Notes
to Condensed Financial Statements
June 30, 2017
(Unaudited)
NOTE
1 – ORGANIZATION AND NATURE OF BUSINESS
GulfSlope
Energy, Inc. (the “Company,” “GulfSlope,” “our” and words of similar import), a Delaware corporation,
is an independent crude oil and natural gas exploration and production company whose interests are concentrated in the United
States Gulf of Mexico (“GOM”) federal waters offshore Louisiana. The Company currently has under lease eleven federal
Outer Continental Shelf blocks (referred to as “prospect,” “portfolio” or “leases” in this
Report).
Since
March 2013, we have been singularly focused on identifying high-potential oil and gas prospects located on the shelf
in the U.S. GOM. We have licensed 3-D seismic data covering approximately 2.2 million acres and have evaluated this data
using advanced interpretation technologies. As a result of these analyses, we have identified and acquired leases on
multiple prospects that we believe may contain economically recoverable hydrocarbon deposits, and we plan to continue to
conduct more refined analyses of our prospects as well as target additional lease and property acquisitions. We have
given preference to areas with water depths of 450 feet or less where production infrastructure already exists. We have nine
prospects that we deem technically complete and ready to drill, all of which are located in such shallow waters. We believe
this will allow for any discoveries to be developed faster and less expensively, given our goal to reduce economic risk while
increasing returns. Recent actions of the Bureau of Ocean Energy Management (“BOEM”) have reduced the royalty
rate for leases in future lease sales in water depths of less than 200 meters (approximately 656 feet) from 18.75% to 12.5%,
further enhancing the economics for drilling.
As
of June 30, 2017, we have no production or proved reserves.
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES
The
condensed financial statements included herein are unaudited. However, these condensed financial statements include all adjustments
(consisting of normal recurring adjustments), which, in the opinion of management are necessary for a fair presentation of financial
position, results of operations and cash flows for the interim periods. The results of operations for interim periods are not
necessarily indicative of the results to be expected for an entire year. The preparation of financial statements in accordance
with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts
reported in the Company’s condensed financial statements and accompanying notes. Actual results could differ materially
from those estimates.
Certain
information, accounting policies, and footnote disclosures normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted in this Form
10-Q pursuant to certain rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed financial
statements should be read in conjunction with the audited financial statements for the year ended September 30, 2016, which were
included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016 and filed with the Securities
and Exchange Commission on December 27, 2016.
Cash
and Cash Equivalents
GulfSlope
considers highly liquid investments with insignificant interest rate risk and original maturities to the Company of three months
or less to be cash equivalents. Cash equivalents consist primarily of interest-bearing bank accounts and money market funds. The
Company’s cash positions represent assets held in checking and money market accounts. These assets are generally available
on a daily or weekly basis and are highly liquid in nature.
Liquidity/Going
Concern
The
Company has incurred accumulated losses as of June 30, 2017 of $38.7 million. Further losses are anticipated in developing our
business. As a result, our auditors have expressed substantial doubt about our ability to continue as a going concern. As of June
30, 2017, we had $.02 million of unrestricted cash on hand. The Company estimates that it will need to raise a minimum of $4 million
to meet its obligations and planned expenditures through August 2018. The Company plans to finance its operations through the
issuance of equity and debt, joint ventures including farm-outs, or further sales of working interests in prospects. Our policy
has been to periodically raise funds through sale of equity on a limited basis, to avoid undue dilution while at the early stages
of execution of our business plan. Short term needs have been historically funded through loans from executive management and
other related parties. There are no assurances that financing will be available with acceptable terms, if at all. If the Company
is not successful in obtaining adequate financing, operations would need to be curtailed or ceased, including those associated
with being a public reporting company. The financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
Full
Cost Method
The
Company uses the full cost method of accounting for its oil and gas exploration and development activities as defined by the Securities
and Exchange Commission (“SEC”). Under the full cost method of accounting, all costs associated with successful and
unsuccessful exploration and development activities are capitalized on a country-by-country basis into a single cost center (“full
cost pool”). Such costs include property acquisition costs, geological and geophysical (“G&G”) costs, carrying
charges on non-producing properties, costs of drilling both productive and non-productive wells and overhead charges directly
related to acquisition, exploration and development activities. Proceeds from property sales will generally be credited to the
full cost pool, with no gain or loss recognized, unless such a sale would significantly alter the relationship between capitalized
costs and the proved reserves attributable to these costs. A significant alteration would typically involve a sale
of 25% or more of the proved reserves related to a single full cost pool.
Proved
properties are amortized on a country-by-country basis using the units of production method (UOP). The UOP calculation multiplies
the percentage of estimated proved reserves produced each quarter by the cost of those reserves. The amortization base in the
UOP calculation includes the sum of proved property, net of accumulated depreciation, depletion and amortization (DD&A), estimated
future development costs (future costs to access and develop proved reserves), and asset retirement costs, less related salvage
value.
The
costs of unproved properties and related capitalized costs (such as G&G costs) are withheld from the amortization calculation
until such time as they are either developed or abandoned. Unproved properties and properties under development are reviewed
for impairment at least quarterly and are determined through an evaluation considering, among other factors, seismic data, requirements
to relinquish acreage, drilling results, remaining time in the commitment period, remaining capital plan, and political, economic,
and market conditions. In countries where proved reserves exist, exploratory drilling costs associated with dry holes are transferred
to proved properties immediately upon determination that a well is dry and amortized accordingly. In countries where a reserve
base has not yet been established, impairments are charged to earnings.
Companies
that use the full cost method of accounting for oil and natural gas exploration and development activities are required to perform
a ceiling test calculation each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule
4-10. The ceiling test is performed quarterly, on a country-by-country basis, utilizing the average of prices in effect on the
first day of the month for the preceding twelve-month period. The ceiling limits such pooled costs to the aggregate of the present
value of future net revenues attributable to proved crude oil and natural gas reserves discounted at 10%, plus the lower of cost
or market value of unproved properties less any associated tax effects. If such capitalized costs exceed the ceiling, the Company
will record a write-down to the extent of such excess as a non-cash charge to earnings. Any such write-down will reduce earnings
in the period of occurrence and results in a lower depreciation, depletion and amortization rate in future periods. A write-down
may not be reversed in future periods even though higher oil and natural gas prices may subsequently increase the ceiling.
As
of June 30, 2017, the Company’s oil and gas properties consisted of unproved properties and no proved reserves.
Basic
and Dilutive Earnings Per Share
Basic
earnings (loss) per share (“EPS”) is computed by dividing net income (loss) (the numerator) by the weighted average
number of common shares outstanding for the period (denominator). Diluted EPS is computed by dividing net income (loss) by the
weighted average number of common shares and potential common shares outstanding (if dilutive) during each period. Potential common
shares include stock options, warrants, and restricted stock. The number of potential common shares outstanding relating to stock
options, warrants, and restricted stock is computed using the treasury stock method.
As
the Company has incurred losses for the nine months ended June 30, 2017 and 2016, the potentially dilutive shares are anti-dilutive
and are thus not added into the loss per share calculations. As of June 30, 2017 and 2016, there were 163,805,888 and 81,885,606
potentially dilutive shares, respectively.
Recent
Accounting Pronouncements
In
May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU No. 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. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. As amended, the
new standard is effective for annual reporting periods beginning after December 15, 2017. Early application is permitted. The
standard permits the use of either the retrospective or cumulative effect transition method. The Company has no revenues to
date and does not anticipate the adoption of this standard to have a material impact on its financial statements.
In
August 2014, the FASB issued Accounting Standard Update No. 2014-15 (“ASU No. 2014-15”),
Presentation of Financial
Statements Going Concern (Subtopic 205-40)
which requires management to assess an entity’s ability to continue
as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically,
ASU No. 2014-15 provides a definition of the term substantial doubt and requires an assessment for a period of one year after
the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial
doubt is alleviated as a result of consideration of management’s plans and requires an express statement and other disclosures
when substantial doubt is not alleviated. ASU No. 2014-15 is now effective, and has been adopted by the Company. See the liquidity
and going concern section of Note 2 for the further discussion on management’s analysis.
On
February 25, 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. The new guidance establishes the principles
to report transparent and economically neutral information about the assets and liabilities that arise from leases. The new guidance
is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early
application is permitted for all organizations. The Company has not yet selected the period during which it will implement this
pronouncement, and it is currently evaluating the impact the adoption of ASU 2016-02 will have on its financial statements.
In
March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09,
“Compensation - Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”)
. ASU 2016-09 simplifies
several aspects of accounting for share-based payment award transactions, including income tax consequences, classification of
awards as either liability or equity, and classification on the statement of cash flows. The standard is effective for annual
periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The
Company is currently evaluating the impact the adoption of ASU 2016-09 will have on its financial statements.
In
March 2016, the FASB issued ASU No. 2016-06,
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt
Instruments (a consensus of the Emerging Issues Task Force)
(“ASU 2016-06”), which clarifies the requirements
for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly
and closely related to their debt hosts and requires that an entity assess the embedded call (put) options solely in accordance
with the four-step decision sequence in ASC 815. ASU 2016-06 is effective for fiscal years beginning after December 15, 2016,
and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company
is currently evaluating the impact the adoption of ASU 2016-06 will have on its financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification
of Certain Cash Receipts and Cash Payments, which addresses diversity in how certain cash receipts and cash payments are presented
and classified in the statement of cash flows. ASU 2016-15 provides guidance on the following specific cash flow issues:
debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon
interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments
made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned
life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees;
beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance
principle. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017,
and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company
is still evaluating the impact of this update, but does not expect it to have a material impact on its financial statements.
The
Company has evaluated all other recent accounting pronouncements and believes that none of them will have a significant effect
on the Company’s financial statements.
NOTE
3 – OIL AND NATURAL GAS PROPERTIES
In
March 2014 and 2015, the Company was awarded a total of 23 Outer Continental Shelf blocks in the Central Gulf of Mexico. During
the quarter ended June 30, 2016, the Company relinquished six of the lease blocks acquired. The capitalized lease costs of $2,610,678
associated with these blocks were recorded as impairment of oil and natural gas properties. The Company also deducted $280,000
as an impairment of certain capitalized exploration costs that were directly allocable to the relinquished blocks, for a total
impairment deduction of $2,890,678 for the quarter ended June 30, 2016. During the quarter ended June 30, 2017, the
Company relinquished six lease blocks. The capitalized lease costs of $2,054,212 associated with these blocks were recorded as
impairment of oil and natural gas properties. The Company also deducted $1,262,000 as an impairment of certain capitalized exploration
costs that were directly allocable to the 2017 relinquished blocks, for a total impairment deduction of $3,316,212.
In
May 2016, the Company entered into a letter agreement subject to execution of definitive documents (the “letter agreement”)
with Texas South that sets out the terms and conditions of a proposed farm-out arrangement (the “Farm-out”) to develop
two shallow-depth oil and gas prospects located on offshore Gulf of Mexico blocks currently leased by the Company. Through June
30, 2017 the Company received $400,000 under the terms of the letter agreement. In accordance with full cost requirements, the
Company recorded the proceeds from the transaction as an adjustment to the capitalized costs of its oil & gas properties with
no gain or loss recognition. The Company also received lease rental reimbursements of $63,147 for 2016 and $63,147 for 2017 under
the terms of this letter agreement.
The
Company paid $376,368 and $632,665 in gross annual lease rental payments to the BOEM for the nine months ended June 30, 2017 and
the year ended September 30, 2016, respectively. The Company’s share of these amounts are included in unproved properties.
For
the year ended September 30, 2016, the Company incurred $1,354,674 in consulting fees and salaries and benefits associated with
full-time geoscientists, and $463,497 associated with technological infrastructure, third party hosting services and seismic data.
The Company capitalized these G&G costs because the Company owned specific unevaluated properties that these costs relate
to. At June 30, 2016, a portion of these costs, $280,000, specifically related to leases relinquished in June 2016
were immediately impaired. These remaining capitalized amounts when added to the amount paid in 2016 for lease rental
payments of $632,665 and netted with the 2016 receipts from sale of a working interest of $400,000 as well as the relinquished
leases impairment amount of $2,610,678 subtracting lease rentals receivable of $191,171 results in unproved oil and gas properties
of $4,526,171, reflected on our balance sheet at September 30, 2016.
For
the nine months ended June 30, 2017, the Company incurred $130,675 in consulting fees, salaries and benefits, $167,250 in stock
option costs associated with geoscientists, and $34,073 associated with technological infrastructure and third party hosting services.
The Company capitalized these G&G costs because the Company owned specific unevaluated properties that these costs relate
to. These capitalized amounts when added to the amount paid in 2017 for lease rental payments of $376,368 and netted with the
2017 receipts from working interest portion of annual rentals $118,680 as well as the relinquished leases impairment amount of
$3,316,212 results in unproved oil and gas properties of $1,799,645 reflected on our balance sheet at June 30, 2017.
NOTE
4 – RELATED PARTY TRANSACTIONS
During
April through September 2013, the Company entered into convertible promissory notes whereby it borrowed a total of $6,500,000
from John Seitz, its current chief executive officer. The notes are due on demand, bear interest at the rate of 5% per annum,
and are convertible into shares of common stock at a conversion price equal to $0.12 per share of common stock (the then offering
price of shares of common stock to unaffiliated investors). In May 2013, John Seitz converted $1,200,000 of the aforementioned
debt into 10,000,000 shares of common stock, which shares were issued in July 2013. Between June of 2014 and December 2015, the
Company entered into promissory notes whereby it borrowed a total of $2,410,000 from Mr. Seitz. The notes are not convertible,
due on demand and bear interest at a rate of 5% per annum. During January through September 2016, the Company entered into promissory
notes whereby it borrowed a total of $363,000 from Mr. Seitz. The notes are due on demand, bear interest at the rate of 5% per
annum, and the outstanding principal and interest is convertible at the option of the holder into securities issued by the Company
in a future offering, at the same price and terms received by unaffiliated investors. Additionally, during the nine months ended
June 30, 2017, the Company entered into promissory notes with John Seitz whereby it borrowed a total of $442,500. The notes are
due on demand, bear interest at the rate of 5% per annum, and the outstanding principal and interest is convertible at the option
of the holder into securities issued by the Company in a future offering, at the same price and terms received by unaffiliated
investors. As of June 30, 2017 the total amount owed to John Seitz, our CEO, is $8,515,500. There was a total of $1,092,388 of
unpaid interest associated with these loans included in accrued interest payable within our balance sheet as of June 30, 2017.
From
August 2015 through February 2016 the Company entered into promissory notes whereby it borrowed a total of $267,000 from Dr. Ronald
Bain, its current president and chief operating officer, and his affiliate ConRon Consulting, Inc. These notes are not convertible,
due on demand and bear interest at the rate of 5% per annum. As of June 30, 2017, the total amount owed to Dr. Bain and his affiliate
was $267,000. There was a total of $24,759.17 of accrued interest associated with these loans and the Company has recorded interest
expense for the same amount. During the fiscal year ended September 30, 2016, Dr. Ronald Bain also entered into a $92,000 convertible
promissory note with associated warrants (“Bridge Financing”) under the same terms received by other investors (see
Note 5).
Domenica
Seitz, CPA, a related party, has provided accounting consulting services to the Company. During the three and nine month period
ended June 30, 2017, services provided were $5,915 and $26,710, respectively. The Company has accrued these amounts, and
they are reflected in the June 30, 2017 condensed financial statements.
On
November 15, 2016, a family member of the CEO, a related party, entered into a $50,000 convertible promissory note with associated
warrants (“Bridge Financing”) under the same terms received by other investors (see Note 5).
John
Seitz has not received a salary since May 31, 2013, the date he commenced serving as our chief executive officer and accordingly,
no amount has been accrued on our financial statements.
Kevin
Bain, son of Dr. Bain, is a geoscientist, employee of the Company.
All
employees of the Company (including executive management), who are all shareholders of the Company, have been paid a reduced salary
plus benefits beginning on January 1, 2016.
On
January 1, 2017, 1.25 million restricted shares, which had vested in September 2016, were issued to an employee.
On
January 1, 2017, 33.5 million stock options were granted to six employees and two directors of the Company. The CEO was not included
in the award. The stock options vested 50% on January 1, 2017 and the remaining 50% will vest on January 1, 2018, provided that
the option holder continues to serve as an employee or director on the vesting date. The stock options are exercisable for seven
years from the original grant date of January 1, 2017, until January 1, 2024.
NOTE
5 – BRIDGE FINANCING – CONVERTIBLE PROMISSORY NOTES WITH ASSOCIATED WARRANTS
Between
June and November 2016, the Company issued eleven convertible promissory notes with associated warrants in a private placement
to accredited investors for total gross proceeds of $837,000. Three of the notes were to related parties for proceeds totaling
$222,000, including the extinguishment of $70,000 worth of related party payables. The convertible notes have a maturity of one
year, bear an annual interest rate of 8% and can be converted at the option of the holder at a conversion price of $0.025 per
share. In addition, the convertible notes will automatically convert if a qualified equity financing of at least $3 million occurs
before maturity and such mandatory conversion price will equal the effective price per share paid in the qualified equity financing.
In addition to the convertible notes, the investors received 27.9 million warrants (7.4 million to the above mentioned related
parties) with an exercise price of $0.03 and a term of the earlier of three years or upon a change of control. The Company evaluated
the various financial instruments under ASC 480 and ASC 815 and determined no instruments or features required fair value accounting.
Therefore, in accordance with ASC 470-20-25-2, the Company allocated the proceeds between the convertible notes and warrants based
on their relative fair values. This resulted in an allocation of $452,422 to the warrants and $384,578 to the convertible notes.
After such allocation, the Company evaluated the conversion option to discern whether a beneficial conversion feature existed
based upon comparing the effective exercise price of the convertible notes to the fair value of the shares they are convertible
into. The Company concluded a beneficial conversion feature existed and measured such beneficial conversion feature at $384,368.
Accordingly, the debt discount associated with these notes was $836,790. Such discount will be amortized using the effective interest
rate method over the term (one year) of the convertible notes. For the three and nine months ended June 30, 2017 amortization
of this discount totaled $186,359 and $597,331 and is included in interest expense in the statement of operations. Accrued interest
expense for the three and nine months ended June 30, 2017 is $16,740, and $49,731.
Upon
maturity of eight of the eleven promissory notes in June 2017, the Company issued 3,225,000 extension warrants (equal to 25% of
the original warrant amount) to the holders of the notes to extend the terms to January 15, 2018. The Company evaluated this modification
including considering the fair value of the warrants issued and concluded that extinguishment accounting was required as the present
value of future cash flows from the new note, including the fair value of the warrants issued to extend, exceeded the present
value of future cash flows of the old note by more than 10%. The fair value of the warrants was deemed to be $50,701 and such
amount was recognized immediately as a loss on extinguishment of debt. The fair value of the warrants was determined using the
Black-Scholes option pricing model using the following assumptions: (1) Stock price: $0.025; (2) Exercise price: $0.03; (3) Term:
2 years; (4) Risk free rate: 1.35%; and (5) Volatility: 135%.
On
December 28, 2016, the Company issued a convertible promissory note with 500,000 shares of restricted stock and 550,000 warrants
in a private placement to an accredited investor for $50,000 in proceeds. The warrants have a five-year term and an exercise price
of $0.10. The promissory note has a face value of $55,555 and incurs a one-time upfront interest charge of six percent. The holder
of the note has the option to convert the note into shares of common stock at a conversion price of $0.02 per share. Approximately
$450,000 of additional funding is available under similar terms if the Company and the lender mutually agree to further tranches.
The Company evaluated the various financial instruments under ASC 480 and ASC 815 and determined no material instruments or features
required fair value accounting. Therefore, in accordance with ASC 470-20-25-2, the Company allocated the proceeds between the
convertible note, restricted common stock, and warrants based on their relative fair values. This resulted in an allocation of
$8,460 to the restricted stock, $7,969 to the warrants and $33,571 to the convertible note. After such allocation, the Company
evaluated the conversion option to discern whether a beneficial conversion feature existed based upon comparing the effective
exercise price of the convertible note to the fair value of the shares it is convertible into. The Company concluded a beneficial
conversion feature existed and measured such beneficial conversion feature at $33,571. Accordingly, at December 28, 2016, the
debt discount associated with these notes was $55,555. Such discount will be amortized using the effective interest rate method
over the term (seven months) of the convertible note. For the three and nine months ended June 30, 2017 amortization of this discount
totaled $23,810 and $48,181, respectively and is included in interest expense in the statement of operations. Accrued interest
expense for the three and nine months ended June 30, 2017 is zero and $3,333, respectively.
On
March 14, 2017, the Company issued a convertible promissory note with 1,000,000 shares of restricted stock and 1,100,000 warrants
in a private placement to an accredited investor for $100,000 in proceeds. The warrants have a five-year term and an exercise
price of $0.10. The promissory note has a face value of $111,111 and incurs a one-time upfront interest charge of six percent.
The holder of the note has the option to convert the note into shares of common stock at a conversion price of $0.02 per share.
Approximately $350,000 of additional funding is available under similar terms if the Company and the lender mutually agree to
further tranches. The Company evaluated the various financial instruments under ASC 480 and ASC 815 and determined no material
instruments or features required fair value accounting. Therefore, in accordance with ASC 470-20-25-2, the Company allocated the
proceeds between the convertible note, restricted common stock, and warrants based on their relative fair values. This resulted
in an allocation of $17,250 to the restricted stock, $14,051 to the warrants and $68,699 to the convertible note. After such allocation,
the Company evaluated the conversion option to discern whether a beneficial conversion feature existed based upon comparing the
effective exercise price of the convertible note to the fair value of the shares it is convertible into. The Company concluded
a beneficial conversion feature existed and measured such beneficial conversion feature at $68,699. Accordingly, at March 14,
2017, the debt discount associated with these notes was $111,111. Such discount will be amortized using the effective interest
rate method over the term (seven months) of the convertible note. For the three and nine months ended June 30, 2017 amortization
of this discount totaled $47,619 and $56,446 respectively and is included in interest expense in the statement of operations.
Accrued interest expense for the three and nine months ended June 30, 2017 is zero and $6,667, respectively.
NOTE
6 – COMMON STOCK/PAID IN CAPITAL
In
March 2016, the Company issued 520,273 shares of common stock to one vendor as consideration for services rendered in the ordinary
course of business.
As
discussed in Note 5, between June and November 2016, the Company issued 27.9 million warrants in conjunction with $837,000 convertible
notes payable. The warrants have an exercise price of $0.03 and a term of the earlier of 3 years or upon a change of control.
Based upon the allocation of proceeds between the convertible notes payable and the warrants, approximately $452,422 was allocated
to the warrants.
As
discussed in Note 5, in June 2017, 3.2 million additional warrants were awarded to the holders of Bridge Notes that matured in
June 2017.
The
fair value of the warrants were determined using the Black Scholes valuation model with the following key assumptions:
|
|
June 2016
|
|
|
July 2016
|
|
|
August 2016
|
|
|
November 2016
|
|
|
June 2017
|
|
|
Number of Warrants Issued
|
|
12.9 million
|
|
|
10.0 million
|
|
|
3.3 million
|
|
|
1.7 million
|
|
|
3.2 million
|
|
Stock Price:
|
|
$
|
0.054
|
|
|
$
|
0.040
|
|
|
$
|
0.032
|
|
|
$
|
0.029
|
|
|
$
|
0.025
|
|
Exercise Price:
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
Term:
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
2 years
|
|
Risk Free Rate:
|
|
|
.87
|
%
|
|
|
.80
|
%
|
|
|
.88
|
%
|
|
|
1.28
|
%
|
|
|
1.35
|
%
|
Volatility:
|
|
|
135
|
%
|
|
|
138
|
%
|
|
|
137
|
%
|
|
|
131
|
%
|
|
|
135
|
%
|
In
December 2016, 500,000 shares of restricted stock were issued in conjunction with a financing transaction (see Note 5).
As
discussed in Note 5, in December 2016, the Company issued 550,000 warrants in conjunction with a convertible note payable. The
warrants have an exercise price of $0.10 and a term of the earlier of 5 years or upon a change of control. Based upon the allocation
of proceeds between the convertible note payable and the warrants, approximately $7,969 was allocated to the warrants.
In
March 2017, 1,000,000 shares of restricted stock were issued in conjunction with a financing transaction (see Note 5).
As
discussed in Note 5, in March 2017, the Company issued 1,100,000 warrants in conjunction with a convertible note payable. The
warrants have an exercise price of $0.10 and a term of the earlier of 5 years or upon a change of control. Based upon the allocation
of proceeds between the convertible note payable and the warrants, approximately $14,051 was allocated to the warrants.
The
fair value of the warrants were determined using the Black Scholes valuation model with the following key assumptions:
|
|
December 2016
|
|
|
March 2017
|
|
Number of Warrants Issued
|
|
|
550,000
|
|
|
|
1,100,000
|
|
Stock Price:
|
|
$
|
0.028
|
|
|
$
|
0.0279
|
|
Exercise Price:
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
Term:
|
|
|
5 years
|
|
|
|
5 years
|
|
Risk Free Rate:
|
|
|
2.02
|
%
|
|
|
2.13
|
%
|
Volatility:
|
|
|
155
|
%
|
|
|
127
|
%
|
NOTE
7– STOCK-BASED COMPENSATION
On
January 1, 2017, 1.25 million restricted shares, which had vested in September 2016, were issued to an employee.
On
January 1, 2017, 33.5 million stock options were granted to 6 employees and 2 directors of the Company. The CEO was not included
in the award. The stock options vested 50% on January 1, 2017 and the remaining 50% will vest on January 1, 2018, provided that
the option holder continues to serve as an employee or director on the vesting date. The stock options are exercisable for seven
years from the original grant date of January 1, 2017, until January 1, 2024.
The
fair value of the stock-options were determined using the Black Scholes valuation model with the following key assumptions:
|
|
January 1, 2017
|
|
Number of Stock Options Awarded
|
|
|
33,500,000
|
|
Stock Price:
|
|
$
|
0.0278
|
|
Exercise Price:
|
|
$
|
0.0278
|
|
Term:
|
|
|
4 years
|
|
Risk Free Rate:
|
|
|
1.71
|
%
|
Volatility:
|
|
|
127
|
%
|
The
Company used the historical volatility of its stock for the period March 21, 2013 (the date the exploration activities began)
through January 1, 2017 for the Black Scholes computation. The Company has no historical data regarding the expected life of the
options and therefore used the simplified method of calculating the expected life. The risk free rate was calculated using
the U.S. Treasury constant maturity rates similar to the expected life of the options, as published by the Federal Reserve. The
Company has no plans to declare any future dividends.
Stock-based
compensation cost is measured at the grant date, using the estimated fair value of the award, and is recognized over the required
vesting period. The Company recognized $93,381 and $560,287 in stock-based compensation during the three and nine months ended
June 30, 2017, and $174,650 and $582,694 in stock-based compensation during the three and nine months ended June 30, 2016, respectively. A
portion of these costs, $27,875 and $99,050, were capitalized to unproved properties and the remainder were recorded as general
and administrative expenses for the three months ended June 30, 2017 and 2016, respectively. For the nine months ended June 30,
2017 and 2016, $167,250 and $324,797, respectively, were capitalized to unproved properties.
The
following table summarizes the Company’s stock option activity during the nine months ended June 30, 2017:
|
|
Number
of Options
|
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term
|
|
Outstanding at September 30, 2016
|
|
2,000,000
|
|
|
$
|
0.12
|
|
|
—
|
|
Granted
|
|
33,500,000
|
|
|
$
|
.0278
|
|
|
—
|
|
Exercised
|
|
—
|
|
|
|
—
|
|
|
—
|
|
Cancelled
|
|
—
|
|
|
|
—
|
|
|
—
|
|
Outstanding at June 30, 2017
|
|
35,500,000
|
|
|
$
|
.0330
|
|
|
|
3.4 years
|
|
Vested and expected to vest
|
|
18,750,000
|
|
|
$
|
.0330
|
|
|
|
3.4 years
|
|
Exercisable at June 30, 2017
|
|
18,750,000
|
|
|
|
.0330
|
|
|
|
—
|
|
As
of June 30, 2017, remaining expense to be recognized related to outstanding options was $186,763.
As
of June 30, 2017 there was zero intrinsic value for stock options outstanding as of June 30, 2017.
NOTE
8– COMMITMENTS AND CONTINGENCIES
In
March 2013, the Company licensed certain seismic data pursuant to two agreements. With respect to the first agreement, as
of June 30, 2017, the Company has paid $6,135,500 in cash, with no additional amount due. With respect to the second agreement,
as of June 30, 2017, the Company has paid $3,009,195 in cash and is obligated to pay $1,003,065.
In
October 2016, the Company purchased a directors and officers’ insurance policy for $170,850 and financed $155,010 of the
premium by executing a note payable. The balance of the note payable at June 30, 2017 is $31,494.
NOTE
9 – SUBSEQUENT EVENTS
The
company entered into a promissory note with John Seitz in July and August 2017 whereby it borrowed a total of $50,000. The note
is due on demand, bears interest at the rate of 5% per annum, and the principal amount is convertible at the option of the holder
into securities issued by the Company in a future offering, at the same price and terms received by unaffiliated investors.
The
maturity date of $400,000 of convertible promissory notes that matured in July and August of 2017 were extended to January 15,
2018 in exchange for 3.3 million of additional warrants.
The
$50,000 promissory note dated December 28, 2016 that matured in July 2017 was extended until August 30, 2017 and $20,000 was converted
into 2 million shares of the company’s stock.