(EDGAR Online via COMTEX) — ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements. Please see “Forward-Looking Statements” above for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. The following discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared on the accrual basis of accounting, whereby revenues are recognized when earned, and expenses are recognized when incurred. This management’s discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical financial statements included elsewhere in this Annual Report. In addition to the impact of the matters discussed in “Risk Factors,” our future results could differ materially from our historical results due to a variety of factors, many of which are out of our control.
Prior to September 2013, we had not been engaged in any substantive business activity. In September 2013, our chief executive officer was appointed and began to focus the Company’s interest on acquiring mineral rights and royalty interests, which we believe will generate royalty or other income without significant ongoing expense to the Company. 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. In March 2014, we entered into a farm out letter agreement with GulfSlope, relating to certain prospects GulfSlope bid on at the Central Gulf of Mexico Lease Sale 231, located within 2.2 million acres of 3D seismic licensed and interpreted by GulfSlope. Under the terms of the farm-out letter agreement as amended in September 2015, we acquired contractual rights to a 20% working interest in six prospects for $10,000,000. The Company agreed to pay its proportionate share of the net rental costs related to the prospects. GulfSlope will be the operator of record and shall have the right to negotiate all future joint operating agreements. To date, no economically viable oil and gas reserve have been discovered on our acreage in the Eagle Ford Shale or our prospects in the Gulf of Mexico, and there is no assurance that viable oil and gas reserves will ever be discovered on our acreage or our prospects.
Our mineral rights are currently subject to an 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 October 31, 2015, one well has been drilled on the acreage and no definitive plans were announced as to when, if ever, the lessee would commence drilling on the remaining acreage. The independent producer’s lease on the undrilled acreage expired in December 2014. Currently, the drilled well is producing but we do not expect significant income due to current market conditions.
The Company has incurred accumulated losses for the period from inception to October 31, 2015 of approximately $6,784,978. Further losses are anticipated in developing its business. As a result, the Company’s auditors have expressed substantial doubt about our ability to continue as a going concern. As of October 31, 2015, the Company had $2,135 of cash on hand. As of the date of this Annual Report, we will require additional funds for the balance of fiscal year 2016. The Company plans to finance the Company through best-efforts equity and/or debt financings. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Significant Accounting Policies
Investment securities are composed of common stock of GulfSlope Energy, Inc. (“GulfSlope), and are classified as “available-for-sale”. Available-for-sale securities are adjusted to their fair market value with unrealized gains and losses, net of tax, recorded as a component of accumulated other comprehensive income. Upon disposition of these investments, the specific identification method is used to determine the cost basis in computing realized gains or losses, which are reported in other income and expense. Declines in value that are judged to be other than temporary are reported in other comprehensive income and expense. During the year ended October 31, 2015, the Company recorded an unrealized loss of $715,000 to adjust the investment securities to fair market value.
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
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.
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.
The Company has adopted ASC 740 for reporting purposes. As of October 31, 2015 the Company had net operating loss carryforwards of approximately $3,762,000 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 tax loss carryforwards.
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.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued ASC
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 October 31, 2015, the Company’s oil and gas properties consisted of capitalized acquisition costs for unproved mineral rights.
RESULTS OF OPERATIONS
Results of Operations for the Year Ended October 31, 2015 compared to October 31, 2014
We had no sales during the years ended October 31, 2015 and October 31, 2014. General and administrative expenses were approximately $0.8 million for the year ended October 31, 2015, compared to $1.8 million for the year ended October 31, 2014. The decrease in general and administrative expenses of approximately $1.0 million for the year ended October 31, 2015 compared to the year ended October 31, 2014 was primarily attributed to a decrease in consulting fees, legal and accounting professional fees, and travel expenses of approximately $1.0 million.
We had a net loss of approximately $0.9 million for the year ended October 31, 2015, compared to a net loss of $1.9 million for the year ended October 31, 2014. The decrease in net loss of approximately $1.0 million was due primarily to the aforementioned activity in general and administrative expenses.
The basic and diluted loss per share for the year ended October 31, 2015 was $0.00, compared to a net loss per share of $0.01 for the year ended October 31, 2014.
We recorded other comprehensive loss of $715,000 for the year ended October 31, 2015. This represents an unrealized loss on the 5,000,000 shares of GulfSlope common stock our Company purchased from James Askew in March 2014. For the year ended October 31, 2014, the Company had an unrealized gain of $682,000.
As of October 31, 2015, the Company’s cash balance was $2,135, compared to a cash balance of $84,482 as of October 31, 2014. As of October 31, 2015, the Company’s assets consisted of cash of $2,135, prepaid assets of $3,948, investment securities of $235,000 and mineral interests and oil and gas property of $10,375,955. As of October 31, 2014, the Company’s assets consisted of cash of $84,482, investment securities of $950,000 and mineral interests and oil and gas property of $8,570,000.
Cash flow from Operating Activities
During the year ended October 31, 2015, we used cash of $291,310 for operating activities as compared to a use of cash of $1,770,614 during the year ended October 31, 2014. The decrease in cash used for operating activities during the year was primarily due to the reduction in normal general and administrative expenses incurred during the year.
Cash flow from Investing Activities
During the year ended October 31, 2015, we used $1,805,955 to purchase contractual rights for working interests in various prospects in an amended farm-out agreement with GulfSlope entered into in September 2015. During the year ended October 31, 2014, we used $270,000 cash to acquire oil and gas property, $268,000 to acquire common stock in GulfSlope, and $8,200,000 to acquire contractual rights for up to a 20% working interest in various prospects in a farm-out agreement with GulfSlope entered into in March 2014.
Cash flow from Financing Activities
During the year ended October 31, 2015, we received proceeds of $2,014,918 from financing activities compared with $10,219,010 during the year ended October 31, 2014. The decrease is attributed to a lower level of financing necessary to fund business activities during the year-ended October 31, 2015. During the period ended October 31, 2014, we received $2,142,900 related to the sale of the Company’s common stock and $8,076,110 from the issuance of convertible and non-convertible notes.
Liquidity and Capital Resources
As at October 31, 2015, we had a cash balance of $2,135 and a working capital deficit of $1,601,422. Our accumulated deficit from inception (March 15, 2010) to October 31, 2015 was $6,784,978. Our net loss of $945,687 for the year ended October 31, 2015 was mostly funded by proceeds raised from equity financings since September 2013 and issuances of third party and related party note payable agreements. During the year ended October 31, 2015, our cash position decreased by $82,347.
In June 2014, we entered into a subscription agreement with an accredited investor under which the Company issued a promissory note in the original principal amount of $1,000,000 and a one-year warrant to purchase 2,000,000 shares of our common stock at an exercise price of $0.25 per share with a fair value of $58,367. The promissory note matured on June 30, 2015 and bears interest at a fixed rate of 10% per annum. In June 2015, the subscription agreement was amended to extend the maturity date from June 30, 2015 to June 30, 2016 and increase the principal amount of the note to $1,100,000.
In October 2015, the Company entered into a note payable agreement with an accredited investor for $700,000. The note expires on October 1, 2017 and bears interest at a fixed rate of 10% per annum.
In October 2015 and November 2015, we entered into related party promissory note agreements with our director and chief executive officer James Askew. These promissory note agreements provided us with $82,918 and $46,734, respectively.
In December 2015, we raised $105,000 through the sale of 5,250,000 shares of common stock.
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.
Off-Balance Sheet Arrangements
As of October 31, 2015, 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.
Recent Accounting Pronouncements
We have reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on our results of operation, financial position or cash flows. With the exception of the pronouncements listed below, these recently issued pronouncements are not expected to have a material impact on our financial position, results of operations, or cash flows.
In May 2014, the FASB issued its final standard on revenue from contracts with customers. The standard, issued as ASU No. 2014-09: Revenue from Contracts with Customers (Topic 606) by the FASB, 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 we have no revenues, the new guidance is not expected to have a material impact on our financial statements and related disclosures.
In August 2014, the FASB issued Accounting Standard Update No. 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) which requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, this standard provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early application is permitted. We are currently evaluating the accounting impact that this pronouncement will have on our financial statements.