’s equity, and purchases or sales of equity
interests that do not result in a change in control will be accounted for as
equity transactions. In addition, net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement and, upon a loss of control, the interest sold, as well as any
interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS No. 160 is effective for us beginning January 1,
2009 and will apply prospectively, except for the presentation and disclosure
requirements, which will apply retrospectively. At this current time, we do not
believe that adoption of SFAS No. 160 would have any effect on our financial
statements.
On
January 1, 2007, we adopted Emerging Issues Task Force Issue No. 06-2 (“EITF
06-2”),
Accounting for
Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No.
43
. EITF 06-2 requires companies to accrue the costs of compensated
absences under a sabbatical or similar benefit arrangement over the requisite
service period. As we do not currently have a plan for compensated absences
under a sabbatical or similar benefit arrangement, the adoption of EITF 06-2 had
no effect on our financial statements.
In
February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities
. SFAS No. 159 gives us the irrevocable
option to carry many financial assets and liabilities at fair values, with
changes in fair value recognized in earnings. SFAS No. 159 is effective for us
beginning January 1, 2008, although early adoption is permitted. We are
currently assessing the potential impact that electing fair value measurement
would have on our financial statements and have not determined what election we
will make.
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
,
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. SFAS No.
157 is effective for us beginning January 1, 2008. In December 2007, the FASB
released a proposed FASB Staff Position (FSP FAS 157-b –
Effective Date of FASB Statement No.
157
) which, if adopted as proposed, would delay the effective date of
SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually). We are currently assessing the
potential impact that adoption of this statement would have on our financial
statements.
2. PROPERTY
AND EQUIPMENT
No
acquisitions of oil and gas properties were made during the quarter ended
December 31, 2007.
3. SHARE
CAPITAL
Stock for Services Compensation
Plan
- In accordance with Texhoma’s Stock for Services Compensation Plan,
on August 26, 2004, the Company filed a registration statement on Form S-8 with
the Securities and
Exchange
Commission, for registration under the Securities Act of 1933 of Securities to
Be Offered to Employees Pursuant to Employee Benefit Plans to register the
shares of common stock under Texhoma’s Plan in an amount of up to
11,000,000 pre forward split shares and 44,000,000 post forward split shares at
various exercise prices. The Board of Directors is authorized,
without further approval; to issue shares of common stock under the plan from
time to time of up to an aggregate of 44,000,000 post forward split shares of
the Company’s common stock.
Common Stock
- In May 2007,
4,800,000 shares of our common stock, at $0.0125, were subscribed for in
consideration for $60,000.
In May
2007, Valeska Energy Corp. entered into a management agreement with Texhoma for
a minimum period of three months. Mr. William M. Simmons is the Chief
Executive Officer of Valeska. In exchange for these services, Valeska
was issued 15,200,000 shares of Texhoma’s stock as payment and
retainer. On June 8, 2007, Capersia transferred 1,000,000 shares of
Texhoma stock to Mr. William Simmons and 1,000,000 shares to Valeska Energy
Corp.
In June
2007, 18,000,000 shares of our common stock were purchased at $0.0125 per share
by Hobart Global Ltd., a British Virgin Islands corporation in exchange for
$225,000.
In July
2007, additional shares of common stock were sold to Camecc A/S, a Norwegian
company for $12,500 or $0.0125 per share and another 500,000 shares were issued
to Mr. Ibrahim Nafi Onat in consideration for his entry into a Consulting
Agreement with us.
On or
about August 13, 2007, we entered into a Second Amendment to Management Services
Agreement with Valeska Energy Corp. (“Valeska” and the “Second
Amendment”).
Pursuant
to the Second Amendment, we and Valeska agreed to extend the term of the
Management Services Agreement until September 30, 2008, and to pay Valeska the
following consideration in connection with agreeing to perform the services
required by the original Management Services Agreement, and in consideration for
allowing Daniel Vesco and William M. Simmons to serve as Directors of the
Company, bringing on personnel to assist the Company with the day to day
operations of the Company, and helping bring the Company current in its filings
(the “Services”):
|
|
1,000
shares of the Company’s Series A Preferred Stock (discussed
below);
|
|
|
A
monthly fee of $20,000 per month during the extended term of the Second
Amendment, plus reasonable and actual costs incurred by Valeska (or
individuals or designees brought on by Valeska, including lodging, car
rental and telephone expenses therewith) in connection with such
Services;
|
|
|
10,000,000
restricted shares of the Company’s common stock; and
|
|
|
60,000,000
options to purchase shares of the Company’s common stock, which shall have
a cashless exercise provision, shall be valid for a period of three years
from their grant date, and shall have an exercise price of $0.02 per share
which was greater than 110% of the trading price of the Company’s common
stock on the Pinksheets on the day of such
grant.
|
On or
about October 30, 2007, we entered into a Cooperation Agreement and Mutual
Release with our former consultant Terje Reiersen (“Reiersen” and the “Reiersen
Release”). Pursuant to the Reiersen Release, Reiersen agreed to
release us, our current and former officers, agents, directors, servants,
attorneys, representatives, successors, employees and assigns from any and all
rights, obligations, claims,
demands
and causes
of action in contract or tort, under any federal or state law, whether known or
unknown, relating to his services with the Company or the Company in general for
any matter whatsoever other than in connection with any claims against any
former officers or Directors of the Company, which claims Reiersen assigned to
the Company. In connection with the Reiersen Release, we paid
Reiersen $2,500 and issued Reiersen 250,000 restricted shares of our common
stock.
As part
of the consulting agreement with Nafi Onat, an additional 500,000 shares of our
common stock are to be issued to Mr. Onat, our director and consultant according
to the terms of the agreement. These shares were issued to Mr. Onat at
$0.006 per share based on the average trading price of the Company's common
stock on the Pinksheets on January 2, 2008, the first trading day following the
six month period designated as the award date of the common stock.
4. STOCK
OPTIONS
Pursuant
to the Company's 2006 Stock Incentive Plan (the "Plan") options were issued at
an exercise price of $0.13 per share, which was equal to the average of the
highest ($0.125) and lowest ($0.111) quoted selling prices of the Company's
common stock on June 1, 2006, multiplied by 110%. The remaining options were
granted to the following individuals in the following amounts:
Options
that remain outstanding at December 31, 2007 include issuances of 2,000,000
options to a consultant of the Company in consideration for investor relations
services rendered to the Company. The options granted to the consultant were not
granted pursuant to the Plan. The options have an exercise price of $0.13 per
share, vest at a rate of 250,000 options every three months and expire if
unexercised on June 1, 2009.
60,000,000
options were also granted to Valeska Energy Corp. on August 13, 2007 in
conjunction with the second amendment to the terms of their management agreement
at $0.02 per share and vested immediately. The options expire if
unexercised on August 13, 2010.
The
following is a summary of the option activity during the three months ended
December 31, 2007:
|
|
Number
|
|
|
Average
|
|
|
|
Of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding
at October 1, 2007
|
|
|
62,000,000
|
|
|
$
|
0.0235
|
|
Granted
and Expired
|
|
|
-
|
|
|
|
-
|
|
Balance
at December 31, 2007
|
|
|
62,000,000
|
|
|
$
|
0.0235
|
|
Compensation
costs associated with the issuance of options to purchase shares of common stock
to employees, directors or consultants is measured at fair value at the date of
issuance based upon the options vested and expensed during the current
period.
As
of December 31, 2007, 61,250,000 of the options were
vested. Based on our knowledge as of the date of this filing, we have
not applied a forfeiture rate to the vested options. We reduced
the accrual for option expense by $589,546 in our current financial statements.
The trading price of our stock was $0.006 per share on December 31,
2007. The Black-Scholes option model with the following
assumptions: weighted average risk-free interest rate of 4.25%,
estimated volatility of 243%, weighted-average expected life of 2.6 years and no
expected dividend yield, resulted in a fair value per option of
$0.005.
5.
RELATED PARTIES
On
December 7, 2004, the Company borrowed $50,000 from a related party, MFS
Technology. The loan is evidenced by a convertible promissory note, see
Note 6 for additional information.
In June
2007, Valeska Energy Corp. entered into a management agreement with Texhoma for
a minimum period of three months. Mr. William Simmons is the Chief
Executive Officer of Valeska. In exchange for these services, Valeska
was issued 15,200,000 shares of Texhoma’s stock as payment and
retainer. On June 8, 2007, Capersia transferred 1,000,000 shares of
Texhoma stock to Mr. William Simmons and 1,000,000 shares to Valeska Energy
Corp.
In July
2007, 500,000 shares were issued to Mr. Ibrahim Nafi Onat in consideration for
his entry into a consulting agreement with us.
On or
about August 13, 2007, we entered into a Second Amendment to Management Services
Agreement with Valeska Energy Corp. (“Valeska” and the “Second
Amendment”).
Pursuant
to the Second Amendment, we and Valeska agreed to extend the term of the
Management Services Agreement until September 30, 2008, and to pay Valeska the
following consideration in connection with agreeing to perform the services
required by the original Management Services Agreement, and in consideration for
allowing Daniel Vesco and William M. Simmons to serve as Directors of the
Company, bringing on personnel to assist the Company with the day to day
operations of the Company, and helping bring the Company current in its filings
(the “Services”):
|
|
1,000
shares of the Company’s Series A Preferred Stock;
|
|
|
A
monthly fee of $20,000 per month during the extended term of the Second
Amendment, plus reasonable and actual costs incurred by Valeska (or
individuals or designees brought on by Valeska, including lodging, car
rental and telephone expenses therewith) in connection with such
Services;
|
|
|
10,000,000
restricted shares of the Company’s common stock; and
|
|
|
60,000,000
options to purchase shares of the Company’s common stock, which shall have
a cashless exercise provision, shall be valid for a period of three years
from their grant date, and had an exercise price of $0.02 per share, equal
to greater than 110% of the trading price of the Company’s common stock on
the Pinksheets on the day of such
grant.
|
All of
the above transactions may have been entered into at terms which may not have
been available to unrelated parties.
6. NOTES
PAYABLE AND CONVERTIBLE LOANS
On
December 7, 2004, the Company borrowed $50,000 from a related
party. The loan is evidenced by a convertible promissory
note. The loan bears interest at 5% per annum calculated 6 months
after the advancement of funds. $25,000 was due on June 7, 2005 and
the remaining balance, plus interest was due on December 7, 2005. The
loan has not been repaid, extended or converted. The lender has the option
during the term of the loan, and any extension, to convert the principle and
interest into shares of common stock at a conversion price of $0.30 per
shares.
The
Laurus Master Fund, Ltd (“Laurus”) note accrues interest at the Prime Rate plus
two percent (2.0%) as published in The Wall Street Journal, but shall not at any
time be less than eight percent (8.0%). Payments of accrued interest
and principal equal eighty (80%) of the Net Revenue paid to Texaurus in respect
of oil, gas and/or other hydrocarbon production in which Texaurus has an
interest and each payment is applied first to accrued interest due and then to
the principal balance of the note
On or
about October 19, 2006, we issued a Promissory Note to Mr. Frank Jacobs, our
then Director, in the amount of $493,643.77, which amount represented funds
advanced to the Company by Mr. Jacobs during the 2006 calendar year and
management fees owed to Mr. Jacobs for his services to the Company during the
2006 calendar year (the “Jacobs' Note”). The Jacobs' Note bears interest at the
rate of 6% per annum until paid, and is payable by the Company at any time on
demand. The Jacobs' Note may be pre-paid at any time without penalty. Any
amounts not paid on the Jacobs' Note when due shall bear interest at the rate of
15% per annum. As discussed below, the Jacobs Note and all affiliated
notes were forgiven.
On or
about June 5, 2007, we entered into an Agreement with Jacobs Oil & Gas
Limited (“Jacobs”), pursuant to which Jacobs agreed that no interest would be
due from us and/or accrue on the principal or accrued interest to date on his
outstanding Promissory Note for the period of one (1) year from the date of the
Agreement and that he would not try to collect the principal and/or accrued
interest on such note for a period of one (1) year.
The
Company also entered into a Security Agreement with Mr. Jacobs under which
Agreement the Board of Directors ratified the assignment of 200,000 shares of
the common stock of Morgan Creek Energy Corp., which shares were held by the
Company, to Mr. Jacobs as security for the money that is owed to Mr. Jacobs
under the Jacobs' Note.
On or
about November 2, 2007, we entered into a First Amendment to Securities Purchase
Agreement, Secured Term Note and Registration Rights Agreement with Laurus (the
“First Amendment”). Pursuant to the First Amendment, Laurus agreed
to:
(a)
|
waive
any default which may have occurred as a result of our failure to become
current in our filings with the Commission, assuming that we become
current in our filings prior to December 15,
2007;
|
(b)
|
amend
the terms of the Laurus Note to provide that a “Change of Control” of
Texaurus under the Note, which requires approval of Laurus, includes any
change in Directors such that Daniel Vesco and William M. Simmons are no
longer Directors of Texaurus; and
|
(c)
|
amend
the terms of the Registration Rights Agreement with Laurus to provide that
the date we are required to gain effectiveness of a registration statement
registering the shares of common stock issuable in connection with the
exercise of the Laurus Warrant in the Company is amended to no later than
April 30, 2008, and that the effective date of any additional registration
statements
required
to be filed by us in connection with the Registration Rights Agreement,
shall be thirty (30) days from such filing
date.
|
On or
about November 28, 2007, we entered into a Settlement Agreement and Mutual
Release (the “Agreement”) by and between the Company, Frank A. Jacobs, our
former officer and Director (“Jacobs”), and Jacobs Oil & Gas Limited, a
British Columbia corporation (“JOGL” and collectively with Jacobs, the “Jacobs
Parties”), Clover Capital, a creditor of the Company (“Clover”), Capersia Pte.
Ltd., a Singapore company and a significant stockholder of the Company
(“Capersia”), Peter Wilson, an individual and a former Director of the Company
(“Wilson”), and Sterling Grant Capital, Inc., a British Columbia corporation,
controlled by Mr. Wilson (“SGC” and collectively with Clover, Capersia and
Wilson, the “Non-Jacobs Parties,” and with the Jacobs Parties, the “Interested
Parties”). We had various disputes with the Interested Parties
relating to the issuances of and transfers of various shares of our common stock
and various of the Interested Parties had alleged that we owed them
consideration (the “Disputes”). We entered into the Agreement to
settle the Disputes with the Interested Parties.
In
consideration for the Company agreeing to enter into the Agreement, the Jacobs
Parties agreed to the following terms: the Jacobs Parties would return to the
Company for cancellation 5,000,000 of the 7,500,000 shares purchased by Jacobs
in March 2006 (the “Jacobs Shares”); all debt owed by Texhoma to the Jacobs
Parties, known or unknown, was discharged and forgiven, including the total
outstanding amount of the approximately $500,000 Promissory Note owed to Frank
A. Jacobs by the Company (the “Jacobs Note”); the Company owes Jacobs no rights
to contribution and/or indemnification in connection with Jacobs employment with
the Company; Jacobs agreed to certify the accuracy and correctness of the
Company’s previously prepared annual and interim financial statements and
periodic reports, relating to the time period of his employment from
approximately January 2005 to June 2007; the Jacobs Parties agreed they have no
interest in and will not interfere with the issuance of or any subsequent
transfers of shares to or from Lucayan Oil and Gas Investments, Ltd. (the “LOGI
Shares”), a Bahamas corporation; Jacobs agreed to use his best efforts to answer
the Company’s questions and produce documents in the future regarding operations
and financials of the Company; Jacobs agreed that he no longer holds any
exercisable options of the Company; the Voting Agreement entered into between
various parties in June 2007, including Jacobs, remains in full affect and force
against Jacobs; and Jacobs has no interest in any shares other than the
aforementioned 2,500,000 shares.
Additionally,
in consideration for the Company agreeing to enter into the Agreement, the
Non-Jacobs Parties agreed to the following terms: any and all debts owed by
Texhoma to Clover, which purportedly totaled approximately $60,000, Capersia,
which purportedly totaled $60,000 or any of the Non-Jacobs Parties (including
approximately $20,000 purportedly owed to Wilson) was discharged and forgiven;
the Non-Jacobs Parties agreed that they have no interest in and will not
interfere with the issuance of the LOGI Shares; the Voting Agreement remains in
full force and effect against Capersia; and in connection with the 30,000,000
shares of Company stock in Capersia’s possession received through Texhoma’s
previous purchase of a 40% interest in Black Swan Petroleum Pty. Ltd. (the
“Capersia Shares”), Capersia will not transfer shares in excess of 2% of
Texhoma’s then outstanding shares in any three (3) month period, until the
second anniversary of the Agreement.
As a
result of the Agreement, the Company was able to settle approximately $640,000
in debt which it purportedly owed to the various Interested Parties and to
settle any and all other claims which such parties, in return for the
consideration discussed above, which mainly consisted of assigning the rights to
the 200,000 shares of Morgan Creek Energy Corp. stock to Frank A. Jacobs, which
shares had an approximate value of $92,000 based on the trading price of Morgan
Creek Energy Corp.’s common stock on the date of the Agreement of
$0.46. The extinguishment of this debt resulted in a gain of
approximately $370,000 for us.
On or
about November 28, 2007, we entered into a Subscription Agreement with Pagest
Services SA, a Swiss Company, pursuant to which we agreed to sell two units
consisting of $125,000 in Convertible Promissory Notes with a conversion price
of $0.0125 per share, convertible at the option of Purchaser, into the Company’s
common stock, and Class A and Class B Warrants to purchase 5,000,000 shares of
common stock with an exercise price of $0.02 and $0.03 per share, respectively,
exercisable for a period of two years from the date of the Subscription
Agreement (the “Units”). One Unit was sold immediately to the
Purchaser, and one Unit was sold on December 19,
2007. The Convertible Promissory Notes bear interest at the rate of
2% per annum, until paid in full, which amount will increase to 15% per annum,
upon the occurrence of an Event of Default (as defined in the Convertible
Promissory Notes). The Convertible Promissory Notes are due on the
first anniversary of the date they are sold, with the first $125,000 in
Convertible Promissory Notes being due on November 28, 2008, unless converted
into shares of our
common
stock. In the event that our common stock trades on the market or
exchange on which it then trades, at a trading price of more than $0.02 per
share, for any 10 day trading period, the Convertible Promissory Note will
automatically convert into shares of our common stock at the rate of one share
for each $0.0125 owed to the subscriber. We also agreed to provide
the subscriber piggy-back subscription rights in connection with the sale of the
Units.
7. NET
INCOME OR (LOSS) PER SHARE
Restricted
shares and warrants are included in the computation of the weighted average
number of shares outstanding during the periods presented. The net
income (loss) per common share is calculated by dividing the consolidated loss
by the weighted average number of shares outstanding during the
periods. If we report net losses for any period presented, the
inclusion of options and warrants in the calculation would be anti-dilutive, and
they are excluded from the computation presented in the financial statements for
periods of (loss). Although we reported net income for the three months
ended December 31, 2007, we have not included non-vested stock options or
warrants in our fully diluted earnings per share calculations as the exercise
price is above the average market price for all stock options granted and
warrants outstanding as of December 31, 2007; and therefore, these stock options
and warrants would have an anti-dilutive effect if included in the fully diluted
earnings per share calculation.
8. WARRANTS
The
following is a summary of the warrant activity during the three months ended
December 31, 2007:
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|
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Weighted
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Number
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|
|
Average
|
|
|
|
Of
|
|
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Exercise
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|
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|
Warrants
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|
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Price
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|
|
|
|
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Outstanding,
October 1, 2007
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11,687,500
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$
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0.04
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Granted
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10,000,000
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0.025
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Outstanding
at December 31, 2007
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|
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21,687,500
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$
|
0.033
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Costs
attributable to the issuance of share purchase warrants are measured at fair
value at the date of issuance and expensed with a corresponding increase to
additional Paid-in-Capital at the time of issuance. When the warrant
is exercised, the receipt of consideration is an increase in common share
capital and Paid-in-Capital.
We
granted 10,000,000 warrants during the three months ended December 31,
2007 at exercise prices of $0.02 and $0.03 per share.
The
trading price of our stock was $0.006 per share on December 31,
2007. Warrants were originally issued at prices of $0.02 to
$0.04 resulting in a weighted average price of $0.033 per
share. The Black-Scholes option model with the following
assumptions: weighted average risk-free interest rate of 4.25%,
estimated volatility of 243%, weighted-average expected life of 2.6 years and no
expected dividend yield, resulted in a fair value per warrant of
$0.00539.
The fair
value of the warrants granted and vested during the three months ended December
31, 2007, based upon the Black-Scholes option pricing model was $116,944 a
decrease of $89,677 from the expense at September 30, 2007and as such we
reflected the reduction to expense previously reported in our current financial
statements.
The
earnings per share presentation reflects only the weighted average loss per
share for the periods of loss, because including the warrants when a loss is
being reported has an anti-dilutive effect on earnings (loss) per share
calculations.
9.
COMMITMENTS AND CONTINGENCIES
As
discussed in prior years filings, management wound down operations in Thailand
and Australia after unsuccessful drilling in the Concession of Black Swan
Petroleum. A determination has not been made as to the financial or
legal consequence to Texhoma or its officers or its shareholders, for subsequent
obligations, if any, to persons or governmental entities which may arise from
doing business or owning or leasing property in Thailand and
Australia.
10.
SUBSEQUENT EVENTS
In
January 2008, 500,000 shares or our common stock were issued to Mr. Nafi Onat,
our director and consultant according to the terms of his consulting
agreement. These shares were issued to Mr. Onat at $0.006 per share
based upon the average trading price of TXHE.PK on January 2, 2008 the first day
of trading following the six month period designated as the award date of the
common stock.
On
January 18, 2008, 18,200,000 shares of our common stock were issued to Valeska
Energy Corp., as agreed in the Management Agreement upon the Company’s financial
statements being current and upon application by the Company to trade its common
stock on the Over-The-Counter Bulletin Board, which had occurred as of January
18, 2008.
11.
GOING CONCERN ISSUES
We cannot
provide any assurances that the Company will be able to secure sufficient funds
to satisfy the cash requirements for the next 12 months. The inability to secure
additional funds would have a material adverse effect on the
Company.
These
financial statements are presented on the basis that the Company will continue
as a going concern. Other than the previously disclosed
impairments, no adjustments have been made to these financial statements to give
effect to valuation adjustments that may be necessary in the event the Company
is not able to continue as a going concern. The effect of those
adjustments, if any, could be substantial.
The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America which
contemplate continuation of the Company as a going concern. The
Company reported net income from operations of $543,000
for the three months ended December 31, 2007 but has incurred
$14,463,000 in cumulative losses. Further, the Company has inadequate
working capital to maintain or develop its operations, and is dependent upon
funds from its stockholders and third party financing.
These
factors raise substantial doubt about the ability of the Company to continue as
a going concern. The financial statements do not include any
adjustments that might result from the outcome of these
uncertainties. There is no assurance that the Company will receive
the necessary loans required to funds its exploration plans.
* * * * *
* * * *
Item
2. Management’s Discussion and Analysis or Plan of
Operations.
FORWARD-LOOKING
STATEMENTS
ALL
STATEMENTS IN THIS DISCUSSION THAT ARE NOT HISTORICAL ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT OTHERWISE INCLUDE
THE WORDS "BELIEVES", "EXPECTS", "ANTICIPATES", "INTENDS", "PROJECTS",
"ESTIMATES", "PLANS", "MAY INCREASE", "MAY FLUCTUATE" AND SIMILAR EXPRESSIONS OR
FUTURE OR CONDITIONAL VERBS SUCH AS "SHOULD", "WOULD", "MAY" AND "COULD" ARE
GENERALLY FORWARD-LOOKING IN NATURE AND NOT HISTORICAL FACTS. THESE
FORWARD-LOOKING STATEMENTS WERE BASED ON VARIOUS FACTORS AND WERE DERIVED
UTILIZING NUMEROUS IMPORTANT ASSUMPTIONS AND OTHER IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE THE INFORMATION CONCERNING OUR
FUTURE FINANCIAL PERFORMANCE, BUSINESS STRATEGY, PROJECTED PLANS AND OBJECTIVES.
THESE FACTORS INCLUDE, AMONG OTHERS, THE FACTORS SET FORTH BELOW UNDER THE
HEADING "RISK FACTORS." ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN
THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE
RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOST OF THESE FACTORS
ARE DIFFICULT TO PREDICT ACCURATELY AND ARE GENERALLY BEYOND OUR CONTROL. WE ARE
UNDER NO OBLIGATION TO PUBLICLY UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. REFERENCES IN
THIS FORM 10-QSB, UNLESS ANOTHER DATE IS STATED, ARE TO DECEMBER 31,
2007. AS USED HEREIN, THE “COMPANY,” “TEXHOMA,” “WE,” “US,” “OUR” AND
WORDS OF SIMILAR MEANING REFER TO TEXHOMA ENERGY, INC. AND ITS WHOLLY OWNED
DELAWARE SUBSIDIARY, TEXAURUS ENERGY, INC., UNLESS OTHERWISE
STATED.
ITEM 1. DESCRIPTION OF BUSINESS
Business
History
Texhoma
Energy, Inc. (“we,” “us,” the “Company”, and “Texhoma”), was originally formed
as a Nevada corporation on September 28, 1998 as Pacific Sports Enterprises,
Inc. Our business objective was to own and operate a professional basketball
team that would be a member of the American Basketball Association. The American
Basketball Association was not successful in organizing the league, and
consequently the member teams ceased operating activities in 1999. Thereafter,
we were dormant without any business operations until October 20,
2000.
In May
2001, we changed our name to Make Your Move, Inc. and on September 20, 2004, we
changed our name to Texhoma Energy, Inc. in connection with our change in
business focus to oil and gas exploration and production.
Effective
May 28, 2004, we affected a 1:150 reverse stock split of our issued and
outstanding shares of common stock. Effective November 9, 2004, we affected a
4:1 forward split of our issued and outstanding common stock. Unless otherwise
stated all share amounts listed throughout this filing retroactively take into
account both the May 28, 2004 reverse stock split and the November 9, 2004
forward stock split.
On
November 5, 2004, we entered into a Sale and Purchase Agreement with Capersia
Pte. Ltd., a Singapore company (“Capersia”), to acquire 40% of an oil and gas
exploration license operated by Black Swan Petroleum Pty. Ltd. (“Black Swan”)
and its wholly owned subsidiary Black Swan Petroleum (Thailand) Limited (“Black
Swan Thai”). Black Swan Thai owned the license, permits and title to a petroleum
concession in the Chumphon Basin in the Gulf of Thailand, referred to as “Block
B7/38” (the “Concession”).
Black
Swan recommenced exploration operations of the Concession and Black Swan drilled
two exploration wells in February and March 2005, which proved void of
commercially viable hydrocarbons. In June 2005 after completion of the
exploration activities, the venturers decided to discontinue the exploration
efforts in Thailand and relinquished the Concession back to the government of
Thailand.
On
January 20, 2006 we divested our shareholding in Black Swan and Black Swan
Thai.
After the
exploration venture in Thailand the Board of Directors of the Company decided to
shift its focus to domestic oil and gas exploration and production, with a
particular focus on south Louisiana and east Texas, including near-shore Gulf of
Mexico.
On
February 2, 2006, we executed a Sale and Purchase Agreement (the “Clovelly SPA”)
with Sterling Grant Capital, Inc. pursuant to which we acquired a 5% (five
percent) working interest in the Clovelly South prospect (bringing our total
working interest to 11%) located in Lafourche Parish, Louisiana. As a result,
the Company agreed to fund the work program for the Clovelly South project in
accordance with the Joint Operating Agreement for the property. The
Allain-Lebreton No. 2 well was drilled and plugged and abandoned in September
2006.
On March
15, 2006, our wholly-owned subsidiary, Texaurus Energy, Inc., which was formed
in March 2006 as a Delaware corporation ("Texaurus"), entered into a Sales and
Purchase Agreement with Structured Capital Corp., a Texas corporation to
purchase certain oil and gas leases in Vermillion Parish, Louisiana. The 8%
working interest (5.38167% net revenue interest) in the Intracoastal City field
was acquired for a) two million five hundred thousand dollars ($2,500,000) and
b) the issuance of 37,500,000 shares of our common stock.
On March
28, 2006 Texaurus entered into a Securities Purchase Agreement ("Securities
Purchase Agreement") with Laurus Master Fund, Ltd. ("Laurus"); a Registration
Rights Agreement with Laurus; issued Laurus a Common Stock Purchase Warrant;
entered into a Master Security Agreement with Laurus; sold Laurus a Secured Term
Note in the amount of $8,500,000, and entered into various other agreements.
Additionally, in connection with the closing, we issued Laurus a Common Stock
Purchase Warrant to purchase up to 10,625,000 shares of our common stock at an
exercise price of $0.04 per share.
In
addition Laurus can acquire up to 961 shares of Texaurus’ common stock at an
exercise price of $0.001 per share, representing 49% of Texaurus’ outstanding
common stock. This will be valued at Fair Market Value as of the date
of the transaction.
The
Securities Purchase Agreement and Laurus March 2006 funding is described in
greater detail below under “March 2006 Laurus Master Fund, Ltd.
Funding.”
On March
28, 2006, with an effective date of January 1, 2006, Texaurus closed a Sales
& Purchase Agreement to purchase certain interests in the Barnes Creek gas
field and the Edgerly field from Kilrush Petroleum, Inc. Texaurus paid the
$5,225,000 purchase price with proceeds received from its sale of the Secured
Term Note with Laurus.
March 2006 Funding with
Laurus Master Fund, Ltd.
On March
28, 2006 (the "Closing"), Texaurus entered into a Securities Purchase Agreement
("Securities Purchase Agreement") with Laurus Master Fund, Ltd. ("Laurus"); a
Registration Rights Agreement with Laurus ("Registration Rights Agreement");
issued Laurus a Common Stock Purchase Warrant (the "Texaurus Warrant"); entered
into a Master Security Agreement with Laurus; sold Laurus a Secured Term Note in
the amount of $8,500,000 (the "Note"), and entered into various other agreements
described below. Additionally, in connection with the Closing, we issued Laurus
a Common Stock Purchase Warrant (the "Texhoma Warrant"), which agreements are
described in greater detail below.
SECURED
TERM NOTE
The
Secured Term Note (the "Note") in the amount of $8,500,000, which was sold by
Texaurus to Laurus in connection with the Closing, is due and payable in three
years from the Closing on March 27, 2009 (the "Maturity Date"), and bears
interest at the Wall Street Journal Prime Rate (the "Prime Rate"), plus two
percent (2%) (the "Contract Rate"), based on a 360 day year, payable monthly in
arrears, beginning on
April 1,
2006, provided however that the Contract Rate shall never be less than eight
percent (8%). As of February 6, 2008, the Contract Rate is eight percent (8.00%)
per year, with the Prime Rate at six percent (6%) as of February 6,
2008.
Additionally,
the Note provided for principal payments on the funds to be made each month,
beginning on June 1, 2006, and continuing up to and including the Maturity Date.
The amount of these monthly principal payments is equal to eighty percent (80%)
of the gross production revenue received by Texaurus, relating to all oil and
gas properties owned by Texaurus, for the prior calendar month, provided that
the principal payments shall increase to one hundred percent (100%) of such
gross production revenue if an Event of Default occurs (as defined in the
Note).
If an
Event of Default occurs under the Note, the Note shall bear additional interest
in the amount of two percent (2%) per month above the then current interest rate
of the Note, until such Event of Default is cured or waived. Additionally, upon
the occurrence of and during the continuance of any Event of Default, Laurus can
at its option, demand repayment in full of all obligations and liabilities owing
by Texaurus to Laurus by way of a default payment equal to 130% of the
outstanding principal amount of the Note and any accrued but unpaid interest
thereon.
Additionally,
we agreed to guaranty the Note and other obligations owing to Laurus pursuant to
a Guaranty, the entry into a Master Security Agreement (described below) and the
entry into a Stock Pledge Agreement, whereby we pledged 100% of the outstanding
stock of Texaurus to Laurus to guarantee the payment and performance of all
obligations and indebtedness owed to Laurus by Texaurus.
In
connection with the Closing, Texaurus paid Laurus Capital Management, LLC, the
manager of Laurus, a closing payment equal to 3.5% of the Note, or $297,500;
Energy Capital Advisors, LLC, an advisory fee equal to $495,000; certain amounts
paid to various other parties, including our law firm, Laurus' law firm and
certain of our advisors; and the $5,225,000 paid for the Kilrush, represented
the entire $8,500,000 received in connection with the sale of the Note, as well
as $300,000 of the funding provided by our former Executive Chairman and
Director, Frank Jacobs.
Additionally,
in consideration for advisory services rendered in connection with the Closing,
we granted Energy Capital Solutions, LLC, warrants to purchase up to 1,062,500
shares of our common stock at an exercise price of $0.04 per share. Energy
Capital Solutions, LLC's warrants expire if unexercised at 5:00 P.M. C.S.T. on
March 28, 2011.
REGISTRATION
RIGHTS AGREEMENT
In
connection with the Closing, we entered into a Registration Rights Agreement
with Laurus, by which we agreed to file a registration statement covering the
shares exercisable in connection with the Texhoma Warrant within sixty (60) days
of the date of the Closing, and that such registration statement would be
effective within one hundred and eighty (180) days of the Closing date, which
registration statement we have been unable to file to date, due to the fact that
we are not current in our filings with the Commission. In November
2007, we entered into the First Amendment to Securities Purchase Agreement,
Secured Term Note and Registration Rights Agreement with Laurus, to amend the
Registration Rights Agreement, which requires us to gain effectiveness of a
registration statement covering the shares exercisable in connection with the
Texhoma Warrant to April 30, 2008.
TEXAURUS
WARRANT
In
connection with the Closing, Texaurus issued Laurus the Texaurus Warrant, which
provides Laurus the right to purchase up to 961 shares of Texaurus common stock,
representing 49% of Texaurus' outstanding common stock at an exercise price of
$0.001 per share. The Texaurus Warrant is exercisable by Laurus at any time
after the payment by Texaurus in full of the Note. The Texaurus Warrant will be
subject to identical rights to registration as described above in connection
with the Texhoma Registration Rights Agreement, when and if Texaurus completes
an initial public offering and/or otherwise becomes publicly
traded.
TEXHOMA
WARRANT
In
addition to the Texaurus Warrant granted to Laurus by Texaurus, at the Closing,
we granted Laurus a Common Stock Purchase Warrant (the "Texhoma Warrant"), to
purchase up to 10,625,000 shares of our common stock at an exercise price of
$0.04 per share, which if exercised in full would provide us aggregate
consideration of $425,000. The Texhoma Warrant expires if
unexercised at 5:00 P.M. on March 28, 2011. The Texhoma Warrant contains a
provision whereby Laurus is not able to exercise any portion of the Warrant,
which exercise would cause it to hold more than 4.99% of our issued and
outstanding common stock, unless an Event of Default under the Note has occurred
(as described above) and/or if Laurus provides us 75 days prior written notice
of their intent to hold greater than 4.99% of our issued and outstanding common
stock.
MASTER
SECURITY AGREEMENT
To secure
the payment of the obligations of Texaurus incurred in connection with the
Closing, Texaurus and we entered into a Master Security Agreement with Laurus,
whereby Texaurus and we agreed to grant Laurus a continuing security interest in
all of our cash, cash equivalents, accounts, accounts receivable, deposit
accounts (including the amount in the Restricted Account, as described above),
inventory, equipment, goods, fixtures, documents, instruments, contract rights,
general intangibles, chattel paper, investment property, letter-of-credit
rights, trademarks and applications, patents and applications, copyrights and
applications and other intellectual property which Texaurus has or hereafter
acquires; the Kilrush Property and any additional properties or interests
acquired by Texaurus, as well as certain other interests associated with such
properties.
SIDE
LETTER AGREEMENT
In
connection with the issuance of the Texaurus Warrant, we and Texaurus entered
into a "Side Letter Agreement," whereby we and Texaurus agreed that following
the exercise of the Texaurus Warrant by Laurus, we and Laurus would negotiate in
good faith the terms of a shareholders agreement in connection with Texaurus,
which among other things would provide for Laurus' consent to certain actions to
be taken by Texaurus or us, including, declaring or paying any dividends,
selling or disposing of any assets, entering into any transactions outside of
the normal course of business, creating any mortgage, lien, charge or other form
of encumbrance with respect to any assets, entering into any agreements with
third parties, issuing or selling any capital stock, warrants or convertible
securities, or appointing or replacing any outside accountants or
auditors.
Significant Transactions
Affected During 2006 and 2007:
On May
31, 2006, Texhoma entered into six (6) participation agreements to purchase
various oil and gas leases from Sunray Operating Company LLC.
In June
and August 2006, Texhoma closed the purchase of three (3) of the participation
agreements, entering into Assignments and Bill of Sales for purchase from Sunray
Operating Company LLC (“Sunray”) of the following Leases:
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Leases
covering approximately 196 acres of land in Brazoria County, Texas. In the
purchase, Texhoma acquired an undivided 37.5% interest, subject to
existing overriding royalty interests equal to 25% of 8/8. Additionally,
Sunray is entitled to a five-eighths of eight-eighths (62.5% of 8/8)
working interest, proportionally reduced at payout; and
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·
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Leases
covering approximately 20 acres of land in Brazoria County, Texas. In the
purchase, Texhoma acquired an undivided 35% interest in the leases,
subject to existing overriding royalty interests equal to 25% of
8/8.
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·
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Leases
covering approximately 280 acres of land in Brazoria County, Texas. In the
purchase, Texhoma acquired an undivided 72.5% interest in the leases,
subject to existing overriding royalty interests equal to 28% of 8/8.
Texhoma simultaneously sold a 42.5% interest leaving a 30%
interest.
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·
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Texhoma
declined to participate in the purchase of the leases covering
approximately 80 acres in Brazoria County. In September 2006, this well
was a dry hole and participation in subsequent wells was
declined. However, Texhoma continues to hold a 12.5% back in
Working Interest.
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·
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Two
leases for another 160 acre site and a 60 acre site which were declined by
Texhoma and in which we retained a 12.5% back in Working
Interest.
|
We
purchased the Leases from Sunray for aggregate consideration of $143,161, of
which $113,161 was paid in cash and $30,000 was paid in the form of shares of
our common stock, by the issuance of an aggregate of 375,000 units (each a
"Unit"), which each include one (1) share of common stock and one (1) warrant,
which entitles the holder of such warrant to purchase one (1) share of our
common stock at an exercise price of $0.15 per share, prior to the one (1) year
anniversary of such warrant grant, which Units were valued at $0.08 per
Unit. Approximately $50,000 remained due to Sunray in connection with
the purchase of the Leases outstanding as of December 31, 2007.
Upon the
closing of the Purchases we and Sunray agreed to enter into an operating
agreement in connection with the development of the leases. Additionally, both
we and Sunray agreed that should either party be unable or unwilling, for any
reason, to participate in the drilling of the initial well on any of the leases
described above, the non-participating party shall, at least 90 days prior to
any expiration or any rental date under the leases, assign the participating
party all of its right, title and interest in such lease.
Letter
Agreement
On or
about May 15, 2007, we entered into a Letter Agreement with Matrixx Resource
Holdings Inc. (“Matrixx”) to sell our 11% working interest in the property known
as the Clovelly Prospect (the “Clovelly Prospect”) for $150,000. In connection
with and pursuant to the Letter Agreement, we expected to receive an earnest
money deposit of $25,000 on or about May 25, 2007, with the remainder of the
purchase price to be paid on or before June 30, 2007; however, we have not
received any funds or any deposit from Matrixx and the Letter Agreement has been
terminated.
Management Services
Agreement
On or
about May 15, 2007, we entered into a Management Services Agreement with Valeska
Energy Corp. (“Valeska”), whose Chief Executive Officer is William M. Simmons,
who became an officer and Director of us on or about June 4, 2007, as described
below, which was subsequently amended on or about June 1, 2007 (collectively the
“Management Agreement”).
Pursuant
to the Management Agreement, we agreed to enter into a Joint Venture agreement
with Valeska (the “Joint Venture”), described below; Valeska agreed to provide
us management services and act as a
Management
Consultant to us, for a monthly fee of $10,000 (plus expenses), or 15% of any
revenue we generate, whichever is greater (excluded from this definition however
are asset sales and/or income of a capital nature, and included in the
definition are 20% of the revenues we receive from our Joint Venture with Laurus
Master Fund, Ltd.); and we also agreed to issue Valeska 15,200,000 restricted
shares of our common stock. We also agreed pursuant to the Management Agreement,
as amended, that we would issue Valeska an additional 18,200,000 shares of our
common stock upon such time as we are able to bring our public reporting
requirements current with the Commission and seek reinstatement on the
Over-The-Counter Bulletin Board. These shares will be valued at Fair Market
Value using the most appropriate valuation method. The Management
Agreement had a minimum term of three months, beginning on May 1,
2007. The Management Services Agreement was later amended and
extended by the parties’ entry into the Second Amendment to Management Services
Agreement with Valeska Energy Corp. in August, 2007, as described
below.
Joint Venture
Agreement
On or
about May 15, 2007, we entered into a Joint Venture Relationship Agreement with
Valeska (the “Joint Venture Agreement”), pursuant to which we and Valeska agreed
to form a new Texas limited partnership (the “Joint Venture”), of which Valeska
will serve as general partner. The Joint Venture Agreement contemplates that
Valeska will cause funds to be invested, arrange financial and strategic
partnerships, and that both parties would bring investment opportunities to the
Joint Venture. Pursuant to the Joint Venture Agreement, Valeska has
co-investment rights in the Joint Venture. Any distributions from the Joint
Venture will be paid first to Valeska and the Company, in an amount equal to 8%
to Valeska and 2% to the Company, subject to investor approval; then to any
investors as negotiated therewith; and finally Valeska and the Company will
share any remaining distributions, with Valeska receiving 80% of such
distributions and the Company receiving 20% of such distributions.
The Joint
Venture Agreement also provides that Valeska has the right to require us to
purchase its interest in the Joint Venture at any time, in exchange for shares
of our common stock. In the event that Valeska exercises this right, the
valuation of the Joint Venture will be valued in a negotiated manner or at 30%
greater than the gross acquisition cost of any property acquired by the Joint
Venture, and the number of shares exchangeable for such interest will be equal
to the market price of our shares of common stock on the date that such right is
exercised by Valeska.
Additionally,
we have the right, pursuant to the Joint Venture Agreement, to veto any deal
which Valeska proposes to include in the Joint Venture.
Voting
Agreement
On or
about June 5, 2007, certain of our largest shareholders, including Capersia Pte.
Ltd.; Frank A. Jacobs, our former officer and Director; and Valeska Energy,
Inc., which is controlled by William M. Simmons, the President and Director of
the Company, and is majority owned by Daniel Vesco, the Company’s Chief
Executive Officer and a Director of the Company, through an entity which he
controls (“Valeska” and collectively the “Shareholders”) entered into a Voting
Agreement (the “Voting Agreement”). Pursuant to the terms of the
Voting Agreement the Shareholders agreed that for the Term of the Voting
Agreement, as defined below, no Shareholder would vote any of the shares of
common stock (the “Shares”) which they hold for (i.e. in favor of) the removal
of William M. Simmons or Daniel Vesco, our Directors (the “New
Directors”). The Shareholders also agreed that in the event of any
shareholder vote of the Company (either by Board Meeting, a Consent to Action
with Meeting, or otherwise) relating to the removal of the New Directors; the
re-election of the New Directors; and/or the increase in the number of directors
of the Company during the Term of the Voting Agreement, that such Shareholders
would vote their Shares against the removal of the New Directors; for the
re-election of such New Directors; and/or vote against the increase in the
number of directors of the Company, without the unanimous consent of the New
Directors, respectively.
The
Voting Agreement further provided that in the event that either of the New
Directors breaches his fiduciary duty to the Company, including, but not limited
to such Director’s conviction of an act or acts constituting a felony or other
crime involving moral turpitude, dishonesty, theft or fraud; such Director’s
gross negligence in connection with his service to the Company as a Director
and/or in any executive capacity which he may hold; and/or if any Shareholder
becomes aware of information which would lead a reasonable person to believe
that such Director has committed fraud or theft from the Company, or a
violation
of the Securities laws, the Voting Agreement shall not apply, and the
Shareholders may vote their shares as they see fit.
The Term
of the Voting Agreement is until June 5, 2009 (the “Term”). The
Shareholders agreed to enter into the Voting Agreement in consideration for the
New Directors agreeing to serve the Company as Directors of the
Company.
On or
about July 12, 2007, another one of our significant shareholders, Lucayan Oil
and Gas Investments, Ltd. (“LOGI”), which is 50% owned by Max Maxwell, our
former President and Director, entered into a Voting Agreement with us, which
was amended by a First Amendment to Voting Agreement, which provided that the
shares of common stock held by LOGI would be subject to the identical terms of
our June 5, 2007 Voting Agreement with the Shareholders.
Consulting
Agreement
Effective
July 1, 2007, we entered into a Consulting Agreement with Ibrahim Nafi Onat, our
Director (the “Consulting Agreement”), pursuant to which Mr. Onat agreed to
serve as our Director and Vice President of Operations for an initial term of
twelve (12) months, which term is renewable month to month thereafter with the
mutual consent of the parties. Pursuant to the Consulting Agreement
we agreed to pay Mr. Onat $2,500 per month during the term of the Consulting
Agreement, to issue him 500,000 restricted shares of common stock valued at the
market price on the date of issuance, in connection with his entry into the
Consulting Agreement and 500,000 restricted shares of common stock assuming he
is still employed under the Consulting Agreement at the expiration of six (6)
months from the effective date of the Consulting Agreement, which he was, and
which shares have been issued to date (the “Six Month
Issuance”).
Material Corporate
Events
On July
17, 2007, the Company's Board of Directors unanimously agreed by a written
consent to action without a meeting, to adopt a Certificate of Designations for
the creation of a Series A preferred stock (the "Series A Preferred
Stock").
The
Series A Preferred Stock has a par value of $0.001 per share. The Series A
Preferred Stock consists of one thousand (1,000) shares, each having no dividend
rights, no liquidation preference, and no conversion or redemption rights.
However, the one thousand (1,000) shares of Series A Preferred Stock have the
right, voting in aggregate, to vote on all shareholder matters equal to
fifty-one percent (51%) of the total vote. For example, if there are 10,000,000
shares of the Company's common stock issued and outstanding at the time of a
shareholder vote, the holders of Series A Preferred Stock, voting separately as
a class, will have the right to vote an aggregate of 10,400,000 shares, out of a
total number of 20,400,000 shares voting.
Additionally,
the Company shall not adopt any amendments to the Company's Bylaws, Articles of
Incorporation, as amended, make any changes to the Certificate of Designations,
or effect any reclassification of the Series A Preferred Stock, without the
affirmative vote of at least 66-2/3% of the outstanding shares of Series A
Preferred Stock. However, the Company may, by any means authorized by law and
without any vote of the holders of shares of Series A Preferred Stock, make
technical, corrective, administrative or similar changes to the Certificate of
Designations that do not, individually or in the aggregate, adversely affect the
rights or preferences of the holders of shares of Series A Preferred
Stock.
On or
about August 13, 2007, we entered into a Second Amendment to Management Services
Agreement with Valeska Energy Corp. (“Valeska” and the “Second
Amendment”).
Pursuant
to the Second Amendment, we and Valeska agreed to extend the term of the
Management Services Agreement until September 30, 2008, and to pay Valeska the
following consideration in connection with agreeing to perform the services
required by the original Management Services Agreement, and in consideration for
allowing Daniel Vesco and William M. Simmons to serve as Directors of the
Company, bringing on personnel to assist the Company with the day to day
operations of the Company, and help bring the Company current in its filings
(the “Services”):
|
·
|
1,000
shares of the Company’s Series A Preferred Stock;
|
|
·
|
A
monthly fee of $20,000 per month during the extended term of the Second
Amendment, plus reasonable and actual costs incurred by Valeska (or
individuals or designees brought on by Valeska, including lodging, car
rental and telephone expenses therewith) in connection with such
Services;
|
|
·
|
10,000,000
restricted shares of the Company’s common stock; and
|
|
·
|
60,000,000
options to purchase shares of the Company’s common stock, which have a
cashless exercise provision, are valid for a period of three years from
their grant date, and have an exercise price of greater than 110% of the
trading price of the Company’s common stock on the Pinksheets on the day
of such grant, which exercise price is equal to $0.02 per
share.
|
On or
about October 30, 2007, we entered into a Cooperation Agreement and Mutual
Release with our former consultant Terje Reiersen (“Reiersen” and the “Reiersen
Release”). Pursuant to the Reiersen Release, Reiersen agreed to
release us, our current and former officers, agents, directors, servants,
attorneys, representatives, successors, employees and assigns from any and all
rights, obligations, claims, demands and causes of action in contract or tort,
under any federal or state law, whether known or unknown, relating to his
services with the Company or the Company in general for any matter whatsoever
other than in connection with any claims against any former officers or
Directors of the Company, which claims Reiersen assigned to the
Company. Reiersen also agreed to cooperate fully with us in
connection with any reasonable requests from us for a period of sixty (60) days
from the date of the Reiersen Release, that we would not owe him any rights of
contribution or indemnification in connection with any services he rendered on
our behalf and that we would not owe him any other consideration other than what
we agreed to provide him in connection with the Reiersen Release (as described
in greater detail below).
In
connection with the Reiersen Release, we agreed to pay Reiersen $2,500 within
ten (10) business days of the parties entry into the Reiersen Release (which
funds have not been paid to date), and issue Reiersen
250,000
restricted shares of our common stock, which shares have not been issued to date
within ten (10) days of the parties entry into the Reiersen
Release.
On or
about November 2, 2007, we entered into a First Amendment to Securities Purchase
Agreement, Secured Term Note and Registration Rights Agreement with Laurus (the
“First Amendment”). Pursuant to the First Amendment, Laurus agreed
to:
(a)
|
waive
any default which may have occurred as a result of our failure to become
current in our filings with the Commission, assuming that we become
current in our filings prior to December 15,
2007;
|
(b)
|
amend
the terms of the Laurus Note to provide that a “Change of Control” of
Texaurus under the Note, which requires approval of Laurus, includes any
change in Directors such that Daniel Vesco and William M. Simmons are no
longer Directors of Texaurus; and
|
(c)
|
amend
the terms of the Registration Rights Agreement with Laurus to provide that
the date we are required to gain effectiveness of a registration statement
registering the shares of common stock issuable in connection with the
exercise of the Laurus Warrant in the Company is amended to no later than
April 30, 2008, and that the effective date of any additional registration
statements required to be filed by us in connection with the Registration
Rights Agreement, shall be thirty (30) days from such filing
date.
|
On or
about November 28, 2007, we entered into a Settlement Agreement and Mutual
Release (the “Jacobs Agreement”) by and between the Company, Frank A. Jacobs,
our former officer and Director (“Jacobs”), and Jacobs Oil & Gas Limited, a
British Columbia corporation (“JOGL” and collectively with Jacobs, the “Jacobs
Parties”), Clover Capital, a creditor of the Company (“Clover”), Capersia Pte.
Ltd., a Singapore company and a significant stockholder of the Company
(“Capersia”), Peter Wilson, an individual and a former Director of the Company
(“Wilson”), and Sterling Grant Capital, Inc., a British Columbia corporation,
controlled by Mr. Wilson (“SGC” and collectively with Clover, Capersia and
Wilson, the “Non-Jacobs Parties,” and with the Jacobs Parties, the “Interested
Parties”). We had various disputes with the Interested Parties
relating to the issuances of and transfers of various shares of our common stock
and various of the Interested Parties had alleged that we owed them
consideration (the “Disputes”). We entered into the Jacobs Agreement
to settle the Disputes with the Interested Parties.
In
consideration for the Company agreeing to enter into the Jacobs Agreement, the
Jacobs Parties agreed to the following terms: the Jacobs Parties would return to
the Company for cancellation 5,000,000 of the 7,500,000 shares purchased by
Jacobs in March 2006 (the “Jacobs Shares”), which shares have been cancelled to
date; all debt owed by Texhoma to the Jacobs Parties, known or unknown, was
discharged and forgiven, including the total outstanding amount of the
approximately $500,000 Promissory Note owed to Frank A. Jacobs by the Company
(the “Jacobs Note”); the Company owes Jacobs no rights to contribution and/or
indemnification in connection with Jacobs employment with the Company; Jacobs
also certified the accuracy and correctness of the Company’s previously prepared
annual and interim financial statements and periodic reports, relating to the
time period of his employment from the period ending September 30, 2005 to the
period ending March 31, 2007; the Jacobs Parties agreed they have no interest in
and will not interfere with the issuance of or any subsequent transfers of
shares to or from Lucayan Oil and Gas Investments, Ltd. (the “LOGI Shares”), a
Bahamas corporation; Jacobs agreed to use his best efforts to answer the
Company’s questions and produce documents in the future regarding operations and
financials of the Company; Jacobs agreed that he no longer holds any exercisable
options of the Company; the Voting Agreement entered into between various
parties in June 2007, including Jacobs, remains in full affect and force against
Jacobs; and Jacobs has no interest in any shares other than the aforementioned
2,500,000 shares.
Additionally,
in consideration for the Company agreeing to enter into the Jacobs Agreement,
the Non-Jacobs Parties agreed to the following terms: any and all debts owed by
Texhoma to Clover, which purportedly totaled approximately $60,000, Capersia,
which purportedly totaled $60,000 or any of the Non-Jacobs Parties (including
approximately $20,000 purportedly owed to Wilson) was discharged and forgiven;
the Non-Jacobs Parties agreed that they have no interest in and will not
interfere with the issuance of the LOGI Shares; the Voting Agreement remains in
full force and effect against Capersia; and in connection with the 30,000,000
shares of Company stock in Capersia’s possession received through Texhoma’s
previous purchase of a 40% interest in Black Swan Petroleum Pty. Ltd. (the
“Capersia Shares”), Capersia will not transfer shares in excess of 2% of
Texhoma’s then outstanding shares in any three (3) month period, until the
second anniversary of the Jacobs Agreement.
Lastly,
in consideration for the Jacobs Parties and the Non-Jacobs Parties agreeing to
the terms of the agreement, Texhoma agreed to the following terms: Jacobs will
retain the remaining 2,500,000 shares of Company stock and Capersia will retain
the aforementioned 30,000,000 shares of Company stock free and clear of any
claims to such shares by the Company; and JOGL shall retain all rights to the
200,000 shares of Morgan Creek Energy Corp. (“Morgan Creek”) shares held in
trust by JOGL as collateral for a promissory note issued to JOGL by the Company
(the “Jacobs Note” and “Morgan Creek Shares”), the Company will release all
claims to said shares or any additional shares of Morgan Creek that the Company
may be due as a result of stock splits or share distributions.
Further,
pursuant to the Jacobs Agreement, the Interested Parties agreed to release the
Company from any and all rights, obligations, claims, demands and causes of
action, known or unknown, asserted or unasserted relating to the Disputes or the
Company or its current or former Directors, and the Company agreed to release
the Jacobs Parties and the Non-Jacobs Parties from any and all rights,
obligations, claims, demands, and causes of action arising from or relating to
the Capersia Shares, Jacobs’ employment with the Company, the Jacobs Note, the
Jacobs Shares, the Morgan Creek shares, and the LOGI Shares.
As a
result of the Jacobs Agreement, the Company was able to settle approximately
$640,000 in debt which it purportedly owed to the various Interested Parties and
to settle any and all other claims which such parties, in return for the
consideration discussed above, which mainly consisted of assigning the rights to
the 200,000 shares of Morgan Creek Energy Corp. stock to Frank A. Jacobs, which
shares had an approximate value of $92,000 based on the trading price of Morgan
Creek Energy Corp.’s common stock on the date of the Jacobs Agreement of
$0.46.
Plan of
Operations
The
Company’s current plan of operations for the next twelve (12) months is to bring
the Company current in its filings with the Commission, get the Company’s
accounting and controls and procedures in order and work to decrease the
Company’s current liabilities.
In
connection with our properties, a deal we had in place to sell the Clovelly
Field interests fell through, and we are relying on the operators of our other
properties regarding the direction of those prospects. To date, all
of those operators have indicated that they have no plans to expand their
current drilling prospects.
We
currently believe that we can continue our operations for approximately the next
ninety days with funds raised in June and December 2007, and
anticipate needing to raise approximately $300,000 in the next twelve months to
pay our current liabilities and maintain our current rate of monthly
expenditures, of which there can be no assurance. Additionally, due
to the fact that the assets held by Texaurus are not generating the level of
revenue as we originally anticipated, we may need to raise additional capital in
Texaurus to repay the Laurus Note and/or for working capital purposes in the
future, which funds may be raised through the sale of debt and/or equity in
Texaurus.
RESULTS OF OPERATIONS FOR
THE QUARTER ENDED DECEMBER 31, 2007 COMPARED TO THE QUARTER ENDED
DECEMBER 31, 2006
We
reported revenues of $418,000 for the quarter ended December 31, 2007 compared
with $478,000 for the quarter ended December 31, 2006, a decrease in revenues of
$60,000 from the prior period. These revenues are the result of our
interest in various oil and gas properties and as such actual production varies
from month to month and quarter to quarter.
We had
oil and gas exploration expenses of $238,000 for the quarter
ended December 31, 2007, as compared to $107,000 for the quarter
ended December 31, 2006. The oil and gas exploration expenses for the
three months ended December 31, 2007, included workover and Approval for
Expenditures “AFE” expense overruns for two of three properties and the
related joint operating costs of the producing properties owned by
Texaurus.
Depletion
and depreciation for the three months ended December 31, 2007 was $165,000 as
compared to $217,000 for the same quarter of 2006, a decrease of
$52,000. The reduction in depletion reflects the reduced asset value
for the Little White Lakes interest as a result of its impairment and the
declining depletion for the properties based upon their declining production
lives.
We
incurred $340,000 in general and administrative income for the quarter ended
December 31, 2007, which was mainly due to the reduction in previously recorded
expenses relating to options granted, based upon the Black Scholes computations
and reflects the expiration of options from 2006 to 2007, offset by legal and
accounting fees associated with our periodic filings. This income is
compared to general and administrative expenses of $246,000 for the same period
in 2006, an increase in general and administrative income of $586,000 from the
prior period.
In
connection with our raising the necessary capital funding to pursue the planned
oil and gas purchases we issued stock warrants to new subscribers of our common
stock as well and our lenders. Stock accretion expense was computed
based upon the Black-Scholes modeling and recorded as warrants were
issued. As a result of the continued Black Scholes modeling, we
recognized a $90,000 reduction in related stock accretion expense for
the quarter ended December 31, 2007 as compared with a reduction of expense
of $529,000 for the quarter ended December 31, 2006.
We
recorded an impairment in our investment in Morgan Creek Energy of $196,000 for
the three months ended December 31, 2006 compared with none for the three months
ended December 31, 2007 due to the exchange of these shares as a partial release
with our former Director, Frank Jacobs, as described above.
In
conjunction with the release retained from Mr. Jacobs, we recorded a $370,000
gain on the extinguishment of debt for the three months ended December 31, 2007
as compared with no extinguishment of debt for the same period ended December
31, 2006.
We
incurred net interest expense of $276,000 for the three months ended December
31, 2007, in connection with the payment of the Laurus Note as
compared with net interest expense of $297,000 for the three months ended
December 31, 2006.
We had
total other income of $187,000 for the three months ended December 31, 2007,
compared to total other income of $40,000 for the three months ended December
31, 2006.
We
had net income of $543,000 for the quarter ended December
31, 2007 as compared to a net loss of $53,000 for the quarter ended December 31,
2006, an increase in net income of $490,000 from the prior
period. The main reasons for the increase in net income were, the
increase in general and administrative income in connection with the expiration
of previously granted warrants and options, the decrease in depreciation and
amortization expense, the increase in gain on extinguishment of debt, and the
increase in total other income, offset by the decrease in oil and gas revenue,
and the increase in oil and gas exploration expenses for the three months ended
December 31, 2007, compared to the three months ended December 31,
2006.
LIQUIDITY
AND CAPITAL RESOURCES
As
of December 31, 2007, we had total assets of $5,264,000, consisting
of cash of $68,000, accounts receivable of $301,000, net oil and gas
properties of $4,462,000 and other assets of $432,000.
We had
current liabilities of $1,318,000, consisting of $565,000 of accounts payable,
$453,000 of accrued expenses, $50,000 of notes payable to related parties, and
$250,000 of convertible notes payable, relating to the convertible notes sold in
November and December 2007 (as described below) and a long term note payable of
$7,935,000 at December 31, 2007. Our current liabilities included
notes payable due to affiliates of $50,000, which note was payable to MFS
Technology.
We had
negative working capital of $948,000 and a retained deficit of $14,463,000 at
December 31, 2007.
For the
three months ended December 31, 2007, cash of $248,000 was provided by our
operating activities and we used $71,000 in our
investing activities. Cash provided by operating activities
consisted mainly of $543,000 of net income, offset by $750,000 of accrued
expenses. Cash used in operating activities for the three months
ended December 31, 2007, included $71,000 of oil and gas property
investments.
We used
$372,000 of cash in our financing activities, due to the proceeds of $250,000
from notes payable sold in November and December 2007, the funds used to repay a
portion of the note payable to Laurus of $220,000 , the forgiveness of affiliate
loans of $403,000, as well as issuances of common stock in exchange
for
services of $1,500, which was in connection with 250,000 shares of common stock
issued to a consultant in connection with such consultant’s entry into a
settlement agreement.
FUNDING
TRANSACTIONS:
We raised
an aggregate of $297,500 through the sale of 23,800,000 shares of common stock
at $0.0125 per share between May and July 2007.
We raised
an aggregate of $125,000 through the sale of a convertible note and warrants to
an investor in November 2007. The same investor also invested an
additional $125,000 on similar terms on or about December 19, 2007.
We have
subsequently used the majority of this funding to pay our general and
administrative expenses and certain acquisitions including the purchase of the
Leases from Sunray and the Management Agreement with Valeska, as described
above.
We
believe that we do not currently have sufficient funds to repay the interest and
principal payments on amortizing payment required on the Secured Term Note with
Laurus, through the payment of production payments on the properties owned by
Texaurus. We will also need to repay $8,500,000 (minus any payment of
principal on the Note which we are able to make through our 80% production
payments to Laurus) on March 27, 2009, which funds we do not currently have and
which we can provide no assurances will be available when such Note is
due.
We have
been advised by the petroleum engineer for the Company that the Texaurus assets
may require further impairment than the amount which has been
recognized. During the year ended September 30, 2006, we recognized
an impairment in connection with the estimated future value of the Texaurus
assets of $2,682,000. We will update our disclosure regarding any
additional impairment in the future when such information is
available.
Additionally,
to continue our planned oil and gas operations the Company remains reliant on
raising further equity funds and our growth and continued operations could be
impaired by limitations on our access to the capital markets. In the event that
we or Texaurus do not generate the amount of revenues from our oil and gas
properties which we anticipate, and/or we or Texaurus decide to purchase
additional oil and gas properties and are required to raise additional
financing, we may have to raise additional capital and/or scale back our
operations which would have a material adverse impact upon our ability to pursue
our business plan. There can be no assurance that capital from outside sources
will be available, or if such financing is available, it may involve issuing
securities senior to our common stock, the common stock of Texaurus or
additional shares of the common stock of Texaurus or equity financings which are
dilutive to holders of our common stock. In addition, in the event we do not
raise additional capital from conventional sources, it is likely that our growth
will be restricted and we may need to scale back or curtail implementing our
business plan.
We have
no current commitments from our officers and Directors or any of our
shareholders to supplement our operations or provide us with financing in the
future. If we are unable to raise additional capital from conventional sources
and/or additional sales of stock in the future, we may be forced to curtail or
cease our operations. Even if we are able to continue our operations, the
failure to obtain financing could have a substantial adverse effect on our
business and financial results.
RISK
FACTORS
You
should carefully consider the following risk factors and other information in
our latest annual report on Form 10-KSB before deciding to become a holder of
our Common Stock. If any of the following risks actually occur, our business and
financial results could be negatively affected to a significant
extent.
WE
WILL NEED ADDITIONAL FINANCING TO CONTINUE OUR BUSINESS PLAN AND DRILL AND STUDY
ADDITIONAL WELLS, WHICH FINANCING, IF WE ARE UNABLE TO RAISE MAY FORCE US TO
SCALE BACK OR ABANDON OUR BUSINESS PLAN.
We raised
$8,500,000 from the sale of a Secured Term Note to Laurus Master Fund, Ltd.
("Laurus") in March 2006. However, approximately $7,894,235 of the amount
borrowed from Laurus was subsequently used to purchase the Intracoastal City
property, the interests in the Barnes Creek gas field and the Edgerly field and
to pay closing costs and fees in connection with the various funding
transactions.
We raised
an aggregate of $384,000 through the sale of 4,800,000 units at a price of $0.08
per unit during June through December 2006, which units each included one (1)
share of common stock and one (1) one-year warrant to purchase one (1) share of
our common stock at an exercise price of $0.15 per share. We raised an aggregate
of $297,500 through the sale of 23,800,000 shares of common stock at $0.0125 per
share between May and July 2007. We raised an aggregate of $250,000
through the sale of two units consisting of Convertible Promissory Notes with a
conversion price of $0.0125 per share, convertible at the option of Purchaser,
into the Company’s common stock, and Class A and Class B Warrants to purchase
5,000,000 shares of common stock with an exercise price of $0.02 and $0.03 per
share, respectively, exercisable for a period of two years from the date of the
Subscription Agreement (the “Units”)
We
believe that we do not currently have sufficient funds to continue to pay the
interest payments required on the Secured Term Note with Laurus, through the
payment of production payments on the properties owned by Texaurus on an ongoing
basis. As such, we are currently in negotiations with Laurus to amend
the terms of the Secured Term Note, which there can be no assurance will be
amended. Additionally, we will need to repay $8,500,000 (minus any
payment of principal on the Note which we are able to make through our 80%
production payments to Laurus) on March 27, 2009, which funds we do not
currently have and which we can provide no assurances will be available when
such Note is due. As such, if we are unable to come to terms with
Laurus regarding the amendment and/or revision of the terms of the Secured Term
Note, we will likely not be able to continue our business operations for more
than approximately three months. Not including the substantial funds
we will require to repay the principal on the Secured Term Note and/or that we
will require to make the required interest payments on the Secured Term Note, we
will require approximately $300,000 of additional capital to continue our
planned oil and gas operations and seek out new acquisitions.
Additionally,
as described below, we cannot be sure that we will find any oil and/or gas on
our properties in the future, our current properties will continue to produce,
our current production will be sufficient to repay the interest (or principal)
on the Laurus Note, nor can we provide any assurances that if found, that the
oil and/or gas will be in commercial quantities, that we will be able to extract
it from the ground, that we will not face liability in connection with our
extraction efforts, and/or that we will be able to generate the revenues we
expect from the future sale of any oil and gas we may discover in the
future.
Finally,
we may choose to spend additional monies on the purchases of oil and gas
properties in the future. Depending on the decisions of our management, the
volatility of the prices of oil and/or gas, our exploration activities, and/or
potential liability, and the amount of money we receive from the sale of oil and
gas, if any, we may need to raise additional capital substantially faster than
six months, which we currently estimate such previously borrowed monies will
last. We do not currently have any additional commitments or identified sources
of additional capital from third parties or from our officers, directors or
majority
shareholders
. We
can provide no assurance that additional financing will be available on
favorable terms, if at all. If we are not able to raise the capital necessary to
continue our business operations, we may be forced to abandon or curtail our
business plan and/or suspend our exploration activities.
BECAUSE
OF THE FACT THAT THE COMPANY HAS LIABILITIES FAR IN EXCESS OF ITS ASSETS; THE
ASSETS OF TEXAURUS HAVE NOT, OVER THE PAST SEVERAL MONTHS, BEEN GENERATING
SUFFICIENT REVENUE TO PAY THE ACCRUED INTEREST ON THE LAURUS NOTE OR THE
EXPENSES OF TEXAURUS; AND BECAUSE OF THE SIGNIFICANT DOWNWARD PRESSURE ON THE
COMPANY’S COMMON STOCK, THE COMPANY’S MANAGEMENT IS CONSIDERING VARIOUS OPTIONS
WHICH INCLUDE, BUT ARE NOT LIMITED TO, DEREGISTERING WITH THE SEC, SEEKING
INVESTMENT IN TEXAURUS FROM ENTITIES OTHER THAN TEXHOMA AND PURSUING
OPPORTUNITIES OUTSIDE AND DISTINCT FROM TEXHOMA.
As of
December 31, 2007, the Company had total liabilities of $9,253,064 and total
assets of only $5,263,590. The Company does not believe that the Texaurus assets
will generate sufficient revenue in the future to enable the Company to repay
the Laurus Note. Additionally, over the past several months, the production
payments payable to the Company from the Texaurus assets have not been
sufficient to pay the accrued interest on the Laurus Note, and the Company can
provide no assurances that such production payments will be sufficient to repay
the interest on the Laurus Note in the future, and/or that the Company will not
be in default of such note. The Company does not believe that it will be able to
raise sufficient additional capital through the sale of equity, if at all, as
there is downward pressure on
the
Company’s
common stock. Currently, there is significant downward pressure on the Company’s
common stock on the Over-The-Counter Bulletin Board, which the Company believes
is making it difficult to create a trading market and preventing it from raising
additional funding through equity financings on acceptable terms to the Company.
If the Company’s current management believes that the Company will not be able
to repay the Laurus Note and/or interest thereon, and/or if the Company’s common
stock continues to have significant downward pressure, the Company’s management
may choose to pursue opportunities outside of the Company that may be in
competition with the Company or impact the Company in a negative manner. If that
were to happen, it is possible that the Company would cease filing reports with
the Commission and /or the value of the Company’s common stock could become
worthless. Additionally, in the future, the Company’s current management may
work outside of the company to start a new company with similar operations as
the Company if they believe that the Company will not be able to repay the
Laurus Note and/or not be able to raise capital on acceptable
terms.
WE
OWE LAURUS MASTER FUND, LTD., A SUBSTANTIAL AMOUNT OF MONEY WHICH WE DO NOT
HAVE.
In connection with the
Securities Purchase Agreement, Laurus Master Fund, Ltd. ("Laurus"), purchased a
$8,500,000 Secured Term Note from Texaurus, which we have guaranteed, and which
bears interest at the
rate of
8% per year (as of February 6, 2007), which is due and payable on March 27,
2009, and which principal and interest is repayable by way of a production
payments equal to 80% of the gross production revenue received by Texaurus in
connection with the Intracoastal City Field, the Edgerly and the Barnes Creek
Properties.
There can
be no assurance that we will have sufficient funds to pay any principal or
interest on the Note when due on March 27, 2009, if such repayment amount is not
sufficiently covered by the payment of production proceeds to Laurus, as
described above, and we do not currently believe that such production payments
will be sufficient to repay such Note or such interest as of the date of this
filing. If we do not have sufficient funds to pay the total remaining amount of
the Note (after taking into account payments of principal, which we may not have
sufficient funds to pay) when due, we will be in default and Laurus may take
control of substantially all of our assets (as described in more detail under
"Risks Relating to the Company's Securities"). As a result, we will need to
raise or otherwise generate approximately $8,500,000 to repay the Note (not
including any adjustments for payment of principal in connection with production
payments paid by Texaurus) by March 27, 2009. If we fail to raise this money, we
could be forced to abandon or curtail our business operations, which could cause
any investment in the Company to become worthless.
OUR
ESTIMATES OF RESERVES COULD HAVE FLAWS, OR MAY NOT ULTIMATELY TURN OUT TO BE
CORRECT OR COMMERCIALLY EXTRACTABLE AND AS A RESULT, OUR FUTURE REVENUES AND
PROJECTIONS COULD BE INCORRECT.
Estimates
of reserves and of future net revenues prepared by different petroleum engineers
may vary substantially depending, in part, on the assumptions made and may be
subject to adjustment either up or down in the future. Our actual amounts of
production, revenue, taxes, development expenditures, operating expenses, and
quantities of recoverable oil and gas reserves may vary substantially from
the estimates. Oil and gas reserve estimates are necessarily inexact
and involve matters of subjective engineering judgment. In addition, any
estimates of our future net revenues and the present value thereof are based on
assumptions derived in part from historical price and cost information, which
may not reflect current and future values, and/or other assumptions made by us
that only represent our best estimates. If these estimates of quantities, prices
and costs prove inaccurate, we may be unsuccessful in expanding our oil and gas
reserves base with our acquisitions. We have been advised by the petroleum
engineer for the Company that the Texaurus assets may require further impairment
than the amount which has been recognized. During the year ended
September 30, 2006, we recognized an impairment in connection with the estimated
future value of the Texaurus assets of $2,682,000. We will update our
disclosure regarding any additional impairment in the future when such
information is available. Additionally, if declines in and
instability of oil and gas prices occur, then additional write downs in the
capitalized costs associated with our oil and gas assets may be required.
Because of the nature of the estimates of our reserves and estimates in general,
we can provide no assurance that additional or further reductions to our
estimated proved oil and gas reserves and estimated future net revenues will not
be required in the future, and/or that our estimated reserves will be present
and/or commercially extractable. If our reserve estimates are incorrect, the
value of our common stock could decrease and we may be forced to write down the
capitalized costs of our oil and gas properties.
WE
RELY HEAVILY ON WILLIAM M. SIMMONS AND DANIEL VESCO, OUR OFFICERS AND
DIRECTORS, AND IF THEY WERE TO LEAVE, WE COULD FACE SUBSTANTIAL COSTS IN
SECURING SIMILARLY QUALIFIED OFFICERS AND DIRECTORS.
Our
success depends upon the personal efforts and abilities of William M. Simmons,
our President and Director and Daniel Vesco, our Chief Executive Officer and
Director. Our ability to operate and implement our exploration activities is
heavily dependent on the continued service of Mr. Simmons and Mr. Vesco and our
ability to attract qualified contractors and consultants on an as-needed
basis.
We face
continued competition for such contractors and consultants, and may face
competition for the services of Mr. Simmons and/or Mr. Vesco in the future. We
do not have any employment contracts with Mr. Simmons or Mr. Vesco, nor do we
currently have any key man insurance on Mr. Simmons or Mr. Vesco. Mr. Simmons
and Mr. Vesco are our driving forces and are responsible for maintaining our
relationships and operations. We cannot be certain that we will be able to
retain Mr. Simmons and Mr. Vesco and/or attract and retain such contractors and
consultants in the future. The loss of either Mr. Simmons and Mr. Vesco, or both
and/or our inability to attract and retain qualified contractors and consultants
on an as-needed basis could have a material adverse effect on our business and
operations.
WE
HAVE BECOME AWARE THAT SPAM EMAILS REFERENCING THE COMPANY HAVE BEEN
DISSEMINATED IN THE PAST, WHICH COULD AFFECT THE MARKET FOR AND/OR THE VALUE OF
OUR COMMON STOCK.
It has
come to our attention that during the month of October 2006 certain spam-emails,
containing false and misleading information about our company, were disseminated
over the internet. The spam-emails distributed by third parties that are not
associated with the Company or its Officers or Directors have not been
authorized, sanctioned or paid for by the Company. We caution investors to
review our most recent Form 8-K with the Commission, our official press releases
and our periodic filings, which we anticipate filing and amending in the future,
before making any investment in us.
While we
are not responsible for the dissemination of the spam-emails and are not aware
of who was responsible, we were contacted by the Commission and were requested
to voluntarily provide shareholder information and disclosures in connection
with the origins of the dissemination of such spam emails. The Company
cooperated fully with the Commission.
The fact
that someone disseminated spam emails about our company and the fact that the
Commission previously looked into such emails may be perceived by potential
investors as a negative factor which could adversely affect the market for
and/or the value of our stock.
BECAUSE
OF THE SPECULATIVE NATURE OF OIL AND GAS EXPLORATION, THERE IS SUBSTANTIAL RISK
THAT NO ADDITIONAL COMMERCIALLY EXPLOITABLE OIL OR GAS WILL BE FOUND AND THAT
OUR BUSINESS WILL FAIL.
The
search for commercial quantities of oil as a business is extremely risky. We
cannot provide investors with any assurance that our properties contain
commercially exploitable quantities of oil and/or gas.
The
exploration expenditures to be made by us may not result in the discovery of
commercial quantities of oil and/or gas and problems such as unusual or
unexpected formations and other conditions involved in oil and gas exploration,
and often result in unsuccessful exploration efforts. If we are unable to find
commercially exploitable quantities of oil and gas, and/or we are unable to
commercially extract such quantities, we may be forced to abandon or curtail our
business plan, and as a result, any investment in us may become
worthless.
OUR
TOTAL AMOUNT OF ISSUED AND OUTSTANDING SHARE AMOUNTS MAY BE INCORRECT, AND WE
MAY HAVE OUTSTANDING SHARES WHICH ARE UNACCOUNTED FOR.
We have
become aware of a subscription agreement relating to the sale of certain shares
of our common stock in February 2005, which shares have not been issued to date,
and which subscription agreement we have been unable to verify as of the date of
this filing. As a result of the subscription agreement, and our
previous failure to issue shares in connection with such subscription agreement,
we may have potential liability for such shareholders loss of liquidity and/or
the decline in the value of our common stock. Additionally, there may
be other subscription agreements which we are not aware of relating to the sale
of our common stock, which sales and issuances are not currently reflected with
our Transfer Agent and/or in the number of outstanding shares of common stock
disclosed throughout this report. As a result, we may have a larger number of
shares outstanding than we currently show on our shareholders list. This
difference, if present, may force us to revise our filings and/or may mean that
the ownership percentage of certain shares of common stock disclosed throughout
this report is incorrect. If we are required to issue additional
shares of common stock in the future relating to previous subscription
agreements which our current management was and/or is not aware, it could cause
substantial dilution to our existing shareholders and/or we could face potential
liability in connection with our failure to issue such shares when originally
subscribed.
BECAUSE
OF THE INHERENT DANGERS INVOLVED IN OIL AND GAS EXPLORATION, THERE IS A RISK
THAT WE MAY INCUR LIABILITY OR DAMAGES AS WE CONDUCT OUR BUSINESS OPERATIONS,
WHICH COULD FORCE US TO EXPEND A SUBSTANTIAL AMOUNT OF MONEY IN CONNECTION WITH
LITIGATION AND/OR A SETTLEMENT.
The oil
and natural gas business involves a variety of operating hazards and risks such
as well blowouts, pipe failures, casing collapse, explosions, uncontrollable
flows of oil, natural gas or well fluids, fires, spills, pollution, releases of
toxic gas and other environmental hazards and risks. These hazards and risks
could result in substantial losses to us from, among other things, injury or
loss of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, cleanup responsibilities,
regulatory investigation and penalties and suspension of operations. In
addition, we may be liable for environmental damages caused by previous owners
of property purchased and leased by us. As a result, substantial liabilities to
third parties or governmental entities may be incurred, the payment of which
could reduce or eliminate the funds available for exploration, development or
acquisitions or result in the loss of our properties and/or force us to expend
substantial monies in connection with litigation or settlements. As such, there
can be no assurance that any insurance obtained by us will be adequate to cover
any losses or liabilities. We cannot predict the availability of insurance or
the availability of insurance at premium levels that justify our purchase. The
occurrence of a significant event not fully insured or indemnified against could
materially and adversely affect our financial condition and operations. We may
elect to self-insure if management believes that the cost of insurance, although
available, is excessive relative to the risks presented. In addition, pollution
and environmental risks generally are not fully insurable. The occurrence of an
event not fully covered by insurance could have a material adverse effect on our
financial condition and results of operations, which could lead to any
investment in us becoming worthless.
WE
REQUIRE SUBSTANTIAL ADDITIONAL FINANCING TO CONTINUE OUR EXPLORATION AND
DRILLING ACTIVITIES, WHICH FINANCING IS OFTEN HEAVILY DEPENDENT ON THE CURRENT
MARKET PRICE FOR OIL AND GAS, WHICH WE ARE UNABLE TO PREDICT.
Our
growth and continued operations could be impaired by limitations on our access
to capital markets. If the market for oil and/or gas were to weaken for an
extended period of time, our ability to raise capital would be substantially
reduced. There can be no assurance that capital from outside sources will be
available, or that if such financing is available, that it will not involve
issuing securities senior to the common stock or equity financings which will be
dilutive to holders of common stock. Such issuances, if made, would likely cause
a decrease in the value of our common stock.
THE
MARKET FOR OIL AND GAS IS INTENSELY COMPETITIVE, AND AS SUCH, COMPETITIVE
PRESSURES COULD FORCE US TO ABANDON OR CURTAIL OUR BUSINESS PLAN.
The
market for oil and gas exploration services is highly competitive, and we only
expect competition to intensify in the future. Numerous well-established
companies are focusing significant resources on exploration and are currently
competing with us for oil and gas opportunities. Additionally, there are
numerous companies focusing their resources on creating fuels and/or materials
which serve the same purpose as oil and gas, but are manufactured from renewable
resources. As a result, there can be no assurance that we will be able to
compete successfully or that competitive pressures will not adversely affect our
business, results of operations and financial condition. If we are not able to
successfully compete in the marketplace, we could be forced to curtail or even
abandon our current business plan, which could cause any investment in us to
become worthless.
WE
MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR GROWTH, WHICH COULD LEAD TO OUR
INABILITY TO IMPLEMENT OUR BUSINESS PLAN.
Our
growth is expected to place a significant strain on our managerial, operational
and financial resources, especially considering that we currently only have
three Directors and a small number of executive officers and employees. Further,
as we enter into additional contracts, we will be required to manage multiple
relationships with various consultants, businesses and other third parties.
These requirements will be exacerbated in the event of our further growth or in
the event that the number of our drilling and/or extraction operations
increases. There can be no assurance that our systems, procedures and/or
controls will
be
adequate to support our operations or that our management will be able to
achieve the rapid execution necessary to successfully implement our business
plan. If we are unable to manage our growth effectively, our business, results
of operations and financial condition will be adversely affected, which could
lead to us being forced to abandon or curtail our business plan and
operations.
THE
PRICE OF OIL AND NATURAL GAS HAS HISTORICALLY BEEN VOLATILE AND IF IT WERE TO
DECREASE SUBSTANTIALLY, OUR PROJECTIONS, BUDGETS, AND REVENUES WOULD BE
ADVERSELY EFFECTED, AND WE WOULD LIKELY BE FORCED TO MAKE MAJOR CHANGES IN OUR
OPERATIONS.
Our
future financial condition, results of operations and the carrying value of our
oil and natural gas properties depend primarily upon the prices we receive for
our oil and natural gas production. Oil and natural gas prices historically have
been volatile and likely will continue to be volatile in the future, especially
given current world geopolitical conditions. Our cash flows from operations are
highly dependent on the prices that we receive for oil and natural gas. This
price volatility also affects the amount of our cash flows available for capital
expenditures and our ability to borrow money or raise additional capital. The
prices for oil and natural gas are subject to a variety of additional factors
that are beyond our control. These factors include:
o
the level of consumer demand for oil and natural gas;
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the domestic and foreign supply of oil and natural gas;
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o
the ability of the members of the Organization of Petroleum Exporting
Countries ("OPEC") to agree to and maintain oil price and production
controls;
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o
the price of foreign oil and natural gas;
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domestic governmental regulations and taxes;
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o
the price and availability of alternative fuel sources;
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o
weather conditions;
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o
market uncertainty due to political conditions in oil and natural gas
producing regions, including the Middle East; and
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worldwide economic conditions.
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These
factors as well as the volatility of the energy markets generally make it
extremely difficult to predict future oil and natural gas price movements with
any certainty. Declines in oil and natural gas prices would not only reduce our
revenue, but could reduce the amount of oil and natural gas that we can produce
economically and, as a result, could have a material adverse effect upon our
financial condition, results of operations, oil and natural gas reserves and the
carrying values of our oil and natural gas properties. If the oil and natural
gas industry experiences significant price declines, we may be unable to make
planned expenditures, among other things. If this were to happen, we may be
forced to abandon or curtail our business operations, which would cause the
value of an investment in us to decline in value, or become
worthless.
OUR
OPERATIONS ARE HEAVILY DEPENDENT ON CURRENT ENVIRONMENTAL REGULATIONS, WHICH WE
ARE UNABLE TO PREDICT, AND WHICH MAY CHANGE IN THE FUTURE, CAUSING US TO EXPEND
SUBSTANTIAL ADDITIONAL CAPITAL.
Public
interest in the protection of the environment has increased dramatically in
recent years. Our oil and natural gas production and our processing, handling
and disposal of hazardous materials, such as hydrocarbons and naturally
occurring radioactive materials (if any) are subject to stringent regulation. We
could incur significant costs, including cleanup costs resulting from a release
of hazardous material, third-party claims for property damage and personal
injuries fines and sanctions, as a result of any violations or
liabilities
under environmental or other laws. Changes in or more stringent enforcement of
environmental laws could force us to expend additional operating costs and
capital expenditures to stay in compliance.
Various
federal, state and local laws regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment,
directly impact oil and gas exploration, development and production operations,
and consequently may impact our operations and costs. These regulations include,
among others, (i) regulations by the Environmental Protection Agency and various
state agencies regarding approved methods of disposal for certain hazardous and
non-hazardous wastes; (ii) the Comprehensive Environmental Response,
Compensation, and Liability Act, Federal Resource Conservation and Recovery Act
and analogous state laws which regulate the removal or remediation of previously
disposed wastes (including wastes disposed of or released by prior owners or
operators), property contamination (including groundwater contamination), and
remedial plugging operations to prevent future contamination; (iii) the Clean
Air Act and comparable state and local requirements which may result in the
gradual imposition of certain pollution control requirements with respect to air
emissions from our operations; (iv) the Oil Pollution Act of 1990 which contains
numerous requirements relating to the prevention of and response to oil spills
into waters of the United States; (v) the Resource Conservation and Recovery Act
which is the principal federal statute governing the treatment, storage and
disposal of hazardous wastes; and (vi) state regulations and statutes governing
the handling, treatment, storage and disposal of naturally occurring radioactive
material.
Management
believes that we are in substantial compliance with applicable environmental
laws and regulations. To date, we have not expended any material amounts to
comply with such regulations, and management does not currently anticipate that
future compliance will have a materially adverse effect on our consolidated
financial position, results of operations or cash flows. However, if we are
deemed to not be in compliance with applicable environmental laws, we could be
forced to expend substantial amounts to be in compliance, which would have a
materially adverse effect on our financial condition. If this were to happen,
any investment in us could be lost.
THE
COMPANY HAS ESTABLISHED PREFERRED STOCK WHICH CAN BE DESIGNATED BY THE COMPANY'S
BOARD OF DIRECTORS WITHOUT SHAREHOLDER APPROVAL AND HAS ESTABLISHED SERIES A
PREFERRED STOCK, WHICH GIVES THE HOLDERS MAJORITY VOTING POWER OVER THE
COMPANY.
The
Company has 1,000,000 shares of preferred stock authorized, and 1,000 shares of
Series A Preferred Stock authorized. Shares of preferred stock of the Company
may be issued from time to time in one or more series, each of which shall have
distinctive designation or title as shall be determined by the Board of
Directors of the Company ("Board of Directors") prior to the issuance of any
shares thereof. The preferred stock shall have such voting powers, full or
limited, or no voting powers, and such preferences and relative, participating,
optional or other special rights and such qualifications, limitations or
restrictions thereof as adopted by the Board of Directors. Because the Board of
Directors is able to designate the powers and preferences of the preferred stock
without the vote of a majority of the Company's shareholders, shareholders of
the Company will have no control over what designations and preferences the
Company's preferred stock will have. As a result of this, the Company's
shareholders may have less control over the designations and preferences of the
preferred stock and as a result the operations of the Company.
THE
COMPANY HAS ESTABLISHED SERIES A PREFERRED STOCK, WHICH GIVES THE HOLDERS
MAJORITY VOTING POWER OVER THE COMPANY.
The
Company has 1,000 shares of Series A Preferred Stock authorized. All outstanding
shares of Series A Preferred stock, which are all currently held by Valeska
Energy Corp., the beneficial owner of which is William M. Simmons, the President
and Director of the Company, can vote in aggregate on all shareholder matters
equal to fifty-one percent (51%) of the total vote. Because of the shares of
Series A Preferred Stock, Valeska Energy Corp., will effectively exercise voting
control over the Company. As a result of this, the Company's shareholders will
have less control over the operations of the Company.
WILLIAM
M. SIMMONS, OUR PRESIDENT CAN EXERCISE VOTING CONTROL OVER CORPORATE
DECISIONS.
William
M. Simmons (through his personal beneficial ownership and through his voting
control over Valeska Energy Corp. (“Valeska”)) beneficially owns 27,200,000
shares of common stock, additionally; Valeska holds all 1,000 shares of our
outstanding shares of Series A Preferred Stock, which Series A
Preferred
Stock, votes in aggregate, a number of voting shares equal to 51% of our total
outstanding shares of voting stock. As a result, our Directors and
officers will exercise control in determining the outcome of all corporate
transactions or other matters, including the election of directors, mergers,
consolidations, the sale of all or substantially all of our assets, and also the
power to prevent or cause a change in control. The interests of Mr. Simmons may
differ from the interests of the other stockholders and thus result in corporate
decisions that are adverse to other shareholders.
THE
REMOVAL OF MR. VESCO AND MR. SIMMONS AS DIRECTORS OF THE COMPANY IS PROTECTED BY
VOTING AGREEMENTS ENTERED INTO WITH THE COMPANY’S MAJORITY
SHAREHOLDERS.
Certain
of the Company’s majority shareholders, including Capersia Pte. Ltd., Lucayan
Oil and Gas Investments, Ltd., Frank A. Jacobs (the Company’s former Chief
Executive Officer and Director) and Valeska Energy Corp. (the “Voting
Shareholders”) entered into Voting Agreements whereby they agreed that they
would not vote the aggregate of 71,874,000 shares of common stock which they
hold for (i.e. in favor of) the removal of Mr. Simmons or Mr. Vesco (the “New
Directors”) until the expiration of the agreements on June 5,
2009. The Voting Shareholders also agreed that in the event of any
shareholder vote of the Company (either by Board Meeting, a Consent to Action
without Meeting, or otherwise) relating to the removal of the New Directors; the
re-election of the New Directors; and/or the increase in the number of directors
of the Company during the term of the Voting Agreements, that such Voting
Shareholders would vote their shares against the removal of the New Directors;
for the re-election of such New Directors; and/or vote against the increase in
the number of directors of the Company, without the unanimous consent of the New
Directors, respectively. The Voting Agreements also included a
provisions whereby in the event that either of the New Directors breaches his
fiduciary duty to the Company, including, but not limited to such New Director’s
conviction of an act or acts constituting a felony or other crime involving
moral turpitude, dishonesty, theft or fraud; such New Director’s gross
negligence in connection with his service to the Company as a Director and/or in
any executive capacity which he may hold; and/or if any Voting Shareholder
becomes aware of information which would lead a reasonable person to believe
that such New Director has committed fraud or theft from the Company, or a
violation of the Securities laws (each a “Breach of Fiduciary Duty”),
this voting requirement set forth above shall not apply. As a result
of the Voting Agreements, it will likely be impossible for the shareholders of
the Company to remove Mr. Simmons or Mr. Vesco as Directors of the Company,
unless a Breach of Fiduciary Duty occurs, and even then, due to Valeska’s
ownership of the Series A Preferred Stock (as described above), it will likely
be impossible for such New Directors to be removed as Directors of the
Company.
THE
INTERESTS OF MR. SIMMONS AND MR. VESCO, OUR PRESIDENT AND CHIEF EXECUTIVE
OFFICER, RESPECTIVELY, MAY DIFFER FROM THE INTERESTS OF OUR OTHER SHAREHOLDERS,
AND THEY MAY ALSO COMPETE WITH THE COMPANY OR ENTER INTO TRANSACTIONS SEPARATE
FROM THE COMPANY.
Mr.
Simmons and Mr. Vesco, our President and Chief Executive Officer, respectively,
are involved in business interests separate from their involvement with the
Company, including but not limited to Valeska Energy Corp., which business
and/or companies may also operate in the oil and gas industry similar to and/or
in competition with the Company. Mr. Simmons and Mr. Vesco are under no
obligation to include us in any transactions which they undertake. As a result,
we may not benefit from connections they make and/or agreements they enter into
while employed by us, and they, or companies they are associated with,
including, but not limited to Valeska, may profit from transactions which they
undertake while we do not. As a result, they may find it more
lucrative or beneficial to cease serving as officers or Directors of the Company
in the future and may resign from the Company at that time. Furthermore, while
employed by us, shareholders should keep in mind that they are under no
obligation to share their contacts and/or enter into favorable contracts and/or
agreements they may come across with the Company, and as a result may choose to
enter into such contracts or agreements through companies which they own, which
are not affiliated with us, and from which we will receive no
benefit. Finally, certain of the agreements they may enter into
on our behalf may benefit them more than us, including, but not limited to the
Management Agreement, which currently pays Valeska $20,000 per
month.
RISKS RELATING TO THE COMPANY'S
SECURITIES
A
DEFAULT BY US UNDER THE SECURED TERM NOTE, TEXHOMA WARRANT OR TEXAURUS WARRANT,
WOULD ENABLE LAURUS MASTER FUND, LTD., TO TAKE CONTROL OF SUBSTANTIALLY ALL OF
OUR ASSETS.
The
Secured Term Note, Texhoma Warrant and Texaurus Warrant, are secured by Laurus
by a continuing security interest in all of our assets, including without
limitation, our cash, cash equivalents, accounts receivable, deposit accounts,
inventory, equipment, goods, fixtures and other tangible and intangible assets,
which we own or at any time in the future may acquire rights, title or interest
to. As a result, if we default under any provision of the Note, Texhoma Warrant
or Texaurus Warrant or we fail to pay any amounts due to Laurus, Laurus may take
control of substantially all of our assets. If this were to happen, we could be
left with no revenue producing assets, and the value of our common stock could
become worthless.
WE
MAY BE REQUIRED TO PAY PENALTIES TO LAURUS MASTER FUND, LTD. UNDER THE
REGISTRATION RIGHTS AGREEMENT, WHICH COULD FORCE US TO EXPEND A SUBSTANTIAL
AMOUNT OF THE MONEY WE HAVE PREVIOUSLY RAISED.
We
granted Laurus Master Fund, Ltd., registration rights to the shares issuable to
Laurus in connection with the Texhoma Warrant, pursuant to a Registration Rights
Agreement, and we plan to register such shares pursuant to a Form SB-2
Registration Statement, once we become current in our filings with the
Commission. We agreed pursuant to the Registration Rights Agreement to use our
best efforts to file the Registration Statement by May 29, 2006 (60 days after
the Closing) and to obtain effectiveness of such registration statement by
September 25, 2006 (180 days after the Closing), neither of which deadlines we
have met; however, pursuant to the First Amendment (described above), Laurus
agreed to amend the date we are required to have gained effectiveness of the
Registration Statement by, to April 30, 2008. Moving forward, should
we fail to obtain effectiveness of the registration statement, and such failure
is deemed to be a default under the Note, we could be forced to pay penalties to
Laurus. As a result, we could be forced to abandon or scale back our current
planned operations and/or raise additional capital, which could cause
substantial dilution to our existing shareholders.
THE
TEXHOMA WARRANT CONTAINS PROVISIONS WHEREBY LAURUS MASTER FUND, LTD. MAY HOLD
MORE THAN 4.99% OF OUR COMMON STOCK, PROVIDED THEY PROVIDE US SEVENTY-FIVE (75)
DAYS NOTICE OR AN EVENT OF DEFAULT OCCURS.
Although
Laurus may not exercise its Texhoma Warrant if such exercise would cause it to
own more than 4.99% of our outstanding common stock, the Texhoma Warrant also
contains provisions which provide for the 4.99% limit to be waived provided that
Laurus provides us with 75 days notice of its intent to hold more than 4.99% of
our common stock or upon the occurrence of an event of default (as defined under
the Note). As a result, if we receive 75 days notice from Laurus and/or an event
of default occurs, Laurus may fully exercise the Texhoma Warrant and fully
convert the Texhoma Warrant into shares of our common stock. If this were to
happen, it would cause immediate and substantial dilution to our existing
shareholders and if it were to happen when our Registration Statement covering
Laurus' securities has been declared effective, the subsequent sale of such
shares in the marketplace, if affected, could cause the trading value of our
common stock, if any, to decrease substantially.
IF
AN EVENT OF DEFAULT OCCURS UNDER THE NOTE, TEXHOMA WARRANT OR TEXAURUS WARRANT
OR ANY OF THE RELATED AGREEMENTS, WE COULD BE FORCED TO IMMEDIATELY PAY THE
AMOUNTS DUE UNDER THE NOTE.
The
Secured Term Note, Texhoma Warrant and Texaurus Warrant include provisions
whereby Laurus Master Fund, Ltd., may make the amounts outstanding under the
Note due and payable if an event of default occurs under the Note, which events
of default include:
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our
failure to pay amounts due under the
Note;
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breach
of any covenants under the Note, if not cured in the time periods
provided;
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breach
of any warranties found in the
Note;
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the
occurrence of any default under any agreement, which causes any contingent
obligation to become due prior to its stated maturity or to become
payable;
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|
o
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any
change or occurrence likely to have a material adverse effect on the
business, assets, liabilities, financial condition, our operations or
prospects;
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|
o
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an
indictment or other proceedings against us or any executive officer;
or
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|
o
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a
breach by us of any provision of the Securities Purchase Agreement, or any
other Related Agreement entered into in connection with the sale of the
Notes.
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If any
event of default were to occur under the Note and Laurus was to make the entire
amount of the Note immediately due and payable, and we did not have sufficient
funds on hand to pay such amounts, we could be forced to sell some or all of our
assets at less than fair market value, and/or abandon or curtail our business
plan and operations.
THE
ISSUANCE OF COMMON STOCK IN CONNECTION WITH THE EXERCISE OF THE TEXHOMA WARRANT
WILL CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION.
Once we
are able to file a registration statement covering the shares of common stock
issuable in connection with the exercise of the Texhoma Warrant, which we do not
anticipate being able to file until such time as we are current in our filings,
the issuance of common stock upon exercise of the Texhoma Warrant will result in
immediate and substantial dilution to the interests of other stockholders since
Laurus Master Fund, Ltd., may ultimately receive and sell the full amount
issuable on exercise of the Texhoma Warrant, which has an exercise price of
$0.04 per share, currently more than the average trading value of our common
stock during the past thirty days. Although Laurus may not exercise its warrant
if such conversion or exercise would cause it to own more than 4.99% of our
outstanding common stock (unless Laurus provides us 75 days notice and/or an
event of default occurs, this restriction does not prevent Laurus from
exercising some of its holdings, selling those shares, and then converting the
rest of its holdings, while still staying below the 4.99% limit. In this way,
Laurus could sell more than this limit while never actually holding more shares
than this limit prohibits. If Laurus chooses to do this, it will likely cause
the value of our common stock to decline in value (if such common stock is
trading at more than $0.04 per share prior to such sales) and will likely also
cause substantial dilution to our common stock.
THE
MARKET FOR OUR COMMON STOCK MAY CONTINUE TO BE VOLATILE, ILLIQUID AND SPORADIC,
IF WE HAVE A MARKET AT ALL.
The
market for our common stock on the Over-The-Counter Bulletin Board (and prior to
that on the Pinksheets) has historically been volatile, illiquid and sporadic
and is subject to wide fluctuations in response to several factors, including,
but not limited to:
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(1)
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actual
or anticipated variations in our results of operations;
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(2)
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our
ability or inability to generate new revenues;
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(3)
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increased
competition; and
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(4)
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conditions
and trends in the oil and gas exploration industry and the market for oil
and gas and petroleum based
products.
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Our
common stock is traded on the Over-The-Counter Bulletin Board under the symbol
"TXHE." In recent years, the stock market in general has experienced extreme
price fluctuations that have oftentimes been unrelated to the operating
performance of the affected companies. Similarly, the market price of our common
stock may fluctuate significantly based upon factors unrelated or
disproportionate to our operating performance. These market fluctuations, as
well as general economic, political and market conditions, such as recessions,
interest rates or international currency fluctuations may adversely affect the
market price of our common stock.
INVESTORS
MAY FACE SIGNIFICANT RESTRICTIONS ON THE RESALE OF OUR COMMON STOCK DUE TO
FEDERAL REGULATIONS OF PENNY STOCKS.
Our
common stock will be subject to the requirements of Rule 15(g)9, promulgated
under the Securities Exchange Act as long as the price of our common stock is
below $4.00 per share. Under such rule, broker-dealers who recommend low-priced
securities to persons other than established customers and accredited investors
must satisfy special sales practice requirements, including a requirement that
they make an individualized written suitability determination for the purchaser
and receive the purchaser's consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990, also requires
additional disclosure in connection with any trades involving a stock defined as
a penny stock. Generally, the Commission defines a penny stock as any equity
security not traded on an exchange or quoted on NASDAQ that has a market price
of less than $4.00 per share. The required penny stock disclosures include the
delivery, prior to any transaction, of a disclosure schedule explaining the
penny stock market and the risks associated with it. Such requirements could
severely limit the market liquidity of the securities and the ability of
purchasers to sell their securities in the secondary market. In addition,
various state securities laws impose restrictions on transferring "penny stocks"
and as a result, investors in the common stock may have their ability to sell
their shares of the common stock impaired.
Other
Considerations
There are
numerous factors that affect our business and the results of its operations.
Sources of these factors include general economic and business conditions,
federal and state regulation of business activities, the level of demand for the
Company’s product or services, the level and intensity of competition in the
industry and the pricing pressures that may result, the Company’s ability to
develop new services based on new or evolving technology and the market’s
acceptance of those new services, the Company’s ability to timely and
effectively manage periodic product transitions, and geographic sales mix of any
particular period, and the ability to continue to improve infrastructure
including personnel and systems, to keep pace with the growth in its overall
business activities.