Item
2. Management’s Discussion and Analysis or Plan of
Operations.
FORWARD-LOOKING
STATEMENTS
ALL
STATEMENTS IN THIS DISCUSSION THAT ARE NOT HISTORICAL ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF
1934, AS AMENDED. STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT OTHERWISE INCLUDE
THE WORDS "BELIEVES", "EXPECTS", "ANTICIPATES", "INTENDS", "PROJECTS",
"ESTIMATES", "PLANS", "MAY INCREASE", "MAY FLUCTUATE" AND SIMILAR EXPRESSIONS
OR
FUTURE OR CONDITIONAL VERBS SUCH AS "SHOULD", "WOULD", "MAY" AND "COULD" ARE
GENERALLY FORWARD-LOOKING IN NATURE AND NOT HISTORICAL FACTS. THESE
FORWARD-LOOKING STATEMENTS WERE BASED ON VARIOUS FACTORS AND WERE DERIVED
UTILIZING NUMEROUS IMPORTANT ASSUMPTIONS AND OTHER IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE THE INFORMATION CONCERNING OUR
FUTURE FINANCIAL PERFORMANCE, BUSINESS STRATEGY, PROJECTED PLANS AND OBJECTIVES.
THESE FACTORS INCLUDE, AMONG OTHERS, THE FACTORS SET FORTH BELOW UNDER THE
HEADING "RISK FACTORS." ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED
IN
THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE
RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOST OF THESE FACTORS
ARE DIFFICULT TO PREDICT ACCURATELY AND ARE GENERALLY BEYOND OUR CONTROL. WE
ARE
UNDER NO OBLIGATION TO PUBLICLY UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS
TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. REFERENCES IN
THIS FORM 10-KSB, UNLESS ANOTHER DATE IS STATED, ARE TO DECEMBER 31,
2006. AS USED HEREIN, THE “COMPANY,” “TEXHOMA,” “WE,” “US,” “OUR” AND
WORDS OF SIMILAR MEANING REFER TO TEXHOMA ENERGY, INC. AND ITS WHOLLY OWNED
DELAWARE SUBSIDIARY, TEXAURUS ENERGY, INC., UNLESS OTHERWISE
STATED.
ITEM
1. DESCRIPTION OF BUSINESS
Business
History
Texhoma
Energy, Inc. (“we,” “us,” the “Company”, and “Texhoma”), was originally formed
as a Nevada corporation on September 28, 1998 as Pacific Sports Enterprises,
Inc. Our business objective was to own and operate a professional basketball
team that would be a member of the American Basketball Association. The American
Basketball Association was not successful in organizing the league, and
consequently the member teams ceased operating activities in 1999. Thereafter,
we were dormant without any business operations until October 20,
2000.
In
May
2001, we changed our name to Make Your Move, Inc. and on September 20, 2004,
we
changed our name to Texhoma Energy, Inc. in connection with our change in
business focus to oil and gas exploration and production.
Effective
May 28, 2004, we affected a 1:150 reverse stock split of our issued and
outstanding shares of common stock. Effective November 9, 2004, we affected
a
4:1 forward split of our issued and outstanding common stock. Unless otherwise
stated all share amounts listed throughout this filing retroactively take into
account both the May 28, 2004 reverse stock split and the November 9, 2004
forward stock split.
On
November 5, 2004, we entered into a Sale and Purchase Agreement with Capersia
Pte. Ltd., a Singapore company (“Capersia”), to acquire 40% of an oil and gas
exploration license operated by Black Swan Petroleum Pty. Ltd. (“Black Swan”)
and its wholly owned subsidiary Black Swan Petroleum (Thailand) Limited (“Black
Swan Thai”). Black Swan Thai owned the license, permits and title to a petroleum
concession in the Chumphon Basin in the Gulf of Thailand, referred to as “Block
B7/38” (the “Concession”).
Black
Swan recommenced exploration operations of the Concession and Black Swan drilled
two exploration wells in February and March 2005, which proved void of
commercially viable hydrocarbons. In June 2005 after completion of the
exploration activities, the venturers decided to discontinue the exploration
efforts in Thailand and relinquished the Concession back to the government
of
Thailand.
On
January 20, 2006 we divested our shareholding in Black Swan and Black Swan
Thai.
After
the
exploration venture in Thailand the Board of Directors of the Company decided
to
shift its focus to domestic oil and gas exploration and production, with a
particular focus on south Louisiana and east Texas, including near-shore Gulf
of
Mexico.
On
February 2, 2006, we executed a Sale and Purchase Agreement (the “Clovelly SPA”)
with Sterling Grant Capital, Inc. pursuant to which we acquired a 5% (five
percent) working interest in the Clovelly South prospect (bringing our total
working interest to 11%) located in Lafourche Parish, Louisiana. As a result,
the Company agreed to fund the work program for the Clovelly South project
in
accordance with the Joint Operating Agreement for the property. The
Allain-Lebreton No. 2 well was drilled and plugged and abandoned in September
2006.
On
March
15, 2006, our wholly-owned subsidiary, Texaurus Energy, Inc., which was formed
in March 2006 as a Delaware corporation ("Texaurus"), entered into a Sales
and
Purchase Agreement with Structured Capital Corp., a Texas corporation to
purchase certain oil and gas leases in Vermillion Parish, Louisiana. The 8%
working interest (5.38167% net revenue interest) in the Intracoastal City field
was acquired for a) two million five hundred thousand dollars ($2,500,000)
and
b) the issuance of 37,500,000 shares of our common stock.
On
March
28, 2006 Texaurus entered into a Securities Purchase Agreement ("Securities
Purchase Agreement") with Laurus Master Fund, Ltd. ("Laurus"); a Registration
Rights Agreement with Laurus; issued Laurus a Common Stock Purchase Warrant;
entered into a Master Security Agreement with Laurus; sold Laurus a Secured
Term
Note in the amount of $8,500,000, and entered into various other agreements.
Additionally, in connection with the closing, we issued Laurus a Common Stock
Purchase Warrant to purchase up to 10,625,000 shares of our common stock at
an
exercise price of $0.04 per share.
In
addition Laurus can acquire up to 961 shares of Texaurus’ common stock at an
exercise price of $0.001 per share, representing 49% of Texaurus’ outstanding
common stock. This will be valued at Fair Market Value as of the date
of the transaction.
The
Securities Purchase Agreement and Laurus March 2006 funding is described in
greater detail below under “March 2006 Laurus Master Fund, Ltd.
Funding.”
On
March
28, 2006, with an effective date of January 1, 2006, Texaurus closed a Sales
& Purchase Agreement to purchase certain interests in the Barnes Creek gas
field and the Edgerly field from Kilrush Petroleum, Inc. Texaurus paid the
$5,225,000 purchase price with proceeds received from its sale of the Secured
Term Note with Laurus.
March
2006 Funding with Laurus Master Fund, Ltd.
On
March
28, 2006 (the "Closing"), Texaurus entered into a Securities Purchase Agreement
("Securities Purchase Agreement") with Laurus Master Fund, Ltd. ("Laurus");
a
Registration Rights Agreement with Laurus ("Registration Rights Agreement");
issued Laurus a Common Stock Purchase Warrant (the "Texaurus Warrant"); entered
into a Master Security Agreement with Laurus; sold Laurus a Secured Term Note
in
the amount of $8,500,000 (the "Note"), and entered into various other agreements
described below. Additionally, in connection with the Closing, we issued Laurus
a Common Stock Purchase Warrant (the "Texhoma Warrant"), which agreements are
described in greater detail below.
SECURED
TERM NOTE
The
Secured Term Note (the "Note") in the amount of $8,500,000, which was sold
by
Texaurus to Laurus in connection with the Closing, is due and payable in three
years from the Closing on March 27, 2009 (the "Maturity Date"), and bears
interest at the Wall Street Journal Prime Rate (the "Prime Rate"), plus two
percent
(2%) (the "Contract Rate"), based on a 360 day year, payable monthly in arrears,
beginning on April 1, 2006, provided however that the Contract Rate shall never
be less than eight percent (8%). As of October 23, 2007, the Contract Rate
is
nine and three-quarters percent (9.75%) per year, with the Prime Rate at seven
and three-quarters percent (7.75%) as of October 23,
2007.
Additionally,
the Note provided for principal payments on the funds to be made each month,
beginning on June 1, 2006, and continuing up to and including the Maturity
Date.
The amount of these monthly principal payments is equal to eighty percent (80%)
of the gross production revenue received by Texaurus, relating to all oil and
gas properties owned by Texaurus, for the prior calendar month, provided that
the principal payments shall increase to one hundred percent (100%) of such
gross production revenue if an Event of Default occurs (as defined in the
Note).
If
an
Event of Default occurs under the Note, the Note shall bear additional interest
in the amount of two percent (2%) per month above the then current interest
rate
of the Note, until such Event of Default is cured or waived. Additionally,
upon
the occurrence of and during the continuance of any Event of Default, Laurus
can
at its option, demand repayment in full of all obligations and liabilities
owing
by Texaurus to Laurus by way of a default payment equal to 130% of the
outstanding principal amount of the Note and any accrued but unpaid interest
thereon.
Additionally,
we agreed to guaranty the Note and other obligations owing to Laurus pursuant
to
a Guaranty, the entry into a Master Security Agreement (described below) and
the
entry into a Stock Pledge Agreement, whereby we pledged 100% of the outstanding
stock of Texaurus to Laurus to guarantee the payment and performance of all
obligations and indebtedness owed to Laurus by Texaurus.
In
connection with the Closing, Texaurus paid Laurus Capital Management, LLC,
the
manager of Laurus, a closing payment equal to 3.5% of the Note, or $297,500;
Energy Capital Advisors, LLC, an advisory fee equal to $495,000; certain amounts
paid to various other parties, including our law firm, Laurus' law firm and
certain of our advisors; and the $5,225,000 paid for the Kilrush, represented
the entire $8,500,000 received in connection with the sale of the Note, as
well
as $300,000 of the funding provided by our former Executive Chairman and
Director, Frank Jacobs.
Additionally,
in consideration for advisory services rendered in connection with the Closing,
we granted Energy Capital Solutions, LLC, warrants to purchase up to 1,062,500
shares of our common stock at an exercise price of $0.04 per share. Energy
Capital Solutions, LLC's warrants expire if unexercised at 5:00 P.M. C.S.T.
on
March 28, 2011.
REGISTRATION
RIGHTS AGREEMENT
In
connection with the Closing, we entered into a Registration Rights Agreement
with Laurus, by which we agreed to file a registration statement covering the
shares exercisable in connection with the Texhoma Warrant within sixty (60)
days
of the date of the Closing, and that such registration statement would be
effective within one hundred and eighty (180) days of the Closing date, which
registration statement we have been unable to file to date, due to the fact
that
we are not current in our filings with the Commission. While we have
been unable to file and/or gain effectiveness of the required Registration
Statement, we have not been notified from Laurus that we are in default of
such
Registration Rights Agreement, and will assume that we are not in default until
we hear otherwise from Laurus, if at all.
TEXAURUS
WARRANT
In
connection with the Closing, Texaurus issued Laurus the Texaurus Warrant, which
provides Laurus the right to purchase up to 961 shares of Texaurus common stock,
representing 49% of Texaurus' outstanding common stock at an exercise price
of
$0.001 per share. The Texaurus Warrant is exercisable by Laurus at any time
after the payment by Texaurus in full of the Note. The Texaurus Warrant will
be
subject to identical rights to registration as described above in connection
with the Texhoma Registration Rights Agreement, when and if Texaurus completes
an initial public offering and/or otherwise becomes publicly
traded.
TEXHOMA
WARRANT
In
addition to the Texaurus Warrant granted to Laurus by Texaurus, at the Closing,
we granted Laurus a Common Stock Purchase Warrant (the "Texhoma Warrant"),
to
purchase up to 10,625,000 shares of our common stock at an exercise price of
$0.04 per share, which if exercised in full would provide us aggregate
consideration of $425,000. The Texhoma Warrant expires if
unexercised at 5:00 P.M. on March 28, 2011. The Texhoma Warrant contains a
provision whereby Laurus is not able to exercise any portion of the Warrant,
which exercise would cause it to hold more than 4.99% of our issued and
outstanding common stock, unless an Event of Default under the Note has occurred
(as described above) and/or if Laurus provides us 75 days prior written notice
of their intent to hold greater than 4.99% of our issued and outstanding common
stock.
MASTER
SECURITY AGREEMENT
To
secure
the payment of the obligations of Texaurus incurred in connection with the
Closing, Texaurus and we entered into a Master Security Agreement with Laurus,
whereby Texaurus and we agreed to grant Laurus a continuing security interest
in
all of our cash, cash equivalents, accounts, accounts receivable, deposit
accounts (including the amount in the Restricted Account, as described above),
inventory, equipment, goods, fixtures, documents, instruments, contract rights,
general intangibles, chattel paper, investment property, letter-of-credit
rights, trademarks and applications, patents and applications, copyrights and
applications and other intellectual property which Texaurus has or hereafter
acquires; the Kilrush Property and any additional properties or interests
acquired by Texaurus, as well as certain other interests associated with such
properties.
SIDE
LETTER AGREEMENT
In
connection with the issuance of the Texaurus Warrant, we and Texaurus entered
into a "Side Letter Agreement," whereby we and Texaurus agreed that following
the exercise of the Texaurus Warrant by Laurus, we and Laurus would negotiate
in
good faith the terms of a shareholders agreement in connection with Texaurus,
which among other things would provide for Laurus' consent to certain actions
to
be taken by Texaurus or us, including, declaring or paying any dividends,
selling or disposing of any assets, entering into any transactions outside
of
the normal course of business, creating any mortgage, lien, charge or other
form
of encumbrance with respect to any assets, entering into any agreements with
third parties, issuing or selling any capital stock, warrants or convertible
securities, or appointing or replacing any outside accountants or
auditors.
Significant
Transactions Affected During 2006 and 2007:
Lucayan
Oil and Gas Investments, Ltd. Transactions
On
April
10, 2006, we entered into a Debt Conversion Agreement with Lucayan Oil and
Gas
Investments, Ltd., a Bahamas corporation, formerly Devon Energy Thai Holdings,
Ltd. ("LOGI"). We had owed $895,000 to LOGI as of the date of the Debt
Conversion Agreement in connection with money received by the Company for the
drilling in Thailand in February and March 2005. Pursuant to the Debt Conversion
Agreement, the Company and LOGI agreed to convert $160,000 of the $895,000
which
LOGI was owed into an aggregate of 4,000,000 shares (or one (1) share for each
$0.04 of debt converted) of newly issued shares of the Company's restricted
common stock. The conversion price used in the Debt Conversion Agreement is
based on 80% of the average market price of the shares for the 30 days preceding
the conversion agreement. This was considered to be the Fair Market
Value at the time of the transaction. The Director and 50% owner of
LOGI is Max Maxwell, who became a Director of the Company on April 10, 2006,
and
President of the Company on April 12, 2006, and resigned as President and
Director on May 1, 2007. Mr. Maxwell obtained his 50% ownership in LOGI on
April
10, 2006 in consideration for joining LOGI as an officer and director and
introducing Texhoma to various oil and gas opportunities.
On
April
10, 2006, the Company entered into a convertible note with LOGI evidencing
the
$735,000 of debt which was still owed to LOGI after the Debt Conversion
Agreement. The terms of the convertible note provided for the same conversion
price as the previously mentioned Debt Conversion Agreement. On May
15, 2006, LOGI provided the Company notice of its desire to convert its $735,000
Promissory Note into 18,375,000 shares of the Company's common stock which
the
Company issued in consideration for the debt conversion. This
conversion rate was considered Fair Market Value at the date of
conversion.
On
May
31, 2006, Texhoma entered into six (6) participation agreements to purchase
various oil and gas leases from Sunray Operating Company LLC.
On
June
8, 2006, we entered into a Promissory Note and Security Agreement (the
"Promissory Note"), with Polaris Holdings, Inc., which held 12,500,000 shares
of
our common stock ("Polaris"). Pursuant to the Promissory Note, Polaris gave
us a
$250,000 loan. The Promissory Note was due and payable on August 10, 2006,
with
interest at 12% per annum. Although the note has not been paid in full to date,
the note had been paid down to $60,000 as of May 2007, and since that date,
an
additional approximately $35,000 has been repaid leaving a balance of
approximately $25,000 as of the filing of this report. We also gave Polaris
an
Option to participate in our Clovelly Field interests in connection with the
Promissory Note (described below). We agreed pursuant to the Promissory Note
to
repay the amounts owed to Polaris by way of (a) two-thirds of the net proceeds
we receive from any stock sales while the Promissory Note is outstanding, and
(b) one-third of our share of the production income we receive from our oil
and
gas interests in Vermillion Parish, Louisiana, which represents a 10% working
interest (7.3% net revenue interest) in such leases and our oil and gas
interests in the Barnes Creek Field, located in Allen Parish, Louisiana and
the
Edgerly Field located in Calcasieu Parish, Louisiana from Kilrush Petroleum,
Inc., which constitutes a 7.42% working interest (a 5.38% net revenue interest)
in the Barnes Creek gas field, and an 11.76% working interest (8.47% net revenue
interest) in the Edgerly oil field (the "Texaurus Interests").
We
used
the proceeds from the Promissory Note to pay for the cost of drilling the
Allain-LeBreton No. 2 well in the Clovelly prospect of which we own an 11%
working interest. The prospect is located in Lafourche Parish, Louisiana and
operated by ORX Resources, Inc. ("ORX"). Our former Director,
President and Chief Executive Officer was a Director of ORX at the time of
the
Company’s entry into the Promissory Note.
In
consideration for Polaris agreeing to loan us the money pursuant to and in
connection with the Promissory Note, we agreed to provide Polaris an option
to
participate in Clovelly field for a three percent (3%) working interest, which
option Polaris can elect after reviewing the logs of the Allain-LeBreton No.
2
well at target depth, but before the completion of the well (the "Option").
In
the event that Polaris elects to exercise its Option and participate in the
Allain-LeBreton No. 2 well, we will surrender 3/11ths of our 11% working
interest in the well and Polaris will reimburse Texhoma for the drilling costs
incurred by use for the three percent (3%) working interest from the
commencement of the drilling operations.
In
the
event that we are unable to repay the Promissory Note to Polaris when due,
we
agreed pursuant to the Promissory Note to assign one hundred percent (100%)
of
the cash flow from our portion of the Texaurus
Interests
to Polaris or its nominee until the Promissory Note is paid in
full. Although as described above, we have not repaid the note to
date, we are currently working with Polaris to repay the note, and they have
not
declared an event of default.
On
October 10, 2006, ORX Resources, Inc., operator of the Clovelly Prospect well,
notified Texhoma that the jointly owned well had been plugged and abandoned
on
September 23, 2006.
In
June
and August 2006, Texhoma closed the purchase of three (3) of the participation
agreements, entering into Assignments and Bill of Sales for purchase from Sunray
Operating Company LLC (“Sunray”) of the following Leases:
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·
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Leases
covering approximately 196 acres of land in Brazoria County, Texas.
In the
purchase, Texhoma acquired an undivided 37.5% interest, subject to
existing overriding royalty interests equal to 25% of 8/8. Additionally,
Sunray is entitled to a five-eighths of eight-eighths (62.5% of 8/8)
working interest, proportionally reduced at payout; and
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·
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Leases
covering approximately 20 acres of land in Brazoria County, Texas.
In the
purchase, Texhoma acquired an undivided 35% interest in the leases,
subject to existing overriding royalty interests equal to 25% of
8/8.
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Leases
covering approximately 280 acres of land in Brazoria County, Texas.
In the
purchase, Texhoma acquired an undivided 72.5% interest in the leases,
subject to existing overriding royalty interests equal to 28% of
8/8.
Texhoma simultaneously sold a 42.5% interest leaving a 30%
interest.
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Texhoma
declined to participate in the purchase of the leases covering
approximately 80 acres in Brazoria County. In September 2006, this
well
was a dry hole and participation in subsequent wells was
declined. However, Texhoma continues to hold a 12.5% back in
Working Interest.
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Two
leases for another 160 acre site and a 60 acre site which were declined
by
Texhoma and in which we retained a 12.5% back in Working
Interest.
|
We
purchased the Leases from Sunray for aggregate consideration of $143,161, of
which $113,161 was paid in cash and $30,000 was paid in the form of shares
of
our common stock, by the issuance of an aggregate of 375,000 units (each a
"Unit"), which each include one (1) share of common stock and one (1) warrant,
which entitles the holder of such warrant to purchase one (1) share of our
common stock at an exercise price of $0.15 per share, prior to the one (1)
year
anniversary of such warrant grant, which Units were valued at $0.08 per
Unit. Approximately $50,000 remained due to Sunray in connection with
the purchase of the Leases outstanding as of October 31, 2007.
Upon
the
closing of the Purchases we and Sunray agreed to enter into an operating
agreement in connection with the development of the leases. Additionally, both
we and Sunray agreed that should either party be unable or unwilling, for any
reason, to participate in the drilling of the initial well on any of the leases
described above, the non-participating party shall, at least 90 days prior
to
any expiration or any rental date under the leases, assign the participating
party all of its right, title and interest in such lease.
Amendment
to Certificate of Incorporation
On
September 20, 2006, with an effective date of filing of September 21, 2006,
we
filed a Certificate of Amendment to our Articles of Incorporation to increase
our authorized shares of common stock to three hundred million (300,000,000)
shares of common stock, $0.001 par value per share, and to re-authorize one
million (1,000,000) shares of preferred stock, $0.001 par value per share (the
"Amendment").
Additionally,
the Amendment provided that shares of our preferred stock may be issued from
time to time in one or more series, with distinctive designation or title as
shall be determined by our Board of Directors prior to the issuance of any
shares thereof. The preferred stock shall have such voting powers, full or
limited, or no voting powers, and such preferences and relative, participating,
optional or other special rights and such qualifications, limitations or
restrictions thereof, as shall be stated in such resolution or resolutions
providing for the issue of such class or series of preferred stock as may be
adopted from time to time by our Board of Directors prior to the issuance of
any
shares thereof. The number of authorized shares of preferred stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the voting
power of all the then outstanding shares of the capital stock of the corporation
entitled to vote generally in the election of
directors,
voting together as a single class, without a separate vote of the holders of
the
preferred stock, or any series thereof, unless a vote of any such holders is
required pursuant to any preferred stock designation.
Promissory
Note
On
or
about October 19, 2006, the Company issued a Promissory Note to Jacobs Oil
&
Gas Limited, an entity controlled by Mr. Frank Jacobs, our former Director,
in
the amount of $493,643.77, which amount represented funds advanced to the
Company by Mr. Jacobs and management fees owed to Mr. Jacobs (the “Jacobs'
Note”). The Jacobs' Note bears interest at the rate of 6% per annum until paid,
and is payable by the Company at any time on demand. The Jacobs' Note may be
pre-paid at any time without penalty. Any amounts not paid on the Jacobs' Note
when due shall bear interest at the rate of 15% per annum. The Company also
entered into a Security Agreement with Mr. Jacobs under which Agreement the
Board of Directors ratified the transfer of 200,000 shares of the common stock
of Morgan Creek Energy Corp., which shares were held by the Company, to Mr.
Frank Jacobs as security for the money that is owed pursuant to the Jacobs'
Note.
On
or
about June 5, 2007, we entered into an Agreement with Jacobs Oil & Gas
Limited (“Jacobs”), pursuant to which Jacobs agreed that no interest would be
due from us and/or accrue on the principal or accrued interest to date on his
outstanding Promissory Note for the period of one (1) year from the date of
the
Agreement and that he would not try to collect the principal and/or accrued
interest on such note for a period of one (1) year.
Letter
Agreement
On
or
about May 15, 2007, we entered into a Letter Agreement with Matrixx Resource
Holdings Inc. (“Matrixx”) to sell our 11% working interest in the property known
as the Clovelly Prospect (the “Clovelly Prospect”) for $150,000. In connection
with and pursuant to the Letter Agreement, we expected to receive an earnest
money deposit of $25,000 on or about May 25, 2007, with the remainder of the
purchase price to be paid on or before June 30, 2007; however, we have not
received any funds or any deposit from Matrixx and the Letter Agreement has
been
terminated.
Management
Services Agreement
On
or
about May 15, 2007, we entered into a Management Services Agreement with Valeska
Energy Corp. (“Valeska”), whose Chief Executive Officer is William M. Simmons,
who became an officer and Director of us on or about June 4, 2007, as described
below, which was subsequently amended on or about June 1, 2007 (collectively
the
“Management Agreement”).
Pursuant
to the Management Agreement, we agreed to enter into a Joint Venture agreement
with Valeska (the “Joint Venture”), described below; Valeska agreed to provide
us management services and act as a Management Consultant to us, for a monthly
fee of $10,000 (plus expenses), or 15% of any revenue we generate, whichever
is
greater (excluded from this definition however are asset sales and/or income
of
a capital nature, and included in the definition are 20% of the revenues we
receive from our Joint Venture with Laurus Master Fund, Ltd.); and we also
agreed to issue Valeska 15,200,000 restricted shares of our common stock. We
also agreed pursuant to the Management Agreement, as amended, that we would
issue Valeska an additional 18,200,000 shares of our common stock upon such
time
as we are able to bring our public reporting requirements current with the
Commission and seek reinstatement on the Over-The-Counter Bulletin Board. These
shares will be valued at Fair Market Value using the most appropriate valuation
method. The Management Agreement had a minimum term of three months,
beginning on May 1, 2007. The Management Services Agreement was later
amended and extended by the parties’ entry into the Second Amendment to
Management Services Agreement with Valeska Energy Corp. in August, 2007, as
described below.
Joint
Venture Agreement
On
or
about May 15, 2007, we entered into a Joint Venture Relationship Agreement
with
Valeska (the “Joint Venture Agreement”), pursuant to which we and Valeska agreed
to form a new Texas limited partnership (the “Joint Venture”), of which Valeska
will serve as general partner. The Joint Venture Agreement contemplates that
Valeska will cause funds to be invested, arrange financial and strategic
partnerships,
and that both parties would bring investment opportunities to the Joint Venture.
Pursuant to the Joint Venture Agreement, Valeska has co-investment rights in
the
Joint Venture. Any distributions from the Joint Venture will be paid first
to
Valeska and the Company, in an amount equal to 8% to Valeska and 2% to the
Company, subject to investor approval; then to any investors as negotiated
therewith; and finally Valeska and the Company will share any remaining
distributions, with Valeska receiving 80% of such distributions and the Company
receiving 20% of such distributions.
The
Joint
Venture Agreement also provides that Valeska has the right to require us to
purchase its interest in the Joint Venture at any time, in exchange for shares
of our common stock. In the event that Valeska exercises this right, the
valuation of the Joint Venture will be valued in a negotiated manner or at
30%
greater than the gross acquisition cost of any property acquired by the Joint
Venture, and the number of shares exchangeable for such interest will be equal
to the market price of our shares of common stock on the date that such right
is
exercised by Valeska.
Additionally,
we have the right, pursuant to the Joint Venture Agreement, to veto any deal
which Valeska proposes to include in the Joint Venture.
Voting
Agreement
On
or
about June 5, 2007, certain of our largest shareholders, including Capersia
Pte.
Ltd.; Frank A. Jacobs, our former officer and Director; and Valeska Energy,
Inc., which is controlled by William M. Simmons, the President and Director
of
the Company, and is majority owned by Daniel Vesco, the Company’s Chief
Executive Officer and a Director of the Company, through an entity which he
controls (“Valeska” and collectively the “Shareholders”) entered into a Voting
Agreement (the “Voting Agreement”). Pursuant to the terms of the
Voting Agreement the Shareholders agreed that for the Term of the Voting
Agreement, as defined below, no Shareholder would vote any of the shares of
common stock (the “Shares”) which they hold for (i.e. in favor of) the removal
of William M. Simmons or Daniel Vesco, our Directors (the “New
Directors”). The Shareholders also agreed that in the event of any
shareholder vote of the Company (either by Board Meeting, a Consent to Action
with Meeting, or otherwise) relating to the removal of the New Directors; the
re-election of the New Directors; and/or the increase in the number of directors
of the Company during the Term of the Voting Agreement, that such Shareholders
would vote their Shares against the removal of the New Directors; for the
re-election of such New Directors; and/or vote against the increase in the
number of directors of the Company, without the unanimous consent of the New
Directors, respectively.
The
Voting Agreement further provided that in the event that either of the New
Directors breaches his fiduciary duty to the Company, including, but not limited
to such Director’s conviction of an act or acts constituting a felony or other
crime involving moral turpitude, dishonesty, theft or fraud; such Director’s
gross negligence in connection with his service to the Company as a Director
and/or in any executive capacity which he may hold; and/or if any Shareholder
becomes aware of information which would lead a reasonable person to believe
that such Director has committed fraud or theft from the Company, or a violation
of the Securities laws, the Voting Agreement shall not apply, and the
Shareholders may vote their shares as they see fit.
The
Term
of the Voting Agreement is until June 5, 2009 (the “Term”). The
Shareholders agreed to enter into the Voting Agreement in consideration for
the
New Directors agreeing to serve the Company as Directors of the
Company.
On
or
about July 12, 2007, another one of our significant shareholders, Lucayan Oil
and Gas Investments, Ltd. (“LOGI”), which is 50% owned by Max Maxwell, our
former President and Director, entered into a Voting Agreement with us, which
was amended by a First Amendment to Voting Agreement, which provided that the
shares of common stock held by LOGI would be subject to the identical terms
of
our June 5, 2007 Voting Agreement with the Shareholders.
Cooperation
Agreement and Mutual Release
On
or
about July 12, 2007, LOGI; Mr. Maxwell; Meredith Maxwell, Mr. Maxwell’s daughter
and our former employee; and A.E. Buzz Jehle, our former consultant
(collectively the “Former Interested Parties”) entered into a Cooperation
Agreement and Mutual Release (the “Release”) with us and Texaurus Energy, Inc.
(“Texaurus”), our wholly owned Delaware subsidiary (for the purposes of the
description of the
Release,
all references to “we,” “us,” the “Company” or similar words include
Texaurus). In connection with the Release, we and the Former
Interested Parties agreed to release each other (including employees, officers,
directors, representatives, employees and assigns) from any and all claims,
rights, causes of action and obligations which were known or unknown at the
time
of the entry into the Release, subject only to the Assignment by the Former
Interested Parties of their rights, causes of actions or demands against any
former officers or Directors of us to the Company and the New Directors (the
“Assignment”) and the Extension. The release we provided to the
Former Interested Parties was against any and all claims, rights, causes of
action and obligations which were known at the time of the entry into the
Release, or which are not brought to the attention of the New Directors or
the
Company by 5:00 P.M. Central Standard Time, on September 30, 2007 (the
“Extension”).
Additionally,
in connection with the Release, Mr. Maxwell personally agreed, to the best
of
his ability, to cooperate with us in connection with an audit of us and
Texaurus; to provide a list of the known liabilities of the Company which Mr.
Maxwell was aware of; and to personally certify the accuracy and completeness
of
any financial statements which the Company prepares covering the time period
during which Mr. Maxwell was President of the Company, in a form similar to
the
Certification Of Chief Executive Officer and Chief Financial Officer Pursuant
To
Section 302 of The Sarbanes-Oxley Act Of 2002 and Certification of Chief
Executive Officer; and (ii) Certification of Chief Financial Officer Pursuant
To
18 U.S.C. Section 1350, as Adopted Pursuant To Section 906 Of The Sarbanes-Oxley
Act Of 2002, which reporting companies are required to file as attachments
to
each periodic filing with the Commission.
Mr.
Maxwell also agreed pursuant to the terms of the Release that any options which
he vested pursuant to the June 2006 options which he was granted by us would
expire if unexercised on August 1, 2007; and that we owe him no rights to
contribution or indemnification in connection with his service to the Company.
Mr. Maxwell also certified that the shares of common stock granted to LOGI
were
issued for valid consideration and fully paid and non-assessable (the
“Certification”). Additionally, pursuant to the terms of the Release,
we agreed to indemnify Mr. Maxwell and Mr. Jehle against any dispute regarding
the shares issued to LOGI, provided that such Certification is valid and
correct.
Consulting
Agreement
Effective
July 1, 2007, we entered into a Consulting Agreement with Ibrahim Nafi Onat,
our
Director (the “Consulting Agreement”), pursuant to which Mr. Onat agreed to
serve as our Director and Vice President of Operations for an initial term
of
twelve (12) months, which term is renewable month to month thereafter with
the
mutual consent of the parties. Pursuant to the Consulting Agreement
we agreed to pay Mr. Onat $2,500 per month during the term of the Consulting
Agreement, to issue him 500,000 restricted shares of common stock valued at
the
market price on the date of issuance, in connection with his entry into the
Consulting Agreement and 500,000 restricted shares of common stock assuming
he
is still employed under the Consulting Agreement at the expiration of six (6)
months from the effective date of the Consulting Agreement (the “Six Month
Issuance”). The Consulting Agreement is described in greater detail
below under “Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(A) Of The Exchange Act.”
Material
Corporate Events
On
July
17, 2007, the Company's Board of Directors unanimously agreed by a written
consent to action without a meeting, to adopt a Certificate of Designations
for
the creation of a Series A preferred stock (the "Series A Preferred
Stock").
The
Series A Preferred Stock has a par value of $0.001 per share. The Series A
Preferred Stock consists of one thousand (1,000) shares, each having no dividend
rights, no liquidation preference, and no conversion or redemption rights.
However, the one thousand (1,000) shares of Series A Preferred Stock have the
right, voting in aggregate, to vote on all shareholder matters equal to
fifty-one percent (51%) of the total vote. For example, if there are 10,000,000
shares of the Company's common stock issued and outstanding at the time of
a
shareholder vote, the holders of Series A Preferred Stock, voting separately
as
a class, will have the right to vote an aggregate of 10,400,000 shares, out
of a
total number of 20,400,000 shares voting.
Additionally,
the Company shall not adopt any amendments to the Company's Bylaws, Articles
of
Incorporation, as amended, make any changes to the Certificate of Designations,
or effect any reclassification of the Series A Preferred Stock, without the
affirmative vote of at least 66-2/3% of the
outstanding
shares of Series A Preferred Stock. However, the Company may, by any means
authorized by law and without any vote of the holders of shares of Series A
Preferred Stock, make technical, corrective, administrative or similar changes
to the Certificate of Designations that do not, individually or in the
aggregate, adversely affect the rights or preferences of the holders of shares
of Series A Preferred Stock.
On
or
about July 26, 2007, with an effective date of July 31, 2007, we entered into
a
Termination of Lease Agreement (the “Termination Agreement”) with our landlord
at 2200 Post Oak Blvd., Suite 340, Houston, Texas 77056 (the “Post Oak
Office”). Pursuant to the terms of the Termination Agreement, we and
the landlord agreed to terminate the lease on the Post Oak Office space, and
we
agreed to pay the landlord approximately $4,090 as a termination fee, $3,331
as
payment of past due rental fees; and we also agreed to forfeit any right to
our
security deposit of approximately $1,578 held by the landlord pursuant to the
terms of our lease in connection with such Termination Agreement.
On
or
about August 13, 2007, we entered into a Second Amendment to Management Services
Agreement with Valeska Energy Corp. (“Valeska” and the “Second
Amendment”).
Pursuant
to the Second Amendment, we and Valeska agreed to extend the term of the
Management Services Agreement until September 30, 2008, and to pay Valeska
the
following consideration in connection with agreeing to perform the services
required by the original Management Services Agreement, and in consideration
for
allowing Daniel Vesco and William M. Simmons to serve as Directors of the
Company, bringing on personnel to assist the Company with the day to day
operations of the Company, and help bring the Company current in its filings
(the “Services”):
|
|
·
|
1,000
shares of the Company’s Series A Preferred Stock;
|
|
|
·
|
A
monthly fee of $20,000 per month during the extended term of the
Second
Amendment, plus reasonable and actual costs incurred by Valeska (or
individuals or designees brought on by Valeska, including lodging,
car
rental and telephone expenses therewith) in connection with such
Services;
|
|
|
·
|
10,000,000
restricted shares of the Company’s common stock; and
|
|
|
·
|
60,000,000
options to purchase shares of the Company’s common stock, which have a
cashless exercise provision, are valid for a period of three years
from
their grant date, and have an exercise price of greater than 110%
of the
trading price of the Company’s common stock on the Pinksheets on the day
of such grant, which exercise price is equal to $0.02 per
share.
|
On
or
about October 30, 2007, we entered into a Cooperation Agreement and Mutual
Release with our former consultant Terje Reiersen (“Reiersen” and the “Reiersen
Release”). Pursuant to the Reiersen Release, Reiersen agreed to
release us, our current and former officers, agents, directors, servants,
attorneys, representatives, successors, employees and assigns from any and
all
rights, obligations, claims, demands and causes of action in contract or tort,
under any federal or state law, whether known or unknown, relating to his
services with the Company or the Company in general for any matter whatsoever
other than in connection with any claims against any former officers or
Directors of the Company, which claims Reiersen assigned to the
Company. Reiersen also agreed to cooperate fully with us in
connection with any reasonable requests from us for a period of sixty (60)
days
from the date of the Reiersen Release, that we would not owe him any rights
of
contribution or indemnification in connection with any services he rendered
on
our behalf and that we would not owe him any other consideration other than
what
we agreed to provide him in connection with the Reiersen Release (as described
in greater detail below).
In
connection with the Reiersen Release, we agreed to pay Reiersen $2,500 within
ten (10) business days of the parties entry into the Reiersen Release (which
funds have not been paid to date), and issue Reiersen 250,000 restricted shares
of our common stock, which shares have not been issued to date within ten (10)
days of the parties entry into the Reiersen Release.
On
or
about November 2, 2007, we entered into a First Amendment to Securities Purchase
Agreement, Secured Term Note and Registration Rights Agreement with Laurus
(the
“First Amendment”). Pursuant to the First Amendment, Laurus agreed
to:
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(a)
|
waive
any default which may have occurred as a result of our failure to
become
current in our filings with the Commission, assuming that we become
current in our filings prior to December 15,
2007;
|
|
(b)
|
amend
the terms of the Laurus Note to provide that a “Change of Control” of
Texaurus under the Note, which requires approval of Laurus, includes
any
change in Directors such that Daniel Vesco and William M. Simmons
are no
longer Directors of Texaurus; and
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|
(c)
|
amend
the terms of the Registration Rights Agreement with Laurus to provide
that
the date we are required to gain effectiveness of a registration
statement
registering the shares of common stock issuable in connection with
the
exercise of the Laurus Warrant in the Company is amended to no later
than
April 30, 2008, and that the effective date of any additional registration
statements required to be filed by us in connection with the Registration
Rights Agreement, shall be thirty (30) days from such filing
date.
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Plan
of Operations
The
Company’s current plan of operations for the next twelve (12) months is to bring
the Company current in its filings with the Commission, get the Company’s
accounting and controls and procedures in order and work to decrease the
Company’s current liabilities.
In
connection with our properties, a deal we had in place to sell the Clovelly
Field interests fell through, and we are relying on the operators of our other
properties regarding the direction of those prospects. To date, all
of those operators have indicated that they have no plans to expand their
current drilling prospects.
We
currently believe that we can continue our operations for approximately the
next
six months with funds raised in June 2007, and anticipate needing to raise
approximately $300,000 in the next twelve months to pay our current liabilities
and maintain our current rate of monthly expenditures, of which there can be
no
assurance. Additionally, due to the fact that the assets held by
Texaurus are not generating the level of revenue as we originally anticipated,
we may need to raise additional capital in Texaurus to repay the Laurus Note
and/or for working capital purposes in the future, which funds may be raised
through the sale of debt and/or equity in Texaurus.
RESULTS
OF OPERATIONS FOR THE QUARTER ENDED DECEMBER 31, 2006 COMPARED
TO THE QUARTER ENDED DECEMBER 31, 2005
We
reported revenues of $478,000 for the quarter ended December 31, 2006
compared with $0 for the quarter ended December 31, 2005. These
revenues are the result of our interest in various oil and gas properties
purchased in March 2006 as well other interests we had previously
obtained. We had no oil and gas properties during the quarter
ended December 31, 2005.
We
had
oil and gas exploration expenses of $107,000 for the quarter
ended December 31, 2006, as compared to $0 for the quarter ended
December 31, 2005. The oil and gas exploration expenses for the three
months ended December 31, 2006, were related to the joint operating costs of
the
producing properties.
Depletion
and depreciation of $217,000 was recorded for the quarter ended December 31,
2006 as compared with $0 for the quarter ended December 31, 2005.
We
incurred general and administrative expenses of $246,000 for the
quarter ended December 31, 2006, compared to $71,000 for the same period in
2005, an increase of $175,000 from the prior period. The increase is
related to our focus on domestic oil and gas exploration beginning in 2006
compared to little or no activity for the quarter ended December 31,
2005.
In
connection with our raising the necessary capital funding to pursue the planned
oil and gas purchases we issued stock warrants to new subscribers of our common
stock as well and our lenders. Stock accretion expense was computed
based upon the Black-Scholes modeling and recorded as warrants were
issued. As a result of the continued Black Scholes
modeling we recognized a $529,000 reduction in related
stock accretion expense at December 31, 2006 as compared with $0 for the quarter
ended December 31, 2005, as no stock warrants were issued during the quarter
ended December 31, 2005.
In
order
to raise capital, we also sold a portion of our working interest acquisitions
to
other parties which included payment in stock of Morgan Creek, whose stock
traded at approximately $1.50 at the time of acquisition. At December
31, 2006 the stock of Morgan Creek Energy Corp. had decreased its trading
value
and
as a result we recorded a loss on the investment of $196,000, as compared with
$0 during the same period in the prior year.
We
incurred net interest expense of $297,000 for the three months ended December
31, 2006, mainly in connection with the payment of the Laurus Note as compared
with no interest for the three months ended December 31, 2005.
We
incurred a net loss of $53,000 for the quarter ended December 31, 2006 as
compared to a net loss of $71,000 for the quarter ended December 31, 2005,
an
increase of $18,000. The main reason for the increase is the net
revenue generated for activities during the quarter ended December 31, 2006,
which was not present for the quarter ended December 31, 2005 offset by the
adjustments to stock accretion expense, during the quarter ended December 31,
2006.
LIQUIDITY
AND CAPITAL RESOURCES
As
of
December 31, 2006, we had total assets of $6,816,000, consisting of cash of
$10,000 and restricted cash, in connection with the funding by Laurus, which
cash is only distributable with the consent of Laurus of $238,000, accounts
receivable of $553,000, net oil and gas properties of $5,134,000 and
other assets of $882,000.
We
had
current liabilities of $1,245,000 and a long term note payable of
$8,261,000 at December 31, 2006. Our current liabilities included
notes payable due to affiliates of $588,000, which notes were payable to
Capersia, Clover Capital and MFS Technology. The note payable was in
connection with the Laurus Note, described above.
We
had
negative working capital of $444,000 and a retained deficit of $12,870,000
as of
December 31, 2006.
For
the
quarter ended December 31, 2006, we used cash of $294,000 in operating
activities and cash provided by investing activities was $187,000.
We
had
cash used in financing activities of $135,000 in repayment of notes payable
to
Laurus Fund of $111,873 and loan repayment to affiliate of $15,000.
FUNDING
TRANSACTIONS:
We
raised
an aggregate of $384,000 through the sale of 4,800,000 units at a price of
$0.08
per unit during June through December 2006, which units each included one (1)
share of common stock and one (1) one-year warrant to purchase one (1) share
of
our common stock at an exercise price of $0.15 per share.
We
raised
an aggregate of $297,500 through the sale of 23,800,000 shares of common stock
at $0.0125 per share between May and July 2007.
We
have
subsequently used the majority of this funding to pay our general and
administrative expenses and certain acquisitions including the purchase of
the
Leases from Sunray and the Management Agreement with Valeska, as described
above.
We
believe that we have sufficient funds to repay the interest and principal
payments on amortizing payment required on the Secured Term Note with Laurus,
through the payment of production payments on the properties owned by Texaurus,
as such amortizing payments do not have any minimum payment amount, and as
such,
the required payment of such amortizing payment on the Secured Term Note will
not adversely impact our future current assets or cash on
hand. However we will need to repay $8,500,000 (minus any payment of
principal on the Note which we are able to make through our 80% production
payments to Laurus) on March 27, 2009, which funds we do not currently have
and
which we can provide no assurances will be available when such Note is
due.
Additionally,
to continue our planned oil and gas operations the Company remains reliant
on
raising further equity funds and our growth and continued operations could
be
impaired by limitations on our access to the capital markets. In the event
that
we or Texaurus do not generate the amount of revenues from our oil and
gas
properties which we anticipate, and/or we or Texaurus decide to purchase
additional oil and gas properties and are required to raise additional
financing, we may have to raise additional capital and/or scale back our
operations which would have a material adverse impact upon our ability to pursue
our business plan. There can be no assurance that capital from outside sources
will be available, or if such financing is available, it may involve issuing
securities senior to our common stock, the common stock of Texaurus or
additional shares of the common stock of Texaurus or equity financings which
are
dilutive to holders of our common stock. In addition, in the event we do not
raise additional capital from conventional sources, it is likely that our growth
will be restricted and we may need to scale back or curtail implementing our
business plan.
We
have
no current commitments from our officers and Directors or any of our
shareholders to supplement our operations or provide us with financing in the
future. If we are unable to raise additional capital from conventional sources
and/or additional sales of stock in the future, we may be forced to curtail
or
cease our operations. Even if we are able to continue our operations, the
failure to obtain financing could have a substantial adverse effect on our
business and financial results.
RISK
FACTORS
You
should carefully consider the following risk factors and other information
in
this annual report on Form 10-KSB before deciding to become a holder of our
Common Stock. If any of the following risks actually occur, our business and
financial results could be negatively affected to a significant
extent.
WE
WILL NEED ADDITIONAL FINANCING TO CONTINUE OUR BUSINESS PLAN AND DRILL AND
STUDY
ADDITIONAL WELLS, WHICH FINANCING, IF WE ARE UNABLE TO RAISE MAY FORCE US TO
SCALE BACK OR ABANDON OUR BUSINESS PLAN.
We
raised
$8,500,000 from the sale of a Secured Term Note to Laurus Master Fund, Ltd.
("Laurus") in March 2006. However, approximately $7,894,235 of the amount
borrowed from Laurus was subsequently used to purchase the Intracoastal City
property, the interests in the Barnes Creek gas field and the Edgerly field
and
to pay closing costs and fees in connection with the various funding
transactions.
We
raised
an aggregate of $384,000 through the sale of 4,800,000 units at a price of
$0.08
per unit during June through December 2006, which units each included one (1)
share of common stock and one (1) one-year warrant to purchase one (1) share
of
our common stock at an exercise price of $0.15 per share. We raised an aggregate
of $297,500 through the sale of 23,800,000 shares of common stock at $0.0125
per
share between May and July 2007.
We
believe that the funds remaining from the sale of the Note to Laurus, the funds
raised through the placement of new equity, and revenue received from the sale
of oil and gas production will allow us to pay our outstanding liabilities
and
continue our business operations for at least the next six months, not including
any amounts due on the Laurus Note. However, as described below, we cannot
be
sure that we will find any oil and/or gas on our properties in the future,
our
current properties will continue to produce, nor can we provide any assurances
that if found, that the oil and/or gas will be in commercial quantities, that
we
will be able to extract it from the ground, that we will not face liability
in
connection with our extraction efforts, and/or that we will be able to generate
the revenues we expect from the future sale of any oil and gas we may discover
in the future.
Additionally,
we may choose to spend additional monies on the purchases of oil and gas
properties in the future. Depending on the decisions of our management, the
volatility of the prices of oil and/or gas, our exploration activities, and/or
potential liability, and the amount of money we receive from the sale of oil
and
gas, if any, we may need to raise additional capital substantially faster than
six months, which we currently estimate such previously borrowed monies will
last. We do not currently have any additional commitments or identified sources
of additional capital from third parties or from our officers, directors or
majority shareholders. We can provide no assurance that additional financing
will be available on favorable terms, if at all. If we are not able to raise
the
capital necessary to continue our business operations, we may be forced to
abandon or curtail our business plan and/or suspend our exploration
activities.
WE
HAVE BEEN CONTACTED BY THE SEC REGARDING OUR DEFICIENT PERIODIC FILINGS AND
HAVE
BEEN NOTIFIED THAT WE COULD BE SUBJECT TO AN ADMINISTRATIVE PROCEEDING TO REVOKE
OUR REGISTRATION UNDER THE SECURITIES ACT OF 1934, AS AMENDED, WITHOUT
NOTICE.
In
November 2007, we were contacted via letter by the SEC in connection with our
deficient periodic filings with the SEC. The letter stated that if we
were not current in our filing obligations with the SEC within fifteen days
from
the date of the letter, we could be subject to a proceeding by the SEC’s
Division of Enforcement, pursuant to Section 12(j) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), without notice, which would revoke
our registration under the Exchange Act, and/or subject us to a trading
suspension under Section 12(k) of the Exchange Act (the
“Actions”). We have been unable to speak directly with the SEC
regarding this matter to date; however, our current management is committed
to
bringing our filings current with the SEC and has made progress during the
past
few months in filing our deficient filings (including this filing), and as
such,
we do not believe that we are a proper candidate of the
Actions. There is a risk however, that moving forward, the SEC could
institute Actions against us without further notice, and may suspend and/or
revoke the registration of our securities pursuant to Section 12(j) of the
Exchange Act, and/or suspend or revoke the trading of our securities on the
Pinksheets pursuant to Section 12(k) of the Exchange Act. If either
of the Actions were instituted by the SEC, and we were unable to avoid or stay
such Actions, it would have a material adverse effect on the Company, could
cause our securities to cease trading on the Pinksheets, and our shares would
have little to no liquidity and/or could cause the value of any of our
securities to become worthless.
WE
OWE LAURUS MASTER FUND, LTD., A SUBSTANTIAL AMOUNT OF MONEY WHICH WE DO NOT
HAVE.
In
connection with the Securities Purchase Agreement, Laurus Master Fund, Ltd.
("Laurus"), purchased a $8,500,000 Secured Term Note from Texaurus, which we
have guaranteed, and which bears interest at the rate of 9.75% per year (as
of
October 23, 2007), which is due and payable on March 27, 2009, and which
principal is repayable by way of a production payments equal to 80% of the
gross
production revenue received by Texaurus in connection with the Intracoastal
City
Field, the Edgerly and the Barnes Creek Properties.
There
can
be no assurance that we will have sufficient funds to pay any principal or
interest on the Note when due on March 27, 2009, if such repayment amount is
not
sufficiently covered by the payment of production proceeds to Laurus, as
described above, and we do not currently believe that such production payments
will be sufficient to repay such Note as of the date of this filing. If we
do
not have sufficient funds to pay the total remaining amount of the Note (after
taking into account payments of principal, which we may not have sufficient
funds to pay) when due, we will be in default and Laurus may take control of
substantially all of our assets (as described in more detail under "Risks
Relating to the Company's Securities"). As a result, we will need to raise
or
otherwise generate approximately $8,500,000 to repay the Note (not including
any
adjustments for payment of principal in connection with production payments
paid
by Texaurus) by March 27, 2009. If we fail to raise this money, we could be
forced to abandon or curtail our business operations, which could cause any
investment in the Company to become worthless.
WE
RELY HEAVILY ON WILLIAM M. SIMMONS AND DANIEL VESCO, OUR OFFICERS AND
DIRECTORS, AND IF THEY WERE TO LEAVE, WE COULD FACE SUBSTANTIAL COSTS IN
SECURING SIMILARLY QUALIFIED OFFICERS AND DIRECTORS.
Our
success depends upon the personal efforts and abilities of William M. Simmons,
our President and Director and Daniel Vesco, our Chief Executive Officer and
Director. Our ability to operate and implement our exploration activities is
heavily dependent on the continued service of Mr. Simmons and Mr. Vesco and
our
ability to attract qualified contractors and consultants on an as-needed
basis.
We
face
continued competition for such contractors and consultants, and may face
competition for the services of Mr. Simmons and/or Mr. Vesco in the future.
We
do not have any employment contracts with Mr. Simmons or Mr. Vesco, nor do
we
currently have any key man insurance on Mr. Simmons or Mr. Vesco. Mr. Simmons
and Mr. Vesco are our driving forces and are responsible for maintaining our
relationships and operations. We cannot be certain that we will be able to
retain Mr. Simmons and Mr. Vesco and/or attract and retain such contractors
and
consultants in the future. The loss of either Mr.
Simmons
and Mr. Vesco, or both and/or our inability to attract and retain qualified
contractors and consultants on an as-needed basis could have a material adverse
effect on our business and operations.
WE
HAVE BECOME AWARE THAT SPAM EMAILS REFERENCING THE COMPANY HAVE BEEN
DISSEMINATED IN THE PAST, WHICH COULD AFFECT THE MARKET FOR AND/OR THE VALUE
OF
OUR COMMON STOCK.
It
has
come to our attention that during the month of October 2006 certain spam-emails,
containing false and misleading information about our company, were disseminated
over the internet. The spam-emails distributed by third parties that are not
associated with the Company or its Officers or Directors have not been
authorized, sanctioned or paid for by the Company. We caution investors to
review our most recent Form 8-K with the Commission, our official press releases
and our periodic filings, which we anticipate filing and amending in the future,
before making any investment in us.
While
we
are not responsible for the dissemination of the spam-emails and are not aware
of who was responsible, we were contacted by the Commission and were requested
to voluntarily provide shareholder information and disclosures in connection
with the origins of the dissemination of such spam emails. The Company
cooperated fully with the Commission.
The
fact
that someone disseminated spam emails about our company and the fact that the
Commission previously looked into such emails may be perceived by potential
investors as a negative factor which could adversely affect the market for
and/or the value of our stock.
BECAUSE
OF THE SPECULATIVE NATURE OF OIL AND GAS EXPLORATION, THERE IS SUBSTANTIAL
RISK
THAT NO ADDITIONAL COMMERCIALLY EXPLOITABLE OIL OR GAS WILL BE FOUND AND THAT
OUR BUSINESS WILL FAIL.
The
search for commercial quantities of oil as a business is extremely risky. We
cannot provide investors with any assurance that our properties contain
commercially exploitable quantities of oil and/or gas.
The
exploration expenditures to be made by us may not result in the discovery of
commercial quantities of oil and/or gas and problems such as unusual or
unexpected formations and other conditions involved in oil and gas exploration,
and often result in unsuccessful exploration efforts. If we are unable to find
commercially exploitable quantities of oil and gas, and/or we are unable to
commercially extract such quantities, we may be forced to abandon or curtail
our
business plan, and as a result, any investment in us may become
worthless.
OUR
TOTAL AMOUNT OF ISSUED AND OUTSTANDING SHARE AMOUNTS MAY BE INCORRECT, AND
WE
MAY HAVE OUTSTANDING SHARES WHICH ARE UNACCOUNTED FOR.
We
recently became aware of a subscription agreement relating to the sale of
certain shares of our common stock in February 2005, which shares have not
been
issued to date, and which subscription agreement we have been unable to verify
as of the date of this filing. As a result of the subscription
agreement, and our previous failure to issue shares in connection with such
subscription agreement, we may have potential liability for such shareholders
loss of liquidity and/or the decline in the value of our common
stock. Additionally, there may be other subscription agreements which
we are not aware of relating to the sale of our common stock, which sales and
issuances are not currently reflected with our Transfer Agent and/or in the
number of outstanding shares of common stock disclosed throughout this report.
As a result, we may have a larger number of shares outstanding than we currently
show on our shareholders list. This difference, if present, may force us to
revise our filings and/or may mean that the ownership percentage of certain
shares of common stock disclosed throughout this report is
incorrect. If we are required to issue additional shares of common
stock in the future relating to previous subscription agreements which our
current management was and/or is not aware, it could cause substantial dilution
to our existing shareholders and/or we could face potential liability in
connection with our failure to issue such shares when originally
subscribed.
BECAUSE
OF THE INHERENT DANGERS INVOLVED IN OIL AND GAS EXPLORATION, THERE IS A RISK
THAT WE MAY INCUR LIABILITY OR DAMAGES AS WE CONDUCT OUR BUSINESS OPERATIONS,
WHICH COULD FORCE US TO EXPEND A SUBSTANTIAL AMOUNT OF MONEY IN CONNECTION
WITH
LITIGATION AND/OR A SETTLEMENT.
The
oil
and natural gas business involves a variety of operating hazards and risks
such
as well blowouts, pipe failures, casing collapse, explosions, uncontrollable
flows of oil, natural gas or well fluids, fires, spills, pollution, releases
of
toxic gas and other environmental hazards and risks. These hazards and risks
could result in substantial losses to us from, among other things, injury or
loss of life, severe damage to or destruction of property, natural resources
and
equipment, pollution or other environmental damage, cleanup responsibilities,
regulatory investigation and penalties and suspension of operations. In
addition, we may be liable for environmental damages caused by previous owners
of property purchased and leased by us. As a result, substantial liabilities
to
third parties or governmental entities may be incurred, the payment of which
could reduce or eliminate the funds available for exploration, development
or
acquisitions or result in the loss of our properties and/or force us to expend
substantial monies in connection with litigation or settlements. As such, there
can be no assurance that any insurance obtained by us will be adequate to cover
any losses or liabilities. We cannot predict the availability of insurance
or
the availability of insurance at premium levels that justify our purchase.
The
occurrence of a significant event not fully insured or indemnified against
could
materially and adversely affect our financial condition and operations. We
may
elect to self-insure if management believes that the cost of insurance, although
available, is excessive relative to the risks presented. In addition, pollution
and environmental risks generally are not fully insurable. The occurrence of
an
event not fully covered by insurance could have a material adverse effect on
our
financial condition and results of operations, which could lead to any
investment in us becoming worthless.
WE
REQUIRE SUBSTANTIAL ADDITIONAL FINANCING TO CONTINUE OUR EXPLORATION AND
DRILLING ACTIVITIES, WHICH FINANCING IS OFTEN HEAVILY DEPENDENT ON THE CURRENT
MARKET PRICE FOR OIL AND GAS, WHICH WE ARE UNABLE TO
PREDICT.
Our
growth and continued operations could be impaired by limitations on our access
to capital markets. If the market for oil and/or gas were to weaken for an
extended period of time, our ability to raise capital would be substantially
reduced. There can be no assurance that capital from outside sources will be
available, or that if such financing is available, that it will not involve
issuing securities senior to the common stock or equity financings which will
be
dilutive to holders of common stock. Such issuances, if made, would likely
cause
a decrease in the value of our common stock.
THE
MARKET FOR OIL AND GAS IS INTENSELY COMPETITIVE, AND AS SUCH, COMPETITIVE
PRESSURES COULD FORCE US TO ABANDON OR CURTAIL OUR BUSINESS
PLAN.
The
market for oil and gas exploration services is highly competitive, and we only
expect competition to intensify in the future. Numerous well-established
companies are focusing significant resources on exploration and are currently
competing with us for oil and gas opportunities. Additionally, there are
numerous companies focusing their resources on creating fuels and/or materials
which serve the same purpose as oil and gas, but are manufactured from renewable
resources. As a result, there can be no assurance that we will be able to
compete successfully or that competitive pressures will not adversely affect
our
business, results of operations and financial condition. If we are not able
to
successfully compete in the marketplace, we could be forced to curtail or even
abandon our current business plan, which could cause any investment in us to
become worthless.
WE
MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR GROWTH, WHICH COULD LEAD TO OUR
INABILITY TO IMPLEMENT OUR BUSINESS PLAN.
Our
growth is expected to place a significant strain on our managerial, operational
and financial resources, especially considering that we currently only have
three Directors and a small number of executive officers and employees. Further,
as we enter into additional contracts, we will be required to manage multiple
relationships with various consultants, businesses and other third parties.
These requirements will be exacerbated in the event of our further growth or
in
the event that the number of our drilling and/or
extraction
operations increases. There can be no assurance that our systems, procedures
and/or controls will be adequate to support our operations or that our
management will be able to achieve the rapid execution necessary to successfully
implement our business plan. If we are unable to manage our growth effectively,
our business, results of operations and financial condition will be adversely
affected, which could lead to us being forced to abandon or curtail our business
plan and operations.
THE
PRICE OF OIL AND NATURAL GAS HAS HISTORICALLY BEEN VOLATILE AND IF IT WERE
TO
DECREASE SUBSTANTIALLY, OUR PROJECTIONS, BUDGETS, AND REVENUES WOULD BE
ADVERSELY EFFECTED, AND WE WOULD LIKELY BE FORCED TO MAKE MAJOR CHANGES IN
OUR
OPERATIONS.
Our
future financial condition, results of operations and the carrying value of
our
oil and natural gas properties depend primarily upon the prices we receive
for
our oil and natural gas production. Oil and natural gas prices historically
have
been volatile and likely will continue to be volatile in the future, especially
given current world geopolitical conditions. Our cash flows from operations
are
highly dependent on the prices that we receive for oil and natural gas. This
price volatility also affects the amount of our cash flows available for capital
expenditures and our ability to borrow money or raise additional capital. The
prices for oil and natural gas are subject to a variety of additional factors
that are beyond our control. These factors include:
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the level of consumer demand for oil and natural gas;
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the domestic and foreign supply of oil and natural gas;
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the ability of the members of the Organization of Petroleum Exporting
Countries ("OPEC") to agree to and maintain oil price and production
controls;
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the price of foreign oil and natural gas;
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domestic governmental regulations and taxes;
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the price and availability of alternative fuel sources;
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weather conditions;
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market uncertainty due to political conditions in oil and natural
gas
producing regions, including the Middle East; and
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worldwide economic conditions.
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These
factors as well as the volatility of the energy markets generally make it
extremely difficult to predict future oil and natural gas price movements with
any certainty. Declines in oil and natural gas prices would not only reduce
our
revenue, but could reduce the amount of oil and natural gas that we can produce
economically and, as a result, could have a material adverse effect upon our
financial condition, results of operations, oil and natural gas reserves and
the
carrying values of our oil and natural gas properties. If the oil and natural
gas industry experiences significant price declines, we may be unable to make
planned expenditures, among other things. If this were to happen, we may be
forced to abandon or curtail our business operations, which would cause the
value of an investment in us to decline in value, or become
worthless.
OUR
ESTIMATES OF RESERVES COULD HAVE FLAWS, OR MAY NOT ULTIMATELY TURN OUT TO BE
CORRECT OR COMMERCIALLY EXTRACTABLE AND AS A RESULT, OUR FUTURE REVENUES AND
PROJECTIONS COULD BE INCORRECT.
Estimates
of reserves and of future net revenues prepared by different petroleum engineers
may vary substantially depending, in part, on the assumptions made and may
be
subject to adjustment either up or down in the future. Our actual amounts of
production, revenue, taxes, development expenditures, operating expenses, and
quantities of recoverable oil and gas reserves may vary substantially from
the estimates. Oil and gas reserve estimates are necessarily inexact
and involve matters of subjective engineering judgment.
In
addition, any estimates of our future net revenues and the present value thereof
are based on assumptions derived in part from historical price and cost
information, which may not reflect current and future values, and/or other
assumptions made by us that only represent our best estimates. If these
estimates of quantities, prices and costs prove inaccurate, we may be
unsuccessful in expanding our oil and gas reserves base with our acquisitions.
Additionally, if declines in and instability of oil and gas prices occur, then
write downs in the capitalized costs associated with our oil and gas assets
may
be required. Because of the nature of the estimates of our reserves and
estimates in general, we can provide no assurance that additional or further
reductions to our estimated proved oil and gas reserves and estimated future
net
revenues will not be required in the future, and/or that our estimated reserves
will be present and/or commercially extractable. If our reserve estimates are
incorrect, the value of our common stock could decrease and we may be forced
to
write down the capitalized costs of our oil and gas properties.
OUR
OPERATIONS ARE HEAVILY DEPENDENT ON CURRENT ENVIRONMENTAL REGULATIONS, WHICH
WE
ARE UNABLE TO PREDICT, AND WHICH MAY CHANGE IN THE FUTURE, CAUSING US TO EXPEND
SUBSTANTIAL ADDITIONAL CAPITAL.
Public
interest in the protection of the environment has increased dramatically in
recent years. Our oil and natural gas production and our processing, handling
and disposal of hazardous materials, such as hydrocarbons and naturally
occurring radioactive materials (if any) are subject to stringent regulation.
We
could incur significant costs, including cleanup costs resulting from a release
of hazardous material, third-party claims for property damage and personal
injuries fines and sanctions, as a result of any violations or liabilities
under
environmental or other laws. Changes in or more stringent enforcement of
environmental laws could force us to expend additional operating costs and
capital expenditures to stay in compliance.
Various
federal, state and local laws regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment,
directly impact oil and gas exploration, development and production operations,
and consequently may impact our operations and costs. These regulations include,
among others, (i) regulations by the Environmental Protection Agency and various
state agencies regarding approved methods of disposal for certain hazardous
and
non-hazardous wastes; (ii) the Comprehensive Environmental Response,
Compensation, and Liability Act, Federal Resource Conservation and Recovery
Act
and analogous state laws which regulate the removal or remediation of previously
disposed wastes (including wastes disposed of or released by prior owners or
operators), property contamination (including groundwater contamination), and
remedial plugging operations to prevent future contamination; (iii) the Clean
Air Act and comparable state and local requirements which may result in the
gradual imposition of certain pollution control requirements with respect to
air
emissions from our operations; (iv) the Oil Pollution Act of 1990 which contains
numerous requirements relating to the prevention of and response to oil spills
into waters of the United States; (v) the Resource Conservation and Recovery
Act
which is the principal federal statute governing the treatment, storage and
disposal of hazardous wastes; and (vi) state regulations and statutes governing
the handling, treatment, storage and disposal of naturally occurring radioactive
material.
Management
believes that we are in substantial compliance with applicable environmental
laws and regulations. To date, we have not expended any material amounts to
comply with such regulations, and management does not currently anticipate
that
future compliance will have a materially adverse effect on our consolidated
financial position, results of operations or cash flows. However, if we are
deemed to not be in compliance with applicable environmental laws, we could
be
forced to expend substantial amounts to be in compliance, which would have
a
materially adverse effect on our financial condition. If this were to happen,
any investment in us could be lost.
THE
COMPANY HAS ESTABLISHED PREFERRED STOCK WHICH CAN BE DESIGNATED BY THE COMPANY'S
BOARD OF DIRECTORS WITHOUT SHAREHOLDER APPROVAL AND HAS ESTABLISHED SERIES
A
PREFERRED STOCK, WHICH GIVES THE HOLDERS MAJORITY VOTING POWER OVER THE
COMPANY.
The
Company has 1,000,000 shares of preferred stock authorized, and 1,000 shares
of
Series A Preferred Stock authorized. Shares of preferred stock of the Company
may be issued from time to time in one or more series, each of which shall
have
distinctive designation or title as shall be determined by the Board of
Directors of the Company ("Board of Directors") prior to the issuance of any
shares thereof. The preferred stock shall have such voting powers, full or
limited, or no voting powers, and such preferences and relative, participating,
optional or other special rights and such qualifications, limitations or
restrictions thereof as
adopted
by the Board of Directors. Because the Board of Directors is able to designate
the powers and preferences of the preferred stock without the vote of a majority
of the Company's shareholders, shareholders of the Company will have no control
over what designations and preferences the Company's preferred stock will have.
As a result of this, the Company's shareholders may have less control over
the
designations and preferences of the preferred stock and as a result the
operations of the Company.
THE
COMPANY HAS ESTABLISHED SERIES A PREFERRED STOCK, WHICH GIVES THE HOLDERS
MAJORITY VOTING POWER OVER THE COMPANY.
The
Company has 1,000 shares of Series A Preferred Stock authorized. All outstanding
shares of Series A Preferred stock, which are all currently held by Valeska
Energy Corp., the beneficial owner of which is William M. Simmons, the President
and Director of the Company, can vote in aggregate on all shareholder matters
equal to fifty-one percent (51%) of the total vote. For example, if there are
10,000,000 shares of the Company's common stock issued and outstanding at the
time of a shareholder vote, the holders of Series A Preferred Stock, voting
separately as a class, will have the right to vote an aggregate of 10,400,000
shares, out of a total number of 20,400,000 shares voting. Because of the shares
of Series A Preferred Stock, Valeska Energy Corp., will effectively exercise
voting control over the Company. As a result of this, the Company's shareholders
will have less control over the operations of the Company.
WILLIAM
M. SIMMONS, OUR PRESIDENT CAN EXERCISE VOTING CONTROL OVER CORPORATE
DECISIONS.
William
M. Simmons (through his personal beneficial ownership and through his voting
control over Valeska Energy Corp. (“Valeska”)) beneficially owns 27,200,000
shares of common stock, additionally; Valeska holds all 1,000 shares of our
outstanding shares of Series A Preferred Stock, which vote 240,584,407 voting
shares. As a result, Mr. Simmons is able to vote 266,784,407 voting
shares based on 471,734,131 voting shares outstanding (representing 231,149,724
shares of common stock outstanding and 240,584,407 shares of stock which the
Series A Preferred Stock are able to vote) representing 56.5% of our outstanding
voting shares. As a result, our Directors and officers will exercise control
in
determining the outcome of all corporate transactions or other matters,
including the election of directors, mergers, consolidations, the sale of all
or
substantially all of our assets, and also the power to prevent or cause a change
in control. The interests of Mr. Simmons, Mr. Vesco and Mr. Onat may differ
from
the interests of the other stockholders and thus result in corporate decisions
that are adverse to other shareholders.
THE
REMOVAL OF MR. VESCO AND MR. SIMMONS AS DIRECTORS OF THE COMPANY IS PROTECTED
BY
VOTING AGREEMENTS ENTERED INTO WITH THE COMPANY’S MAJORITY
SHAREHOLDERS.
Certain
of the Company’s majority shareholders, including Capersia Pte. Ltd., Lucayan
Oil and Gas Investments, Ltd., Frank A. Jacobs (the Company’s former Chief
Executive Officer and Director) and Valeska Energy, Inc. (the “Voting
Shareholders”) entered into Voting Agreements whereby they agreed that they
would not vote the aggregate of 71,874,000 shares of common stock which they
hold for (i.e. in favor of) the removal of Mr. Simmons or Mr. Vesco (the “New
Directors”) until the expiration of the agreements on June 5,
2009. The Voting Shareholders also agreed that in the event of any
shareholder vote of the Company (either by Board Meeting, a Consent to Action
without Meeting, or otherwise) relating to the removal of the New Directors;
the
re-election of the New Directors; and/or the increase in the number of directors
of the Company during the term of the Voting Agreements, that such Voting
Shareholders would vote their shares against the removal of the New Directors;
for the re-election of such New Directors; and/or vote against the increase
in
the number of directors of the Company, without the unanimous consent of the
New
Directors, respectively. The Voting Agreements also included a
provisions whereby in the event that either of the New Directors breaches his
fiduciary duty to the Company, including, but not limited to such New Director’s
conviction of an act or acts constituting a felony or other crime involving
moral turpitude, dishonesty, theft or fraud; such New Director’s gross
negligence in connection with his service to the Company as a Director and/or
in
any executive capacity which he may hold; and/or if any Voting Shareholder
becomes aware of information which would lead a reasonable person to believe
that such New Director has committed fraud or theft from the Company, or a
violation of the Securities laws (each a “Breach of Fiduciary Duty”),
this voting requirement set forth above shall not apply. As a result
of the Voting Agreements, it will likely be impossible for the shareholders
of
the Company to remove Mr. Simmons or Mr. Vesco as Directors of the Company,
unless a Breach of Fiduciary
Duty
occurs, and even then, due to Valeska’s ownership of the Series A Preferred
Stock (as described above), it will likely be impossible for such New Directors
to be removed as Directors of the Company.
THE
INTERESTS OF MR. SIMMONS AND MR. VESCO, OUR PRESIDENT AND CHIEF EXECUTIVE
OFFICER, RESPECTIVELY, MAY DIFFER FROM THE INTERESTS OF OUR OTHER SHAREHOLDERS,
AND THEY MAY ALSO COMPETE WITH THE COMPANY OR ENTER INTO TRANSACTIONS SEPARATE
FROM THE COMPANY.
Mr.
Simmons and Mr. Vesco, our President and Chief Executive Officer, respectively,
are involved in business interests separate from their involvement with the
Company, including but not limited to Valeska Energy Corp., which business
and/or companies may also operate in the oil and gas industry similar to and/or
in competition with the Company. Mr. Simmons and Mr. Vesco are under no
obligation to include us in any transactions which they undertake. As a result,
we may not benefit from connections they make and/or agreements they enter
into
while employed by us, and they, or companies they are associated with,
including, but not limited to Valeska, may profit from transactions which they
undertake while we do not. As a result, they may find it more
lucrative or beneficial to cease serving as officers or Directors of the Company
in the future and may resign from the Company at that time. Furthermore, while
employed by us, shareholders should keep in mind that they are under no
obligation to share their contacts and/or enter into favorable contracts and/or
agreements they may come across with the Company, and as a result may choose
to
enter into such contracts or agreements through companies which they own, which
are not affiliated with us, and from which we will receive no
benefit. Finally, certain of the agreements they may enter into
on our behalf may benefit them more than us, including, but not limited to
the
Management Agreement, which currently pays Valeska $10,000 per
month.
RISKS
RELATING TO THE COMPANY'S SECURITIES
A
DEFAULT BY US UNDER THE SECURED TERM NOTE, TEXHOMA WARRANT OR TEXAURUS WARRANT,
WOULD ENABLE LAURUS MASTER FUND, LTD., TO TAKE CONTROL OF SUBSTANTIALLY ALL
OF
OUR ASSETS.
The
Secured Term Note, Texhoma Warrant and Texaurus Warrant, are secured by Laurus
by a continuing security interest in all of our assets, including without
limitation, our cash, cash equivalents, accounts receivable, deposit accounts,
inventory, equipment, goods, fixtures and other tangible and intangible assets,
which we own or at any time in the future may acquire rights, title or interest
to. As a result, if we default under any provision of the Note, Texhoma Warrant
or Texaurus Warrant or we fail to pay any amounts due to Laurus, Laurus may
take
control of substantially all of our assets. If this were to happen, we could
be
left with no revenue producing assets, and the value of our common stock could
become worthless.
WE
MAY BE REQUIRED TO PAY PENALTIES TO LAURUS MASTER FUND, LTD. UNDER THE
REGISTRATION RIGHTS AGREEMENT, WHICH COULD FORCE US TO EXPEND A SUBSTANTIAL
AMOUNT OF THE MONEY WE HAVE PREVIOUSLY RAISED.
We
granted Laurus Master Fund, Ltd., registration rights to the shares issuable
to
Laurus in connection with the Texhoma Warrant, pursuant to a Registration Rights
Agreement, and we plan to register such shares pursuant to a Form SB-2
Registration Statement, once we become current in our filings with the
Commission. We agreed pursuant to the Registration Rights Agreement to use
our
best efforts to file the Registration Statement by May 29, 2006 (60 days after
the Closing) and to obtain effectiveness of such registration statement by
September 25, 2006 (180 days after the Closing), neither of which deadlines
we
have met. To date, Laurus has not contacted us regarding any potential defaults
under the Registration Rights Agreement, but if they contact us in the future,
and our failure to file and obtain effectiveness of the registration statement
is found to create a default under the Note, we could be forced to pay penalties
to Laurus. As a result, we could be forced to abandon or scale back our current
planned operations and/or raise additional capital, which could cause
substantial dilution to our existing shareholders.
THE
TEXHOMA WARRANT CONTAINS PROVISIONS WHEREBY LAURUS MASTER FUND, LTD. MAY HOLD
MORE THAN 4.99% OF OUR COMMON STOCK, PROVIDED THEY PROVIDE US SEVENTY-FIVE
(75)
DAYS NOTICE OR AN EVENT OF DEFAULT OCCURS.
Although
Laurus may not exercise its Texhoma Warrant if such exercise would cause it
to
own more than 4.99% of our outstanding common stock, the Texhoma Warrant also
contains provisions which provide for
the
4.99%
limit to be waived provided that Laurus provides us with 75 days notice of
its
intent to hold more than 4.99% of our common stock or upon the occurrence of
an
event of default (as defined under the Note). As a result, if we receive 75
days
notice from Laurus and/or an event of default occurs, Laurus may fully exercise
the Texhoma Warrant and fully convert the Texhoma Warrant into shares of our
common stock. If this were to happen, it would cause immediate and substantial
dilution to our existing shareholders and if it were to happen when our
Registration Statement covering Laurus' securities has been declared effective,
the subsequent sale of such shares in the marketplace, if affected, could cause
the trading value of our common stock, if any, to decrease
substantially.
IF
AN EVENT OF DEFAULT OCCURS UNDER THE NOTE, TEXHOMA WARRANT OR TEXAURUS WARRANT
OR ANY OF THE RELATED AGREEMENTS, WE COULD BE FORCED TO IMMEDIATELY PAY THE
AMOUNTS DUE UNDER THE NOTE.
The
Secured Term Note, Texhoma Warrant and Texaurus Warrant include provisions
whereby Laurus Master Fund, Ltd., may make the amounts outstanding under the
Note due and payable if an event of default occurs under the Note, which events
of default include:
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our
failure to pay amounts due under the
Note;
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breach
of any covenants under the Note, if not cured in the time periods
provided;
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breach
of any warranties found in the
Note;
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the
occurrence of any default under any agreement, which causes any contingent
obligation to become due prior to its stated maturity or to become
payable;
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any
change or occurrence likely to have a material adverse effect on
the
business, assets, liabilities, financial condition, our operations
or
prospects;
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an
indictment or other proceedings against us or any executive officer;
or
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a
breach by us of any provision of the Securities Purchase Agreement,
or any
other Related Agreement entered into in connection with the sale
of the
Notes.
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If
any
event of default were to occur under the Note and Laurus was to make the entire
amount of the Note immediately due and payable, and we did not have sufficient
funds on hand to pay such amounts, we could be forced to sell some or all of
our
assets at less than fair market value, and/or abandon or curtail our business
plan and operations.
THE
ISSUANCE OF COMMON STOCK IN CONNECTION WITH THE EXERCISE OF THE TEXHOMA WARRANT
WILL CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION.
Once
we
are able to file a registration statement covering the shares of common stock
issuable in connection with the exercise of the Texhoma Warrant, which we do
not
anticipate being able to file until such time as we are current in our filings,
the issuance of common stock upon exercise of the Texhoma Warrant will result
in
immediate and substantial dilution to the interests of other stockholders since
Laurus Master Fund, Ltd., may ultimately receive and sell the full amount
issuable on exercise of the Texhoma Warrant, which has an exercise price of
$0.04 per share, currently more than the average trading value of our common
stock during the past thirty days. Although Laurus may not exercise its warrant
if such conversion or exercise would cause it to own more than 4.99% of our
outstanding common stock (unless Laurus provides us 75 days notice and/or an
event of default occurs, this restriction does not prevent Laurus from
exercising some of its holdings, selling those shares, and then converting
the
rest of its holdings, while still staying below the 4.99% limit. In this way,
Laurus could sell more than this limit while never actually holding more shares
than this limit prohibits. If Laurus chooses to do this, it will likely cause
the value of our common stock to decline in value (if such common stock is
trading at more than $0.04 per share prior to such sales) and will likely also
cause substantial dilution to our common stock.
THE
MARKET FOR OUR COMMON STOCK MAY CONTINUE TO BE VOLATILE, ILLIQUID AND SPORADIC,
IF WE HAVE A MARKET AT ALL.
The
market for our common stock on the Pinksheets has historically been volatile,
illiquid and sporadic and we anticipate that such market, and the market for
our
common stock on the Over-The-Counter Bulletin Board (which we plan to trade
our
shares once we become current in our filings, of which there can be no
assurance) will continue to be subject to wide fluctuations in response to
several factors, including, but not limited to:
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(1)
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actual
or anticipated variations in our results of operations;
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(2)
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our
ability or inability to generate new revenues;
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(3)
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increased
competition; and
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(4)
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conditions
and trends in the oil and gas exploration industry and the market
for oil
and gas and petroleum based
products.
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Our
common stock is traded on the Pinksheets under the symbol "TXHE." In recent
years, the stock market in general has experienced extreme price fluctuations
that have oftentimes been unrelated to the operating performance of the affected
companies. Similarly, the market price of our common stock may fluctuate
significantly based upon factors unrelated or disproportionate to our operating
performance. These market fluctuations, as well as general economic, political
and market conditions, such as recessions, interest rates or international
currency fluctuations may adversely affect the market price of our common
stock.
INVESTORS
MAY FACE SIGNIFICANT RESTRICTIONS ON THE RESALE OF OUR COMMON STOCK DUE TO
FEDERAL REGULATIONS OF PENNY STOCKS.
Our
common stock will be subject to the requirements of Rule 15(g)9, promulgated
under the Securities Exchange Act as long as the price of our common stock
is
below $4.00 per share. Under such rule, broker-dealers who recommend low-priced
securities to persons other than established customers and accredited investors
must satisfy special sales practice requirements, including a requirement that
they make an individualized written suitability determination for the purchaser
and receive the purchaser's consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990, also requires
additional disclosure in connection with any trades involving a stock defined
as
a penny stock. Generally, the Commission defines a penny stock as any equity
security not traded on an exchange or quoted on NASDAQ that has a market price
of less than $4.00 per share. The required penny stock disclosures include
the
delivery, prior to any transaction, of a disclosure schedule explaining the
penny stock market and the risks associated with it. Such requirements could
severely limit the market liquidity of the securities and the ability of
purchasers to sell their securities in the secondary market. In addition,
various state securities laws impose restrictions on transferring "penny stocks"
and as a result, investors in the common stock may have their ability to sell
their shares of the common stock impaired.
Other
Considerations
There
are
numerous factors that affect our business and the results of its operations.
Sources of these factors include general economic and business conditions,
federal and state regulation of business activities, the level of demand for
the
Company’s product or services, the level and intensity of competition in the
industry and the pricing pressures that may result, the Company’s ability to
develop new services based on new or evolving technology and the market’s
acceptance of those new services, the Company’s ability to timely and
effectively manage periodic product transitions, and geographic sales mix of
any
particular period, and the ability to continue to improve infrastructure
including personnel and systems, to keep pace with the growth in its overall
business activities.