Form 10KSB for TEXHOMA ENERGY INC
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21-Aug-2007
Annual Report
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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.
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RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005 COMPARED TO THE FISCAL YEAR ENDED SEPTEMBER 30, 2004
We had no revenues for the years ended September 30, 2004 or September 30, 2005.
We had oil and gas exploration expenses of $1,709,441 for the year ended September 30, 2005, compared to $0 for the year ended September 30, 2004. The oil and gas exploration expenses were in connection with the Company's acquisition of Black Swan in November 2004, and subsequent exploration expenses in connection with Black Swan.
We had total general and administrative expenses of $1,122,805 for the year ended September 30, 2005, compared to $3,222,977 for the year ended September 30, 2004, a decrease of $2,100,172 or 65.2% from the prior period. The decrease in general and administrative expenses was in connection with our change in business focus to an oil and gas exploration company during the year ended September 30, 2005, and reduced expenses therewith.
We had a net loss of $2,832,246 for the year ended September 30, 2005, compared to a net loss of $3,222,977 of net loss for the year ended September 30, 2004, a decrease in net loss of $390,731 or 12% from the prior period. The main reason for the decrease in net loss was the $2,100,172 decrease in general and administrative expenses in connection with the change in business focus to an oil and gas exploration company, offset by the $1,709,441 increase in oil and gas exploration expenses for the year ended September 30, 2005, compared to the year ended September 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2005, we had total assets of $149,805, consisting of cash of $149,805.
We had total liabilities, consisting solely of current liabilities as of September 30, 2005 of $1,194,958, which included accounts payable of $27,449, accrued expenses of $122,509 and notes payable due to affiliates of $1,045,000, which notes were payable to Capersia, LOGI and MFS Technology.
We had negative working capital of $1,045,153 and a retained deficit of $7,374,759 as of September 30, 2005.
For the year ended September 30, 2005, we had cash used in operating activities of $100,195, which was mainly due to stock issued for services of $1,045,012 in connection with the settlement of debt owed to a former director and consultant and $1,709,441 of oil and gas exploration costs, offset by net loss of $2,832,246.
We had net cash used in investing activities for the year ended September 30, 2005, which was solely due to $1,395,000 invested in the joint venture which amount was later acquired by Lucayan Oil & Gas Investments and converted to shares at $0.04 per share, as described above.
We received $1,645,000 in cash provided by financing activities for the year ended September 30, 2005, through the $1,045,000 of loans from affiliates, which amount was loaned to us by Capersia, LOGI and MFS Technology, and $600,000 of proceeds from the sale of common stock in connection with:
· The March 8, 2005, sale of 2,000,000 shares of common stock in connection with a private placement at $0.10 share for which the Company received $200,000; and
· The December 2005, sale of an aggregate of 4,000,000 in shares of common stock to two entities in connection with a private placement at $0.10 share for which the Company received $400,000.
FUNDING TRANSACTIONS:
In March 2006, our wholly owned Subsidiary Texaurus entered into a Securities Purchase Agreement with Laurus Master Fund, Ltd. ("Laurus"), whereby Texaurus sold a Secured Term Note in the amount of $8,500,000 to Laurus.
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Texaurus subsequently used all but approximately $218,000 to fund the acquisition of Little White Lake Property and Kilrush Properties, with the remaining amount going into a restricted account for use only by Texaurus in connection with further development of the properties held by Texaurus.
In March 2006, we raised $300,000 from the sale of 7,500,000 shares of our common stock, which shares were sold at $0.04 per share, to our former Chief Executive Officer and former Director, Frank Jacobs.
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 do not generate the amount of revenues from our oil and gas properties which we anticipate, and/or we 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 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.
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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. 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 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 10.25% per year (as of July 24, 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.
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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.
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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.
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THE MARKET FOR OIL AND GAS IS INTENSELY COMPETITIVE, AND AS SUCH, COMPETITIVE PRESSURES COULD FORCE US TO ABANDON OR CURTAIL OUR BUSINESS PLAN.
The market for oil and gas exploration services is highly competitive, and we only expect competition to intensify in the future. Numerous well-established companies are focusing significant resources on exploration and are currently competing with us for oil and gas opportunities. Additionally, there are numerous companies focusing their resources on creating fuels and/or materials which serve the same purpose as oil and gas, but are manufactured from renewable resources. As a result, there can be no assurance that we will be able to compete successfully or that competitive pressures will not adversely affect our business, results of operations and financial condition. If we are not able to successfully compete in the marketplace, we could be forced to curtail or even abandon our current business plan, which could cause any investment in us to become worthless.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR GROWTH, WHICH COULD LEAD TO OUR INABILITY TO IMPLEMENT OUR BUSINESS PLAN.
Our growth is expected to place a significant strain on our managerial, operational and financial resources, especially considering that we currently only have three Directors and a small number of executive officers and employees. Further, as we enter into additional contracts, we will be required to manage multiple relationships with various consultants, businesses and other third parties. These requirements will be exacerbated in the event of our further growth or in the event that the number of our drilling and/or extraction operations increases. There can be no assurance that our systems, procedures and/or controls will be adequate to support our operations or that our management will be able to achieve the rapid execution necessary to successfully implement our business plan. If we are unable to manage our growth effectively, our business, results of operations and financial condition will be adversely affected, which could lead to us being forced to abandon or curtail our business plan and operations.
THE PRICE OF OIL AND NATURAL GAS HAS HISTORICALLY BEEN VOLATILE AND IF IT WERE TO DECREASE SUBSTANTIALLY, OUR PROJECTIONS, BUDGETS, AND REVENUES WOULD BE ADVERSELY EFFECTED, AND WE WOULD LIKELY BE FORCED TO MAKE MAJOR CHANGES IN OUR OPERATIONS.
Our future financial condition, results of operations and the carrying value of our oil and natural gas properties depend primarily upon the prices we receive for our oil and natural gas production. Oil and natural gas prices historically have been volatile and likely will continue to be volatile in the future, especially given current world geopolitical conditions. Our cash flows from operations are highly dependent on the prices that we receive for oil and natural gas. This price volatility also affects the amount of our cash flows available for capital expenditures and our ability to borrow money or raise additional capital. The prices for oil and natural gas are subject to a variety of additional factors that are beyond our control. These factors include:
o the level of consumer demand for oil and natural gas;
o the domestic and foreign supply of oil and natural gas;
o the ability of the members of the Organization of Petroleum Exporting Countries ("OPEC") to agree to and maintain oil price and production controls;
o the price of foreign oil and natural gas;
o domestic governmental regulations and taxes;
o the price and availability of alternative fuel sources;
o weather conditions;
o market uncertainty due to political conditions in oil and natural gas producing regions, including the Middle East; and
o 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 . . .
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