The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Texas South Energy, Inc. (the “Company”)
was incorporated pursuant to the laws of the State of Nevada on March 15, 2010. The Company is engaged in the oil and gas business.
In January 2017, The Company formed Texas
South Operating Company, Inc as a wholly owned subsidiary of the Company. It was incorporated pursuant to the laws of the State
of Texas on January 11, 2017.
Texas South Energy, Inc. and Texas South
Operating Company, Inc. (collectively, the “Company”) began filing consolidated financial statements effective with
the March 31, 2017 filing. The consolidated financial statements reflect our accounts after elimination of all significant intercompany
transactions and balances.
The Company has limited operating history
and has devoted its activities to the acquisition of oil and gas assets.
The Company had established a fiscal year
end of October 31; however, on March 3, 2017 the Company adopted a year end of December 31. A transition 10-K was filed for the
period November 2016 through December 2016 to report the change in our year end.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Presentation
The accompanying unaudited consolidated
financial statements have been prepared in all material respects in accordance with United States generally accepted accounting
principles (“U.S. GAAP”) for interim financial information. Intercompany accounts and transactions are eliminated.
Pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), certain information and
footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed
or omitted. The accompanying unaudited consolidated financial statements have been prepared on the same basis as the audited financial
statements for the year ended December 31, 2017.
Because certain information and footnote
disclosures have been condensed or omitted, these unaudited consolidated financial statements should be read in conjunction with
the audited financial statements and notes thereto as of and for the year ended December 31, 2017, which are included in the Company’s
annual report for the year ended December 31, 2017 (the “2017 Annual Report”). In management’s opinion, all normal
and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash
flows for the periods presented have been included. Management believes that the disclosures made in these unaudited consolidated
financial statements are adequate to make the information not misleading. Interim period operating results do not necessarily indicate
the results that may be expected for any other interim period or for the full fiscal year.
There have been no changes in the Company’s
significant accounting policies from those that were disclosed in the Company’s 2017 Annual Report.
Use of Estimates and Assumptions
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. While management believes that such estimates are reasonable when considered
in conjunction with the financial position and results of operations taken as a whole, actual results could differ from those estimates,
and such differences may be material to the financial statements.
Basic and Diluted Net Loss per Share
Basic loss per share is computed by dividing
net loss available to common shareholders by the weighted average number of outstanding common shares during the period. Diluted
loss per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive loss per share excludes
all potential common shares if their effect is anti-dilutive. Because the Company is operating at a loss, it has no potential dilutive
instruments and accordingly basic loss and diluted loss per share are the same.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued its final standard on revenue from contracts with customers. The standard, issued as Accounting
Standards Update (“ASU”) No. 2014-09:
Revenue from Contracts with Customers (Topic 606)
, outlines a single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition
guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services.” ASU 2014-09 becomes effective for reporting periods (including
interim periods) beginning after December 15, 2017. Early application is permitted for reporting periods (including interim
periods) beginning after December 15, 2016. This new standard permits the use of either the retrospective or cumulative effect
transition method. Because the Company has no revenue, the new guidance is not expected to have a material impact on its financial
statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases
(“ASU
2016-02”), which relates to the accounting for leasing transactions. This standard requires a lessee to record on the
balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than twelve
months. In addition, this standard requires both lessees and lessors to disclose certain key information about lease transactions.
This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. We are evaluating the impact the adoption of ASU 2016-02 will have on our consolidated financial statements.
Other new pronouncements issued but not
effective until after September 30, 2018 are not expected to have a material impact on the Company’s financial position,
results of operations, or cash flows.
NOTE 3 - GOING CONCERN
The Company’s financial statements are
prepared in accordance with generally accepted accounting principles applicable to a going concern. This contemplates the realization
of assets and the liquidation of liabilities in the normal course of business. Currently, the Company does not have sufficient
cash, nor does it have operations or a source of revenue sufficient to cover its operational costs in order to allow it to continue
as a going concern. The Company has accumulated losses as of September 30, 2018, of $14,904,726. The Company will be dependent
upon the raising of additional capital through the best-efforts placement of its equity and/or debt securities in order to implement
its business plan. There can be no assurance that the Company will be successful in either situation in order to continue as a
going concern. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These
financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts,
or amounts and classification of liabilities that might result from this uncertainty.
NOTE 4 - OIL & GAS PROPERTIES
In March 2014, we entered into a farm out
letter agreement with GulfSlope Energy, Inc. (“GulfSlope”) relating to certain prospects GulfSlope bid on at the Central
Gulf of Mexico Lease Sale 231, located within 2.2 million acres of 3-D seismic licensed and interpreted by GulfSlope. Under the
terms of the farm-out letter agreement, as amended, we acquired contractual rights to a 20% working interest in 12 blocks covered
in 9 prospects for approximately $10,720,000 paid to GulfSlope through September 30, 2018. We have agreed to pay our proportionate
share of the net rental costs related to the prospects. GulfSlope has conducted extensive seismic work on all of the prospects
focusing on the high potential subsalt play at depths of 15,000’ to 25,000’ and will be the operator of record for
the initial well on each of the prospects. In August 2017, the Company acquired a 20% working interest from GulfSlope in Ship Shoal
Block 351 and in Ship Shoal Block 336, which are collectively referred to as the Tau Prospect. In October 2017, the Company acquired
a 20% working interest from GulfSlope in Eugene Island Block 397 and Green Canyon Block 4, which are collectively referred to as
the Quark Prospect. In January 2018, the Company acquired a 20% working interest in the Vermilion South Addition Block 378 (“Canoe
Prospect”) from GulfSlope.
On January 8, 2018, the Company entered
into a participation agreement dated effective January 1, 2018 (the “Agreement”) with Delek GOM Investments, LLC, a
subsidiary of Delek Group Ltd. (“Delek”), and GulfSlope (collectively, the “Parties”) for the partial farm-out
of the Company’s interests in its Gulf of Mexico oil and gas leases (the “Farm-out”). The Agreement sets out
the terms and conditions of the Parties participation in the drilling of up to a nine well multi-phase exploration program targeting
the Company’s prospects (the “Prospects”) located on the Company’s existing leases (the “Leases”).
Under the terms of the Agreement, the
Parties have committed to initially drill two of the Company’s prospects in Phase I (the “Initial Phase”)
with Delek having the option to participate in two additional two-well drilling phases and a final, three-well drilling phase
(collectively, the “Phases”). In each Phase, Delek will earn a 75% working interest upon paying 90% of the
exploratory costs associated with drilling each exploratory well. The Company will thus retain a 5% working interest while
paying 2% of the exploratory costs associated with drilling each well. In addition, Delek will pay the Company $405,000 upon
the filing of each exploration plan with BOEM and/or BSEE on a Prospect in each Phase. During March 2018 Delek made its first
payment of $405,000 to the Company as the initial plan was filed. Delek made a second payment of $405,000 to the Company
during May 2018. Also, each Party will be responsible for its pro rata share (based on working interest) of delay rentals
associated with the Prospects. GulfSlope will be the Operator during exploratory drilling of a Prospect, however, subsequent
to a commercial discovery, Delek will have the right to become the Operator. Delek will have the right to terminate this
Agreement at the conclusion of any drilling Phase. Delek will also have the option to purchase up to 5% of the
Company’s common stock upon fulfilling its obligation for each Phase (maximum of 20% in the aggregate) at a price per
share equal to a 10% discount to the 30-day weighted average closing price for the Company’s common stock preceding the
acquisition. This option will expire on January 8, 2020. The Company has not recorded any cost associated with the option due
to the future performance obligation of Delek. If Delek meets the obligation and exercises its option the Company will record
the option value at that time as an increase to Oil and Gas Properties. The likelihood of Delek exercising its options to
purchase shares of the Company’s common stock will be dependent on the drilling results from Phase 1 and the
Company’s operating results which will affect the price of the Company’s common stock. We currently do not
anticipate Delek fully exercising this option before the expiration date. At September 30, 2018, the potential value of
issuing 20% of our outstanding stock is approximately $6,000,000. The foregoing description of the Agreement does not
purport to be a complete description of the terms, provisions and conditions of such document, and represents only a summary
of certain of the principal terms, provisions and conditions thereof.
The Company will assign a two-tenths of
one percent of 8/8ths net profits interest in certain of the Company’s oil and gas leases in the two Phase I prospects to
Hi-View Investment Partners, LLC (“Hi-View”) in consideration for consulting services provided pursuant to a non-exclusive
consulting engagement dated October 25, 2017, by and between Hi-View, the Company, and GulfSlope (the “Advisory Agreement”).
Hi-View will be entitled to additional assignments on the same terms and conditions as described above related to any of Leases
in which Delek elects to participate in the drilling of an exploratory well. In addition, the Company issued an aggregate of twenty
million shares of its common stock to Hi-View in consideration for those consulting services provided pursuant to the Advisory
Agreement
In January 2017, the Company entered into
an asset purchase agreement with Sydson Energy, Inc. (“Sydson Energy”) and Sydson Resources, L.P. (“Sydson Resources”
and collectively with Sydson Energy, “Sydson”), where Sydson assigned to us certain onshore oil and gas assets and
interests and certain tangible assets and additionally, certain employees and a consultant of Sydson have agreed to become employees
and a consultant of the Company. Sydson is a private oil and gas company with land operations in Texas and Louisiana that has been
in business since 1982. The oil and gas assets include the following:
|
●
|
In Texas, we acquired a 50% working interest in the undrilled acreage above 4,500’ in the West Tuleta Field, Bee County, Texas comprised of approximately 1,800 gross acres and 900 net acres with a net revenue interest of approximately 75%. The primary drilling objectives are the Vicksburg and Hockley sands which are structurally high on this acreage compared to the prior downdip production.
|
|
●
|
In the adjacent Ray Field, also in Bee County, Texas, we acquired a 50% working interest in the undrilled, acreage on the Walton, Campbell, and Ray leases comprising approximately 75 gross acres with a net revenue interest of approximately 75%. The primary drilling objectives on this acreage are also the Vicksburg and Hockley sands updip to prior production above 3,700’.
|
|
●
|
Southeast of San Antonio, we are acquiring leases with working interest partners covering more than 4,400 acres for horizontal projects above 6,000’ in the Austin Chalk, Eagle Ford, and Buda Lime formation. These projects are adjacent to substantial prior production and contain both conventional and unconventional oil targets. We began drilling operations on the first well during the third quarter of 2018.
|
NOTE 5 - COMMON STOCK
The Company had 950,000,000 shares of common
stock authorized with a par value of $0.001, however during April 2018 the holders of a majority of the issued and outstanding
shares of common stock consented to action via written consent to adopt an amendment to our amended and restated articles of incorporation
to increase the number of authorized shares of common stock from 950,000,000 to 1,350,000,000. The Company filed a Schedule 14C
information statement with the Securities and Exchange Commission and mailed a copy to each holder of common stock of record disclosing
this consent to take action without a shareholders’ meeting. The amendment became effective after (i) 20 days from the mailing
of the information statement to the common stock holders of record (May 15, 2018) and (ii) once it is filed with the Nevada Secretary
of State (May 17, 2018).
On August 1, 2018 the Company filed a preliminary
proxy statement requesting shareholders to vote on increasing the authorized shares of common stock from 1,350,000,000 to 1,500,000,000.
We filed a definitive proxy statement on August 14, 2018 and the proposal passed.
As of September 30, 2018, the Company had
990,199,769 shares of common stock issued and outstanding. During the nine months ended September 30, 2018 the Company sold 58,683,350
shares of stock at a price of $.02 per share for a total of $1,173,667. During the nine months ended September 30, 2018 the Company
issued 20,000,000 shares in exchange for lease brokerage fees valued at $400,000, issued 63,198,147 shares in exchange for the
conversion of $1,554,954 of debt and accrued interest, issued 20,600,000 shares in exchange for settlements valued at $412,000
and issued 5,927,602 shares to three employees and a consultant for services rendered for $86,121.
NOTE 6 - RELATED PARTY TRANSACTIONS
Mr. Askew, our former chief executive officer
and director for over three years, is currently a consultant to the Company. He resigned effective January 3, 2017 and signed a
consulting agreement which is discussed in more detail in footnote 10 “Commitments and Contingencies”. As of September
30, 2018, the Company has accrued $700,000 for Mr. Askew’s consulting expenses. This accrual is reported on the balance sheet
under current liabilities as “Accrued expenses – related party”.
The Company had received unsecured advances
prior to 2014 from a former director in the amount of $52,152. The amount of $42,324 due to the related party was written off during
the quarter ended March 31, 2017 and recorded as “Other income” as a result of the expiration of the applicable statute
of limitations. The remaining balance of $9,828 was written off during the quarter ended March 31, 2018.
Mr. Mayell, our current chief executive
officer and director effective January 4, 2017, is President of Sydson Energy, Inc. and Managing Partner of the General Partner
of Sydson Resources, LP (“Sydson”). Since the Sydson acquisition on January 4, 2017, Sydson and Mr. Mayell have paid
invoices on behalf of the Company and advanced loans to the Company. On August 11, 2017, the Company signed a note payable agreement
with Sydson for $70,000 which represents a portion of the balance owed to Sydson, with the remainder reported as “Accounts
Payable – related party” on the balance sheet. Also on August 11, 2017, the Company signed a note payable agreement
with Mr. Mayell for $47,000 which represents some of the advances Mr. Mayell made to the Company. The note payable balances as
of September 30, 2018 are $70,000 to Sydson and $47,000 to Mr. Mayell and are reported on the balance sheet under current liabilities
as “Convertible notes payable – related party”. The accrued interest on these notes as of September 30, 2018
is $7,978 payable to Sydson and $5,357 payable to Mr. Mayell.
During the nine months ended
September 30, 2018, the Company has paid Mr. Mayell in full a total of $169,630 toward the outstanding accounts payable
balance, leaving a zero balance. As of September 30, 2018, the Company owes Sydson $14,606 which is reported on the balance
sheet as “Accounts payable - related party”.
During the nine months ended September
30, 2018 the Company sold interests in some prospects to several investors, of which the Company owes Sydson Resources, LP its
25% share of the proceeds. Sydson’s share totaled $164,167. The Company made payments to Sydson for $29,963 and applied $82,000
for Sydson’s purchase of a 1% interest in the prospect, so the balance owed to Sydson as of September 30, 2018 was $52,204
and is included in the $66,810 reported as “Accounts payable – related party”.
In January 2017, the Company issued shares
of stock to the following related parties: Mr. Askew 27 million shares, Mr. Mayell 100 million shares and Mr. Connally 65.1 million
shares. See note 10 “Commitments and contingencies” for additional information.
As discussed in Note 7, the Company owes
Sydson $250,000 plus accrued interest – short term totaling $47,596 on a note related to the acquisition of Sydson assets.
Also discussed in Note 8, Mr. Mayell and
JTB Energy LLC, a company managed by Mr. Mayell, have each loaned the Company $250,000. Total interest expense of $67,800 has been
accrued as of September 30, 2018. JTB Energy LLC is a related party of Mr. Mayell.
Also discussed in Note 8, Mr. Mayell loaned
the Company amounts of $170,000 and $50,000 for a total of $220,000 during October 2017. The accrued interest on these notes payable
total $21,522 as of September 30, 2018.
During December 2017, the
Company received a loan of $50,000 from a shareholder. The note and interest is due January 1, 2019 with an interest rate of
10% per annum. During the outstanding period, the note is convertible at the option of the investor up to the outstanding
principal and unpaid interest into common shares at $0.02 per share. The note is reported as “Secured
convertible Notes Payable – related party” under short term liabilities on the balance sheet.
As discussed in Note 8, an accredited investor
loaned the Company $1,700,000 which has been fully converted into shares of the Company’s common stock.
Listed below is a table summarizing the
amounts owed to Mr. Mayell and his related parties.
Name of Related Party
|
|
Original
Amount
|
|
|
Amount
repaid
|
|
|
Balance
owed 9/30/18
|
|
|
Accrued
Interest
|
|
|
Total
owed
|
|
|
Interest
rate
|
|
|
Convertible
into Shares
of Stock
|
Mr. Michael Mayell
|
|
|
686,630
|
|
|
|
(197,630
|
)
|
|
|
489,000
|
|
|
|
60,373
|
|
|
|
549,373
|
|
|
|
10
|
%
|
|
Yes
|
Sydson Energy, Inc.
|
|
|
325,354
|
|
|
|
(240,748
|
)
|
|
|
84,606
|
|
|
|
7,978
|
|
|
|
92,584
|
|
|
|
10
|
%
|
|
Partial
|
Sydson Resources, LP
|
|
|
380,000
|
|
|
|
(77,796
|
)
|
|
|
302,204
|
|
|
|
47,596
|
|
|
|
349,800
|
|
|
|
10
|
%
|
|
No
|
JTB Energy, LLC
|
|
|
250,000
|
|
|
|
0
|
|
|
|
250,000
|
|
|
|
34,306
|
|
|
|
284,306
|
|
|
|
10
|
%
|
|
Yes
|
Total
|
|
$
|
1,641,984
|
|
|
($
|
516,174
|
)
|
|
$
|
1,125,810
|
|
|
$
|
150,253
|
|
|
$
|
1,276,063
|
|
|
|
|
|
|
|
Note: No interest expense has been paid to date on the above
balances.
NOTE 7 - NOTES PAYABLE
The Company had received advances during
2014 and prior from a prior director in the amount of $52,152. The amount of $42,324 due to the related party was written off during
the quarter ended March 31, 2017 and recorded as “Other income” as a result of the expiration of the applicable statute
of limitations. During the quarter ended March 31, 2018, the remaining balance of $9,828 was written off and recorded as “Other
income”. These advances were previously recorded within the “Due to related party” line on the balance sheet
and now have a zero balance.
In connection with the Sydson asset
acquisition, part of the consideration was an unsecured $250,000 note payable to Sydson due March 1, 2017. The note has been
amended effective March 23, 2017 to extend the due date to January 1, 2019 and to charge a fixed rate of 10% interest on the
note. The balance of $250,000 is included in “Notes payable-related party” in the current liabilities section of
the balance sheet.
The company financed the current year insurance
premiums and that note has a balance of $15,484 as of September 30, 2018. This note is reported as “Notes payable”
under current liabilities on the balance sheet.
NOTE 8 - CONVERTIBLE NOTES PAYABLE
Effective March 23, 2017 the Company extended
an unsecured promissory note with an accredited investor in the amount of $1,700,000 to a payment date of January 1, 2019. The
note was reduced by the assignment of a $131,645 note receivable from EnerGulf Resources to the investor. On September 18, 2017
the Company converted $450,000 of the principal amount of the note into 22,500,000 shares of the Company’s common stock at
a conversion price of $0.02 per share. As of December 31, 2017 the outstanding principal balance was $1,118,355 and was reported
as “Convertible Notes Payable” under long term liabilities on the balance sheet. During the quarter ending March
31, 2018, the Company converted an additional $400,000 of the principal balance into 15,000,000 shares of the Company’s common
stock. The transaction was broken down as follows, the principal balance of $200,000 was converted at a conversion price of $0.02
and the principal balance of $200,000 was converted at a conversion price of $0.04. During the second quarter of 2018 another $200,000
of the principal balance was converted into 10,000,000 share of common stock at a conversion price of $0.02. The amended note agreement
now states that the note is convertible into common shares at an average calculated price not to be below $0.02 or to exceed $0.04
per share. The conversion is at the option of the investor up to the balance of the outstanding principal and accrued interest.
Effective July 20, 2018, the remaining principal balance of $518,355 plus the accrued interest of $436,599 was converted
into 38,198,147 shares of the Company’s common stock at a conversion rate of $0.025 per share.
During April 2017, the
Company received a loan of $125,000 from Mr. Mayell and a loan of $125,000 from JTB Energy, LLC. Both loans are secured by a
5% interest in the majority of the offshore leases, payable upon demand with interest rates of 10% per annum. During the
outstanding period, the notes are convertible at the option of the investor up to the outstanding principal and accrued
interest into common shares at $0.02 per share. These loans are both considered related party transactions. The notes
are reported as “Convertible notes payable – related party” under current liabilities. The notes are
convertible up to the outstanding principal and accrued interest into common shares at $0.02 per share. During June 2018 the
Company paid $18,000 on one of Mr. Mayell’s notes payable, leaving a balance of $107,000 as of June 30, 2018. During
July 2018 the Company paid an additional $10,000 on this note payable leaving a balance of $97,000 as of September 30,
2018.
During June 2017, the
Company received an additional loan of $125,000 from Mr. Mayell and an additional loan of $125,000 from JTB Energy, LLC. Both
loans are secured by a 5% interest in the majority of the offshore leases, all payable upon demand with interest rates of 10%
per annum. During the outstanding period, the notes are convertible at the option of the investor up to the outstanding
principal and accrued interest into common shares at $0.02 per share. These loans are both considered related party
transactions. The notes are reported as “Secured convertible notes payable – related party” under current
liabilities. The notes are convertible up to the outstanding principal and accrued interest into common shares at $0.02 per
share.
During August 2017, the Company
converted a portion of the accounts payable balances owed to Sydson and Mr. Mayell to note payable agreements, charging
interest at 10% per annum. Both Sydson and Mr. Mayell had advanced money to the Company and paid invoices on behalf of the
Company, which had previously been reported as “Accounts payable – related party”. The Company converted
$70,000 into a note payable to Sydson and $47,000 into a note payable to Mr. Mayell. The remaining balances owed to them will
continue to be reported as “Accounts payable – related party”. The notes are reported as “Secured
convertible notes payable – related party” under current liabilities. The notes are convertible up to the
outstanding principal and accrued interest into common shares at $0.02 per share.
During October 2017, the Company
received loans of $170,000 and $50,000 from Mr. Mayell. Both loans are secured by a 5% interest in the majority of the
offshore leases, payable upon demand with interest rates of 10% per annum. During the outstanding period, the notes
are convertible at the option of the investor up to the outstanding principal and accrued interest into common shares at
$0.02 per share. These loans are both considered related party transactions and are reported as “Secured convertible
notes payable – related party” under current liabilities.
During December 2017, the Company
received a loan of $50,000 from a shareholder. The note and interest is due January 1, 2019 with an interest rate of 10% per
annum. During the outstanding period, the note is convertible at the option of the investor up to the outstanding principal
and unpaid interest into common shares at $0.02 per share. The note is reported as “Secured convertible Notes Payable
– related party” under current liabilities on the balance sheet.
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments
are cash and accounts payable. The recorded values of cash and accounts payable approximate their fair values based on their short-term
nature.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
See Note 6 for a discussion of Mr. Askew’s
employment agreement and the Company’s financial obligations with respect thereto. Mr. Askew resigned as an executive officer
and director of Texas South in January 2017 and entered into a consulting agreement with the Company that began on January 5, 2017
and terminates on December 31, 2020, and such term shall be extended for an additional one-year period upon December 31 of each
calendar year provided that neither the Company nor consultant notify the other on or prior to 90 days before the applicable December
31
st
that either party does not intend to extend this agreement. The Company shall pay to Mr. Askew $35,000 net per
month and issued Mr. Askew 27 million shares of Company common stock. Upon termination of Mr. Askew by the Company other than for
cause, Mr. Askew is entitled to receive three years of his then consulting compensation as severance.
The Company entered into an employment
agreement with John B. Connally III to serve as chairman of the board that began on January 5, 2017 and terminates on December
31, 2020. Upon December 31 of each calendar year, the term shall be extended for one additional year, provided that neither the
Company nor Mr. Connally notify the other on or prior to 90 days before the applicable December 31
st
date that either
party does not intend to extend this agreement. The Company shall pay to Mr. Connally a base salary of $420,000 per annum, issued
him 65.1 million shares, and Mr. Connally shall be entitled to standard and customary benefits. Mr. Connally has agreed to standard
non-disclosure provisions. Upon termination of Mr. Connally by the Company other than for cause, Mr. Connally is entitled to receive
three years of his then compensation as severance.
The Company entered into an employment
agreement with Mr. Mayell on January 4, 2017 that terminates on December 31, 2020. Upon December 31 of each calendar year, the
term shall be extended for one additional year, provided that neither the Company nor Mr. Mayell notify the other on or prior to
90 days before the applicable December 31
st
date that either party does not intend to extend this agreement. The Company
shall pay to Mr. Mayell a base salary of $420,000 per annum and Mr. Mayell shall be entitled to standard and customary benefits.
Mr. Mayell has agreed to standard non-disclosure and non-competition provisions. Upon termination of Mr. Mayell by the Company
other than for cause, Mr. Mayell is entitled to receive three years of his then compensation as severance.
During the first quarter of fiscal
2017, the above mentioned agreements with Mr. Connally and Mr. Mayell were amended to extend the due dates. The payments are
now due at the end of the terms of the agreements, which is December 31, 2020. These liabilities are accrued in the financial
statements and included in the caption “Accrued expenses” as long term liabilities on the balance sheet.
In April 2018, the employment agreements
for Mr. Mayell and Mr. Connally were amended, whereby all or a portion of the compensation owed to Mr. Mayell and Mr. Connally
for the period from January 2017 through April 30, 2018 can be paid by the Company, at the option of the employee, in restricted
shares of the Company’s common stock valued at $0.02 per share. As of the filing date of this report, neither has elected
to convert the compensation owed into common stock. If all of the compensation owed was converted into shares of stock, Mr. Mayell
would receive 28,000,000 shares and Mr. Connally would receive 27,500,000 shares.
In July 2018, the consulting agreement
for Mr. Askew was amended, whereby all or a portion of the compensation owed to Mr. Askew for the period from February 2017 through
April 30, 2018 can be paid by the Company, at the option of the consultant, in restricted shares of the Company’s common
stock valued at $0.02 per share. The total owed to Mr. Askew for that period was $525,000. If all of the compensation owed was
converted into shares of stock, Mr. Askew would receive 26,250,000 shares of common stock. Mr. Askew has not elected to convert
the currently owed compensation.
NOTE 11 – STOCK-BASED INCENTIVE PLAN
At the September 6, 2018 annual meeting, the
stockholders approved the adoption of the Texas South Energy, Inc. 2018 Omnibus Incentive Plan (the “2018 Plan”),
effectively July 28, 2018. The 2018 Plan authorizes the issuance of 100,000,000 share of common stock prior to its expiration
on July 28, 2028. Incentives under the 2018 Plan may be granted to employees, directors, and consultants of the Company in any
one or a combination of the following forms: incentive stock options, nonqualified stock options, stock appreciation rights, restricted
stock awards or performance stock awards which are valued in whole or in part by reference to, or otherwise based on, our common
stock, including its appreciation in value. As of September 30, 2018, no awards were granted.
NOTE 12 - SUBSEQUENT EVENTS
The employment agreements between the Company
and Mr. Michael Mayell and Mr. John Connally III were amended effective October 16, 2018. Supplement number three to the employment
agreements added the following sentence: Employee has the right, at his option, to receive restricted shares of Company common
stock valued at a price per share equal to the greater of (i) $0.02 and (ii) the average closing price of Company common stock
during the calendar month in which the accrued salary being converted was earned, in lieu of cash, for all or a portion of the
compensation owed to Employee for the period between May 1, 2018 and ended September 30, 2018. The total owed to Mr. Mayell during
this period was $175,000 and the total owed to Mr. Connally III was $175,000. If these totals were converted into shares of stock,
each would receive 8,750,000 shares of common stock.
During October 2018, the Company sold 5,000,000
shares of common stock at a price per share of $0.02 for a total of $100,000 and issued 250,000 shares to a consultant for services
provided at a price per share of $0.02 for a total of $5,000 for services.
During November 2018, through our Form 10Q
filing date, the Company sold 2,500,000 shares of common stock at a price per share of $0.02 for a total of $50,000.
ITEM
2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity
and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction
with (i) the accompanying unaudited financial statements and notes thereto for the nine months ended September 30, 2018 and 2017,
and with our audited financial statements and notes thereto for the year ended December 31, 2017 included in the Company’s
Annual Report on Form 10-K (the “2017 Annual Report”) and (ii) the discussion under the caption “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” of the 2017 Annual Report.
Forward
Looking Statements
This
report on Form 10-Q contains certain forward-looking statements. All statements other than statements of historical fact are “forward-looking
statements” for purposes of these provisions, including any projections of earnings, revenues, or other financial items;
any statements of the plans, strategies, and objectives of management for future operation; any statements concerning proposed
new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief;
and any statement of assumptions underlying any of the foregoing. Such forward-looking statements are subject to inherent risks
and uncertainties, and actual results could differ materially from those anticipated by the forward-looking statements.
Business
Overview
Our
business plan as an oil and gas company is to focus primarily on properties in the Gulf Coast Region. We plan to obtain and manage
working and non-working interests in oil and gas properties.
We
are in the business of exploring for, drilling and producing oil and gas. Our business is subject to multiple factors effecting
the production of oil and gas, including, but not limited to: market prices; national and international economic conditions; import
and export quotas; availability of drilling rigs, casing, pipe, and other equipment and supplies; availability of and proximity
to pipelines and other transportation facilities; the supply and price of competitive fuels; and the regulation of prices, production,
transportation, and marketing by domestic and foreign governmental authorities. Additionally, we may not have control over whether
the owner or operator of the lease will elect to explore for oil and gas on such properties, or to develop them following discoveries
that may occur. Each of these factors may affect the rate at which oil and gas are produced, if ever, on properties in which we
may have an interest.
Our
Current Mineral Interests
In
March 2014, we entered into a farm out letter agreement with GulfSlope Energy, Inc. relating to certain prospects GulfSlope bid
on at the Central Gulf of Mexico Lease Sale 231, located within 2.2 million acres of 3-D seismic licensed and interpreted by GulfSlope.
Under the terms of the farm-out letter agreement, as amended, we acquired contractual rights to a 20% working interest in 12 blocks
covered in 9 prospects and have paid approximately $10,720,000 to GulfSlope through September 30, 2018. We have agreed to pay
our proportionate share of the net rental costs related to the prospects. GulfSlope has conducted extensive seismic work on all
of the prospects focusing on the high potential subsalt play at depths of 15,000’ to 25,000’ and will be the operator
of record for the initial well on each of the prospects. In August 2017, the Company acquired a 20% working interest from GulfSlope
in Ship Shoal Block 351 and in Ship Shoal Block 336, which are collectively referred to as the Tau Prospect. In October 2017,
the Company acquired a 20% working interest from GulfSlope in Eugene Island Block 397 and Green Canyon Block 4, which are collectively
referred to as the Quark Prospect. In January 2018, the Company acquired a 20% working interest in the Vermilion South Addition
Block 378 (“Canoe Prospect”) from GulfSlope.
On
January 8, 2018, the Company entered into a participation agreement dated effective January 1, 2018 (the “Agreement”)
with Delek GOM Investments, LLC, a subsidiary of Delek Group Ltd. (“Delek”), and GulfSlope (collectively, the “Parties”)
for the partial farm-out of the Company’s interests in its Gulf of Mexico oil and gas leases (the “Farm-out”).
The Agreement sets out the terms and conditions of the Parties participation in the drilling of up to a nine well multi-phase
exploration program targeting the Company’s prospects (the “Prospects”) located on the Company’s existing
leases (the “Leases”).
Under
the terms of the Agreement, the Parties have committed to initially drill two of the Company’s prospects in Phase I (the
“Initial Phase”) with Delek having the option to participate in two additional two-well drilling phases and a final,
three-well drilling phase (collectively, the “Phases”). In each Phase, Delek will earn a 75% working interest upon
paying 90% of the exploratory costs associated with drilling each exploratory well. The Company will thus retain a 5% working
interest while paying 2% of the exploratory costs associated with drilling each well. In addition, Delek will pay the Company
$405,000 upon the filing of each exploration plan with BOEM and/or BSEE on a Prospect in each Phase. During March 2018 Delek made
its first payment of $405,000 to the Company as the initial plan was filed. Delek made a second payment of $405,000 to the Company
during May 2018. Also, each Party will be responsible for its pro rata share (based on working interest) of delay rentals associated
with the Prospects. GulfSlope will be the Operator during exploratory drilling of a Prospect, however, subsequent to a commercial
discovery, Delek will have the right to become the Operator. Delek will have the right to terminate this Agreement at the conclusion
of any drilling Phase. Delek will also have the option to purchase up to 5% of the Company’s common stock upon fulfilling
its obligation for each Phase (maximum of 20% in the aggregate) at a price per share equal to a 10% discount to the 30-day weighted
average closing price for the Company’s common stock preceding the acquisition. This option will expire on January 8, 2020.
The Company has not recorded any cost associated with the option due to the future performance obligation of Delek. If Delek meets
the obligation and exercises its option the Company will record the option value at that time as an increase to Oil and Gas Properties.
At September 30, 2018, the potential value of issuing 20% of our outstanding stock is approximately $6,000,000. The foregoing
description of the Agreement does not purport to be a complete description of the terms, provisions and conditions of such document,
and represents only a summary of certain of the principal terms, provisions and conditions thereof.
The
Company will assign a two-tenths of one percent of 8/8ths net profits interest in certain of the Company’s oil and gas leases
in the two Phase I prospects to Hi-View Investment Partners, LLC (“Hi-View”) in consideration for consulting services
provided pursuant to a non-exclusive consulting engagement dated October 25, 2017, by and between Hi-View, the Company, and GulfSlope
(the “Advisory Agreement”). Hi-View will be entitled to additional assignments on the same terms and conditions as
described above related to any of Leases in which Delek elects to participate in the drilling of an exploratory well. In addition,
the Company issued an aggregate of twenty million shares of its common stock to Hi-View in consideration for those consulting
services provided pursuant to the Advisory Agreement.
In
January 2017, the Company entered into an asset purchase agreement with Sydson Energy, Inc. (“Sydson Energy”) and
Sydson Resources, L.P. (“Sydson Resources” and collectively with Sydson Energy, “Sydson”), where Sydson
assigned to us certain onshore oil and gas assets and interests and certain tangible assets and additionally, certain employees
and a consultant of Sydson have agreed to become employees and a consultant of the Company. Sydson is a private oil and gas company
with land operations in Texas and Louisiana that has been in business since 1982. The oil and gas assets include the following:
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In
Texas, we acquired a 50% working interest in the undrilled acreage above 4,500’ in the West Tuleta Field, Bee County,
Texas comprised of approximately 1,800 gross acres and 900 net acres with a net revenue interest of approximately 75%. The
primary drilling objectives are the Vicksburg and Hockley sands which are structurally high on this acreage compared to the
prior downdip production.
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In
the adjacent Ray Field, also in Bee County, Texas, we acquired a 50% working interest in the undrilled, acreage on the Walton,
Campbell, and Ray leases comprising approximately 75 gross acres with a net revenue interest of approximately 75%. The primary
drilling objectives on this acreage are also the Vicksburg and Hockley sands updip to prior production above 3,700’.
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Southeast
of San Antonio, we have acquired leases with working interest partners covering approximately 4,400 acres for horizontal projects
above 6,000’ in the Austin Chalk, Eagle Ford, and Buda Lime formation. These projects are adjacent to substantial prior
production and contain both conventional and unconventional oil targets. We began drilling operations on the first well, the
TXSO Richter Unit 1H, to a total depth of 9,447’ measured depth (MD) during the third quarter of 2018. The well has
been completed with 5 ½” casing set at 9,439’ MD and is waiting on a frac treatment scheduled for November
2018.
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Business
and Acquisition Strategy
Our
primary business strategy includes acquiring both working and non-working interests in oil and gas properties throughout the Gulf
Coast Region and Texas, including offshore prospects. We will consider acquisitions that serve as a platform for complementary
operations. In January, 2017 the Company acquired assets from Sydson Energy, Inc. and Sydson Resources, LP.
The
cost of implementing the forgoing programs will depend on what oil and gas interests are identified and available on terms acceptable
to us. Even if we identify oil and gas interests that are available, the cost of pursuing and acquiring them could be significant.
Our ability to pursue any such opportunities will be dependent on our ability to obtain financings through private equity, debt
financings or agreements with joint venture partners. We can provide no assurance that we have the necessary cash available or
will be able to successfully obtain the necessary financing or joint venture partners to pursue such opportunities.
We
have incurred losses since our inception and expect to incur losses in future periods. We currently rely primarily upon the sale
of our equity securities to fund operations.
Liquidity
and Capital Resources
As of September 30, 2018, we had a cash balance
of $3,222,908 and a working capital deficit of $2,603,161. Our accumulated deficit from inception (March 15, 2010) to September
30, 2018 was $14,904,726. For the nine months ended September 30, 2018, our net loss of $2,027,966 was mostly funded by proceeds
raised from equity financings. During the nine months ended September 30, 2018, our cash position increased by $3,222,453 as a
result of the sale of some of our interests in our prospects, receiving prepaid costs from our participation agreement on the Wilinda
project, and the sale of the Company’s common stock.
During
the nine months ended September 30, 2018, we issued 168,409,099 shares of common stock, of which 58,683,350 shares were issued
for cash in the amount of $1,173,667, 20,000,000 shares were issued for lease brokerage fees valued at $400,000, 63,198,147 shares
were issued to convert $1,554,954 of debt and accrued interest into common stock, 20,600,000 shares were issued in exchange for
settlements value at $412,000 and 5,927,602 shares were issued to three employees and a consultant for services rendered in lieu
of cash for $86,121.
We
will need additional financing to carry out our business plan. Specifically, we will need cash to fund our obligations with respect
to (i) drilling the Canoe and Tau Prospects in Phase I of the offshore program (ii) funding our drilling obligations with respect
to the Wilinda project, and (iii) funding our contingent liabilities under the Sydson agreement. Obtaining additional financing
will be subject to a number of factors including market conditions, investor acceptance of our business plan, and other conditions
outside of our control. These factors may make the timing, amount, terms and conditions of additional financing unattractive or
unavailable to us. If we cannot raise additional funds, we will not be able to carry out our business plans and may cease operations.
Results
of Operations for the Three months Ended September 30, 2018 compared to the Three months ended September 30, 2017
We
earned revenue of $0 during the three months ended September 30, 2018 and 2017. Workover expenses for $15,835 were recorded
during the three months ended September 30, 2018 and zero for the three months ended September 30, 2017. General and
administrative expenses were $607,336 ($324,053 non-cash) for the three months ended September 30, 2018, compared to $688,788
($315,000 non-cash) for the three months ended September 30, 2017. Interest expense was $31,875 for the three months ended
September 30, 2018, compared to $58,601 for the three months ended September 30, 2017.
We
had a net loss of $656,319 for the three months ended September 30, 2018, compared to $748,185 for the three months ended September
30, 2017.
The
basic and diluted loss per share for the three months ended September 30, 2018 and 2017 was $(0.00).
Results
of Operations for the Nine months Ended September 30, 2018 compared to the Nine months ended September 30, 2017
We
earned revenue of $0 during the nine months ended September 30, 2018 and 2017. Included in “Other income” is the write
off of the shareholder note payable for $42,324 during the quarter ended March 31, 2017 and $9,828 during the quarter ended March
31, 2018. General and administrative expenses were $1,869,488 ($1,031,122 non-cash) for the nine months ended September 30, 2018,
compared to $2,905,456 ($1,760,340 non-cash) for the nine months ended September 30, 2017. Interest expense was $123,041 for the
nine months ended September 30, 2018, compared to $154,809 for the nine months ended September 30, 2017. The decrease in interest
expense is primarily a result of the decrease in the note payable balances as a result of the conversion of debt into shares of
common stock.
Off-Balance
Sheet Arrangements
As
of September 30, 2018, we had no off balance sheet transactions that have or are reasonably likely to have a current or future
effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As
of September 30, 2018, our exposure to market risk is limited. We do not expect unfavorable changes in concentration of credit
risk and interest rates impacting our current balances as of September 30, 2018.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
carried out an evaluation, under the supervision and with the participation of our management, including our principal executive
officer (who also serves as our principal financial officer) of the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the period covered by this Form 10-Q. Based upon that evaluation,
our principal executive officer (who also serves as our principal financial officer) concluded that, as of the end of the period
covered in this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed
in reports filed by us under the Exchange Act is recorded, processed, summarized and reported within the required time periods
and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.
Our
management, including our principal executive officer, does not expect that our disclosure controls and procedures or our internal
controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect
the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected. Accordingly, management believes that the financial statements included in
this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods
presented.
Management’s
Interim Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even
those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Changes
in Internal Control over Financial Reporting
There
have been no changes in internal control over financial reporting.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
Management
is not aware of any legal proceedings contemplated by any governmental authority or any other party against us. None of our directors,
officers or affiliates are (i) a party adverse to us in any legal proceedings, or (ii) have an adverse interest to us in any legal
proceedings. Management is not aware of any other legal proceedings that have been threatened against us.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company sold shares of stock for cash and/or
converted note payable balances that were not reported on a Current Report on Form 8-K , in Part II, Item 5 of the Annual report
on Form 10-K or Part II, Item 2 of Form 10Q’s and such transactions are being reported hereby, as follows.
During August 14, 2018 through September 30,
2018 investors purchased 24,333,350 shares of common stock for a purchase price of $.02 per share totaling $486,667.
During August 2018 the Company issued a total
of 437,329 shares at $0.0207 under an employment agreement to an employee for services rendered.
During October 2018, the Company sold 5,000,000
shares of common stock at a price per share of $0.02 for a total of $100,000 and issued 250,000 shares to a consultant for services
provided at a price per share of $0.02 for a total of $5,000 for services.
The employment agreements between the Company
and Mr. Michael Mayell and Mr. John Connally III were amended effective October 16, 2018. Supplement number three to the employment
agreements added the following sentence: Employee has the right, at his option, to receive restricted shares of Company common
stock valued at a price per share equal to the greater of (i) $0.02 and (ii) the average closing price of Company common stock
during the calendar month in which the accrued salary being converted was earned, in lieu of cash, for all or a portion of the
compensation owed to Employee for the period between May 1, 2018 and ended September 30, 2018. The total owed to Mr. Mayell during
this period was $175,000 and the total owed to Mr. Connally III was $175,000. If these totals were converted into shares of stock,
each would receive 8,750,000 shares of common stock.
During November 2018, through our Form 10Q
filing date, the Company sold 2,500,000 shares of common stock at a price per share of $0.02 for a total of $50,000.
The issuances of these securities did not involve
the payment of any sales commissions and were exempt pursuant to Section 4(a)(2) of the Securities Act of 1933.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. MINE SAFETY DISCLOSURES
None.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Quarterly Report to be signed
on its behalf by the undersigned thereunto duly authorized.
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TEXAS
SOUTH ENERGY, INC.
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Date:
November 14, 2018
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By:
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/s/
Michael J. Mayell
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Michael
J. Mayell
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Chief
Executive Officer and
Principal
Financial Officer
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