10-Q: TEXAS SOUTH ENERGY, INC.

(EDGAR Online via COMTEX) — 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, 2016 and 2015, and with our audited financial statements and notes thereto for the year ended October 31, 2015 included in the Company’s Annual Report on Form 10-K (the “2015 Annual Report”) and (ii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2015 Annual Report.

Forward Looking Statements

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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 working and non-working interests in oil and gas properties.

Although we are not currently 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, we may not have 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 we or may have an interest.

Our Current Mineral Interests

In May 2016, the Company entered into a letter agreement with and during the nine months ended July 31, 2016, paid $400,000 to GulfSlope for the right to enter into mutually agreeable future definitive agreements to provide for the participation by the Company in drilling one well on Vermilion Area, South Addition Block 378 (“Canoe Prospect”) and one well on Vermilion Area South Addition Block 375 (“Selectron Prospect”). In June 2016, EnerGulf Resources Inc. (“EnerGulf”) paid the Company $400,000 to participate in the Canoe Prospect and the Selectron Prospect. Subject to the negotiation of future definitive agreements with GulfSlope and EnerGulf and financing being raised by the Company, it is expected that GulfSlope shall commence operations for, and the Company and EnerGulf shall participate in, the drilling of the well in an approximate 5,000 MD/TVD “C” sand test surface and bottomhole location on each of the Canoe Prospect and Selectron Prospect.

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. 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 April 30, 2016, 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. Currently, one drilled well is producing. During the three and nine months ended July 31, 2016, the Company incurred revenues of $6,345 associated with these interests. During the three and nine months ended July 31, 2016, the Company recorded impairment expense of $200,000 associated with these interests. In June 2016, the Company sold these mineral interests to an affiliate of the Company, James M. Askew in exchange for Mr. Askew forgiving $170,000 of indebtedness owed by the Company to him.

In March 2014, we entered into a farm out letter agreement with GulfSlope, relating to certain prospects GulfSlope bid on at the Central Gulf of Mexico Lease Sale 231, located within 2.2 million acres of 3D seismic licensed and interpreted by GulfSlope. Under the terms of the farm-out letter agreement as amended in September 2015, we acquired contractual rights to a 20% working interest in six prospects for $10,000,000. We have agreed to pay our proportionate share of the net rental costs related to the prospects. GulfSlope is the operator of record and has 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 we entered into the farm-out agreement in March 2014.

Business and Acquisition Strategy

Our primary business strategy includes acquiring both working and non-working interests in oil and gas properties throughout the Gulf Coast Region and Texas, including offshore prospects. We will consider acquisitions that serve as a platform for complementary operations.

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 primarily upon the sale of our equity securities to fund operations.

Liquidity and Capital Resources

As of July 31, 2016, we had a cash balance of $57,338 and a working capital deficit of $504,535. Our accumulated deficit from inception (March 15, 2010) to July 31, 2016 was $8,189,837. For the three and nine months ended July 31, 2016, our net loss of $538,231 and $1,404,859, respectively, was mostly funded by proceeds raised from equity financings since September 2013. During the nine months ended July 31, 2016, our cash position increased by $55,203.

During the nine months ended July 31, 2016, we issued 177,275,000 shares of common stock, of which 133,225,000 shares were issued for cash in the amount of $263,500 and 16,550,000 shares were issued for services rendered valued at $0.02 per share and 27,500,000 shares were issued for the extinguishment of debt in the amount of $550,000.

We will need additional financing to carry out our business plan. Specifically, we will need cash to fund our obligations with respect to (i) drilling the Canoe Prospect and Selectron Prospect, both of which are subject to negotiation of acceptable participation agreements and joint operating agreements, amongst other conditions precedent, and (ii) funding our farm-out obligations with GulfSlope pursuant to our March 2014 farm-out letter agreement. 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.

Results of Operations for the Three months Ended July 31, 2016 compared to the Three months ended July 31, 2015

We incurred revenue of $482 and zero during the three months ended July 31, 2016 and 2015. General and administrative expenses were $292,938 for the three months ended July 31, 2016, compared to $147,457 for the three months ended July 31, 2015. Interest expense was $245,775 for the three months ended July 31, 2016, compared to $7,296 for the three months ended July 31, 2015. The increase in interest expense is due to an increase in the notes payable balances for the three months ended July 31, 2016 compared to the same period in the prior year.

We had a net loss of $538,231 for the three months ended July 31, 2016, compared to $154,753 for the three months ended July 31, 2015. The increase in net loss of approximately $383,478 was primarily due to the consideration given to secure the line of credit and an increase in interest expense and costs of procuring investments during the three months ended July 31, 2016.

The basic and diluted loss per share for the three months ended July 31, 2016 and 2015 was ($0.00).

During the three months ended July 31, 2016 and 2015, the Company recorded an unrealized loss of $0 and $250,000, respectively, to adjust the investment securities to fair market value. In February 2016, the Company sold 5,000,000 shares of GulfSlope common stock with a cost value of $268,000 for cash proceeds of $50,000 and recorded a realized loss of $218,000.

Results of Operations for the Nine months Ended July 31, 2016 compared to the Nine months ended July 31, 2015

We incurred revenue of $6,827 and zero during the nine months ended July 31, 2016 and 2015. General and administrative expenses were $656,792 for the nine months ended July 31, 2016, compared to $513,134 for the nine months ended July 31, 2015. The increase in general and administrative expenses is due primarily to the consideration given to secure the line of credit. Impairment expense was $200,000 for the nine months ended July 31, 2016 compared to $0 for the nine months ended July 31, 2015. Interest expense was $336,894 for the nine months ended July 31, 2016, compared to $36,479 for the nine months ended July 31, 2015. The increase in interest expense is due to an increase in the notes payable balances for the nine months ended July 31, 2016 compared to the same period in the prior year.

We had a net loss of $1,404,859 for the nine months ended July 31, 2016, compared to $549,613 for the nine months ended July 31, 2015.

The basic and diluted loss per share for the nine months ended July 31, 2016 and 2015 was ($0.00).

During the nine months ended July 31, 2016 and 2015, the Company recorded an unrealized loss of $185,000 and $700,000, respectively, to adjust the investment securities to fair market value. In February 2016, the Company sold 5,000,000 shares of GulfSlope common stock with a cost value of $268,000 for cash proceeds of $50,000 and recorded a realized loss of $218,000.

As of July 31, 2016, the Company’s cash balance was $57,338, compared to a cash balance of $2,135 as of October 31, 2015. Total assets decreased by $518,016 from October 31, 2015 to July 31, 2016. This decrease is primarily driven by the sale of the 5,000,000 shares of GulfSlope common stock in February 2016 that realized a loss of $218,000 and impairment expense of $200,000 recorded during the nine months ended July 31, 2016 associated with the Company’s oil and gas assets.

Off-Balance Sheet Arrangements

As of July 31, 2016, 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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