Notes
to Condensed Financial Statements
June
30, 2019
(Unaudited)
NOTE
1 – ORGANIZATION AND NATURE OF BUSINESS
GulfSlope
Energy, Inc. (the “Company,” “GulfSlope,” 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. GulfSlope is a technically driven company who uses its licensed
2.2 million acres of three-dimensional (3-D) seismic data to identify, evaluate, and acquire assets with attractive economic profiles.
As
of June 30, 2019, GulfSlope has 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 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, 2018, which were included
in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2018, and filed with the Securities
and Exchange Commission on December 31, 2018.
Cash
GulfSlope
considers highly liquid investments with original maturities to the Company of three months or less to be cash equivalents. There
were no cash equivalents at June 30, 2019 and September 30, 2018.
Liquidity/Going
Concern
The
Company has incurred accumulated losses as of June 30, 2019 of $54.6 million, has negative working capital of $20.6 million
and for the nine months ended June 30, 2019 generated losses of $12.7 million and negative cash flows from operations of $7
million. Further losses are anticipated in developing our business. As a result, there exists substantial doubt about our
ability to continue as a going concern. As of June 30, 2019, we had $2.3 million of unrestricted cash on hand, $2.0 million
of this amount is for the payment of joint payables from drilling operations. The Company estimates that it will need to
raise a minimum of $10.0 million to meet its obligations and planned expenditures through September 2020. The $10 million is
comprised primarily of capital project expenditures as well as general and administrative expenses. It does not include any
amounts due under outstanding debt obligations, which amounted to $11.6 million of current principal and interest as of June
30, 2019. The Company plans to finance operations and planned expenditures through equity and/or debt financings and/or
farm-out agreements. The Company also plans to extend the agreements associated with all loans, the accrued interest payable
on these loans, as well as the Company’s accrued liabilities. There are no assurances that financing will be available
with acceptable terms, if at all or that obligations can be extended. If the Company is not successful in obtaining financing
or extending obligations, operations would need to be curtailed or ceased, or the Company would need to sell assets or
consider alternative plans up to and including restructuring. 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 natural gas exploration and development activities as defined
by the 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”), whereby capitalized costs are amortized over total proved 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 cost center ceiling is defined as the sum of (a) estimated future
net revenues, discounted at 10% per annum, from proved reserves, (b) the cost of properties not being amortized, if any, and (c)
the lower of cost or market value of unproved properties included in the cost being amortized. 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, 2019, the Company’s oil and gas properties consisted of wells in process, and capitalized exploration and acquisition
costs for unproved properties and no proved reserves.
Derivative
Financial Instruments
The
accounting treatment of derivative financial instruments requires that the
Company record
certain embedded conversion options at their fair value as of the inception date of the agreement and at fair value as of each
subsequent balance sheet date with any change in fair value recorded as income or expense. As a result of entering into certain
note agreements, for which such instruments contained a variable conversion feature with no floor, the
Company has adopted
a sequencing policy in accordance with ASC 815-40-35-12 whereby
all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation
issued to employees or directors, as long as the certain variable convertible instruments exist.
Basic
and Dilutive Earnings Per Share
Basic
(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 three and nine months ended June 30, 2019 and 2018, the potentially dilutive shares are
anti-dilutive and are thus not added into the loss per share calculations. As of June 30, 2019 and 2018, there were 357,582,559
and 214,418,438 potentially dilutive shares, respectively.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, “Leases,” and in March 2019, the FASB issued ASU No. 2019-01, “Leases:
Codification Improvements”, which updated the accounting guidance related to leases to increase transparency and comparability
among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about
leasing arrangements. They also clarify implementation issues. These updates are effective for public companies for annual periods
beginning after December 15, 2018, including interim periods therein. Accordingly, the standard is effective for the Company
for its annual period beginning October 1, 2019, and interim periods therein. The standard is to be applied utilizing a modified
retrospective approach, with early adoption permitted. We will adopt these standards on October 1, 2019 with a
cumulative adjustment to retained earnings rather than retrospectively adjusting prior periods. This adoption approach will result
in a balance sheet presentation that is not comparable to the prior period in the first year of adoption. The Company has yet
to begin to assess the quantitative effect of the new standard on the Company’s financial statements and intends to begin
the assessment in the upcoming period.
In
June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based
Payments (“ASU 2018-07”). This ASU expands the scope of Topic 718 to include share-based payment transactions for
acquiring goods and services from nonemployees. The amendments in this ASU are effective for public companies for fiscal years
beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted and the
Company adopted this new standard effective January 1, 2019 with no material impact to stock compensation issued to non-employees
during the nine months ended June 30, 2019.
NOTE
3 – OIL AND NATURAL GAS PROPERTIES
The
Company currently has under lease seven federal Outer Continental Shelf blocks and has licensed 2.2 million acres of three-dimensional
(3-D) seismic data in its area of concentration.
In
January 2018, the Company entered into a strategic partnership with Delek GOM Investments, LLC. (“Delek”), and Texas
South Energy, Inc. (“Texas South”) (collectively, the “Parties”) and executed a participation agreement
(the “Agreement”) for a multi-phase exploration program. Under the terms of the Agreement, the Parties have committed
to drill the Company’s “Canoe” and “Tau” prospects (the “Initial Phase”) with Delek
having the option to participate in two additional two-well drilling phases and a final, three-well drilling phase (collectively,
the “Phases”). In each Phase, Delek will earn a 75% working interest upon paying 90% of the exploratory costs associated
with drilling each exploratory well. The Company will retain a 20% working interest while paying 8% of the costs associated with
drilling each exploratory well. The Company will be required to fund 20% of well costs in excess of 115% of budget. In addition,
Delek will pay the Company approximately $1.1 million in cash for each Prospect when the respective exploration plan is filed
with BOEM for each phase. Also, each Party will be responsible for their pro rata share (based on working interest) of delay rentals
associated with the Prospects. The Company will be the Operator during exploratory drilling of the Prospect, however, subsequent
to a commercial discovery, Delek will have the right to become the Operator. Delek will have the right to terminate this Agreement
at the conclusion of any drilling Phase. Delek will also have the option to purchase up to 5% of the Company’s common stock,
par value $0.001 per share (the “Common Stock”), upon fulfilling its obligation for each Phase (maximum of 20% in
the aggregate) at a price per share equal to a 10% discount to the 30-day weighted average closing price for the Common Stock
preceding the acquisition. This option will expire January 8, 2020.
The
Company, as the operator of two wells drilled in the Gulf of Mexico, has incurred tangible and intangible drilling costs for
the wells in process and has billed its working interest partners for their respective shares of the drilling costs to date.
GulfSlope drilled the first well, Canoe, to a total depth of 5,765 feet (5,670 feet TVD). Multiple open hole plugs were set
across several intervals and the well is equipped with a mud-line suspension system for possible future re-entry. Calibration
of seismic amplitudes, petrophysical analysis, reservoir engineering and scoping of development is currently underway to
determine the commerciality of these sands and that work is expected to be completed in the first calendar quarter of 2020.
The second well, Tau, was drilled to a measured depth of 15,254 feet, as compared to
the originally permitted 29,857 foot measured depth. Producible hydrocarbon zones were not established to the current depth,
but hydrocarbon shows were encountered. Complex geomechanical conditions required two by-pass wellbores, one sidetrack
wellbore, and eight casing strings to reach the current depth. Equipment limitations prevented further drilling. In addition,
the drilling rig had contractual obligations related to another operator. Due to these factors, the Company elected to
abandon this well in a manner that would allow for re-entry at a later time. The drilling, pressure, and reservoir
information has confirmed geophysical and geological models, and reinforces the Company’s confidence that there is
resource potential. The Company is currently evaluating various options related to future operations in this wellbore and
testing of the deeper Tau prospect. In January 2019, the Tau well experienced an underground control of well event and
as a result, the Company filed an insurance claim with its insurance underwriters. The total amount of the claim was
approximately $10.8 million for 100% working interest after the insurance deductible amount, and at June 30, 2019
approximately $8.3 million of this amount had been received. GulfSlope received approximately $2.1 million of this amount and
credited wells in process for approximately $0.7 million, accounts receivable from operations for approximately $0.2 million
and accrued payable for approximately $1.2 million. As discussed above, the Company’s share of the insurance proceeds
could either be 8% or 20%. The Company’s share of the insurance proceeds at 8% is approximately $0.7 million and the
additional 12%, or $1.2 million, is included in accrued expenses as there is uncertainty as to whether the Company has the
right to 8% or 20% of the overall insurance proceeds.
As
of June 30, 2019, the Company’s oil and natural gas properties consisted of unproved properties, wells in process and no
proved reserves. The Company incurred approximately $4.3 million of impairment of oil and natural gas properties for the nine
months ended June 30, 2019 resulting from the expiration of oil and natural gas leases.
NOTE
4 – RELATED PARTY TRANSACTIONS
During
April 2013 through September 2017, the Company entered into convertible promissory notes whereby it borrowed a total of $8,675,500
from John Seitz, the chief executive officer (“CEO”). The notes are due on demand, bear interest at the rate of 5%
per annum, and $5,300,000 of the notes 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). As of June 30, 2019, the total
amount owed to John Seitz is $8,675,500. This amount is included in loans from related parties within the balance sheet.
There was a total of $1,970,032 of unpaid interest associated with these loans included in accrued interest payable within the
balance sheet as of June 30, 2019.
On
November 15, 2016, a family member of the CEO entered into a $50,000 convertible promissory note with associated warrants (“Bridge
Financing”) under the same terms received by other investors (see Note 5).
Domenica
Seitz CPA, related to John Seitz, has provided accounting consulting services to the Company. During the three and nine month
period ended June 30, 2019, the services provided were valued at $14,880 and $44,640, respectively. During the three and nine
month period ended June 30, 2018, the services provided were valued at $5,915 and $17,745, respectively. The Company has accrued
these amounts, and they have been reflected in related party payable in the June 30, 2019 financial statements.
See
Note 5 for a description of the Delek term loan.
NOTE
5 – TERM LOAN AND CONVERTIBLE PROMISSORY NOTES
Between
June and November 2016, the Company issued eleven convertible promissory notes (“Bridge Financing 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 had a maturity of one year (prior to extension), 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 approximately 27.9
million warrants, with an exercise price of $0.03 and a term of the earlier of three years or upon a change of control. Upon maturity
of the eleven promissory notes during 2017, the Company issued approximately 7 million extension warrants with an exercise price
of $0.03 per share (equal to 25% of the original warrant amount) to the holders of the notes to extend the terms to January 15,
2018. Upon revised maturity of the eleven promissory notes on January 15, 2018, the Company issued approximately 2.8 million extension
warrants with an exercise price of $0.10 per share (equal to 10% of the original warrant amount) to the holders of the notes to
extend the term to April 16, 2018. In June 2018, the maturity date of all of the notes was extended to January 15, 2019. Six of
the Bridge Financing Notes with a principal balance of $560,000 plus accrued interest of approximately $87,000 were converted
during the year ended September 30, 2018. The remaining note balance at June 30, 2019 is $277,000. Accrued interest for the quarter
ended June 30, 2019, was approximately $6,000 and cumulative accrued interest was approximately $66,000. The Company completed
the extension of the remaining notes to April 30, 2020. In consideration for the extension of the remaining notes, the Company
extended the term of the warrants until April 30, 2020. As a result, approximately $152,000 was recorded as a debt discount and
to additional paid-in capital for the modification.
On
March 1, 2019, the Company entered into a Term Loan Agreement by and among the Company, as borrower, and Delek, as lender. In
the Term Loan Agreement, Delek agreed to provide the Company with multiple draw term loans in an aggregate stated principal amount
of up to $11.0 million (the “Term Loan Facility” and the loans thereunder, the “Loans”). The maturity
date of the Term Loan Facility is six months following the closing date of the Term Loan Agreement which is March 1, 2019. Until
such maturity date, the Loans under the Term Loan Agreement shall bear interest at a rate per annum equal to 5.0%, payable in
arrears on the maturity date. If an event of default occurs, all Loans under the Term Loan Agreement shall bear interest at a
rate equal to 7.0%, payable on demand. In connection with the Term Loan Agreement, the Company entered into: (i) a Subordination
Agreement (the “Subordination Agreement”) by and among the Company, as borrower, John N. Seitz, as subordinated lender
(the “Subordinated Lender”), and Delek, as senior lender; (ii) a Security Agreement (the “Security Agreement”)
among the Company, as debtor, and Delek, as lender; and (iii) warrants to purchase 238,095,238 shares of Common Stock, at an exercise
price of $0.042 per share issued to Delek GOM (the “Warrants”). The Company may elect, at its option, to prepay borrowings
outstanding under the Term Loan Agreement in multiples of $100,000 and not less than $500,000 without premium or penalty. The
Company may be required to prepay the Loans with any net cash proceeds resulting from an asset sale, receipt of insurance proceeds
from certain casualty events, proceeds from equity issuances or incurrence of indebtedness other than the Loans (subject to a
$500,000 carve-out to be applied toward the Company’s general corporate purposes) or receipt of any cash proceeds from any
payments, refunds, rebates or other similar payments and amounts under the Company’s operative documents. This potentially
includes the $0.7 million insurance proceeds received related to the Company’s share during the nine-months ended June 30,
2019. Amounts outstanding under the Term Loan Agreement are secured by a security interest in substantially all of the properties
and assets of the Company.
As
of March 6, 2019, the Company had borrowed a total of $10.0 million under the Term Loan Facility and issued to Delek GOM warrants
to purchase 238,095,238 shares of Common Stock; and Delek GOM fully exercised the warrants through a Loan Reduction Exercise,
thereby extinguishing the Company’s outstanding obligations to Delek GOM as of that date. The Company allocated the proceeds
between debt and warrants on a relative fair value basis, recording a debt discount of approximately $5.1 million. The exercise
of the warrants through the extinguishment of the loan was accounted for as a standard warrant exercise and an extinguishment
of debt including a recognition of a loss in the amount of the debt discount of approximately $5.1 million.
On
April 19, 2019, the Company borrowed $1.0 million under the Term Loan Facility and issued to Delek warrants to purchase 23,809,524
shares of stock. The Company allocated the proceeds between debt and warrants on a relative fair value basis, recording a debt
discount of approximately $0.5 million. As of June 30, 2019, the warrants have not been exercised and the term loan is outstanding.
On
June 21, 2019 the Company entered into a Securities Purchase Agreement (“SPA”)
under the terms of which the Company will issue and sell to Buyers up to an aggregate of $3,000,000 of convertible debentures
(“Convertible Debentures”) and associated warrants. On
June 21, 2019, approximately $2,100,000 of Convertible Debentures were purchased upon the signing of the SPA (the “First
Closing”), and $400,000 and $500,000, respectively, shall be purchased by the holder
upon: (1) the filing of a Registration Statement with the U.S. Securities and Exchange Commission (the “SEC”)
registering the resale of the Conversion Shares by the Buyers which occurred on August 5, 2019; and (2) the date a registration
statement covering the underlying common shares has first been declared effective by the SEC.
The
Convertible Debentures accrue interest at eight percent per annum, mature on June 21, 2020, and are convertible at the option
of the holder any time after issuance into common stock at a conversion rate of the lesser of: (1) $0.05 per share; or (2) 80%
of the lowest volume weighted adjusted price (as reported by Bloomberg, LP) for the ten consecutive trading days immediately preceding
conversion. In addition, the holder received warrants to purchase an aggregate of 50 million shares of common stock at an exercise
price of $0.04 per share. Such warrants expire on the fifth anniversary of issuance. The offering costs related to this issuance
were approximately $281,000.
The
Company evaluated the conversion feature and concluded that it should be bifurcated and accounted for as a derivative liability
due to the variable conversion feature which does not contain an explicit limit on the number of shares that are required to be
issued. In addition, the Company concluded the warrants required treatment as derivative liabilities as the Company could not
assert in has sufficient authorized but unissued shares to settle the warrants upon exercise when taking into account other stock
based commitments including the Convertible Debentures. Accordingly, the embedded conversion feature and warrants were recorded
at fair value at issuance and are subsequently remeasured to fair value each reporting period. The fair value of the derivative
liabilities at issuance exceeded the net proceeds received resulting in an approximately $1.7 million day one charge to interest
expense in the Condensed Statement of Operations.
The
fair value of the embedded conversion feature was determined utilizing a Geometric Brownian Motion Stock Path Based Monte Carlo
Simulation that utilized the following key assumptions:
|
June
21, 2019
|
June
30, 2019
|
Stock
Price
|
$
|
0.041
|
|
$
|
0.041
|
|
Fixed
Exercise Price
|
$
|
0.050
|
|
$
|
0.050
|
|
Volatility
|
|
148
|
%
|
|
150
|
%
|
Term
(Years)
|
|
1.00
|
|
|
0.98
|
|
Risk
Free Rate
|
|
1.95
|
%
|
|
1.92
|
%
|
In
addition to the fixed exercise price noted above, the model incorporates the variable conversion price which is simulated as 80%
of the lowest trading price within the ten consecutive days preceding presumed conversion.
The
Company’s term loan and convertible promissory notes consisted of the following as of June 30, 2019.
Notes
Payable at June 30, 2019
|
Notes
|
Discount
|
Notes,
Net of Discount
|
Term
Loan
|
1,000,000
|
(283,735)
|
716,265
|
Convertible
Promissory Notes
|
2,327,000
|
(2,242,485)
|
84,515
|
Total
|
3,327,000
|
(2,526,220)
|
800,780
|
NOTE
6 – FAIR VALUE MEASUREMENT
Fair
value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Fair value measurements are classified and disclosed in one of the following
categories:
Level
1:
|
Unadjusted
quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
GulfSlope considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency
and volume to provide pricing information on an ongoing basis.
|
Level
2:
|
Quoted prices in
markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term
of the asset or liability. This category includes those derivative instruments that GulfSlope values using observable market
data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instrument,
can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.
Instruments in this category include non-exchange traded derivative financial instruments as well as warrants to purchase
common stock and long-term incentive plan liabilities calculated using the Black-Scholes model to estimate the fair value
as of the measurement date.
|
Level
3:
|
Measured based on
prices or valuation models that require inputs that are both significant to the fair value measurement and less observable
from objective sources (i.e. supported by little or no market activity).
|
As
required by ASC 820-10, financial assets and liabilities are classified based on the lowest level of input that is significant
to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement
requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair
value hierarchy levels.
Fair
Value on a Recurring Basis
The
following table sets forth by level within the fair value hierarchy the Company’s derivative financial instruments that
were accounted for at fair value on a recurring basis as of June 30, 2019:
Description
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
|
Total
Fair
Value as of
|
|
Derivative Financial Instrument
at September 30, 2018
|
|
$
|
—
|
|
|
$
|
(271,710
|
)
|
|
$
|
—
|
|
|
$
|
(271,710
|
)
|
Issuance of Derivative Financial Instruments
|
|
|
—
|
|
|
|
(3,521,907
|
)
|
|
|
—
|
|
|
|
(3,521,907
|
)
|
Derivative Financial Instrument at June 30,
2019
|
|
$
|
—
|
|
|
$
|
(3,917,008
|
)
|
|
$
|
—
|
|
|
$
|
(3,917,008
|
)
|
Non-recurring
fair value assessments include impaired oil and natural gas property assessments and stock based compensation. During the nine
months ended June 30, 2019, the Company recorded an impairment of $4.2 million to its oil and natural gas properties for the expiration
of oil and natural gas leases whose value was determined to be zero.
NOTE
7 – COMMON STOCK/PAID IN CAPITAL
As
discussed in Note 5, between June and November 2016, the Company issued 27.9 million warrants in conjunction with the Bridge Financing
Notes. The warrants have an exercise price of $0.03 and a term of the earlier of three 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. During June through August 2017, the maturity date of all of the Bridge Financing Notes was extended to January
15, 2018, in exchange for the issuance of 25% additional warrants. The warrants have an exercise price of $0.03 and the same expiration
date (three years from original transaction) as the original warrants. On January 15, 2018, the maturity date of the Bridge Financing
Notes was extended to April 16, 2018, in exchange for the issuance of 10% additional warrants (see Note 5 for status of notes).
The warrants have an exercise price of $0.10 per share and the same expiration date (three years from original transaction) as
the original warrants. Through June 30, 2019, approximately 3.3 million warrants have been exercised, approximately 4.0 million
have expired and approximately 30.5 million remain outstanding.
The
fair value of the warrants was determined using the Black Scholes valuation model with the following key assumptions:
Warrants
Issue Date
|
|
June
2016
|
|
|
July
2016
|
|
|
August
2016
|
|
|
November
2016
|
|
|
June
2017
|
|
|
July
2017
|
|
|
August
2017
|
|
|
January
2018
|
|
Warrants
Outstanding
|
|
7.6
million
|
|
|
10.0
million
|
|
|
3.3
million
|
|
|
1.7
million
|
|
|
1.9
million
|
|
|
2.5
million
|
|
|
1.25
million
|
|
|
2.3
million
|
|
Stock
Price (1)
|
|
$
|
0.054
|
|
|
$
|
0.040
|
|
|
$
|
0.032
|
|
|
$
|
0.029
|
|
|
$
|
0.025
|
|
|
$
|
0.019
|
|
|
$
|
0.016
|
|
|
$
|
0.11
|
|
Exercise Price
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Term (2)
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
2 years
|
|
|
|
2 years
|
|
|
|
2 years
|
|
|
|
1.5 years
|
|
Risk Free Rate
|
|
|
.87
|
%
|
|
|
.80
|
%
|
|
|
.88
|
%
|
|
|
1.28
|
%
|
|
|
1.35
|
%
|
|
|
1.35
|
%
|
|
|
1.33
|
%
|
|
|
1.89
|
%
|
Volatility
|
|
|
135
|
%
|
|
|
138
|
%
|
|
|
137
|
%
|
|
|
131
|
%
|
|
|
135
|
%
|
|
|
136
|
%
|
|
|
135
|
%
|
|
|
163
|
%
|
(1)
Fair market value on the date of agreement.
(2)
Average term.
Below
is a summary of warrants issued in conjunction with convertible notes which were paid in full as of September 30, 2018. The warrants
are outstanding at June 30, 2019.
|
|
|
|
|
Warrants
Outstanding
|
|
|
|
Warrants
Exercisable
|
|
|
Exercise
Price
|
|
|
|
Number
Outstanding
|
|
|
|
Remaining
Contractual
Life
(Yrs)
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
Number
Exercisable
|
|
|
|
Weighted
Average
Exercise
Price
|
|
$
|
0.10
|
|
|
|
550,000
|
|
|
|
2.50
|
|
|
$
|
0.10
|
|
|
|
550,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
2.71
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
3.30
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
3.46
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
During
the nine months ended June 30, 2019, the Company issued approximately 19.3 million shares of common stock and approximately 9.7
million warrants to accredited investors in a private placement. The funds were received in the prior fiscal year and included
as a liability because the transaction did not close until the current fiscal year and it was moved to equity during the
quarter ended December 31, 2018. Based upon the allocation of proceeds between the common stock and the warrants, approximately
$259,000 was allocated to the warrants.
The
fair value of the warrants was determined using the Black Scholes valuation model with the following key assumptions:
|
|
December
2018
|
|
Number of Warrants Issued
|
|
|
9,662,500
|
|
Stock Price
|
|
$
|
0.044
|
|
Exercise Price
|
|
$
|
0.09
|
|
Term
|
|
|
3 years
|
|
Risk Free Rate
|
|
|
2.46
|
%
|
Volatility
|
|
|
149
|
%
|
As
discussed in Note 5, as of March 6, 2019, the Company had borrowed a total of $10.0 million under the Term Loan Facility and issued
to Delek GOM warrants to purchase approximately 238 million shares of common Stock and Delek GOM fully exercised the warrants
through a Loan Reduction Exercise and was issued approximately 238 million shares of common stock. Upon receiving the proceeds,
the Company allocated the proceeds between debt and warrants on a relative fair value basis, recording a debt discount of approximately
$5.1 million. The exercise of the warrants through the extinguishment of the loan was accounted for as a standard warrant exercise
and an extinguishment of debt including a recognition of a loss in the amount of the debt discount of approximately $5.1 million.
On April 19, 2019, the Company borrowed $1.0 million under the Term Loan Facility and issued to Delek warrants to purchase 23,809,524
shares of stock. the Company allocated the proceeds between debt and warrants on a relative fair value basis, recording a debt
discount of approximately $0.5 million. As of June 30, 2019, the warrants have not been exercised and the term loan is still outstanding.
As
disclosed in Note 5, the Company issued warrants to purchase an aggregate of 50 million shares of common stock at an exercise
price of $0.04 per share in conjunction with the issuance of the Convertible Debentures. Such warrants expire on the fifth anniversary
of issuance. The fair value of the warrants was determined utilizing a Geometric Brownian Motion Stock Path Based Monte Carlo
Simulation.
NOTE
8 – STOCK-BASED COMPENSATION
On
January 1, 2017, 33.5 million stock options, with an exercise price of $0.0278 per share, 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 50% on January 1,
2018. The stock options are exercisable for seven years from the original grant date of January 1, 2017, until January 1, 2024.
On
May 1, 2018, 500,000 stock options, with an exercise price of $0.065 per share were granted to an employee. The stock options
vested on the issue date. The stock options are exercisable for approximately 7.5 years from the date of grant of May 1, 2018
to December 31, 2025.
On
June 1, 2018, 67.5 million stock options, with an exercise price of $0.075 per share were granted to employees, directors and
contractors. 18.5 million of the stock options vested on June 1, 2018, 24 million vested on June 1, 2019 and 25 million will vest
on June 1, 2020 provided the holder continues to serve as an employee or a director on the vesting date. The stock options are
exercisable for approximately 7.5 years from the grant date of June 1, 2018, to December 31, 2025. 49 million of these stock options
were awarded from the Company’s 2018 Omnibus Incentive Plan and 18.5 million stock options were inducement awards.
On
January 2, 2019 the Company issued 1 million stock options to a former employee and contractor. 50% of the stock options vested
on the issue date and the remainder will vest in July 2019. The stock options were valued at approximately $35,000 to be recognized
over the service period of seven months. The stock options are exercisable until December 31, 2025.
The
fair value of the stock-options granted during 2018 and 2019 were determined using the Black Scholes valuation model with the
following key assumptions:
Date
of Grant
|
|
May
1, 2018
|
|
|
June
1, 2018
|
|
|
January
2, 2019
|
|
Number
of Stock Options Granted
|
|
|
500,000
|
|
|
|
67,500,000
|
|
|
|
1,000,000
|
|
Stock Price
|
|
$
|
0.065
|
|
|
$
|
0.075
|
|
|
$
|
0.045
|
|
Exercise Price
|
|
$
|
0.065
|
|
|
$
|
0.075
|
|
|
$
|
0.045
|
|
Expected Life of
Options
|
|
|
4.25
years
|
|
|
|
4.25
years
|
|
|
|
3.75
years
|
|
Risk Free Rate
|
|
|
2.74
|
%
|
|
|
2.675
|
%
|
|
|
2.51
|
%
|
Volatility
|
|
|
145.21
|
%
|
|
|
145.21
|
%
|
|
|
126.37
|
%
|
The
following table summarizes the Company’s stock option activity during the nine months ended June 30, 2019:
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Term
(In years)
|
|
Outstanding
at September 30, 2018
|
|
|
103,500,000
|
|
|
$
|
0.0605
|
|
|
|
|
|
Granted
|
|
|
1,000,000
|
|
|
|
0.0450
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding at
June 30, 2019
|
|
|
104,500,000
|
|
|
$
|
0.0604
|
|
|
|
5.82
|
|
Vested and expected
to vest
|
|
|
104,500,000
|
|
|
$
|
0.0604
|
|
|
|
5.82
|
|
Exercisable at
June 30, 2019
|
|
|
79,000,000
|
|
|
$
|
0.0559
|
|
|
|
5.82
|
|
There
was approximately $0.4 million of intrinsic value for the options outstanding as of June 30, 2019. As of June 30, 2019, there
was approximately $1.5 million of unrecognized stock-based compensation expense to be recognized over a period of 1 year.
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 $415,111 and $1,371,150 in stock based compensation during the three months ended June
30, 2019 and June 30, 2018, respectively. A portion of these costs, $229,255 and $585,858, were capitalized to unproved properties
for the three months ended June 30, 2019 and June 30, 2018, respectively, with the remainder recorded as general and administrative
expenses for each respective period. The Company recognized $1,217,214 and $1,464,534 in stock based compensation for nine months
ended June 30, 2019 and 2018, respectively. A portion of these costs, $659,196 and $613,733, were capitalized to unproved properties
for the nine months ended June 30, 2019 and 2018, respectively.
NOTE
9 – COMMITMENTS AND CONTINGENCIES
In
July 2018, the Company entered into a thirty-nine month lease for approximately 5,000 square feet of office space. Annual base
rent is approximately $94 thousand for the first 18 months, increasing to approximately $97 thousand and $99 thousand, respectively
during the remaining term of the lease.
The
Company reached an agreement with a vendor in August 2018 for the settlement of approximately $1 million in debt. The vendor was
paid approximately $0.16 million in cash and 10 million shares of GulfSlope common stock. The agreement contains a provision that
upon the sale of the common stock if the original debt is not fully satisfied, full payment will be made under a mutually agreed
payment plan. If the stock is sold for a gain any surplus in excess of $1.3 million shall be a credit against future purchases
from the vendor. The agreement was determined to meet the definition of a derivative in accordance with ASC 815. At June 30, 2019
there is a derivative financial instrument liability of approximately $0.5 million.
In
October 2018, the Company purchased a directors and officers’ insurance policy for approximately $160,000 and financed $146,000
of the premium by executing a note payable. The balance of the note payable at June 30, 2019, is approximately $41,000.
From
time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course
of business. No legal proceedings, government actions, administrative actions, investigations or claims are currently pending
against us or involve the Company.
NOTE
10 – SUBSEQUENT EVENTS
Additional
insurance proceeds of approximately $2.5 million were received in July and August 2019 for 100% working interest related to the
Tau well incident (see Note 3).