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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended July 31, 2014
 
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________________ To ______________________
 
Commission file number 333-171064
 
TEXAS SOUTH ENERGY, INC.
(Exact name of registrant as specified in its charter)
 
 
Nevada
99-0362471
(State or other jurisdiction of incorporation or
(I.R.S. Employer Identification No.)
organization)
 
   
   
3 Riverway, Suite 1800
Houston, Texas
77056
(Address of principal executive offices)
(Zip Code)
 
(713) 209-2950
(Registrant’s telephone number)
 
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was require to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [X]    No [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes [ ]   No [X]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [ X ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes [ ]   No [X]
 
As of September 17, 2014, the registrant’s outstanding common stock consisted of 362,215,670 shares.



 
 

 


TEXAS SOUTH ENERGY, INC.
TABLE OF CONTENTS


     
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements
Balance Sheets as of July 31, 2014 and October 31, 2013 (Unaudited)
Unaudited Statements of Operations and Comprehensive Income for the Three Months and Nine Months Ended July 31, 2014 and 2013, and From Inception (March 15, 2010) to July 31, 2014
Unaudited Statements of Cash Flows for the Nine Months Ended July 31, 2014 and 2013, and from Inception (March 15, 2010) to July 31, 2014
Unaudited Notes to Financial Statements
 
3
Item 2.
Management Discussion and Analysis of Financial Condition and Results of Operations
12
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
15
Item 4.
Controls and Procedures
15
     
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings
16
Item 2.
Unregistered Sales of Equity Securities
16
Item 3.
Defaults Upon Senior Securities
16
Item 4.
Mine Safety Disclosures
16
Item 5.
Other Information
16
Item 6.
Exhibits
16
Item 7.
Signatures
16
 
 
 
 
 



 
2

 

PART I – FINANCIAL INFORMATION
 
 
ITEM 1.  FINANCIAL STATEMENTS
 
 
The accompanying unaudited financial statements have been prepared in all material respects in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying unaudited financial statements have been prepared on the same basis as the financial statements for the year ended October 31, 2013.
 
Because certain information and footnote disclosures have been condensed or omitted, these unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto as of and for the year ended October 31, 2013, which are included in the Company’s annual report for the year ended October 31, 2013 (the “2013 Annual Report”). In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. Management believes that the disclosures made in these unaudited financial statements are adequate to make the information not misleading. Interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year.
 
There have been no changes in the Company’s significant accounting policies from those that were disclosed in the Company’s 2013 Annual Report.






 
3

 


TEXAS SOUTH ENERGY, INC.
(An Exploration Stage Company)
FINANCIAL STATEMENTS
July 31, 2014

 



UNAUDITED BALANCE SHEETS
Page F-2
   
UNAUDITED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Page F-3
   
UNAUDITED STATEMENTS OF CASH FLOWS
Page F-4
   
UNAUDITED NOTES TO FINANCIAL STATEMENTS
Page F-5













 
4

 


TEXAS SOUTH ENERGY, INC.
(An Exploration Stage Company)
BALANCE SHEETS
(Unaudited)

   
July 31,
2014
   
October 31,
2013
 
             
ASSETS
           
             
CURRENT ASSETS
           
Cash
 
$
345,379
   
$
374,086
 
Prepaid expenses
   
-
     
10,838
 
    Investment securities – available for sale
   
1,200,000
     
-
 
    Advances - mineral interests
   
8,200,000
     
-
 
TOTAL CURRENT ASSETS
   
9,745,379
     
384,924
 
                 
    Oil & Gas property
   
370,000
     
-
 
TOTAL ASSETS
 
$
10,115,379
   
$
384,924
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
                 
CURRENT LIABILITIES
               
Accounts payable and accrued expenses
 
$
126,619
   
$
3,057,921
 
Convertible Notes payable
    6,992,950      
-
 
Notes Payable (net debt discount of $58,367 and $0 as of July 31, 2014 and October 31, 2013)      976,633        -  
Due to related party (Note 8)
   
52,152
     
52,152
 
TOTAL CURRENT LIABILITIES
   
8,148,354
     
3,110,073
 
                 
COMMITMENTS AND CONTINGENCIES (Note 10)
               
                 
STOCKHOLDERS’ EQUITY (DEFICIT)
               
Common stock (Note 7)
               
    Authorized 950,000,000 shares of common stock, $0.001 par value, 
               
Issued and outstanding at July 31, 2014 and October 31, 2013
326,138,004 and 198,000,000 shares of common stock, respectively
   
326,138
     
198,000
 
Additional paid-in capital
   
6,053,851
     
(134,278
)
    Additional paid-in capital – shares to be issued
   
160,000
     
1,174,000
 
Accumulated other comprehensive income
   
932,000
     
-
 
Deficit accumulated during the exploration stage
   
(5,504,964
)
   
(3,962,871
)
Total stockholders’ equity (deficit)
   
1,967,025
     
(2,725,149
)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
$
10,115,379
   
$
384,924
 


The accompanying notes are an integral part of these financial statements



 
5

 
TEXAS SOUTH ENERGY, INC.
(An Exploration Stage Company)
UNAUDITED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
 
 
   
Three months ended July 31,
   
Nine months ended July 31,
   
Cumulative results from inception
(March 15, 2010) to July 31,
 
   
2014
   
2013
   
2014
   
2013
   
2014
 
EXPENSES
                             
                               
General and administrative expense
   
555,906
     
6,276
     
1,515,821
     
22,007
     
5,478,692
 
Interest expense
   
18,730
     
1,830
     
26,272
     
1,830
     
26,272
 
                                         
NET LOSS
   
(574,636
)
   
(8,106
)
   
(1,542,093
)
   
(23,837
)
   
(5,504,964
)
                                         
Other Comprehensive Income:
                                       
Unrealized gain on securities available for sale
   
600,000
     
-
     
932,000
     
-
     
932,000
 
Total Comprehensive Income (Loss)
 
$
25,364
   
$
(8,106
)
 
$
(610,093
)
 
$
(23,837
)
 
$
(4,572,964
)
                                         
NET LOSS PER COMMON SHARE - Basic and diluted
 
$
(0.00
)
 
$
(0.00
)
 
$
(0.01
)
 
$
(0.00
)
       
                                         
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
   
326,138,004
     
24,000,000
     
302,568,817
     
24,000,000
         

 
 
The accompanying notes are an integral part of these financial statements



 
6

 


TEXAS SOUTH ENERGY, INC.
(An Exploration Stage Company)
UNAUDITED STATEMENTS OF CASHFLOWS
(Unaudited)
 
   
Nine months ended July 31,
   
March 15,
 2010
(Inception)
to July 31,
 
   
2014
   
2013
   
2014
 
                         
Net loss
 
$
(1,542,093
)
 
$
(23,837
)
 
$
(5,504,964
)
Adjustments to reconcile net loss to net cash used in operating activities
                       
Non-cash interest
   
-
     
1,830
     
2,722
 
Stock compensation expense
   
-
     
-
     
23,000
 
Change in prepaid expenses
   
10,838
     
-
     
-
 
Change in accounts payable and accrued expenses
   
69,698
     
9,223
     
3,127,619
 
                         
NET CASH USED IN OPERATING ACTIVITIES
   
(1,461,557
)
   
(12,784
)
   
(2,351,623
)
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Purchase of marketable securities
   
(268,000
)
   
-
     
(268,000
)
Advances for mineral interests
   
(8,200,000
)
   
-
     
(8,200,000
)
Acquisition of oil and gas property
   
(270,000
)
   
-
     
(270,000
)
NET CASH USED IN INVESTING ACTIVITIES
   
(8,738,000
)
   
-
     
(8,738,000
)
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Proceeds from issuance of notes payable
   
8,027,950
     
-
     
8,027,950
 
Proceeds from sale of common stock (issued)
   
1,982,900
     
-
     
3,194,900
 
Proceeds from sale of common stock (to be issued)
   
160,000
     
-
     
160,000
 
Increase in due to related party
   
-
     
12,303
     
52,152
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
10,170,850
     
12,303
     
11,435,002
 
                         
NET INCREASE (DECREASE) IN CASH
   
(28,707
   
(481
   
345,379
 
                         
CASH, BEGINNING OF PERIOD
   
374,086
     
540
     
-
 
                         
CASH, END OF PERIOD
 
$
345,379
   
$
59
   
$
345,379
 
                         
Supplemental cash flow information and noncash financing activities:
                       
Cash paid for:
                       
                         
Interest
 
$
-
   
$
-
   
$
-
 
Income taxes
 
$
-
   
$
-
   
$
-
 
                         
Non-cash Activity:
                       
Issuance of shares for oil & gas property
 
$
100,000
   
$
-
   
$
100,000
 
Issuance of shares for accrued compensation
 
$
3,001,000
   
$
-
   
$
3,001,000
 
                         
Unrealized gain on securities
Available for sale
 
$
932,000
   
$
 -
   
$
932,000
 
 
 
The accompanying notes are an integral part of these financial statements

 
7

 


Texas South Energy, Inc.
(An Exploration Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
July 31, 2014
(UNAUDITED)
 
 
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Texas South Energy, Inc. (the “Company”) was incorporated pursuant to the laws of the State of Nevada on March 15, 2010.  The Company had initially intended to commence business operations by producing and performing traditional Peruvian dances both in Peru and the United States.  On September 24, 2013, there was a change in control of the Company.  The Company is engaged in the oil and gas business.
 
The Company is an exploration stage company that has limited operating history and has earned no revenues.  Since September 2013, the Company has devoted its activities to the acquisition of oil and gas assets. The Company is in the initial exploration stage and has incurred a net loss since inception of $5,504,964.

The Company has established a fiscal year end of October 31.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
The accompanying unaudited financial statements have been prepared in all material respects in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying unaudited financial statements have been prepared on the same basis as the financial statements for the year ended October 31, 2013.

Because certain information and footnote disclosures have been condensed or omitted, these unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto as of and for the year ended October 31, 2013, which are included in the Company’s annual report for the year ended October 31, 2013 (the “2013 Annual Report”). In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. Management believes that the disclosures made in these unaudited financial statements are adequate to make the information not misleading. Interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year.

There have been no changes in the Company’s significant accounting policies from those that were disclosed in the Company’s 2013 Annual Report.
 
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less at the time of issuance to be cash equivalents.

Investment Securities
Investment securities are composed of common stock of GulfSlope Energy, Inc. (“GulfSlope), and are classified as "available-for-sale" (see Note 8 below).  Available-for-sale securities are adjusted to their fair market value with unrealized gains and losses, net of tax, recorded as a component of accumulated other comprehensive income. Upon disposition of these investments, the specific identification method is used to determine the cost basis in computing realized gains or losses, which are reported in other income and expense. Declines in value that are judged to be other than temporary are reported in other comprehensive income and expense. During the nine months ended July 31, 2014, the Company recorded an unrealized gain of $932,000 to adjust the investment securities to fair market value.
 
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Basic and Diluted Net Loss per Share
The Company computes loss per share in accordance with ASC 260, “Earnings per Share”, which requires presentation of both basic and diluted earnings per share on the face of the statement of operations. Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of outstanding common shares during the period. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period.  Dilutive loss per share excludes all potential common shares if their effect is anti-dilutive. The Company has no potential dilutive instruments and accordingly basic loss and diluted loss per share are the same.
 
 
8

 
Fair Value
In accordance with the requirements of ASC 825 and ASC 820, the Company has determined the estimated fair value of financial instruments using available market information and appropriate valuation methodologies.  The fair value of financial instruments classified as current assets or liabilities approximate their carrying value due to the short-term maturity of the instruments.  

Income Taxes
The Company has adopted ASC 740 for reporting purposes.  As of July 31, 2014, the Company had net operating loss carry forwards of approximately $1,920,000 that may be available to reduce future years’ taxable income and will expire beginning in 2028.  Availability of loss usage is subject to change of ownership limitations under Internal Revenue Code 382.  Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the tax loss carryforwards.

Stock-based Compensation
The Company has not adopted a stock option plan and has not granted any stock options.  Common stock has been granted to third parties for services rendered (see Note 7).
 
In December 2004, the Financial Accounting Standards Board (“FASB”) issued ASC 718 "Compensation - Stock Compensation" and 505-50 “Equity-Based Payments to Non-Employees.”  This statement requires a public entity to expense the cost of services received in exchange for an award of equity instruments.  This statement also provides guidance on valuing and expensing these awards, as well as disclosure requirements of these equity arrangements.  The Company adopted ASC 718 and 505-50 upon creation of the company and expenses share based costs in the period incurred.

Accounting for Oil and Gas Properties
The Company utilizes the full cost method to account for its investment in oil and gas properties.  Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, professional fees incurred for the lease acquisitions, capitalized interest costs relating to properties, geological expenditures, and tangible and intangible development costs (including direct internal costs), are capitalized into the full cost pool. When the Company commences production from established proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, will be depleted on the units-of-production  method using estimates of proven reserves. Investments in unproved properties and major development projects, including capitalized interest if any, are not depleted until proven reserves associated with the projects can be determined.  If the future exploration of unproven properties is determined to be uneconomical, the amount of such properties is added to the capital costs to be depleted.  As of July 31, 2014, the Company's oil and gas properties consisted of capitalized acquisition costs for unproved mineral rights.

Recent Accounting Pronouncements
Management does not anticipate that any recently issued but not yet effective accounting pronouncements will materially impact the Company’s financial condition.
 
NOTE 3 – GOING CONCERN
 
The Company’s financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern.  This contemplates the realization of assets and the liquidation of liabilities in the normal course of business.  Currently, the Company does not have sufficient cash, nor does it have operations or a source of revenue sufficient to cover its operation costs and allow it to continue as a going concern.  The Company has accumulated a net loss since inception (March 15, 2010) through July 31, 2014, of $5,504,964.  The Company will be dependent upon the raising of additional capital through placement of our equity and/or debt securities in order to implement its business plan, or merge with an operating company.  There can be no assurance that the Company will be successful in either situation in order to continue as a going concern.  The Company is funding its initial operations by way of issuing common shares.  As of July 31, 2014, the Company had issued 326,138,004 shares of common stock at prices ranging from $0.003 to $0.05 per share, for net funds to the Company of $3,194,900.  These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.  These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
 
NOTE 4 – OIL & GAS PROPERTY

On January 22, 2014, the Company entered into a contract for sale with the owner of mineral interests in 86.69 acres in Lavaca County, Texas (the “Acreage”) pursuant to which the Company acquired a 37.5% interest in the Acreage’s mineral rights, including the oil and gas rights  (the “Acquired Interest”).  In exchange for the Acquired Interest, the Company paid the seller $270,000 in cash and issued the seller 2,000,000 shares of the Company’s common stock, valued at $100,000.

 
9

 
NOTE 5 – ADVANCES - MINERAL INTERESTS
 
On March 10, 2014, the Company entered into a farm out letter agreement with GulfSlope Energy, Inc. (“GulfSlope”), relating to five prospects (the “Prospects”) located within 2.2 million acres of 3D seismic licensed and interpreted by GulfSlope.  At the time the farm out agreement was entered into, the Company’s chief executive officer and sole director, Mr. Askew, was also a director of GulfSlope.  Mr. Askew resigned as a director of GulfSlope effective March 27, 2014.  Under the terms of the farm-out letter agreement, the Company may acquire up to a 20% working interest in the Prospects for up to $10,000,000 payable by the Company to GulfSlope. As of July 31, 2014, the Company had paid $8,200,000 of the $10,000,000 resulting in a farm-out investment asset of $8,200,000.  In addition, the Company has agreed to pay its proportionate share of the net rental costs related to the Prospects. GulfSlope will be the operator of record and shall have the right to negotiate all future joint operating agreements.
 
NOTE 6 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company adopted the FASB standard related to fair value measurement at inception. The standard defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. The standard applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. The standard clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The recorded values of long-term debt approximate their fair values, as interest approximates market rates. As a basis for considering such assumptions, the standard established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows.

Level 1. Observable inputs such as quoted prices in active markets;

Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company’s financial instruments are cash, accounts payable, and investment securities.  The recorded values of cash and accounts payable approximate their fair values based on their short-term nature.  The fair value of investment securities (common stock in GuflSlope) is based on 24 cents per share, derived from recent GulfSlope private placement financing transactions.  The GulfSlope common stock is thinly traded, resulting in the private placement transactions providing the most reliable measurement.

NOTE 7 – COMMON STOCK

On September 24, 2013, the Company issued 69,000,000 shares of common stock to James Askew, the Company’s chief executive officer and sole director, for services rendered.  The stock was valued at $23,000.

On October 4, 2013, the Company sold 105,000,000 shares of common stock at $0.0003 for $35,000 cash.

On October 7, 2013, the Company’s board of directors and majority shareholders approved increasing the number of the Company’s authorized common shares from 75,000,000 to 950,000,000, the authorization of 50,000,000 shares of blank check preferred stock, and effecting a 3-for-1 forward stock split of the Company’s common stock.  Pursuant to the 3-for-1 common stock split, the Company issued two additional shares of common stock for each issued share of the Company’s common stock outstanding prior to the forward split.  The 3-for-1 forward split became effective November 12, 2013.  The forward split has been shown retroactively. No preferred shares have been issued.

During October 2013, the Company received cash and subscriptions to purchase 23,480,004 shares of common stock at $0.05 per share for $1,174,000 cash.   The shares were unissued as of October 31, 2013, and were reflected in the financial statements as “Additional paid-in capital – shares to be issued”.  The shares were subsequently issued in November 2013.

During November 2013 through January 2014, the Company received cash and subscriptions to purchase 9,050,000 shares of common stock at $0.05 per share for $452,500 cash.  The shares were issued in February and March 2014.

During February and March 2014, the Company received cash of $1,530,400 for the sale of 30,608,000 shares of common stock at $0.05 per share.  

In April 2014, the Company received cash of $50,000 for the issuance of 250,000 shares at $0.20 per share.  The shares were unissued as of July 31, 2014, and are reflected in the financial statements as “Additional paid-in capital – shares to be issued”. 

In June 2014, the Company received cash of $110,000 for the issuance of 550,000 shares at $0.20 per share for $110,000.  The shares were unissued as of July 31, 2014 (issued in August 2014), and are reflected in the financial statements as “Additional paid-in capital – shares to be issued”. 

As of July 31, 2014, the Company has not granted any stock options.
 
 
10

 
NOTE 8 – RELATED PARTY TRANSACTIONS

As of July 31, 2014 and October 31, 2013 the Company had received advances from a prior director in the amount of $52,152. The amounts due to the related party remain outstanding, unsecured due on demand and non-interest bearing with no set terms of repayment.  Imputed interest of $2,722 was recorded as donated capital during the twelve months ended October 31, 2013.
 
On September 27, 2013, the Company entered into a one-year employment agreement with its director and chief executive officer James Askew.  The agreement provides for a one-time issuance of 69,000,000 shares of common stock, a $75,000 cash signing bonus, and $35,000 cash compensation per month.  Per the agreement, Mr. Askew was paid a $75,000 cash bonus in September 2013, and issued 69,000,000 shares of the Company’s common stock in September 2013.  The stock was valued at $23,000 based upon the Company’s recent stock sales.  In October 2013, the Company awarded a $600,000 cash bonus to Mr. Askew for his success in raising capital for the Company prior to October 31, 2013.  On March 17, 2014, the Company and Mr. Askew amended the employment agreement to extend the term for one year, expiring September 2015, and to provide that Mr. Askew is entitled to receive base compensation through the end of the term if such agreement is terminated prior to the end of the term.  On March 17, 2014, the Company also entered into an indemnification agreement with Mr. Askew tracking the statutory provisions of the Nevada Statutes.

On March 21, 2014, the Company acquired 5 million shares of restricted GulfSlope common stock from our sole officer and director James M. Askew for a purchase price of $268,000.  At the time of the acquisition, Mr. Askew was also a director of GulfSlope. Mr. Askew resigned as a director of GulfSlope effective March 27, 2014. During the nine months ended July 31, 2014, the Company recorded an unrealized gain of $932,000 to adjust the investment securities to fair market value.
 
NOTE 9 – NOTES PAYABLE
 
In connection with the Company’s funding obligations pursuant to the farm-out letter agreement (see Note 5 above), on March 10, 2014, the Company entered into a financing arrangement for up to $10,000,000 in connection with the issuance of 1% unsecured convertible promissory notes (the “Notes”), convertible into shares of the Company’s common stock at a conversion price of $0.20 per share. The conversion occurred in August 2014 (See Note 11 below– Subsequent Events). The Notes are governed by the note agreement (the “Note Agreement”) and accrue interest at 1% per annum. The principal and accrued but unpaid interest on the Notes automatically convert upon the Company’s receipt of the acquired working interest in the Prospects. If the Company receives less than its acquired working interest in the Prospects, then the principal and accrued but unpaid interest shall be automatically converted on a pro rata basis.  The noteholders have funded $6,992,950 as of July 31, 2014. 

Effective June 2014, Texas South Energy, Inc. entered into a subscription agreement with an accredited investor under which the Company issued (i) a promissory note in the original principal amount of $1,000,000, and (ii) a one-year warrant to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share with a fair value of $58,367.  The promissory note matures on June 30, 2015 and bears interest at a fixed rate of 10% per annum.

In June 2014, the Company entered into a non-convertible promissory note for $35,000. This note expired on August 15, 2014 (see Note 11).

NOTE 10 – COMMITMENTS AND CONTINGENCIES

On September 27, 2013, the Company entered into a one-year employment agreement with its director and chief executive officer James Askew.  Among other compensation (see Note 8 above), the agreement provides for $35,000 cash compensation per month.  On March 17, 2014, the Company and Mr. Askew amended the employment agreement to extend the term for one year, expiring September 2015, and to provide that Mr. Askew is entitled to receive base compensation through the end of the term if such agreement is terminated prior to the end of the term.  On March 17, 2014, the Company also entered into an indemnification agreement with Mr. Askew tracking the statutory provisions of the Nevada Statutes.
 
On October 11, 2013, the Company entered into a one-year consulting agreement with John B. Connally, III.  The agreement provides for a one-time issuance of 60,000,000 shares of common stock, valued at $3,000,000, $25,000 cash signing bonus, and $10,000 cash compensation per month. The stock was issued in November 2013.
 
NOTE 11 – SUBSEQUENT EVENTS
 
On August 21, 2014, in connection with the Company’s convertible note agreement, dated March 10, 2014, (see Note 9), the Company received notice of conversion from the holders of an aggregate principal amount of $6,992,950, plus accrued interest of $27,437 (the “Conversion”).  The holders converted the total outstanding principal and interest under the Note Agreement into 35,102,181 shares of common stock.  The Conversion extinguishes the Company’s obligations under the Note Agreement, including the promissory notes underlying the Note Agreement.

In August 2014, the Company issued 800,000 shares of common stock at $0.20 per share related to cash and subscriptions received in April and June 2014 (see Note 7 above).

As of July 31, 2014, the Company had a promissory note that was issued by the Company in June 2014 but expired on August 15, 2014. The proceeds of the note were then provided to the Company for the issuance of 175,485 shares of common stock at $.20 per share.

 
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ITEM 2.  MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with (i) the accompanying unaudited financial statements and notes thereto for the three and nine months ended July 31, 2013 and 2014, and with our financial statements and notes thereto for the year ended October 31, 2013 included in the Company’s Annual Report on Form 10-K (the “2013 Annual Report”) and (ii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2013 Annual Report.
 
Forward Looking Statements
 
This report on Form 10-Q contains certain forward-looking statements.  All statements other than statements of historical fact are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies, and objectives of management for future operation; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing. Such forward-looking statements are subject to inherent risks and uncertainties, and actual results could differ materially from those anticipated by the forward-looking statements.

Business Overview

Beginning in September 2013, we changed our business plan from performing traditional Peruvian dances to an oil and gas royalties and leasing company focused primarily on properties in the Gulf Coast Region.  We plan to obtain and manage:  (1) existing royalty interests; (2) mineral rights, which we intend to lease to oil and gas operators in exchange for a royalty payment, and (3) other passive interests or rights in oil and gas properties.  Our focus is on identifying and acquiring mineral rights and royalty interests, which we believe will generate royalty or other passive income without significant ongoing expense to the Company.

In January 2014, we acquired our first mineral interest, which consists of a 37.5% interest in mineral rights covering 86.69 acres in Lavaca County, Texas.  To date, no economically viable oil and gas reserves have been discovered on our acreage, and there is no assurance that viable oil and gas reserves will ever be discovered on our acreage.  We are an exploration stage company that has limited operating history and has earned no revenues.

We do not intend to engage in oil and gas exploration, development or production; instead we intend to lease any mineral rights we acquire to oil and gas operators granting them the right to explore, drill and produce oil and gas from the mineral rights in exchange for a royalty payment.  In addition to royalty payments, the leases will contain standard commercial terms.  At this time, we are subject to one outstanding lease on our current mineral rights.

Although we are not in the business of exploring, drilling and producing oil and gas, our business is still subject to multiple factors effecting the production of oil and gas, including, but not limited to:  market prices; national and international economic conditions; import and export quotas; availability of drilling rigs, casing, pipe, and other equipment and supplies; availability of and proximity to pipelines and other transportation facilities; the supply and price of competitive fuels; and the regulation of prices, production, transportation, and marketing by domestic and foreign governmental authorities.  Additionally, the Company generally will have no control over whether the owner or operator of the lease will elect to explore for oil and gas on such properties, or to develop them following discoveries that may occur. Each of these factors may affect the rate at which oil and gas are produced, if ever, on properties in which the Company has or may have an interest.
 
Finally, because we do not intend to drill, produce or operate oil and gas properties, we do not intend to bear ordinary production and operating costs and will have limited direct exposure to risk associated with exploring and producing oil and gas; instead, those costs and risks will likely be borne by the owner or operator of the lease.  However, our potential royalty revenues, if any, may be negatively affected by any decreases in the operator’s production volumes and revenues due to these risks.

Our Current Onshore Mineral Interests
 
In January 2014, we acquired a 37.5% interest in mineral rights covering 86.69 acres in Lavaca County.  Our acreage is included in the Eagle Ford Shale located in South Texas.  To date, no economically viable oil and gas reserves have been discovered on our acreage, and there is no assurance that viable oil and gas reserves will ever be discovered on our acreage.
 
Our mineral rights are currently subject to an existing oil, gas and mineral lease with an independent producer of oil and gas in the Eagle Ford Shale.  Pursuant to the lease, Texas South is entitled to a royalty payment equal to 37.5% of 0.1875% of the sale proceeds, if any, actually received from the production of oil and gas from our acreage.  As of July 31, 2014, no wells were drilled on the acreage and no definitive plans were announced as to when, if ever, the lessee would commence drilling on the acreage.  If the lessee does not produce oil or gas in paying quantities by December 2014, the lease will terminate.  If the lease expires, Texas South will seek to extend our current lease or lease the mineral rights to another oil and gas operator, but can be uncertain as to whether it will obtain a new lease or a new lease on favorable terms.

In addition, in connection with this acquisition, we acquired the right to lease 100% of the mineral rights underlying the 86.69 acres to any third party; so long as such lease requires a royalty payment of at least 1/6 of the oil and gas produced from the property to the owners of the mineral rights.  We believe this right will provide us with additional leverage entering into any potential future lease.
 
 
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Our Current Offshore Contractual Interests and Investment
 
On March 10, 2014, the Company entered into a farm out letter agreement with GulfSlope Energy, Inc. ("GulfSlope"), relating to five prospects (the "Prospects") located within 2.2 million acres of 3D seismic licensed and interpreted by GulfSlope.  Under the terms of the farm-out letter agreement, the Company may acquire up to a 20% working interest in the Prospects for up to $10,000,000 payable by the Company to GulfSlope.  As of July 31, 2014, the Company had funded $8,200,000.   In addition, the Company has agreed to pay its proportionate share of the net rental costs related to the Prospects.  GulfSlope will be the operator of record and shall have the right to negotiate all future joint operating agreements.  Mr. Askew is a beneficial owner of 8.8% of the common stock of GulfSlope and was a director of GulfSlope when the Company entered into the farm-out agreement.

Business and Acquisition Strategy

Our primary business strategy includes:

●   Continuing to grow our interests in mineral rights through additional investments in prospective property in the Eagle Ford Shale.    The Eagle Ford Shale is one of the fastest growing unconventional shale trends in North America.  The Eagle Ford Shale is a geological formation located in South Texas that lies directly beneath the Austin Chalk formation and above the Buda Limestone formation. It is considered to be the "source rock," or the original source of hydrocarbons that are contained in the Austin Chalk formation. The Eagle Ford Shale produces from various depths between 4,000 and 14,000 feet.  

●   Pursuing royalty opportunities.   We will consider opportunities to expand our interest through acquisitions of oil and gas reserves, existing royalty interests or other passive investments in oil and gas properties.  We will consider opportunities that we believe will maximize income from royalty based arrangements. We plan to pursue royalty opportunities that are complementary to our business plan.
 
●   Expand and diversify our interests to property located outside the Eagle Ford Shale, including in the Gulf of Mexico.   We intend to acquire interests in oil and gas properties throughout the Gulf Coast Region, including off-shore prospects.  We entered into a farm-out letter agreement with GulfSlope in March 2014.  We will consider acquisitions that serve as a platform for complementary acquisitions.

The cost of implementing the forgoing programs will depend on what oil and gas interests are identified and available on terms acceptable to us.  Even if we identify oil and gas interests that are available, the cost of pursuing and acquiring them could be significant. Our ability to pursue any such opportunities will be dependent on our ability to obtain financings through private equity, debt financings or agreements with joint venture partners. We can provide no assurance that we have the necessary cash available or will be able to successfully obtain the necessary financing or joint venture partners to pursue such opportunities.
 
We have incurred losses since our inception.  We rely upon the sale of our securities or loans from our President to fund our operations.  We are not involved in any bankruptcy, receivership or similar proceedings.

Liquidity and Capital Resources
 
As of July 31, 2014, we had cash of $345,379 and a working capital surplus of $1,597,025.  Our accumulated deficit from inception (March 15, 2010) to July 31, 2014 was $5,504,964.  Our net loss of $1,542,093 for the nine months ended July 31, 2014 was mostly funded by proceeds raised from equity financings since September 2013.  During the nine months ended July 31, 2014, our cash position decreased by $28,707.
 
In March 2014, the Company entered into a credit agreement to raise up to $10,000,000 in connection with the issuance of 1% unsecured convertible promissory notes (the “Notes”), convertible into shares of the Company’s common stock at a conversion price of $0.20 per share. The noteholders funded a principal amount of $6,992,950 as of July 31, 2014 and in August 2014, the principal amount and accrued interest on these notes were converted in the entirety into 35,102,181 shares of common stock.

Effective June 2014, Texas South Energy, Inc. entered into a subscription agreement with an accredited investor under which the Company issued (i) a promissory note in the original principal amount of $1,000,000, and (ii) a one-year warrant to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share with a fair value of $58,367.  The promissory note matures on June 30, 2015 and bears interest at a fixed rate of 10% per annum.

In August and September 2014, the Company issued 36,077,666 shares of common stock for aggregate gross consideration of $7,215,533.

We will need additional financing to carry out our business plan.  Obtaining additional financing will be subject to a number of factors including market conditions, investor acceptance of our business plan, and investor sentiment.  These factors may make the timing, amount, terms and conditions of additional financing unattractive or unavailable to us.  If we cannot raise additional funds, we will not be able to carry out our business plans and may cease operations.
 
 
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Results of Operations for the Three Months Ended July 31, 2014 Compared to the Three Months Ended July 31, 2013

We had no sales during the three month periods ended July 31, 2014 and July 31, 2013.  General and administrative expenses were $555,906 for the three months ended July 31, 2014, compared to $6,276 for the three months ended July 31, 2013.  The increase in general and administrative expenses of approximately $550,000 for the three months ended July 31, 2014 compared to the three months ended July 31, 2013 was primarily attributed to the significant business being conducted during this period, including an increase in consulting fees, legal and accounting professional fees, compensation expense and travel expenses.  Interest expense was $18,730 for the three months ended July 31, 2014, compared to $1,830 in the prior year.  The increase in interest expense is due to the convertible notes.

We had a net loss of $574,636 for the three months ended July 31, 2014, compared to $8,106 for the three months ended July 31, 2013.  The increase in net loss of approximately $567,000 was due to the increase in the aforementioned general and administrative expenses.
 
The basic and diluted net loss per share for the three months ended July 31, 2014 and 2013 was $0.00.
 
We recorded other comprehensive income of $600,000 for the three months ended July 31, 2014.  This represents an unrealized gain on the 5,000,000 shares of GulfSlope common stock our Company purchased from our sole officer and director James Askew in March 2014.  No other comprehensive income was recorded during the three months ended July 31, 2013.
 
As of July 31, 2014, the Company’s cash balance was $345,379, compared to a cash balance of $374,086 as of October 31, 2013. Total assets increased by $9,730,455 from October 31, 2013 to July 31, 2014. This increase is driven by the new farm out investment of $8,200,000 in March and June 2014. The increase is also attributable to the acquisition of $268,000 of restricted GulfSlope common stock in March 2014. In January 2014 we acquired a 37.5% interest in mineral rights in Lavaca County, Texas for $370,000, which included the oil and gas rights, in exchange $270,000 in cash and common stock valued at $100,000.
 
Results of Operations for the Nine Months Ended July 31, 2014 Compared to the Nine Months Ended July 31, 2013

We had no sales during the nine month periods ended July 31, 2014 and July 31, 2013.  General and administrative expenses were $1,515,821 for the nine months ended July 31, 2014, compared to $22,007 for the nine months ended July 31, 2013.  The increase in general and administrative expenses of approximately $1,494,000 for the nine months ended July 31, 2014 compared to the nine months ended July 31, 2013 was primarily attributed to the significant business being conducted during this period, including an increase in consulting fees, legal and accounting professional fees, compensation expense and travel expenses.  Interest expense was $26,272 for the nine months ended July 31, 2014, compared to $1,830 in the prior year.  The increase in interest expense is due to the debt associated with the farm-out agreement as outlined above.

We had a net loss of $1,542,093 for the nine months ended July 31, 2014, compared to $23,837 for the nine months ended July 31, 2013.  The increase in net loss of approximately $1,518,000 was due to the increase in the aforementioned general and administrative expenses.
 
The basic and diluted loss per share for the nine months ended July 31, 2014 and 2013 was $0.01 and $0.00, respectively.
 
We recorded other comprehensive income of $932,000 for the nine months ended July 31, 2014.  This represents an unrealized gain on the 5,000,000 shares of GulfSlope common stock our Company purchased from James Askew in March 2014.  No other comprehensive income was recorded during the nine months ended July 31, 2013.

Cash Flow from Operating Activities

Net cash used in operating activities increased by $1,448,773 from November 1, 2013 to July 31, 2014 compared to the period from November 1, 2012 to July 31, 2013. This increase is primarily due to the impact of normal general and administrative expenses incurred during the nine month period ended July 31, 2014 compared to July 31, 2013.
 
Cash Flow from Investing Activities

During the nine month period ended July 31, 2014, we used $270,000 cash to acquire mineral rights, $268,000 to acquire common stock in related party GulfSlope, and $8,200,000 to acquire up to a 20% working interest in various prospects in an agreement with GulfSlope.  During the nine months ended July 31, 2013, we used no cash in investing activities.
 
Cash Flow from Financing Activities

During the nine month period ended July 31, 2014, we received proceeds of $10,170,850 from financing activities compared with $12,303 during the nine month period ended July 31, 2013.  The increase is attributed to $2,142,900 cash received in the sale of the Company’s common stock and $8,027,950 of cash received for the convertible and non-convertible notes.
 
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Off-Balance Sheet Arrangements

As of July 31, 2014, we had no off balance sheet transactions that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of July 31, 2014, our exposure to market risk is limited. We do not expect unfavorable changes in concentration of credit risk and interest rates impacting our current balances as of July 31, 2014.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer (who also serves as our principal financial officer) of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the period covered by this Form 10-Q. Based upon that evaluation, our principal executive officer (who also serves as our principal financial officer) concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed by us under the Exchange Act is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

Our management, including our principal executive officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

Management’s Interim Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
 
Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting.
 
 
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PART II – OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
Management is not aware of any legal proceedings contemplated by any governmental authority or any other party against us.  None of our directors, officers or affiliates are (i) a party adverse to us in any legal proceedings, or (ii) have an adverse interest to us in any legal proceedings.  Management is not aware of any other legal proceedings that have been threatened against us.
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In connection with a private placement of our common stock, between May 1, 2014 and July 31, 2014, the Company sold an aggregate of 550,000 shares of its common stock at a purchase price of $0.20 per share receiving gross proceeds of $110,000.  The Company intends to use the proceeds from the private placement in connection with the acquisition of oil and gas interests and for general corporate purposes.
 
The issuance of the shares described above was made without registration under the Securities Act of 1933, as amended (the “Act”), in reliance on the exemptions provided by Section 4(a)(2) of the Act, Regulation D under the Act, Regulation S under the Act and in reliance on similar exemptions.  No advertising or general solicitation was made in connection with the sale and issuance of the Company’s common stock.
 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.  MINE SAFETY DISCLOSURES
 
None.
 
ITEM 5.  OTHER INFORMATION
 
None.

ITEM 6.  EXHIBITS

Exhibit
Exhibit
Number
Description
10.1(1)
Form of Subscription Agreement
31.1
Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14 or 15d-14 of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-101.INS
XBRL Instance Document
EX-101.SCH
XBRL Taxonomy Extension Schema
EX-101.CAL
XBRL Taxonomy Extension Calculation Linkbase
EX-101.LAB
XBRL Taxonomy Extension Label Linkbase
EX-101.PRE
XBRL Taxonomy Extension Presentation Linkbase
EX-101.DEF
XBRL Taxonomy Extension Definition Linkbase


SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.

   
TEXAS SOUTH ENERGY, INC. 
 
Date:  September 22, 2014
By:
/s/ James Askew
   
James Askew
   
President, Chief Executive Officer, Secretary
Treasurer, Chief Financial Officer
and Director


 
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