UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2014
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ To ______________________
TEXAS SOUTH ENERGY, INC.
(Exact name of registrant as specified in its charter)
Inka Productions Corp.
(Former Name)
| Nevada | 99-0362471 |
| (State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) |
| organization) | |
3 Riverway, Suite 1800 Houston, Texas | 77056 |
| (Address of principal executive offices) | (Zip Code) |
(713) 209-2950
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was require to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller reporting company [ X ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes [ ] No [X]
As of March 18, 2014, the registrant’s outstanding common stock consisted of 326,138,004 shares.
TEXAS SOUTH ENERGY, INC.
TABLE OF CONTENTS
| PART I – FINANCIAL INFORMATION | ||
Item 1. | Financial Statements Balance Sheets as of January 31, 2014 and October 31, 2013 (unaudited). Unaudited Statements of Operations for the three months ended January 31, 2014 and 2013, and from inception (March 15, 2010) to January 31, 2014. Unaudited Statements of Cash Flows for the three months ended January 31, 2014 and 2013, and from inception (March 15, 2010) to January 31, 2014. Unaudited Notes to Financial Statements | 3 |
Item 2. | Management Discussion And Analysis Of Financial Condition and Results of Operations | 4 |
Item 4. | Controls And Procedures | 7 |
| PART II – OTHER INFORMATION | ||
Item 1. | Legal Proceedings: | 8 |
Item 2. | Unregistered Sales Of Equity Securities | 8 |
Item 4. | Mine Safety Disclosures | 8 |
Item 5. | Other Information: | 8 |
Item 6. | Exhibits | 9 |
Item 7. | Signature | 9 |
| 2 |
ITEM 1. FINANCIAL STATEMENTS
The financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted. However, in the opinion of management, all adjustments (which include only normal recurring accruals) necessary to present fairly the financial position and results of operations for the period presented have been made. The results for interim periods are not necessarily indicative of trends or of results to be expected for the full year. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K filed on February 13, 2014 with the U.S. Securities and Exchange Commission (SEC) and can be found on the SEC website at www.sec.gov.
| 3 |
TEXAS SOUTH ENERGY, INC.
(An Exploration Stage Company)
FINANCIAL STATEMENTS
January 31, 2014
| UNAUDITED BALANCE SHEETS | Page F-2 |
| UNAUDITED STATEMENTS OF OPERATIONS | Page F-3 |
| UNAUDITED STATEMENTS OF CASH FLOWS | Page F-4 |
| Page F-5 |
F-1 |
TEXAS SOUTH ENERGY, INC.
(An Exploration Stage Company)
(Unaudited)
| January 31, 2014 | October 31, 2013 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 168,052 | $ | 374,086 | ||||
| Prepaid expenses | - | 10,838 | ||||||
| TOTAL CURRENT ASSETS | 168,052 | 384,924 | ||||||
| Oil & Gas Property | 370,000 | - | ||||||
| TOTAL ASSETS | $ | 538,052 | $ | 384,924 | ||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued liabilities | $ | 21,627 | $ | 27,677 | ||||
| Accrued expenses | - | 3,030,244 | ||||||
| Due to related party (Note 7) | 52,152 | 52,152 | ||||||
| TOTAL CURRENT LIABILITIES | 73,779 | 3,110,073 | ||||||
| STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Preferred stock | ||||||||
| 50,000,000 shares preferred stock authorized, none issued and outstanding | - | - | ||||||
| Common stock (Note 6) | ||||||||
| Authorized 950,000,000 shares of common stock, $0.001 par value, | ||||||||
Issued and outstanding at January 31, 2014 and October 31, 2013 | 286,480 | 198,000 | ||||||
| Additional Paid in Capital | 4,052,242 | (134,278 | ) | |||||
| Additional Paid in Capital – shares to be issued | 452,500 | 1,174,000 | ||||||
| Deficit accumulated during the exploration stage | (4,326,949 | ) | (3,962,871 | ) | ||||
| Total Stockholders’ Equity (Deficit) | 464,273 | (2,725,149 | ) | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 538,052 | $ | 384,924 | ||||
F-2
The accompanying notes are an integral part of these financial statements
(An Exploration Stage Company)
(Unaudited)
Three months ended January 31, 2014 | Three months ended January 31, 2013 | March 15, 2010 (Inception) to January 31, 2014 | ||||||||||
| EXPENSES | ||||||||||||
| General and administrative expenses | $ | 364,078 | $ | 11,216 | $ | 4,326,949 | ||||||
| NET LOSS | $ | (364,078 | ) | $ | (11,216 | ) | $ | (4,326,949 | ) | |||
| BASIC AND DILUTED NET LOSS PER COMMON SHARE | $ | (0.00 | ) | $ | (0.00 | ) | ||||||
| WEIGHTED AVERAGE NUMBER OF BASIC AND DILUTED COMMON SHARES OUTSTANDING | 269,333,481 | 24,000,000 | ||||||||||
F-3
The accompanying notes are an integral part of these financial statements
TEXAS SOUTH ENERGY, INC.
(An Exploration Stage Company)
STATEMENTS OF CASHFLOWS
(Unaudited )
Three months ended January 31, 2014 | Three months ended January 31, 2013 | March 15, 2010 (Inception) to January 31, 2014 | ||||||||||
| $ | (364,078 | ) | $ | (11,216 | ) | $ | (4,326,949 | ) | ||||
A Adjustment to reconcile net loss to net cash provided by (used in) operating activities | ||||||||||||
| Non-cash interest | - | - | 2,722 | |||||||||
| Stock compensation expense | - | - | 23,000 | |||||||||
| Decrease in prepaid expenses | 10,838 | - | - | |||||||||
| Increase in accounts payables and accrued liabilities | (35,294 | ) | 7,662 | 3,022,627 | ||||||||
| NET CASH USED IN OPERATING ACTIVITIES | (388,534 | ) | (3,554 | ) | (1,278,600 | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Acquisition of oil and gas property | (270,000 | ) | - | (270,000 | ) | |||||||
| NET CASH USED IN INVESTING ACTIVITIES | (270,000 | ) | - | (270,000 | ) | |||||||
| Proceeds from sale of common stock (issued) | - | - | 1,212,000 | |||||||||
| Proceeds from sale of common stock (to be issued) | 452,500 | - | 452,500 | |||||||||
| Increase in due to related party | - | 6,500 | 52,152 | |||||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 452,500 | 6,500 | 1,716,652 | |||||||||
| NET INCREASE (DECREASE) IN CASH | (206,034 | ) | 2,946 | 168,052 | ||||||||
| CASH, BEGINNING OF PERIOD | 374,086 | 540 | - | |||||||||
| CASH, END OF PERIOD | $ | 168,052 | $ | 3,486 | $ | 168,052 | ||||||
| Supplemental cash flow information and noncash financing activities: | ||||||||||||
| Cash paid for: | ||||||||||||
| Interest | $ | - | $ | - | $ | - | ||||||
| Income taxes | $ | - | $ | - | $ | - | ||||||
| Non-cash Activity: | ||||||||||||
| Issuance of Founder’s shares | $ | - | $ | - | $ | 5,000 | ||||||
| Issuance of shares for oil & gas property | $ | 100,000 | $ | - | $ | 100,000 | ||||||
| Issuance of shares for accrued compensation | $ | 3,001,000 | $ | - | $ | 3,001,000 | ||||||
F-4
The accompanying notes are an integral part of these financial statements
Texas South Energy, Inc.
[An Exploration Stage Company]
NOTES TO THE FINANCIAL STATEMENTS
January 31, 2014
(UNAUDITED)
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Texas South Energy, Inc., formerly known as “Inka Productions Corp.”, (the “Company”) was incorporated pursuant to the laws of the State of Nevada on March 15, 2010. The Company had initially intended to commence business operations by producing and performing traditional Peruvian dances both in Peru and the United States. On September 24, 2013, there was a change in control of the Company. On October 7, 2013, the board of directors and majority shareholders of the Company approved an amendment changing the name of the Company to “Texas South Energy, Inc.” The Company is engaged in the oil and gas business.
The Company is an exploration stage company that has limited operating history and has earned no revenues. Since September 2013, the Company has devoted its activities to the acquisition of oil and gas assets. The Company is in the initial exploration stage and has incurred losses since inception totaling $4,326,949.
The Company has established a fiscal year end of October 31.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less at the time of issuance to be cash equivalents.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Actual results could differ from those estimates.
Financial Instruments
The carrying value of the Company's financial instruments approximates their fair value because of the short maturity of these instruments.
Basic and Diluted Net Loss per Share
The Company computes loss per share in accordance with ASC 260, “Earnings per Share” which requires presentation of both basic and diluted earnings per share on the face of the statement of operations. Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of outstanding common shares during the period. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive loss per share excludes all potential common shares if their effect is anti-dilutive. The Company has no potential dilutive instruments and accordingly basic loss and diluted loss per share are the same.
Fair Value
In accordance with the requirements of ASC 825 and ASC 820, the Company has determined the estimated fair value of financial instruments using available market information and appropriate valuation methodologies. The fair value of financial instruments classified as current assets or liabilities approximate their carrying value due to the short-term maturity of the instruments.
F-5
Income Taxes
The Company has adopted ASC 740 for reporting purposes. As of October 31, 2013 the Company had net operating loss carry forwards of approximately $940,000 that may be available to reduce future years’ taxable income and will expire beginning in 2028. Availability of loss usage is subject to change of ownership limitations under Internal Revenue Code 382. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the future tax loss carryforwards.
Net Loss per Share
Basic loss per share includes no dilution and is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding for the period. Dilutive loss per share reflects the potential dilution of securities that could share in the losses of the Company. Because the Company does not have any potentially dilutive securities, the accompanying presentation is only of basic loss per share.
Stock-based Compensation
The Company has not adopted a stock option plan and has not granted any stock options. Common stock has been granted to numerous third parties for services (see Note 6).
Share Based Expenses
In December 2004, the Financial Accounting Standards Board (“FASB”) issued ASC 718 "Compensation - Stock Compensation" and 505-50 “Equity-Based Payments to Non-Employees.” This statement requires a public entity to expense the cost of employee services received in exchange for an award of equity instruments. This statement also provides guidance on valuing and expensing these awards, as well as disclosure requirements of these equity arrangements. The Company adopted ASC 718 and 505-50 upon creation of the company and expenses share based costs in the period incurred.
Accounting for Oil and Gas Properties
The Company utilizes the full cost method to account for its investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, professional fees incurred for the lease acquisitions, capitalized interest costs relating to properties, geological expenditures, and tangible and intangible development costs (including direct internal costs), are capitalized into the full cost pool. When the Company commences production from established proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, will be depleted on the units-of-production method using estimates of proven reserves. Investments in unproved properties and major development projects, including capitalized interest if any, are not depleted until proven reserves associated with the projects can be determined. If the future exploration of unproven properties is determined to be uneconomical, the amount of such properties is added to the capital costs to be depleted. As of January 31, 2014, the Company's oil and gas properties consisted of capitalized acquisition cost for unproved mineral rights.
Recent Accounting Pronouncements
Management does not anticipate that the recently issued but not yet effective accounting pronouncements will materially impact the Company’s financial condition.
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 operation costs and allow it to continue as a going concern. The Company has accumulated losses since Inception (March 15, 2010) through January 31, 2014, of $4,326,949. The Company will be dependent upon the raising of additional capital through placement of our common and/or preferred stock in order to implement its business plan, or merge with an operating company. There can be no assurance that the Company will be successful in either situation in order to continue as a going concern. The Company is funding its initial operations by way of issuing common shares. As of January 31, 2014, the Company had issued 137,480,004 at prices ranging from $0.003 to $0.05 per share, for net funds to the Company of $1,664,500. 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.
F-6
NOTE 4 – OIL & GAS PROPERTY
On January 22, 2014, the Company entered into a contract for sale with the owner of mineral interests in 86.69 acres in Lavaca County, Texas (the “Acreage”) pursuant to which the Company acquired a 37.5% interest in the Acreage’s mineral rights, including the oil and gas rights (the “Acquired Interest”). In exchange for the Acquired Interest, the Company paid the seller $270,000 in cash and issued the seller 2,000,000 shares of the Company’s common stock, valued at $100,000.
NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted the FASB standard related to fair value measurement at inception. The standard defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. The standard applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. The standard clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The recorded values of long-term debt approximate their fair values, as interest approximates market rates. As a basis for considering such assumptions, the standard established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows.
Level 1. Observable inputs such as quoted prices in active markets;
Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company’s financial instruments are cash and accounts payable. The recorded values of cash and accounts payable approximate their fair values based on their short-term nature.
NOTE 6 – COMMON STOCK
On September 24, 2013, the Company issued 69,000,000 shares of common stock to James Askew, the Company’s Chief Executive Officer and sole Director, for services rendered. The stock was valued at $23,000.
On October 4, 2013, the Company sold 105,000,000 shares of common stock at $0.0003 for $35,000 cash.
On October 7, 2013, the Company’s board of directors and majority shareholders approved increasing the number of the Company’s authorized common shares from 75,000,000 to 950,000,000, the issuance of 50,000,000 shares of blank check preferred stock, and effecting a 3-for-1 forward stock split of the Company’s common stock. Pursuant to the 3-for-1 common stock split, the Company issued two additional shares of common stock for each issued share of the Company’s common stock outstanding prior to the forward split. The 3-for-1 forward split became effective November 12, 2013. The forward split has been shown retroactively. No preferred shares have been issued.
During October 2013, the Company received cash and subscriptions to purchase 23,480,004 shares of common stock at $0.05 per share for $1,174,000 cash. The shares were unissued as of October 31, 2013, and were reflected in the financial statements as “Additional Paid in Capital – Shares to be issued”. The shares were subsequently issued in November 2013.
During November 2013 through January 2014, the Company received cash and subscriptions to purchase 9,050,000 shares of common stock at $0.05 per share for $452,500 cash. The shares were unissued as of January 31, 2014, and are reflected in the financial statements as “Additional Paid in Capital – Shares to be issued”. The shares were subsequently issued in February and March 2014.
As of January 31, 2014, the Company has not granted any stock options.
F-7
NOTE 7 – RELATED PARTY TRANSACTIONS
As of January 31, 2014 and October 31, 2013 the Company had received advances from a prior Director in the amount of $52,152. The amounts due to the related party remain outstanding, unsecured due on demand and non-interest bearing with no set terms of repayment. Imputed interest of $2,722 was recorded as donated capital during the twelve months ended October 31, 2013.
On September 27, 2013, the Company entered into a one-year employment agreement with its director and chief executive officer James Askew. The agreement provides for a one-time issuance of 69,000,000 shares of common stock, a $75,000 cash signing bonus, and $35,000 cash compensation per month. Per the agreement, Mr. Askew was paid a $75,000 cash bonus in September 2013, and issued 69,000,000 shares of the Company’s common stock in September 2013. The stock was valued at $23,000 based upon the Company’s recent stock sales. In October 2013, the Company awarded a $600,000 cash bonus to Mr. Askew for his success in raising capital for the Company prior to October 31, 2013. On March 17, 2014, the Company and Mr. Askew amended the employment agreement to extend the term for one year, expiring September 2015, and to provide that Mr. Askew is entitled to receive base compensation through the end of the term if such agreement is terminated prior to the end of the term. On March 17, 2014, the Company also entered into an indemnification agreement with Mr. Askew tracking the statutory provisions of the Nevada Statutes.
On March 10, 2014, the Company entered into a farm out letter agreement with GulfSlope Energy, Inc. (“GulfSlope”), relating to five prospects (the “Prospects”) located within 2.2 million acres of 3D seismic licensed and interpreted by GulfSlope. The Company’s chief executive officer and sole director is also a director of Gulfslope. Under the terms of the farm-out letter agreement, the Company will acquire up to a 20% working interest in the Prospects for up to $10,000,000 payable by the Company to GulfSlope on or before by April 11, 2014. In addition, the Company has also agreed to pay its proportionate share of the net rental costs related to the Prospects. Failure of GulfSlope to deliver the 20% working interest in the Prospects to the Company by August 1, 2014 will allow the Company, at its option, to request a refund of payments made to date (subject to a pro-rata optional refund upon partial delivery of Prospects). GulfSlope will be the operator of record and shall have the right to negotiate all future joint operating agreements.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
On September 27, 2013, the Company entered into a one-year employment agreement with its director and chief executive officer James Askew. Among other compensation (see Note 7 above), the agreement provides for $35,000 cash compensation per month. On March 17, 2014, the Company and Mr. Askew amended the employment agreement to extend the term for one year, expiring September 2015, and to provide that Mr. Askew is entitled to receive base compensation through the end of the term if such agreement is terminated prior to the end of the term. On March 17, 2014, the Company also entered into an indemnification agreement with Mr. Askew tracking the statutory provisions of the Nevada Statutes.
On October 11, 2013, the Company entered into a one-year consulting agreement with John B. Connally, III. The agreement provides for a one-time issuance of 60,000,000 shares of common stock, valued at $3,000,000, $25,000 cash signing bonus, and $10,000 cash compensation per month. The stock was issued in November 2013.
In connection with the Company’s funding obligations pursuant to the farm-out letter agreement (see Note 7 above), on March 10, 2014, the Company entered into a financing arrangement for up to $10,000,000 in connection with the issuance of 1% unsecured convertible promissory notes (the “Notes”), convertible into shares of the Company’s common stock at a conversion price of $0.20 per share. The Notes are governed by the note agreement (the “Note Agreement”). The Notes will mature on August 15, 2014, unless converted, at which time the principal and interest will be due. The Notes accrue interest at 1% per annum. The noteholder may convert the Notes at any time. The principal and accrued but unpaid interest on the Notes shall automatically convert upon the Company’s receipt, on or before August 1, 2014, of a 20% working interest in the Prospects. If the Company receives less than a 20% working interest in the Prospects, then the principal and accrued but unpaid interest shall be automatically converted on a pro rata basis. Pursuant to the Note Agreement, the noteholders have agreed to fund the proceeds of the Notes in three tranches. The noteholders have funded $6,500,000 to date. The noteholders may fund up to an additional $3,500,000 by April 11, 2014.
NOTE 9 – SUBSEQUENT EVENTS
During February and March the Company issued the 9,050,000 shares that were subscribed but unissued as of January 31, 2014 (see NOTE 6 above).
On March 10, 2014, the Company entered into a farm out letter agreement with GulfSlope Energy, Inc. (“GulfSlope”), relating to five prospects (the “Prospects”) located within 2.2 million acres of 3D seismic licensed and interpreted by GulfSlope. The Company’s chief executive officer and sole director is also a director of Gulfslope. See Related Parties Transactions Note 7 above.
On March 17, 2014, the Company (i) amended the employment agreement with its director and chief executive officer James Askew to extend the term for one year, expiring September 2015, and to provide that Mr. Askew is entitled to receive base compensation through the end of the term if such agreement is terminated prior to the end of the term, and (ii) entered into an indemnification agreement with its chief executive officer tracking the statutory provisions of the Nevada Statutes.
During February and March 2014, the Company sold 30,608,000 shares of common stock at $0.05 per share for $1,530,400.
On March 21, 2014, the Company acquired 5 million shares of restricted GulfSlope Energy, Inc. common stock from James M. Askew for a purchase price of $268,000.
F-8
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
Beginning in September 2013, we changed our business plan from performing traditional Peruvian dances to an oil and gas royalties and leasing company focused primarily on properties in the Gulf Coast Region. We plan to obtain and manage: (1) existing royalty interest; (2) mineral rights, which we intend to lease to oil and gas operators in exchange for a royalty payment, and (3) other passive interests or rights in oil and gas properties. Our focus is on identifying and acquiring mineral rights and royalty interests, which we believe will generate royalty or other passive income without significant ongoing expense to the Company.
In January 2014, we acquired our first mineral interest, which consists of a 37.5% interest in mineral rights covering 86.69 acres in Lavaca County, Texas. To date, no economically viable oil and gas reserves have been discovered on our acreage, and there is no assurance that viable oil and gas reserves will ever be discovered on our acreage. We are an exploration stage company that has limited operating history and has earned no revenues.
We do not intend to engage in oil and gas exploration, development or production; instead we intend to lease any mineral rights we acquire to oil and gas operators granting them the right to explore, drill and produce oil and gas from the mineral rights in exchange for a royalty payment. In addition to royalty payments, the leases will contain standard commercial terms. At this time, we are subject to one outstanding lease on our current mineral rights.
Although we are not in the business of exploring, drilling and producing oil and gas, our business is still 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, the Company generally will have no 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 the Company has or may have an interest.
Finally, because we do not intend to drill, produce or operate oil and gas properties, we do not intend to bear ordinary production and operating costs and will have limited direct exposure to risk associated with exploring and producing oil and gas; instead, those costs and risks will likely be born by the owner or operator of the lease. However, our potential royalty revenues, if any, may be negatively affected by any decreases in the operator’s production volumes and revenues due to these risks.
Our Current Onshore Mineral Interests
In January 2014, we acquired a 37.5% interest in mineral rights covering 86.69 acres in Lavaca County. Our acreage is included in the Eagle Ford Shale located in South Texas. To date, no economically viable oil and gas reserves have been discovered on our acreage, and there is no assurance that viable oil and gas reserves will ever be discovered on our acreage.
Our mineral rights are currently subject to an existing oil, gas and mineral lease with an independent producer of oil and gas in the Eagle Ford Shale. Pursuant to the lease, Texas South is entitled to a royalty payment equal to 37.5% of 0.1875% of the sale proceeds, if any, actually received from the production of oil and gas from our acreage. As of January 31, 2014, no wells were drilled on the acreage and no definitive plans were announced as to when, if ever, the lessee would commence drilling on the acreage. If the lessee does not produce oil or gas in paying quantities by December 2014, the lease will terminate. If the lease expires, Texas South will seek to extend our current lease or lease the mineral rights to another oil and gas operator, but can be uncertain as to whether it will obtain a new lease or a new lease on favorable terms.
| 4 |
In addition, in connection with this acquisition, we acquired the right to lease 100% of the mineral rights underlying the 86.69 acres to any third party; so long as such lease requires a royalty payment of at least 1/6 of the oil and gas produced from the property to the owners of the mineral rights. We believe this right will provide us with additional leverage entering into any potential future lease.
Our Current Offshore Contractual Interests and Investment
On March 10, 2014, the Company entered into a farm out letter agreement with GulfSlope Energy, Inc. ("GulfSlope"), relating to five prospects (the "Prospects") located within 2.2 million acres of 3D seismic licensed and interpreted by GulfSlope. Under the terms of the farm-out letter agreement, the Company will acquire up to a 20% working interest in the Prospects for up to $10,000,000 payable by the Company to GulfSlope on or before by April 11, 2014. In addition, the Company has also agreed to pay its proportionate share of the net rental costs related to the Prospects. Failure of GulfSlope to deliver the 20% working interest in the Prospects to the Company by August 1, 2014 will allow the Company, at its option, to request a refund of payments made to date (subject to a pro-rata optional refund upon partial delivery of Prospects). GulfSlope will be the operator of record and shall have the right to negotiate all future joint operating agreements. Mr. Askew is a director and beneficial owner of 8.8% of the common stock of GulfSlope. On March 21, 2014, the Company acquired 5 million shares of restricted GulfSlope Energy, Inc. common stock from James M. Askew for a purchase price of $268,000.
Business and Acquisition Strategy
Our primary business strategy includes:
● Continuing to grow our interests in mineral rights through additional investments in prospective property in the Eagle Ford Shale. The Eagle Ford Shale is one of the fastest growing unconventional shale trends in North America. The Eagle Ford Shale is a geological formation located in South Texas that lies directly beneath the Austin Chalk formation and above the Buda Limestone formation. It is considered to be the "source rock," or the original source of hydrocarbons that are contained in the Austin Chalk formation. The Eagle Ford Shale produces from various depths between 4,000 and 14,000 feet.
● Pursuing royalty opportunities. We will consider opportunities to expand our interest through acquisitions of oil and gas reserves, existing royalty interests or other passive investments in oil and gas properties. We will consider opportunities that we believe will maximize income from royalty based arrangements. We plan to pursue royalty opportunities that are complementary to our business plan.
● Expand and diversify our interests to property located outside the Eagle Ford Shale, including in the Gulf of Mexico. We intend to acquire interests in oil and gas properties throughout the Gulf Coast Region, including off-shore prospects. We entered into a farm-out letter agreement with GulfSlope in March 2014. We will consider acquisitions that serve as a platform for complementary acquisitions.
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. We rely upon the sale of our securities or loans from our President to fund our operations. We are not involved in any bankruptcy, receivership or similar proceedings.
Liquidity and Capital Resources
As of January 31, 2014, we had cash of $168,052 and a working capital surplus of $94,273. Our accumulated deficit from inception (March 15, 2010) to January 31, 2014 was $4,326,949. Our net loss of $364,078 for the three months ended January 31, 2014 was mostly funded by funds raised from equity financings since September 2013. During the three months ended January 31, 2014 our cash position decreased by $206,034.
In connection with the Company's funding obligations pursuant to the farm-out letter agreement, on March 10, 2014, the Company entered into a financing arrangement for up to $10,000,000 in connection with the issuance of 1% unsecured convertible promissory notes (the "Notes"), convertible into shares of the Company's common stock at a conversion price of $0.20 per share. The Notes are governed by the note agreement (the "Note Agreement"). The Notes will mature on August 15, 2014, unless converted, at which time the principal and interest will be due. The Notes accrue interest at 1% per annum. The noteholder may convert the Notes at any time. The principal and accrued but unpaid interest on the Notes shall automatically convert upon the Company's receipt, on or before August 1, 2014, of a 20% working interest in the Prospects. If the Company receives less than a 20% working interest in the Prospects, then the principal and accrued but unpaid interest shall be automatically converted on a pro rata basis. Pursuant to the Note Agreement, the noteholders have agreed to fund the proceeds of the Notes in three tranches. The noteholders have funded $6,500,000 to date. The noteholders may fund up to an additional $3,500,000 by April 11, 2014.
We will need additional financing to carry out our business plan. Obtaining additional financing will be subject to a number of factors including market conditions, investor acceptance of our business plan, and investor sentiment. 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.
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Results of Operations for the Three months Ended January 31, 2014 compared to the Three months ended January 31, 2013
We had no sales during the three month periods ended January 31, 2014 and January 31, 2013. General and administrative expenses were $364,078 for the three months ended January 31, 2014, compared to $11,216 for the three months ended January 31, 2013. The increase in general and administrative expenses of approximately $353,000 for the three months ended January 31, 2014 compared to the three months ended January 31, 2013 was primarily attributed to an increase in consulting fees, legal and accounting professional fees, and travel expenses.
We had a net loss of $364,078 for the three months ended January 31, 2014, compared to $11,216 for the three months ended January 31, 2013. The increase in net loss of approximately $353,000 was due to the increase in aforementioned general and administrative expenses.
The basic and diluted loss per share for the three months ended January 31, 2014 and 2013 was $0.00.
As of January 31, 2014, the Company’s cash balance was $168,052, compared to a cash balance of $374,086 as of October 31, 2013. At January 31, 2014, the Company’s assets consisted of $168,052 cash, and $370,000 oil and gas property. At October 31, 2013, the Company’s assets consisted of $374,086 cash and $10,838 prepaid expenses.
Cash flow from Operating Activities
During the three months ended January 31, 2014, we used cash of $388,534 for operating activities as compared to cash of $3,554 used during the three months ended January 31, 2013. The increase in cash used for operating activities during the year was primarily due to payment of normal general and administrative expenses incurred during the three month period.
Cash flow from Investing Activities
During the three months ended January 31, 2014, we used $270,000 cash to acquire mineral rights. During the three months ended January 31, 2013, we used no cash in investing activities.
Cash flow from Financing Activities
During the three months ended January 31, 2014, we received proceeds of $452,500 from financing activities compared with none during the three months ended January 31, 2013. The increase is attributed to approximately funds raised in the sale of the Company’s common stock during 2014.
Off-Balance Sheet Arrangements
As of January 31, 2014, 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.
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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 Interim Report. 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.
Our management, with the participation of our principal executive officer (who also serves as our principal financial officer) evaluated the effectiveness of our internal control over financial reporting as of January 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control Integrated Framework. Based on this evaluation, our management concluded that, as of January 31, 2014, our internal control over financial reporting was effective.
This Interim Report does not include an attestation report of our registered public accounting firm regarding internal controls over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Security and Exchange Commission that permit us to provide only management’s report in this Interim Report.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting.
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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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 5. OTHER INFORMATION
On March 17, 2014, the Company (i) amended the employment agreement with its director and chief executive officer James Askew to extend the term for one year, expiring September 2015, and to provide that Mr. Askew is entitled to receive base compensation through the end of the term if such agreement is terminated prior to the end of the term, and (ii) entered into an indemnification agreement with its chief executive officer tracking the statutory provisions of the Nevada Statutes.
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ITEM 6. EXHIBITS
| Exhibit | |
| Number | Description |
| 10.1 | Farm-Out Letter Agreement |
| 10.2 | Note Agreement, as amended |
| 10.3 | Amendment No. 1 to Employment Agreement |
| 10.4 | Indemnification Agreement |
| 10.5 | Assignment Agreement |
| 31.1 | Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14 or 15d-14 of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| EX-101.INS | XBRL Instance Document |
| EX-101.SCH | XBRL Taxonomy Extension Schema |
| EX-101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| EX-101.LAB | XBRL Taxonomy Extension Label Linkbase |
| EX-101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
| EX-101.DEF | XBRL Taxonomy Extension Definition Linkbase |
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.
TEXAS SOUTH ENERGY, INC. | ||
| Date: March 21, 2014 | By: | /s/ James Askew |
| James Askew | ||
PresidentChief Executive Officer, Secretary Treasurer, Chief Financial Officer and Director |
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