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EX-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 - Texas South Energy, Inc.ex32-1.htm
EXCEL - IDEA: XBRL DOCUMENT - Texas South Energy, Inc.Financial_Report.xls
EX-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 - Texas South Energy, Inc.ex31-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended January 31, 2015
 
[  ] 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 March 16, 2015, 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 January 31, 2015 and October 31, 2014 (unaudited)
Unaudited Statements of Operations and Comprehensive Income for the Three Months Ended January 31, 2015 and 2014
Unaudited Statements of Cash Flows for the Three Months Ended January 31, 2015 and 2014
Unaudited Notes to Financial Statements
3
Item 2.
Management Discussion And Analysis Of Financial Condition and Results of Operations
4
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
7
Item 4.
Controls And Procedures
7
     
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings
8
Item 2.
Unregistered Sales Of Equity Securities
8
Item 3.
Defaults Upon Senior Securities
8
Item 4.
Mine Safety Disclosures
8
Item 5.
Other Information
8
Item 6.
Exhibits
9
Item 7.
Signatures
9
 
 
 
 
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 audited financial statements for the year ended October 31, 2014.
 
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, 2014, which are included in the Company’s annual report for the year ended October 31, 2014 (the “2014 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 2014 Annual Report.
 
 
3

 

 
TEXAS SOUTH ENERGY, INC.
FINANCIAL STATEMENTS
January 31, 2015

 



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

 
 

 
F - 1

 
 
TEXAS SOUTH ENERGY, INC.
BALANCE SHEETS
(Unaudited)



   
January 31,
2015
   
October 31,
2014
 
ASSETS
           
             
CURRENT ASSETS
           
Cash
 
$
7,137
   
$
84,482
 
Investment securities – available for sale
   
525,000
     
950,000
 
Advances – mineral interests
   
8,200,000
     
8,200,000
 
TOTAL CURRENT ASSETS
   
8,732,137
     
9,234,482
 
                 
Oil & Gas property
   
370,000
     
370,000
 
TOTAL ASSETS
 
$
9,102,137
   
$
9,604,482
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES                
Accounts payable and accrued liabilities
 
$
160,027
   
$
124,347
 
Accounts payable – related party
   
70,000
     
-
 
Accrued expenses
   
27,542
     
27,542
 
Notes payable
(net debt discount of $21,887 and $36,479 as of January 31, 2015 and October 31, 2014, respectively)
   
 
978,113
     
 
963,521
 
Due to related party
   
52,152
     
52,152
 
TOTAL CURRENT LIABILITIES
   
1,287,834
     
1,167,562
 
                 
 COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock
   
     
 
    50,000,000 shares preferred stock authorized, none issued and outstanding
               
Common stock
               
950,000,000 shares common stock authorized, $0.001 par value, 362,215,670 shares of common stock issued and outstanding 
   
362,215
     
362,215
 
Additional paid-in capital
   
13,231,996
     
13,231,996
 
Accumulated other comprehensive income
   
257,000
     
682,000
 
Accumulated deficit
   
(6,036,908
)
   
(5,839,291
)
Total stockholders’ equity
   
7,814,303
     
8,436,920
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
9,102,137
   
$
9,604,482
 
 
The accompanying notes are an integral part of these financial statements

 
F - 2

 

TEXAS SOUTH ENERGY, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
 
   
Three months ended
 
   
January 31,
 2015
   
January 31,
2014
 
             
EXPENSES
           
             
General and administrative expenses
 
$
183,025
   
$
364,078
 
Interest expense
   
14,592
     
  -
 
                 
NET LOSS
   
(197,617
)
   
(364,078
)
                 
Other comprehensive loss:
               
Unrealized loss on securities available for sale
   
(425,000
)
   
-
 
Total comprehensive loss
 
$
(622,617
)
 
$
(364,078
)
                 
NET LOSS PER COMMON SHARE
               
Basic and diluted
 
$
(0.00
)
 
$
(0.00
)
                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
               
Basic and diluted
   
362,215,670
     
269,333,481
 

 
 The accompanying notes are an integral part of these financial statements
 
 
F - 3

 
 
TEXAS SOUTH ENERGY, INC.
STATEMENTS OF CASHFLOWS
(Unaudited )
 
             
     Three months ended  
   January 31, 2015      January 31, 2014
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
 
$
(197,617
)
 
$
(364,078
)
Adjustments to reconcile net loss to net cash used in operating activities
               
Amortization of debt discount
   
14,592
     
-
 
Change in prepaid expenses
   
-
     
10,838
 
Change in accounts payable and accrued expenses
   
               35,680
     
(35,294
)
Change in accounts payable – related party
   
               70,000
     
-
 
NET CASH USED IN OPERATING ACTIVITIES
   
 (77,345
)
   
(388,534
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Acquisition of oil and gas property
   
-
     
(270,000
)
NET USED IN INVESTING ACTIVITIES
   
-
     
(270,000
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from issuance of notes payable
   
-
     
                         -
 
Proceeds from sale of common stock (to be issued)
   
                         -
     
452,500
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
-
     
452,500
 
                 
NET DECREASE IN CASH
   
 (77,345
)
   
(206,034
)
                 
CASH, BEGINNING OF PERIOD
   
              84,482
     
374,086
 
                 
CASH, END OF PERIOD
 
$
7,137
   
$
168,052
 
                 
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
 
Issuance of shares for accrued compensation
 
$
-
   
$
3,001,000
 
                 
Unrealized loss on securities:
               
Available for sale
 
$
425,000
   
$
-
 
 
The accompanying notes are an integral part of these financial statements

 
F - 4

 

Texas South Energy, Inc.
NOTES TO THE FINANCIAL STATEMENTS
January 31, 2015
(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 losses since inception of $6,036,908.

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 audited financial statements for the year ended October 31, 2014.

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, 2014, which are included in the Company’s annual report for the year ended October 31, 2014 (the “2014 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 2014 Annual Report.
 
Use of Estimates and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that such estimates are reasonable when considered in conjunction with the financial position and results of operations taken as a whole, actual results could differ from those estimates, and such differences may be material to the financial statements.

Basic and Diluted Net Loss per Share
The Company computes loss per share in accordance with ASC 260, “Earnings per Share” which requires presentation of both basic and diluted earnings per share on the face of the statement of operations. Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of outstanding common shares during the period. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period.  Dilutive loss per share excludes all potential common shares if their effect is anti-dilutive. The Company has no potential dilutive instruments and accordingly basic loss and diluted loss per share are the same.
 
 
F - 5

 

Recent Accounting Pronouncements
The Company has elected to adopt early application of Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements; it no longer presents or discloses inception-to-date information and other remaining disclosure requirements of Topic 915.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. Because the Company has no revenues, the new guidance is not expected to have a material impact on its financial statements and related disclosures.
 
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”), which eliminates the deferral of FAS 167 and makes changes to both the variable interest model and the voting model. These changes will require re-evaluation of certain entities for consolidation and will require the Company to revise its documentation regarding the consolidation or deconsolidation of such entities. ASU 2015-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, and is to be applied retrospectively, with early adoption permitted. The new guidance is not expected to have a material impact on its financial statements and related disclosures.

Management does not anticipate that the recently issued but not yet effective accounting pronouncements will materially impact the Company’s financial condition.

NOTE 3 – GOING CONCERN
 
The Company’s financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern.  This contemplates the realization of assets and the liquidation of liabilities in the normal course of business.  Currently, the Company does not have sufficient cash, nor does it have operations or a source of revenue sufficient to cover its operation costs and allow it to continue as a going concern.  The Company has accumulated losses since Inception (March 15, 2010) through January 31, 2015, of $6,036,908.  The Company will be dependent upon the raising of additional capital through placement of our common and/or preferred stock in order to implement its business plan, or merge with an operating company.  There can be no assurance that the Company will be successful in either situation in order to continue as a going concern.  The Company is funding its initial operations by way of issuing common shares. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.  These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
 

 
F - 6

 
 
NOTE 4 – OIL & GAS PROPERTY

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

NOTE 5 – 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 January 31, 2015, 2014, the Company had paid $8,200,000 of the $10,000,000 resulting in a farm-out investment asset of $8,200,000.  The transfer of the contractual rights to the working interests is expected to occur in 2015.  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.

 
 
 
 
 
 
 
 
 
 
F - 7

 

NOTE 6 – RELATED PARTY TRANSACTIONS
 
As of January 31, 2015 and October 31, 2014 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. 
 
On September 27, 2013, the Company entered into a one-year employment agreement with its director and chief executive officer James Askew. The agreement provided for a one-time issuance of 69,000,000 shares of common stock, $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. As of January 31, 2015, the Company owed $70,000 to James Askew pursuant to his employment agreement.

On March 21, 2014, the Company acquired five 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 three months ended January 31, 2015, the Company recorded an unrealized loss of $425,000 to adjust the investment securities to fair market value.

 NOTE 7 – NOTES PAYABLE

In connection with the Company’s funding obligations pursuant to the farm-out letter agreement (see Note 5 – Advances – Mineral Interests 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. The holders converted the total outstanding principal amount of $6,992,950 and accrued interest of $27,437 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. 
 
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 when proceeds of the note were then provided to the Company for the issuance of 175,485 shares of common stock at $.20 per share.

NOTE 8 – FAIR VALUE OF FINANCIAL INSTRUMENTS

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 Company’s Level 2 asset consists of investment securities. The fair value of investment securities (common stock in GulfSlope) is based on $0.105 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 9 – COMMITMENTS AND CONTINGENCIES
 
In September 2013, the Company entered into a one-year employment arrangement with its director and chief executive officer James Askew.  Among other compensation (see Note 6 – Related Party Transactions 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.

 
F - 8

 

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 months ended January 31, 2014 and 2015, and with our audited financial statements and notes thereto for the year ended October 31, 2014 included in the Company’s Annual Report on Form 10-K (the “2014 Annual Report”) and (ii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2014 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 company focused primarily on properties in the Gulf Coast Region.   We plan to obtain and manage:  (1) existing royalty interests and other passive interests or rights in oil and gas properties; (2) mineral rights, which we intend to lease to oil and gas operators in exchange for a royalty payment, and (3) working interests in oil and gas properties.
 
 
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.
 
Our Current Onshore Mineral Interests
 
In January 2014, we acquired a 37.5% interest in mineral rights covering 86.69 acres in Lavaca County.  Our acreage is included in the Eagle Ford Shale located in South Texas.  To date, no economically viable oil and gas reserves have been discovered on our acreage, and there is no assurance that viable oil and gas reserves will ever be discovered on our acreage.
 
Our mineral rights are currently subject to an existing oil, gas and mineral lease with an independent producer of oil and gas in the Eagle Ford Shale.  Pursuant to the lease, Texas South is entitled to a royalty payment equal to 37.5% of 0.1875% of the sale proceeds, if any, actually received from the production of oil and gas from our acreage.  As of January 31, 2015, one well has been drilled on the acreage and no definitive plans were announced as to when, if ever, the lessee would commence drilling on the remaining acreage. The lease on the undrilled acreage expired in December 2014. The results of the drilled well are not yet known. 

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 holders of the mineral rights.   We believe this right may provide us with additional leverage when entering into any potential future leases.
 
            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 GulfSlope bid on at the Central Gulf of Mexico Lease Sale 231 conducted by the BOEM, of which four of the prospects were awarded to GulfSlope. These prospects are 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 January 31, 2015, the Company had funded $8,200,000. The transfer of the contractual rights to the working interests is expected to occur in 2015.  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 in excess of 5% of the common stock of GulfSlope and was a director of GulfSlope when the Company entered into the farm-out agreement.

 
4

 
 
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.

·           Expanding and diversifying our interests to property located outside the Eagle Ford Shale.  We intend to acquire both working and non-working 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 and expect to incur losses in future periods.  We rely upon the sale of our securities or loans from our President to fund our operations.  We are not involved in any bankruptcy, receivership or similar proceedings.

Liquidity and Capital Resources

As of January 31, 2015, we had a cash balance of $7,137 and a working capital surplus of $7,444,303.  Our accumulated deficit from inception (March 15, 2010) to January 31, 2015 was $6,036,908.  Our net loss of $197,617 for the three months ended January 31, 2015 was mostly funded by proceeds raised from equity financings since September 2013.  During the three months ended January 31, 2015, our cash position decreased by $77,345.
 
We will need additional financing to carry out our business plan.  Obtaining additional financing will be subject to a number of factors including market conditions, investor acceptance of our business plan, and investor sentiment.  These factors may make the timing, amount, terms and conditions of additional financing unattractive or unavailable to us.  If we cannot raise additional funds, we will not be able to carry out our business plans and may cease operations.
 
 
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Results of Operations for the Three months Ended January 31, 2015 compared to the Three months ended January 31, 2014

We had no sales during the three month periods ended January 31, 2015 and January 31, 2014.  General and administrative expenses were $183,025 for the three months ended January 31, 2015, compared to $364,078 for the three months ended January 31, 2014.  The decrease in general and administrative expenses of approximately $181,000 for the three months ended January 31, 2015 compared to the three months ended January 31, 2014 was primarily attributed to a decrease in consulting fees and travel expense. Interest expense was $14,592 for the three months ended January 31, 2015, compared to $0 in the prior period. The increase in interest expense is due to amortization of the debt discount associated with the notes payable.

We had a net loss of $197,617 for the three months ended January 31, 2015, compared to $364,078 for the three months ended January 31, 2014.  The decrease in net loss of approximately $166,000 was due to the decrease in aforementioned general and administrative expenses.

The basic and diluted loss per share for the three months ended January 31, 2015 and 2014 was $0.00.

We recorded other comprehensive loss of $425,000 for the three months ended January 31, 2015.  This represents an unrealized loss 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 January 31, 2014.
 
As of January 31, 2015, the Company’s cash balance was $7,137, compared to a cash balance of $84,482 as of October 31, 2014.  Total assets decreased by $502,345 from October 31, 2014 to January 31, 2015. This decrease is driven by less cash on hand at January 31, 2015 and the unrealized loss of $425,000 recorded in the three months ended January 31, 2015.

Cash flow from Operating Activities

During the three months ended January 31, 2015, we used cash of $77,345 for operating activities as compared to cash of $388,534 used during the three months ended January 31, 2014.  The decrease in cash used for operating activities during the period was primarily due the impact of normal general and administrative expenses incurred during the three month period ended January 31, 2015 compared to January 31, 2014.

Cash flow from Investing Activities

During the three months ended January 31, 2015, we used no cash in investing activities.  During the three months ended January 31, 2014, we used $270,000 to acquire mineral rights.

Cash flow from Financing Activities

During the three months ended January 31, 2015, we received no cash related to financing activities. During the three months ended January 31, 2014 we received proceeds of $452,500 from the issuance of common stock.
  
Off-Balance Sheet Arrangements

As of January 31, 2015, we had no off balance sheet transactions that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


 
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of January 31, 2015, 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 January 31, 2015.

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

None.
 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.  MINE SAFETY DISCLOSURES
 
None.
 
ITEM 5.  OTHER INFORMATION
 
None.
 

 
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ITEM 6.  EXHIBITS

Exhibit Number
Exhibit Description
31.1
Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14 or 15d-14 of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-101.INS
XBRL Instance Document
EX-101.SCH
XBRL Taxonomy Extension Schema
EX-101.CAL
XBRL Taxonomy Extension Calculation Linkbase
EX-101.LAB
XBRL Taxonomy Extension Label Linkbase
EX-101.PRE
XBRL Taxonomy Extension Presentation Linkbase
EX-101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.


 
 
TEXAS SOUTH ENERGY, INC. 
 
Date:  March 16, 2015
By:
/s/ James Askew
   
James Askew
   
Chief Executive Officer,
Principal Financial Officer, and Sole Director
 
 
 
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