Filed
Pursuant to Rule 424(b)(3)
Registration No. 333-233021
Prospectus
dated November 5, 2019
GULFSLOPE
ENERGY, INC.
444,095,238
Shares of Common Stock
This
prospectus relates to the sale of up to 444,095,238 shares of our common stock which may be resold from time to time by the
selling security holders identified in this prospectus. The selling security holders acquired the shares of common stock
offered by this prospectus in a series of transactions beginning in March 2019. We are registering the offer and sale of the
shares of common stock to satisfy registration rights we have granted. See “Selling Security Holders” beginning
on page 18 in this prospectus for a complete description of the selling security holders.
The
selling security holders will receive all proceeds from the sale of our common stock, and therefore we will not receive any of
the proceeds from their sale of shares of our common stock. The shares which may be resold by the selling security holders constituted
approximately 41% of our issued and outstanding common stock on the date of this prospectus.
The
market for the common stock is limited, sporadic and volatile. The selling security holders are offering these shares of common
stock. The selling security holders may sell all or a portion of these shares from time to time in market transactions through
any market on which our common stock is then traded, in negotiated transactions or otherwise, and at prices and on terms that
will be determined by the then prevailing market price or at negotiated prices directly or through a broker or brokers, who may
act as agent or as principal or by a combination of such methods of sale. The selling security holders will receive all proceeds
from the sale of the common stock. For additional information on the methods of sale, you should refer to the section entitled
“Plan of Distribution.”
Our
common stock is quoted on both the OTC Bulletin Board (“OTCBB”) and the OTCQB quotation systems under the symbol “GSPE.”
The last bid price of our common stock on November 1, 2019 was $0.03 per share.
This
investment involves a high degree of risk. You should purchase shares only if you can afford a complete loss of your
investment. You should read this prospectus in its entirety and carefully consider the risk factors beginning on page 7 of
this prospectus and the financial data and related notes incorporated by reference before deciding to invest in the
shares.
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or
determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The
date of this prospectus November 5, 2019
TABLE
OF CONTENTS
You
should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information
that is different. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any jurisdiction
where the offer or sale of these securities is not permitted. You should assume that the information contained in this prospectus
is accurate as of the date on the front of this prospectus only. Our business, financial condition, results of operations and
prospects may have changed since that date. This prospectus will be updated as required by law.
PROSPECTUS
SUMMARY
GULFSLOPE
ENERGY, INC.
SUMMARY
This
summary highlights selected information about GulfSlope and this offering. This summary is not complete and does not contain all
of the information that may be important to you. You should read carefully the entire prospectus, including “Risk Factors”
and the other information contained or incorporated by reference in this prospectus before making an investment decision. Unless
otherwise indicated or the context otherwise requires “we,” “us,” “our,” “GulfSlope”,
or “Company” refer to GulfSlope Energy, Inc.
The
Company
GulfSlope
Energy, Inc. is an independent crude oil and natural gas exploration and production company whose interests are concentrated in
the United States Gulf of Mexico federal waters. We are a technically driven company and we use our licensed 2.2 million acres
of three-dimensional (3-D) seismic data to identify, evaluate, and acquire assets with attractive economic profiles. GulfSlope
Energy commenced commercial operations in March 2013. GulfSlope Energy was originally organized as a Utah corporation in 2004
and became a Delaware corporation in 2012.
We
have focused our operations in the Gulf of Mexico because we believe this area provides us with favorable geologic and economic
conditions, including multiple reservoir formations, comprehensive geologic databases, extensive infrastructure, relatively favorable
royalty regime, and an attractive acquisition market and because our management and technical teams have significant experience
and technical expertise in this geologic province. Additionally, we licensed 2.2 million acres of advanced three-dimensional (3D)
seismic data, a significant portion of which has been enhanced by new, state-of-the-art reprocessing and noise attenuation techniques
including reverse time migration depth imaging. We use our broad regional seismic database and our reprocessing efforts to continuously
generate an inventory of high-quality prospects and since inception, we have generated a total of 25 prospects, advancing nine
of those prospects to drill ready status. The use of our extensive seismic database, coupled with our ability, knowledge, and
expertise to effectively reprocess this seismic data, allows us to further optimize our drilling program and to effectively evaluate
acquisition and joint venture opportunities. We consistently assess our prospect inventory in order to deploy capital as efficiently
as possible.
Competitive
Advantages
Experienced
management. Our management has significant experience in finding and developing oil and natural gas. Our team has a track
record of discovering and developing multi-billion dollar projects worldwide. Our management team has over 200 years of combined
industry experience exploring, discovering, and developing oil and natural gas. We successfully deployed a technical team with
over 150 years of combined industry experience exploring for and developing oil and natural gas in the development and execution
of our technical strategy. We believe the application of advanced geophysical techniques on a specific geographic area with unique
geologic features such as conventional reservoirs whose trapping configurations have been obscured by overlying salt layers provides
us with a competitive advantage.
Advanced
seismic image processing. Commercial improvements in 3-D seismic data imaging and the development of advanced processing
algorithms, including pre-stack depth, beam, and reverse time migration have allowed the industry to better distinguish hydrocarbon
traps and identify previously unknown prospects. Specifically, advanced processing techniques improve the definition of the seismic
data from a scale of time to a scale of depth, thus correctly locating the images in three dimensions. Our technical team has
significant experience utilizing advanced seismic image processing techniques in our core area, and applies the industry’s
most advanced noise reduction technology to generate clearer images.
Industry
leading position in our core area. We have licensed 2.2 million acres of 3D seismic data which covers over 440 OCS Federal
lease blocks on the highly prolific Louisiana outer shelf, offshore Gulf of Mexico. We believe the proprietary and state-of-the-art
reprocessing of our licensed 3-D seismic data, along with our proprietary and leading-edge geologic depositional reservoir sand
and petroleum trapping models, gives us an advantage in assembling a high quality drilling portfolio in our core area. We continuously
work to identify additional leasing opportunities to further enhance our drilling portfolio.
Key
Management
John
N. Seitz. Mr. Seitz has served as the Company’s chief executive officer and chairman of the board and director
since May 31, 2013, and served as a consultant to the Company from March 2013 through May 2013. Prior to joining the Company,
Mr. Seitz held positions of increasing responsibility at Anadarko Petroleum Corporation (NYSE: APC), serving most recently as
a director and as president and chief executive officer until 2003. Mr. Seitz also serves on the board of directors of ION
Geophysical Corporation (NYSE: IO), a leading technology focused seismic solutions company. Mr. Seitz is a Certified
Professional Geological Scientist from the American Institute of Professional Geologists and a licensed professional
geoscientist with the State of Texas. Mr. Seitz also serves as a trustee for the American Geological Institute Foundation. In
2000, the Houston Geological Society honored Mr. Seitz as a “Legend in Wildcatting,” and he is a member of the
All American Wildcatters. Mr. Seitz holds a Bachelor of Science degree in Geology from the University of Pittsburgh, a
Master of Science degree in Geology from Rensselaer Polytechnic Institute, and has completed the Advanced Management Program
at the Wharton School.
John
H. Malanga. Mr. Malanga has served as chief financial officer since July 2014 and is responsible for leading the financial
function of the organization, overseeing strategic planning and analysis, accounting and reporting, treasury, tax, audit and risk
management. From 2005 to 2014, Mr. Malanga worked as a senior investment banker with the energy firms of Weisser, Johnson &
Co. and Sanders Morris Harris Inc. Mr. Malanga began his investment banking career with Jefferies & Co. Over his career, he
has participated in capital markets, mergers and acquisitions, and financial advisory transactions with particular emphasis on
providing strategic and financial advice to emerging growth companies. Mr. Malanga holds a Bachelor of Science in Economics from
Texas A&M University and a Master in Business Administration with a concentration in finance from Rice University.
Charles
G. Hughes. Mr. Hughes has served as vice president land since April 2014. Mr. Hughes’ executive responsibilities include
all land and industry partner related matters. He formerly served as general manager – land and business development for
Marubeni Oil & Gas (USA), Inc. from 2007 to 2014. From 1980 to 2007, Mr. Hughes served in roles of increasing responsibility
both onshore and offshore in the Gulf of Mexico at Anadarko Petroleum Corporation. Mr. Hughes is a member and former Chairman
of the OCS Advisory Board, a member of the Association of Professional Landmen, the Houston Association of Professional Landmen
and the Professional Landmen’s Association of New Orleans. Mr. Hughes received his Bachelor of Business Administration in
Petroleum Land Management from the University of Texas.
Richard
S. Langdon. Richard S. Langdon has served as a director of the Company since March 2014. Mr. Langdon is currently the executive
vice president and chief financial officer of Altamont Energy, Inc., a newly formed privately held exploration and production
company. Mr. Langdon served as the president, chief executive officer and outside director of Badlands Energy, Inc. and its predecessor
entity, Gasco Energy, Inc. since May 2013 and Debtor-in Possession since August 2017. Prior to assuming the President and CEO
role, Mr. Langdon had served as a Gasco Energy Inc. outside board member since 2003. Mr. Langdon serves as a member of the board
of managers of Sanchez Midstream Partners, LP, and is a member of its Audit, Nominating and Corporate Governance and Conflicts
Committees. Mr. Langdon was the president and chief executive officer of KMD Operating Company, LLC (“KMD Operating”),
and its predecessor entity, Matris Exploration Company LP (“Matris Exploration”), both privately held exploration
and production companies, from July 2004 through December 2015. Mr. Langdon was executive vice president and chief operating officer
of KMD Operating, from August 2009, until the merger of Matris Exploration into KMD Operating in November 2011. From 1997 until
2002, Mr. Langdon served as executive vice president and chief financial officer of EEX Corporation, a publicly traded exploration
and production company that merged with Newfield Exploration Company in 2002. Prior to that, he held various positions with the
Pennzoil Companies from 1991 to 1996, including executive vice president - International Marketing - Pennzoil Products Company;
senior vice president - Business Development - Pennzoil Company and senior vice president - Commercial & Control - Pennzoil
Exploration & Production Company. Mr. Langdon graduated from the University of Texas at Austin with a Bachelor of Science
degree in Mechanical Engineering in 1972 and a Masters of Business Administration in 1974.
Paul
L. Morris. Mr. Morris has served as a director of the Company since March 2014. Mr. Morris founded Elk River Resources, LLC
in August 2013 to explore and develop oil and gas potential in the oil-producing regions of the southwest United States. Mr. Morris
has served as chairman and chief executive officer of Elk River Resources since inception. Prior to Elk River Resources, Mr. Morris
served as president and chief executive officer from 1988 to September 2013 of Wagner & Brown, Ltd., an independent oil and
gas company headquartered in Midland, Texas. With Wagner & Brown, Mr. Morris oversaw all company operations, including exploration
and production activities, in eight states as well as in France, England and Australia. Mr. Morris also oversaw affiliates involved
in natural gas gathering and marketing, crude oil purchasing and reselling, pipeline development, construction and operation,
and compressed natural gas (CNG) design, fabrication and operations. Mr. Morris served as president of Banner Energy from 1981
until 1988. Mr. Morris graduated from the University of Cincinnati with a Bachelor of Science degree in Mechanical Engineering
in 1964. Mr. Morris has also completed the Executive Management Program in the College of Business Administration of Penn State
University.
Recent
Developments
Drilling
of Canoe and Tau Prospects
We
are currently the operator of two wells drilled in the Gulf of Mexico. We commenced drilling operations at the Canoe prospect
in August 2018 and drilling was completed later that month. The well was drilled to a total of 5,765 feet measured depth (5,700
feet true vertical depth) and no problems were encountered while drilling. Based on Logging-While-Drilling and Isotube analysis
of hydrocarbon samples, oil sands were encountered in the northwest center of the block. A full integration of the well information
and seismic data is being performed for further evaluation of the shallow potential of the wellbore and the block, and to define
commerciality of these oil pays. The well was temporarily abandoned and multiple open-hole plugs were set across several intervals.
The well is equipped with a mud-line suspension system for possible future re-entry. A deeper subsalt prospect on the Canoe lease
block, for which the block was originally leased, is not yet drill-ready and is pending further seismic enhancement.
The
second well, Tau prospect, is located approximately six miles northeast of the Mahogany Field, discovered in 1993. The Mahogany
Field is recognized as the first commercial discovery below allocthonous salt in the Gulf of Mexico. The Tau Prospect is defined
by mapping of 3D seismic reprocessed by RTM methods. Drilling operations on the Tau subsalt prospect commenced in September 2018.
The wellbore is designed to test multiple Miocene horizons trapped against a well-defined salt flank, including equivalent reservoir
sands discovered and developed at the nearby Mahogany Field. The surface location for Tau is located in 305 feet of water. In
January 2019, the Tau well experienced an underground control of well event and as a result, we filed an insurance claim with
its insurance underwriters for a net amount of approximately $10.8 million for 100% working interest. The insurance claim was
subsequently approved, and approximately $8 million was received in April and May 2019. On May 13, 2019, we announced the Tau
well 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. We were unable to
continue drilling due to equipment limitations and contractual obligations related to the drilling rig for another operator. Due
to these factors, we elected to temporarily abandon this well in a manner that would allow for re-entry at a later time. We are
currently evaluating various options related to future operations in this wellbore and testing of the deeper Tau prospect.
Term
Loan
On
March 1, 2019, we entered into a Term Loan Agreement by and among GulfSlope, as borrower, and Delek, as lender. In the Term Loan
Agreement, Delek agreed to provide us 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. 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 GulfSlope, as borrower, John N. Seitz, as subordinated lender (the “Subordinated Lender”), and Delek, as senior
lender; (ii) a Security Agreement (the “Security Agreement”) among GulfSlope, 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. We
may elect, at our 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. We are 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 our general corporate purposes) or receipt of any cash
proceeds from any payments, refunds, rebates or other similar payments and amounts under the joint operating agreement. Amounts
outstanding under the Term Loan Agreement are secured by a security interest in substantially all of our properties and assets.
We had borrowed a total of $11.0 million under the Term Loan Facility and issued to Delek GOM warrants to purchase 261,904,762
shares of Common Stock; and Delek GOM exercised warrants for 238,095,238 shares of Common Stock through a Loan Reduction Exercise,
thereby leaving $1 million of outstanding obligations to Delek GOM. In connection with the Term Loan, we entered into a registration
rights agreement with Delek pursuant to which we have agreed to register the shares of Common Stock issued to them for public
resale upon request. The maturity date of the $1,000,000 remaining balance of the term loan is October 19, 2019 and an
agreement is being negotiated to extend the maturity date.
On
October 22, 2019, the Company and Delek executed a Post-Drilling Agreement Regarding Certain Issues, pursuant to which, as payoff
for the Company’s outstanding obligations of $1,220,548 (“Term Loan Payoff Amount”) to Delek under the Term
Loan Facility, the Company issued a convertible debenture to Delek (the “Delek Convertible Debenture”) in a principal
amount equal to the Term Loan Payoff Amount, as a consequence of which the Term Loan Facility has been terminated.
The
Delek Convertible Debenture is convertible at the option of Delek at any time in whole or in part for up to 24,410,960 shares
of Common Stock at a conversion price of $0.05 per share. Interest on the Delek Convertible Debenture is accruable at 12%
per annum and the maturity of the Delek Convertible Debenture is October 22, 2020 (which interest rate will increase to 15% per
annum upon any Event of Default as defined in the Delek Convertible Debenture). The Company has a right to prepay the Delek
Convertible Debenture prior to maturity for an amount equal to the outstanding principal balance plus accrued and unpaid interest.
Absent any restrictions under the federal securities laws, Delek’s ability to sell shares of common stock of the Company
issued upon conversion of the Delek Convertible Debenture will be limited, in any one-month period, to 10% (ten percent) of the
total volume of such converted shares.
Issuance
of Convertible Debentures
On
June 21, 2019, we entered into a Securities Purchase Agreement (“SPA”) with a qualified institutional buyer
(“Buyer”). Under the terms of the SPA, we will issue and sell to Buyer up to an aggregate of $3.0 million of
convertible debentures (“Convertible Debentures”), which shall be convertible (as converted, the
“Conversion Shares”) into shares of Common Stock, of which $2,100,000 were purchased upon the signing of the SPA
(the “First Closing”), $400,000 were purchased upon the filing of a registration statement with the SEC
registering the resale of the Conversion Shares by the Buyer, and $500,000 shall be purchased on or about the date the
registration statement has first been declared effective by the SEC (collectively, the “Offering”). The
Convertible Debenture bears an annual interest rate equal to 8% and a maturity date of June 21, 2020, which may be
extended at the option of Buyer. At maturity, the Company is obligated to pay the holder an amount in cash representing all
outstanding principal and accrued and unpaid interest. Subject to the terms of the Convertible Debenture, at any time the
Holder is entitled to convert any portion of the outstanding and unpaid principal and accrued interest into fully paid and
nonassessable shares of Common Stock of the Company. The number of shares of Common Stock issuable upon conversion
is determined by dividing the amount to be converted by the lesser of (x) $0.05 per share or (y) 80% of the lowest daily VWAP
price (as reported by Bloomberg, LP) for the ten (10) consecutive trading days immediately preceding the date of
determination. At the First Closing, the Company also issued to Buyer warrants to purchase an aggregate of 50.0 million
shares of Common Stock at an exercise price of $0.04 per share. The warrants expire on the fifth (5 th )
anniversary after issuance.
In
connection with the issuance of the Convertible Debenture and warrants, we entered into registration rights agreement pursuant
to which we have, among other things, agreed to file a registration statement with the SEC within thirty days of the SPA registering
for public resale the shares of Common Stock underlying the Convertible Debenture and warrants.
Risk
Factors
Investing
in our common stock involves risks that include the speculative nature of oil and natural gas exploration, competition, volatile
oil and natural gas prices and other material factors. You should read carefully the section of this prospectus entitled “Risk
Factors” beginning on page 8 for an explanation of these risks before investing in our common stock. In particular, the
following considerations may offset our competitive strengths or have a negative effect on our strategy or operating activities,
which could cause a decrease in the price of our common stock and a loss of all or part of your investment:
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Our
business is difficult to evaluate because of our limited operating history;
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Failure
to enter into leases with BOEM on our prospects;
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Failure
to enter into strategic partnerships, joint operating agreements and farm out agreements needed to exploit our prospects;
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Failure
to raise sufficient capital needed to implement our business plan;
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There exists substantial doubt about our ability to continue as
a going concern;
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Difficulties
managing the growth of our business may adversely affect our financial condition and results of operations;
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Failure
to develop our prospects;
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Our
exploration and development operations require substantial capital that we may be unable to obtain, which could lead to a
loss of properties and a decline in our reserves;
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Our
future success depends on our ability to find, develop or acquire oil and natural gas reserves;
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The
volatility of oil and natural gas prices due to factors beyond our control greatly affects our profitability;
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Our
prospects are all in the Gulf of Mexico, making us vulnerable to risks associated with a concentration of operations in a
single geographic area; and
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Our
operations are subject to various governmental regulations which require compliance that can be burdensome and expensive;
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Corporate
Information
Our
address is 1331 Lamar St., Suite 1665, Houston, Texas 77010, and our telephone number is (281) 918-4100. Our web site can be accessed
at www.gulfslope.com. The contents of our website do not form a part of, and are not incorporated by reference in, this prospectus
or any Offering Statement that we have filed with the SEC. You may access and read our SEC filings through the SEC’s web
site (www.sec.gov), which contains reports, proxy and information statements and other information regarding registrants, including
us, that file electronically with the SEC.
About
This Offering
Common
stock offered by selling security holders
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A
total of up to 444,095,238 shares of common stock. The selling security holders may from time to time sell some, all or none
of the shares of common stock pursuant to which this prospectus is a part.
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Shares
outstanding prior to the offering
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1,092,266,844
shares as of October 14, 2019
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Shares
to be outstanding after the offering
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1,298,266,844
shares
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Use
of proceeds
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The
selling security holders will receive all of the proceeds from the sale of shares of our common stock. We will not receive
any proceeds from the sale of the common stock.
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Risk
Factors
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The
securities offered hereby involve a high degree of risk. See “Risk Factors.”
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Stock
symbol
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GSPE
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RISK
FACTORS
Investing
in our common stock involves a high degree of risk. You should carefully consider each of the following risks, together with
all other information set forth in this prospectus, including the consolidated financial statements and the related notes and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual
Report on Form 10-K for the fiscal year ended September 30, 2018, as updated in our Quarterly Reports on Form 10-Q for the
fiscal quarters ended December 31, 2018, March 31, 2019 and June 30, 2019, before deciding whether to invest in our
common stock.. The risks and uncertainties described below are not the only ones we face. Other risks and uncertainties,
including those that we do not currently consider material, may impair our business. If any of the adverse developments
discussed below actually occur, our business, financial condition, operating results or cash flows could be materially and
adversely affected. This could cause the value of our common stock to decline, and you may lose all or part of
your investment.
Risks
Related to Our Business and Financial Condition
Our
business plan requires substantial additional capital, which we may be unable to raise on acceptable terms, if at all, which may
in turn limit our ability to execute our business strategy.
We
have planned operating expenditures through September 2020, of approximately $10.0 million, which includes $6.0 million
for drilling related capital expenditures, $1.5 million of other operations related expenditures to include but not limited
to bonus payments for new leases and lease rentals to the BOEM and seismic reprocessing costs, and $2.5 million in general
and administrative expenses. We will need to raise additional capital in 2020 and may be required to enter into debt and
equity financing arrangements and joint ventures. There is no assurance that we will be able to raise the capital necessary
to fund our business plan and our operations through September 2020. Failure to raise the required capital to fund our 2020
operations, on favorable terms or at all, will have a material adverse effect on us, and will likely cause us to
curtail operations or suspend our 2020 business plan.
We
expect our capital outlays and operating expenditures to increase substantially over at least the next several years as we expand
our operations. Lease acquisition costs and drilling operations are very expensive, and if we are to expand our operations after
2019 we will need to raise substantial additional capital through additional equity offerings, strategic alliances or debt financing.
Our
future capital requirements will depend on many factors, including:
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the
number, location, terms and pricing of our anticipated lease acquisitions;
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our
financing of the lease acquisitions and associated bonding;
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our
ability to enter into partnerships and farm-outs with other oil and gas E&P companies and/or financial investors on satisfactory
terms;
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location
of any drilling activities, whether onshore or offshore, as well as the depth of any wells to be drilled;
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cost
of additional seismic data to license as well as the reprocessing cost;
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the
scope, rate of progress and cost of any exploration and production activities;
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oil
and natural gas prices;
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our
ability to locate and acquire hydrocarbon reserves;
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our
ability to produce those oil or natural gas reserves;
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access
to oil and gas services and existing pipeline infrastructure;
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the
terms and timing of any drilling and other production-related arrangements that we may enter into;
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the
cost and timing of governmental approvals and/or concessions;
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the
cost, number, and access to qualified industry professionals we employ; and
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the
effects of competition by larger companies operating in the oil and gas industry.
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To
the extent we are able to raise capital through equity financings, they may be dilutive to our stockholders. Alternative forms
of future financings may include preferred stock with preferences or rights superior to our common stock. Debt financings may
involve a pledge of assets and will rank senior to our common stock. We have historically financed our operations through best
efforts private equity and debt financings. We do not have any credit or equity facilities available with financial institutions,
stockholders or third party investors, and will continue to rely on best efforts financings. There is no assurance that we can
raise the capital necessary to expand our operations. Failure to raise the required capital to fund operations, on favorable terms
or at all, will have a material adverse effect on us, and will likely cause us to curtail or cease operations.
Our
financial statements express substantial doubt about our ability to continue as a going concern, raising questions as to our continued
existence.
We
have incurred losses since our inception resulting in an accumulated deficit of approximately $54.6 million at June 30, 2019,
and we have a net capital deficiency. Further losses are anticipated as we continue to develop our business. To continue as a
going concern, we estimate that we will need approximately $10 million to meet our obligations and planned operating 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. We plan to finance our operations through equity and/or debt financings, and strategic
alliances. There are no assurances that financing will be available with acceptable terms, if at all. If we are not successful
in obtaining financing, our 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.
If
we fail to establish and maintain proper internal controls, our ability to produce accurate financial statements or comply with
applicable regulations could be impaired.
We
are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley
Act”). Section 404 requires that we document and test our internal control over financial reporting and issue
management’s assessment of our internal control over financial reporting. In our annual report for the year ended
September 30, 2018, we identified and disclosed material weaknesses related to the failure to record interest on an interest
bearing payable and failure to accurately value a fair value financial instrument issued in settlement of a liability. These
errors are a result of insufficient control activities related to the review and monitoring of Company contracts to ensure
the proper accounting for such contracts. In connection with the restatement of our condensed financial statements, as of
March 31, 2019 and for the three and six-months ended, we identified an additional material weakness in our internal control
over financial reporting. This additional material weakness is due to a lack of effective controls over the valuation of
accounts receivable which resulted in a material error in the financial statements. In an attempt to remediate the material
weaknesses, management has developed a contract review process, increased the use of external consultants and
is investigating expansion of the accounting department in its ongoing remediation efforts of the material weaknesses. We also are
developing a plan for remediation of controls over the valuation of accounts receivable from joint operations.
If
we fail to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, the accuracy and timeliness of the filing of
our annual and quarterly reports may be materially adversely affected and could cause investors to lose confidence in our reported
financial information, which could have a negative effect on the trading price of our Common Stock.
We
have no proved reserves and areas that we decide to drill may not yield oil and natural gas in commercial quantities or quality,
or at all.
We
have no proved reserves. We have identified prospects based on available seismic and geological information that indicates the
potential presence of oil and natural gas. However, the areas we decide to drill may not yield oil and natural gas in commercial
quantities or quality, or at all. Most of our current prospects are in various stages of evaluation that will require substantial
additional seismic data reprocessing and interpretation. Even when properly used and interpreted, 3-D seismic data and visualization
techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do
not enable the interpreter to know whether hydrocarbons are, in fact, present in those structures. We have drilled two wells,
one of which is currently being evaluated. Accordingly, we do not know if our prospects will contain oil and natural gas in sufficient
quantities or quality to recover drilling and completion costs or to be economically viable. Even if oil and natural gas is found
on our prospects in commercial quantities, construction costs of pipelines and other transportation costs may prevent such prospects
from being economically viable. If one or more of our prospects do not prove to be successful, our business, financial condition
and results of operations will be materially adversely affected.
We
are substantially dependent on certain members of our management and technical team.
Investors
in our common stock must rely upon the ability, expertise, judgment and discretion of our management and the success of our technical
team in identifying and acquiring leasehold interests, as well as discovering and developing any oil and gas reserves. Our performance
and success are dependent, in part, upon key members of our management and technical team, and their loss or departure could be
detrimental to our future success. In making a decision to invest in our common stock, you must be willing to rely to a significant
extent on our management’s discretion and judgment. The loss of any of our management and technical team members could have
a material adverse effect on our business prospects, results of operations and financial condition, as well as on the market price
of our common stock. We may not be able to find replacement personnel with comparable skills. If we are unable to attract and
retain key personnel, our business may be adversely affected. We do not currently maintain key-man insurance on any member of
the management team.
The
seismic data we use are subject to non-exclusive license arrangements and may be licensed to our competitors, which could adversely
affect the execution of our acquisition strategy and business plan.
Our
3-D seismic license agreements are non-exclusive, industry-standard agreements. Accordingly, the licensor of such seismic data
has the right to license the same data that we acquired to our competitors, which could adversely affect our acquisition strategy
and the execution of our business plan. We are not authorized to assign any of our rights under our license agreements, including
a transaction with a potential joint venture partner or acquirer, without complying with the terms of the license agreements and
a payment to the licensor (by us or the acquirer in the event of a change of control transaction or our partner in a joint venture
transaction). However, our interpretation of this seismic data and importantly, reprocessing and the modeling of certain seismic
data utilized to identify and technically support oil and gas prospects, is unique and proprietary to the Company.
We
are an oil and natural gas exploration company with limited operating history, and there can be no assurance that we will be successful
in executing our business plan. We may never attain profitability.
We
commenced our business activity in March 2013, when we entered into 3-D license agreements covering approximately 2.2
million acres, and have entered into additional 3-D license agreements with seismic companies to acquire additional data and
reprocess seismic data. While we intend to engage in the drilling, development, and production of oil and natural gas in the
future, we currently have no reserves or production. As we are a relatively new business, we are subject to all the risks and
uncertainties, which are characteristic of a new business enterprise, including the substantial problems, expenses and
other difficulties typically encountered in the course of its business, in addition to normal business risks, as well as
those risks that are specific to the oil and gas industry. Investors should evaluate us in light of the delays, expenses,
problems and uncertainties frequently encountered by companies developing markets for new products, services and
technologies. We may never overcome these obstacles.
We
may be unable to access the capital markets to obtain additional capital that we will require to implement our business plan,
which would restrict our ability to grow.
Our
current capital on hand is insufficient to enable us to execute our business strategy beyond December 2019. Though,
our inability to complete the agreement to extend the maturity date of the $1.0 million remaining balance of the Delek term
loan due October 19, 2019 could further effect our liquidity and business plan. Because we are a company with limited
resources, we may not be able to compete in the capital markets with much larger, established companies that have ready
access to capital. Our ability to obtain needed financing may be impaired by conditions and instability in the capital
markets (both generally and in the oil and gas industry in particular), our status as a new enterprise without a demonstrated
operating history, the location of our leases and prices of oil and natural gas on the commodities markets (which will impact
the amount of financing available to us), and/or the loss of key consultants and management. Further, if oil and/or natural
gas prices on the commodities markets continue to decrease, then potential revenues, if any, will decrease, which
may increase our requirements for capital. Some of the future contractual arrangements governing our operations may require
us to maintain minimum capital (both from a legal and practical perspective), and we may lose our contractual rights if we
do not have the required minimum capital. If the amount of capital we can raise is not sufficient, we may be required to
curtail or cease our operations.
We
have a limited operating history with significant losses and expect losses to continue for the foreseeable future.
We
have incurred annual operating losses since our inception. As a result, at June 30, 2019, we had an accumulated deficit of approximately
$54.6 million. We had no revenues in 2018 and do not anticipate generating revenues in fiscal 2019, or in subsequent periods unless
we are successful in discovering economically recoverable oil or gas reserves. We expect that our operating expenses will increase
as we develop our projects. We expect continued losses in fiscal year 2019, and thereafter until future discoveries are brought
online and we begin producing oil and gas.
The
terms of the definitive documents governing the Term Loan Facility may restrict our operations, particularly our ability to respond
to changes or take certain actions. If we are unable to repay the Term Loan Facility as it becomes due, we may be unable to continue
as a going concern.
On
March 1, 2019, we entered into a Term Loan Agreement by and among GulfSlope, as borrower, and Delek, as lender. In the Term
Loan Agreement, Delek agreed to provide us 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”). Borrowings under the
Term Loan Facility mature in six months and bear interest at the rate of 5.0% and are secured by the assets of the Company.
As of the date of this prospectus there is $1.0 million outstanding under the Term Loan Facility and no additional amounts
available to be borrowed. The maturity date of the $1,000,000 remaining balance of the term loan is October 19, 2019
and an agreement is being negotiated to extend the maturity date.
The
definitive documents governing the Term Loan Facility contain a number of restrictive covenants that impose operating and financial
restrictions on us and limit our ability to engage in acts that may be in our long-term best interest, including restrictions
on the ability to: incur indebtedness, grant liens, undergo certain fundamental changes, dispose of assets, make investments,
enter into transactions with affiliates, and make certain restricted payments, in each case subject to limitations and exceptions
to be set forth in the definitive documentation for the Term Loan Facility. The definitive documentation governing the Term Loan
Facility also contains customary events of default that include, among other things, certain payment defaults, covenant defaults,
cross-defaults to other indebtedness, change of control defaults, judgment defaults, and bankruptcy and insolvency defaults. Such
events of default may allow the creditor to accelerate the related debt and may result in the acceleration of any other debt to
which a cross-acceleration or cross-default provision applies which could have a material adverse effect on our business, operations
and financial results. Furthermore, if we are unable to repay the amounts due and payable under the definitive documentation governing
our Term Loan Facility, the lender could proceed against the collateral granted to them to secure that indebtedness which could
force us into bankruptcy or liquidation. In the event our lender accelerated the repayment of the borrowings, we may not have
sufficient assets to repay that indebtedness. Any acceleration of amounts due under the Term Loan Facility would likely have a
material adverse effect on us and would threaten our ability to continue as a going concern. As a result of these restrictions,
we may be limited in how we conduct business; unable to continue our business operations; unable to raise additional debt or equity
financing to operate during general economic or business downturns; or unable to compete effectively or to take advantage of new
business opportunities.
Our
lack of diversification increases the risk of an investment in our common stock.
Our
business will focus on the oil and gas industry in commercially advantageous offshore areas of the United States. Larger companies
have the ability to manage their risk by diversification. However, we lack diversification, in terms of both the nature and geographic
scope of our business. As a result, factors affecting our industry, or the regions in which we operate, will likely impact us
more acutely than if our business were diversified.
Strategic
relationships upon which we rely are subject to change, which may diminish our ability to conduct our operations.
Our
ability to successfully bid on and acquire properties, to discover resources, to participate in drilling opportunities and to
identify and enter into commercial arrangements with customers and partners, depends on developing and maintaining close working
relationships with industry participants and on our ability to select and evaluate suitable properties. Further, we must consummate
transactions in a highly competitive environment. These realities are subject to change and may impair our ability to grow.
To
develop our business, we will endeavor to use the relationships of our management and to enter into strategic relationships, which
may take the form of joint ventures with other private parties or with local government bodies or contractual arrangements with
other oil and gas companies, including those that supply equipment and other resources that we will use in our business. We may
not be able to establish these strategic relationships, or if established, we may not be able to maintain them. In addition, the
dynamics of our relationships with strategic partners may require that we incur expenses or undertake activities we would not
otherwise incur or undertake in order to fulfill our obligations to these partners or maintain our relationships. If our strategic
relationships are not established or maintained, our business prospects may be limited, which could diminish our ability to conduct
our operations.
Competition
in obtaining rights to explore and develop oil and gas reserves may impair our business.
The
oil and gas industry is extremely competitive. Present levels of competition for oil and gas leases and drilling rights are high
worldwide. Other oil and gas companies with greater resources may compete with us by bidding for leases and drilling rights, as
well as other properties and services we may need to operate our business. Additionally, other companies may compete with us in
obtaining capital from investors. Competitors include larger, established exploration and production companies, which have access
to greater financial and other resources than we have currently, and may be more successful in the recruitment and retention of
qualified employees and may conduct their own refining and petroleum marketing operations, giving them a competitive advantage.
In addition, actual or potential competitors may be strengthened through the acquisition of additional assets and interests. Because
of some or all of these factors, we may not be able to compete.
We
may not be able to effectively manage our growth, which may harm our future profitability.
We
are currently not profitable however, our strategy envisions building and expanding our business in order to become profitable.
If we fail to effectively manage our growth, our financial results will be adversely affected. Growth may place a strain on our
management systems and resources. We must continue to refine and expand our business development capabilities, our systems, processes,
and our access to financing sources. As we grow, we must continue to hire, train, supervise and manage new employees. We cannot
assure you that we will be able to:
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expand
our systems effectively or efficiently or in a timely manner;
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optimally
allocate our human resources; or
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identify
and hire qualified employees or retain valued employees.
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If
we are unable to manage our growth and our operations, our financial results could be adversely affected, which could prevent
us from ever attaining profitability.
Any
change to government regulation/administrative practices may have a negative impact on our ability to operate profitably.
The
laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency impacting
any jurisdiction where we might conduct our business activities, including the BOEM and EPA, may be changed, applied or interpreted
in a manner which may fundamentally alter the ability of the Company to conduct business. The actions, policies or regulations,
or changes thereto, of any government body or regulatory agency or other special interest groups, may have a detrimental effect
on us. Any or all of these situations may have a negative impact on our ability to operate profitably. Additionally, certain bonding
and/or insurance may be required in jurisdictions in which we chose to have operations, increasing our costs to operate.
Risks
Related to Our Industry
An
extended decline in oil prices and significant fluctuations in energy prices may continue indefinitely, affecting the commercial
viability of our projects and negatively affecting our business prospects and viability.
The
commercial viability of our projects is highly dependent on the price of oil and natural gas. Prices also affect our ability to
borrow money or raise additional capital. We will need to obtain additional financing to fund our activities. Our ability to do
so may be adversely affected by an extended decline in oil prices. If we are unable to obtain such financing when needed, on commercially
reasonable terms, we may be required to cease our operations, which could have a materially adverse impact on the market price
of our stock. An extended decline in oil prices may have a material adverse effect on our planned operations, financial condition
and level of expenditures that we may ultimately have to make for the development of any oil and natural gas reserves we may acquire.
The
oil and gas markets are very volatile, and we cannot predict future oil and natural gas prices. Historically, oil and natural
gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty
and a variety of additional factors that are beyond our control. In addition, the prices we receive for any future production
and the levels of any future production and reserves will depend on numerous factors beyond our control. These factors include,
but are not limited to, the following:
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changes
in global supply and demand for oil and natural gas by both refineries and end users;
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the
ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production
controls;
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the
price and volume of imports of foreign oil and natural gas;
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political
and economic conditions, including embargoes, in oil-producing countries or affecting other oil-producing activity;
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the
level of global oil and gas exploration and production activity;
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the
level of global oil and gas inventories;
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government
policies to discourage use of fuels that emit GHGs and encourage use of alternative energy;
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technological
advances affecting energy consumption;
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domestic
and foreign governmental regulations and taxes;
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proximity
and capacity of oil and gas pipelines and other transportation facilities;
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the
price and availability of competitors’ supplies of oil and gas in captive market areas;
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the
introduction, price and availability of alternative forms of fuel to replace or compete with oil and natural gas;
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import
and export regulations for LNG and/or refined products derived from oil and gas production from the US;
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speculation
in the price of commodities in the commodity futures market;
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the
availability of drilling rigs and completion equipment; and
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the
overall economic environment.
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Further,
oil and natural gas prices do not necessarily fluctuate in direct relationship to each other. The price of oil has been extremely
volatile, and we expect this volatility to continue for the foreseeable future. For example, during the period from January 1,
2014 to December 31, 2018, NYMEX West Texas Intermediate oil prices ranged from a high of $107.95 per bbl to a low of $26.19 per
bbl. Average daily prices for NYMEX Henry Hub gas ranged from a high of $8.15 per MMBtu to a low of $1.49 per MMBtu during the
same period. This near term volatility may affect future prices in 2019 and beyond. The volatility of the energy markets makes
it difficult to predict future oil and natural gas price movements with any certainty.
Exploration
for oil and natural gas is risky and may not be commercially successful, impairing our ability to generate revenues.
Oil
and natural gas exploration involves a high degree of risk. These risks are more acute in the early stages of exploration. We
may not discover oil or natural gas in commercially viable quantities. It is difficult to project the costs of implementing an
exploratory drilling program due to the inherent uncertainties of drilling in unknown formations, the costs associated with encountering
various drilling conditions, such as over pressured zones (which may lead to blowouts, fires, and explosions) and tools lost in
the hole, and changes in drilling plans, locations as a result of prior exploratory wells or additional seismic data and interpretations
thereof, and final commercial terms negotiated with partners. Developing exploratory oil and gas properties requires significant
capital expenditures and involves a high degree of financial risk. The budgeted costs of drilling, completing, and operating exploratory
wells are often exceeded and can increase significantly when drilling costs rise. Drilling may be unsuccessful for many reasons,
including title problems, adverse weather conditions (which may be more frequent as climate changes), cost overruns, equipment
shortages, mechanical difficulties, and environmental hazards (including spills and toxic gas releases). There is no assurance
that we will successfully complete any wells or if successful, that the wells would be economically successful. Moreover, the
successful drilling or completion of any oil or gas well does not ensure a profit on investment. Exploratory wells bear a much
greater risk of loss than development wells. We cannot assure you that our exploration, exploitation and development activities
will result in profitable operations, the result of which will materially adversely affect our business.
Oil
and natural gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays
in excess of those anticipated, causing an adverse effect on the Company.
Oil
and natural gas operations are subject to national, state, and local laws relating to the protection of the environment, including
laws regulating removal of natural resources from the ground, spill response capabilities, and the discharge of materials into
the environment. Oil and natural gas operations are also subject to national, state, and local laws and regulations, which seek
to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Environmental standards
imposed by national, state or local authorities may be changed and any such changes may have material adverse effects on our activities.
Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus
causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages which
we are unlikely to insure against fully due to prohibitive premium costs and other reasons. To date, we have not been required
to spend any amounts on compliance with environmental regulations; however, we may be required to expend substantial sums in the
future as we develop projects, and this may affect our ability to begin, maintain, or expand our operations.
We
may be dependent upon third party operators of any oil and natural gas properties we may acquire.
Third
parties may act as the operators of our oil and natural gas wells and control the drilling and operating activities to be conducted
on our properties, if and when such assets are acquired. Therefore, we may have limited control over certain decisions related
to activities on our properties relating to the timing, costs, procedure, and location of drilling or production activities, which
could affect the Company’s results.
Our
leases may be terminated if we are unable to make future lease payments or if we do not drill in a timely manner.
The
failure to timely affect all lease related payments could cause the leases to be terminated by the BOEM. Net lease rental
obligations on our existing prospects are expected to be approximately $0.5 million in fiscal year 2019. Our leases have a
five-year primary term, expiring in 2020, 2022 and 2023. Each lease may be extended by drilling a well capable of producing
hydrocarbons and submitting a Plan of Production approved by the regulatory authorities. In addition, the terms of our leases
may be extended for an additional three years, provided a well is spud targeting hydrocarbons with a true vertical depth in
excess of 25,000 feet within the primary term of the lease. In addition, the terms of our leases may also be extended by the
granting of a Subsalt Lease Term Extension, should we elect to apply and qualify for said extension on any lease(s). If we
are not successful in raising additional capital, we may be unable to successfully exploit our properties, and we may lose
the rights to develop these properties upon the expiration of our leases. If not successful in securing extensions, those
leases will be subject to the competitive bid process in the twice a year BOEM OCS Lease Sales.
We
may not be able to develop oil and natural gas reserves on an economically viable basis.
To
the extent that we succeed in discovering oil and/or natural gas reserves, we cannot assure that these reserves will be capable
of production levels we project or in sufficient quantities to be commercially viable. On a long-term basis, our viability depends
on our ability to find, develop and commercially produce oil and gas reserves, assuming we acquire leases or drilling rights.
Our future reserves, if any, will depend not only on our ability to develop then-existing properties, but also on our ability
to identify and acquire additional suitable producing properties or prospects, to find markets for the oil and natural gas we
develop and to effectively distribute our production into markets.
Future
oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not
produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure
a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental
damage could greatly increase the cost of operations and various field operating conditions may adversely affect the production
from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-downs of wells resulting
from extreme weather conditions, problems in storage and distribution and adverse geological and mechanical conditions. While
we will endeavor to effectively manage these conditions, we cannot be assured of doing so optimally, and we will not be able to
eliminate them completely in any case. Therefore, these conditions could adversely impact our operations.
We
may not be able to obtain drilling rigs and other equipment and geophysical service crews necessary to exploit any oil and natural
gas resources we may acquire.
We
may not be able to procure the necessary drilling rigs and related services and equipment or the cost of such items may be prohibitive.
Our ability to comply with future license obligations or otherwise generate revenues from the production of operating oil and
natural gas wells could be hampered as a result of this, and our business could suffer.
Environmental
risks may adversely affect our business.
All
phases of the oil and natural gas business present environmental risks and hazards and are subject to environmental regulation
pursuant to a variety of federal, state and local laws and regulations. Environmental legislation provides for, among other things,
restrictions and prohibitions on spills, releases or emissions of various substances produced in association with oil and natural
gas operations, including products, byproducts, and wastes. The legislation also requires that wells and facility location be
sited, operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Compliance with
such legislation can require significant expenditures, and a breach may result in the imposition of fines and penalties, some
of which may be material. Environmental legislation is evolving in a manner we expect may result in stricter standards and enforcement,
larger fines and liability, prevention of the right to operate or participate in leasing, and potentially increased capital expenditures
and operating costs. The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities
to foreign governments and third parties and may require us to incur costs to remedy such discharge. The application of environmental
laws to our business may cause us to curtail our production or increase the costs of our production, development or exploration
activities.
Any
insurance that we may acquire will likely be inadequate to cover liabilities we may incur.
Our
involvement in the exploration for, and development of, oil and natural gas properties may result in our becoming subject to liability
for pollution, blow-outs, property damage, personal injury or other hazards. Although we intend to obtain insurance in accordance
with industry standards to address such risks, such insurance has limitations and so will be unlikely to cover the full extent
of such liabilities. In addition, such risks may not, in all circumstances be insurable or, in certain circumstances, we may choose
not to obtain insurance to protect against specific risks due to the high premiums associated with such insurance or for other
reasons. The payment of such uninsured liabilities would reduce the funds available to us. If we suffer a significant event that
is not fully insured or if the insurer of such event is not solvent or denies coverage, we could be required to divert funds from
capital investment or other uses towards covering our liability for such events.
We
are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational
disruption or financial loss.
The
oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain exploration, development,
production, processing and distribution activities. For example, we depend on digital technologies to interpret seismic data,
conduct reservoir modeling and record financial and other data. Our industry faces various security threats, including cyber-security
threats. Cyber-security attacks in particular are increasing and include, but are not limited to, malicious software, attempts
to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems,
unauthorized release of confidential or otherwise protected information and corruption of data. Although to date we have not experienced
any material losses related to cyber-security attacks, we may suffer such losses in the future. Moreover, the various procedures
and controls we use to monitor and protect against these threats and to mitigate our exposure to such threats may not be sufficient
in preventing security threats from materializing. If any of these events were to materialize, they could lead to losses of intellectual
property and other sensitive information essential to our business and could have a material adverse effect on our business prospects,
reputation and financial position.
Risks
Related to our Common Stock
There
is a limited trading market for our shares. You may not be able to sell your shares if you need money.
Our
common stock is traded on the OTC Markets (QB Marketplace Tier), an inter-dealer automated quotation system for equity securities.
During the three calendar months preceding filing of this report, the average daily trading volume of our common stock was approximately
502,000 shares. As of October 2, 2019, we had approximately 190 record holders of our common stock (not including an indeterminate
number of stockholders whose shares are held by brokers in “street name”). There has been limited trading activity
in our stock, and when it has traded, the price has fluctuated widely. We consider our common stock to be “thinly traded”
and any last reported sale prices may not be a true market-based valuation of the common stock. Stockholders may experience difficulty
selling their shares if they choose to do so because of the illiquid market and limited public float for our common stock. This
situation is attributable to a number of factors, including, but not limited to:
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we are
a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment
community that generate or influence sales volume; and
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stock
analysts, stock brokers and institutional investors may be risk-averse and reluctant to follow a company such as ours that
faces substantial doubt about its ability to continue as a going concern or to purchase or recommend the purchase of our shares
until such time as we become more viable.
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As
a result, an investor may find it difficult to dispose of, or to obtain accurate quotations of the price of our common stock.
Accordingly, investors must assume they may have to bear the economic risk of an investment in our common stock for an indefinite
period of time, and may lose their entire investment. There can be no assurance that a more active market for our common stock
will develop, or if one should develop, there is no assurance that it will be sustained. This severely limits the liquidity of
our common stock and would likely have a material adverse effect on the market price of our common stock and on our ability to
raise additional capital.
The amount of common stock registered
for resale may significantly impact our share price and volatility.
The amount of our common
stock to be registered for resale in the Registration Statement represents a significant percentage of our currently outstanding
common stock. The 444,095,238 shares of our common stock in registered for resale in this Registration Statement equals approximately
41% of our issued and outstanding common stock. We cannot predict what effect this may have on the price of our common stock
or the volume of transactions involving our shares in the market. Sales of a substantial amount of our common stock or the perception
that such sales may occur could adversely affect the liquidity of the market for our common stock or their price. Large price
changes or low trading volume may preclude you from buying or selling our common stock at all, or at any particular price or during
a time frame that satisfies your investment objectives.
We
may issue preferred stock.
Our
Certificate of Incorporation authorizes the issuance of up to 50 million shares of “blank check” preferred stock with
designations, rights and preferences determined from time to time by the Board of Directors. Accordingly, our Board of Directors
is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting, or other
rights, which could adversely affect the voting power or other rights of the holders of the common stock. In the event of issuance,
the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change
in control of the Company. Although we have no present intention to issue any shares of its authorized preferred stock, there
can be no assurance that we will not do so in the future.
Future
sales of our common stock could lower our stock price.
We
will likely sell additional shares of common stock to fund working capital obligations in future periods. We cannot predict the
size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock
will have on the market price of our common stock. Sales of substantial amounts of our common stock, or the perception that such
sales could occur, may adversely affect prevailing market prices for our common stock. Moreover, sales of our common stock by
existing shareholders could also depress the price of our common stock. For instance, we have issued instruments that are convertible
into or exercisable for 350 million shares of our Common Stock, which may have conversion or exercise rights that are at prices
lower than the trading price of our Common Stock. In particular, the holder of the $2.1 million in Convertible Debentures we have
issued may convert at any time a price equal to the lesser of (x) $0.05 per share or (y) 80% of the lowest daily VWAP of a share
of our Common Stock (as reported by Bloomberg, LP) for the ten (10) consecutive trading days immediately preceding the date of
determination.
Our
issuance of additional shares of Common Stock, or options or warrants to purchase those shares, would dilute your proportionate
ownership and voting rights.
We
are authorized to issue up to 1,550,000,000 shares of capital stock, comprising 1,500,000,000 shares of Common Stock, par value
$0.001 per share, and 50,000,000 shares of preferred stock, par value $0.001 per share (“Preferred Stock”). We have
issued and outstanding, as of June 30, 2019, 1,092,266,844 shares of Common Stock and 0 shares of Preferred Stock, plus another
approximately 350 million shares may be issued by us if all of the securities we have issued that are exercisable for, or convertible
into, shares of Common Stock are exercised or converted. Our board of directors (the “Board”) may generally issue
shares of Common Stock, Preferred Stock or options or warrants to purchase those shares without further approval by our shareholders,
based upon such factors as the Board may deem relevant at that time. See “Description of Capital Stock.” It is likely
that we will be required to issue a large amount of additional securities to raise capital to further our development. It is also
likely that we will issue a large amount of additional securities to directors, officers, employees and consultants as compensatory
grants in connection with their services, both in the form of stand-alone grants or under our stock plans. We cannot assure you
that we will not issue additional shares of Common Stock, Preferred Stock, or options or warrants to purchase those shares, under
circumstances we may deem appropriate at the time.
Our
common stock is subject to the “penny stock” rules of the SEC and FINRA, which makes transactions in our common stock
cumbersome and may reduce the value of an investment in the stock.
The
SEC has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as
any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share,
subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
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that
a broker or dealer approve a person’s account for transactions in penny stocks; and
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the
broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity
of the penny stock to be purchased.
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In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
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obtain
financial information and investment experience and objectives of the person; and
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make
a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
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The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which, in highlight form sets forth:
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the
basis on which the broker or dealer made the suitability determination; and
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that
the broker or dealer received a signed, written agreement from the investor prior to the transaction.
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Generally,
brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make
it more difficult for investors to dispose of common stock and cause a decline in the market value of stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to
be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny
stocks.
In
addition to the “penny stock” rules promulgated by the SEC, FINRA has adopted rules that require a broker-dealer to
have reasonable grounds for believing that an investment is suitable for a customer when recommending the investment to that customer.
Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable
efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information.
Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will
not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their
customers buy our common stock, which may limit investors’ ability to buy and sell our stock and have an adverse effect
on the market for our shares.
The
price of our common stock will remain volatile, which could lead to losses by investors and costly securities litigation.
The
trading price of our common stock is likely to be highly volatile and could fluctuate in response to factors such as:
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actual
or anticipated variations in our operating results including but not limited to leasing, drilling, and discovery of oil and
gas;
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the
price of oil and gas;
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announcements
of developments by us, our strategic partners or our competitors;
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announcements
by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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adoption
of new accounting standards affecting our Company’s industry;
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additions
or departures of key personnel;
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sales
of our common stock or other securities in the open market;
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our
ability to acquire seismic data and other intellectual property on commercially reasonable terms and to defend such intellectual
property from third party claims;
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the
effects of government regulation, permitting and other legal requirements, including new legislation or regulation;
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other
events or factors, many of which are beyond our control.
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The
stock market is subject to significant price and volume fluctuations. In the past, following periods of volatility in the market
price of companies’ securities, securities class action litigation has often been initiated against those companies. Litigation
initiated against us, whether or not successful, could result in substantial costs and diversion of our management’s attention
and resources, which could harm our business and financial condition.
We
do not anticipate paying any dividends on our common stock.
Cash
dividends have never been declared or paid on our common stock, and we do not anticipate such a declaration or payment for the
foreseeable future. We cannot assure stockholders of a positive return on their investment when they sell their shares, nor can
we assure that stockholders will not lose the entire amount of their investment in the Company.
Our
certificate of incorporation could make a merger, tender offer, or proxy contest difficult.
Our
shareholders have approved an amendment and restatement of our certificate of incorporation to (i) eliminate the ability of stockholders
to act by written consent and (ii) to classify the board of directors into three classes with staggered terms. These amendments
may discourage, delay or prevent a change in control.
Any
of the risk factors discussed herein could have a significant material adverse effect on our business, results of operations,
financial condition, or liquidity. Readers of this prospectus should not consider any descriptions of these risk factors to be
a complete set of all potential risks that could affect GulfSlope. These factors should be carefully considered together with
the other information contained in this prospectus and materials filed by us with the SEC and incorporated herein by reference.
Further, any of these risks are interrelated and could occur under similar business and economic conditions, and the occurrence
of certain of them may in turn cause the emergence or exacerbate the effect of others. Such a combination could materially increase
the severity of the impact of these risks on our business, results of operations, financial condition, or liquidity.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Included
in this prospectus are “forward-looking” statements, as well as historical information. Although we believe that the
expectations reflected in these forward-looking statements are reasonable, we can give no assurance that the expectations reflected
in these forward-looking statements will prove to be correct. Our actual results could differ materially from those anticipated
in forward-looking statements as a result of certain factors, including matters described in the section titled “Risk Factors.”
Forward-looking statements include those that use forward-looking terminology, such as the words “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “may,” “project,” “plan,”
“will,” “shall,” “should,” and similar expressions, including when used in the negative. Although
we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements
involve risks and uncertainties and no assurance can be given that actual results will be consistent with these forward-looking
statements. Important factors that could cause our actual results, performance or achievements to differ from these forward-looking
statements include the factors described in the “Risk Factors” section and elsewhere in this prospectus.
All
forward-looking statements attributable to us are expressly qualified in their entirety by these and other factors. We undertake
no obligation to update or revise these forward-looking statements, whether to reflect events or circumstances after the date
initially filed or published, to reflect the occurrence of unanticipated events or otherwise.
USE
OF PROCEEDS
The
selling security holders are selling shares of common stock covered by this prospectus for their own account. We will not receive
any of the proceeds from the resale of these shares.
DETERMINATION
OF OFFERING PRICE
We
are not selling any of the common stock that we are registering. The common stock will be sold by the selling security holders
as detailed in this prospectus. Such selling security holders may sell the common stock at the market price as of the date of
sale or a price negotiated in a private sale. Our common stock is listed for quotation on both the OTCBB and the OTCQB quotation
systems under the symbol “GSPE.”
SELLING
SECURITY HOLDERS
The
following table details the name of each selling stockholder, the number of shares owned by that selling stockholder, and the
number of shares that may be offered by each selling stockholder for resale under this prospectus. The selling security holders
may sell up to 444,095,238 shares of our common stock from time to time in one or more offerings under this prospectus. Because
the selling stockholder may offer all, some or none of the shares it holds, and because, based upon information provided to us,
there are currently no agreements, arrangements, or understandings with respect to the sale of any of the shares, no definitive
estimate as to the number of shares that will be held by the selling stockholder after the offering can be provided. The selling
shareholder has informed us that it is not a registered broker-dealer and does not have any written or oral agreement or understanding,
directly or indirectly, with any person to distribute the securities. Furthermore, unless otherwise indicated below, the selling
shareholder is not an affiliates of broker-dealers. The following table has been prepared on the assumption that all shares offered
under this prospectus will be sold to parties unaffiliated with the selling security holder.
Name of Selling Stockholder
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Number of
Shares of
Common Stock
Owned
Prior to the
Offering
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Shares of
Common
Stock
Included in
Prospectus
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Number of
Shares of
Common Stock
Owned
After the
Offering(2)
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Percentage
of
Ownership
After
Completion
of Offering
(2)(3)
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YA II PN, Ltd.
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54,504,155(1)
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206,000,000
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0
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0%
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Delek GOM Investments, LLC
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238,095,238(4)
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238,095,238
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0
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0%
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(1)
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The
number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 of the Exchange Act, and the
information is not necessarily indicative of beneficial ownership for any other purpose. Under such rule, beneficial ownership
includes 0 shares as to which the selling security holders has sole or shared voting power or investment power and also includes
54,504,155 shares, which the selling security holders has the right to acquire within 60 days. Under the terms of the convertible
debentures and warrants, the holders do not have the right to convert the debentures or exercise the warrants to the extent
that after giving effect to such conversion or exercise, the holder (together with its affiliates) would beneficially own
in excess of 4.99% of the shares of our common stock outstanding. Matthew Beckman is Manager of Yorkville Advisors Global
II, LLC, the General Partner of Yorkville Advisors Global, LP, the investment manager of YA II PN Ltd and has voting and dispositive
power over the shares.
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(2)
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Assumes
the sale of all shares of common stock registered pursuant to this prospectus, although the selling security holders are under
no obligations known to us to sell any shares of common stock at this time.
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(3)
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This
percentage is based upon 1,092,266,844 shares issued and outstanding as of October 14, 2019, plus the additional shares that
the selling stockholder is deemed to beneficially own.
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(4)
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The sole member of Delek GOM Investments, LLC is Delek GOM Holdings, LLC. The sole member of Delek GOM Holdings, LLC is DKL Investments Limited. The sole stockholder of DKL Investments Limited is Delek Group Ltd.. The majority of Delek Group Ltd.’s outstanding share capital and voting rights are owned, directly and indirectly, by Itshak Sharon Tshuva through private companies wholly-owned by him, and the remainder is held by the public. Mr. Tshuva has voting and dispositive power over the shares.
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PLAN
OF DISTRIBUTION
The
selling security holders and any of their pledgees, donees, transferees, assignees and successors-in-interest may, from time to
time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are
traded or in private transactions. These sales may be at fixed or negotiated prices. The selling security holders may use any
one or more of the following methods when selling shares:
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ordinary
brokerage transactions and transactions in which the broker-dealer solicits investors;
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block
trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
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purchases
by a broker-dealer as principal and resale by the broker-dealer for its account;
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an
exchange distribution in accordance with the rules of the applicable exchange;
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privately
negotiated transactions;
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to
cover short sales made after the date that this Registration Statement is declared effective by the Commission;
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broker-dealers
may agree with the selling security holders to sell a specified number of such shares at a stipulated price per share;
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a
combination of any such methods of sale; and
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any
other method permitted pursuant to applicable law.
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The
selling security holders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling security holders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any broker-dealer acts as agent for the purchaser of shares,
from the purchaser) in amounts to be negotiated. The selling security holders do not expect these commissions and discounts to
exceed what is customary in the types of transactions involved.
The
selling security holders may from time to time pledge or grant a security interest in some or all of the Shares owned by them,
if permitted by applicable laws and regulations, and, if they default in the performance of their secured obligations, the pledgees
or secured parties may offer and sell shares of common stock from time to time under this prospectus, or under an amendment to
this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of selling
security holders to include the pledgee, transferee or other successors in interest as selling security holders under this prospectus.
Each
selling shareholder has informed us that he, she or it is not a registered broker-dealer and does not have any written or
oral agreement or understanding, directly or indirectly, with any person to distribute the securities. Certain of the selling
shareholders are affiliates of broker-dealers. Each such selling shareholder has represented to us that it acquired the
securities to be resold pursuant to this prospectus in the ordinary course of its business and, at the time of the
acquisition, such selling shareholder had no agreements or understandings, directly or indirectly, with any person to
distribute the securities. Upon the Company being notified in writing by a Selling Stockholder that any material arrangement
has been entered into with a broker-dealer for the sale of common stock through a block trade, special offering, exchange
distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if
required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) the name of each such Selling Stockholder and of
the participating broker-dealer(s), (ii) the number of shares involved, (iii) the price at which such shares of common stock
were sold, (iv) the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable,
(v) that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by
reference in this prospectus, and (vi) other facts material to the transaction. In addition, upon the Company being notified
in writing by a Selling Stockholder that a donee or pledge intends to sell more than 500 shares of common stock, a supplement
to this prospectus will be filed if then required in accordance with applicable securities law.
The
selling security holders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees
or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
The
selling security holders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters”
within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers
or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, that can be attributed to
the sale of Securities will be paid by the Selling Stockholder and/or the purchasers. Each Selling Stockholder has represented
and warranted to the Company that it acquired the securities subject to this Registration Statement in the ordinary course of
such Selling Stockholder’s business and, at the time of its purchase of such securities such Selling Stockholder had no
agreements or understandings, directly or indirectly, with any person to distribute any such securities.
The
Company has advised each Selling Stockholder that it may not use shares registered on this Registration Statement to cover short
sales of common stock made prior to the date on which this Registration Statement shall have been declared effective by the Commission.
If a Selling Stockholder uses this prospectus for any sale of the common stock, it will be subject to the prospectus delivery
requirements of the Securities Act. The selling security holders will be responsible to comply with the applicable provisions
of the Securities Act and Exchange Act, and the rules and regulations thereunder promulgated, including, without limitation, Regulation
M, as applicable to such selling security holders in connection with resales of their respective shares under this Registration
Statement.
The
Company is required to pay all fees and expenses incident to the registration of the shares, but the Company will not receive
any proceeds from the sale of the common stock. The Company has agreed to indemnify the selling security holders against certain
losses, claims, damages and liabilities, including liabilities under the Securities Act. If the selling security holders use this
prospectus for any sale of the common stock, they will be subject to the prospectus delivery requirements of the Securities Act.
DESCRIPTION
OF OUR CAPITAL STOCK
We
are authorized to issue up to 1,550,000,000 shares of capital stock, comprising 1,500,000,000 shares of Common Stock, par value
$0.001 per share, and 50,000,000 shares of preferred stock, par value $0.001 per share (“Preferred Stock”).
Common
Stock
As
of October 14, 2019, there are 1,092,266,844 shares of our Common Stock issued and outstanding.
Voting
Each
holder of our Common Stock is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of stockholders.
Any action at a meeting at which a quorum is present will be decided by a majority of the votes cast. Cumulative voting for the
election of directors is not permitted.
Dividends
Holders
of our Common Stock are entitled to receive dividends when, as and if declared by the Board out of funds legally available for
payment, subject to the rights of holders, if any, of our preferred stock. Any decision to pay dividends on our Common Stock will
be at the discretion of the Board. The Board may or may not determine to declare dividends in the future. See “Dividend
Policy.” The Board’s determination to issue dividends will depend upon our profitability and financial condition,
and other factors that the Board deems relevant.
Liquidation
Rights
In
the event of a voluntary or involuntary liquidation, dissolution or winding up of our company, the holders of our Common Stock
will be entitled to share ratably on the basis of the number of shares held in any of the assets available for distribution after
we have paid in full all of our debts and after the holders of all outstanding preferred stock, if any, have received their liquidation
preferences in full.
Preferred
Stock
As
of the date of this Prospectus, there are no shares of our Preferred Stock issued and outstanding.
The
Board is expressly authorized from time to time to designate one or more series of the Preferred Stock, to issue the
Preferred Stock as Preferred Stock of any such series, and in connection with the designation of each such series to fix by
resolution or resolutions providing for the issue of shares thereof the voting and other powers, if any, and the
designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations
or restrictions thereof to the fullest extent now or hereafter permitted by Delaware law. All series of Preferred
Stock shall rank equally and be identical in all respects except as set forth in the Board’s resolutions providing for
the issue of such stock.
Limitations
on Liability and Indemnification of Officers and Directors
Delaware
law authorizes corporations to limit or eliminate (with a few exceptions) the personal liability of directors to corporations
and their stockholders for monetary damages for breaches of directors’ fiduciary duties as directors. Our articles of incorporation
and bylaws include provisions that eliminate, to the extent allowable under Delaware law, the personal liability of directors
or officers for monetary damages for actions taken as a director or officer, as the case may be. Our articles of incorporation
and bylaws also provide that we must indemnify and advance reasonable expenses to our directors and officers to the fullest extent
permitted by Delaware law. We are also expressly authorized to carry directors’ and officers’ insurance for our directors,
officers, employees and agents for some liabilities. We currently maintain directors’ and officers’ insurance covering
certain liabilities that may be incurred by directors and officers in the performance of their duties.
The
limitation of liability and indemnification provisions in our articles of incorporation and bylaws may discourage stockholders
from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions may also have the effect of reducing
the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise
benefit us and our stockholders. In addition, your investment may be adversely affected to the extent that, in a class action
or direct suit, we pay the costs of settlement and damage awards against directors and officers pursuant to the indemnification
provisions in our articles of incorporation and bylaws.
There
is currently no pending litigation or proceeding involving any of directors, officers or employees for which indemnification is
sought.
Registration
Rights
Registration Rights
Agreement with Delek GOM Investments, LLC
On
March 1, 2019, the Company entered into that certain term loan agreement (the “Term Loan Agreement”) with Delek GOM
Investments LLC (“Delek GOM”), a wholly owned subsidiary of Delek Group Ltd. Pursuant to the Term Loan Agreement,
among other things, the Company issued to Delek GOM warrants (“Warrants”) to purchase shares of Common Stock at an
exercise price of $0.042 per share, and the Company undertook to enter into a registration rights agreement (the “Delek
Registration Rights Agreement”) with Delek GOM with respect to the Common Stock and Warrants. Delek GOM, in its capacity
as a holder of Common Stock and/or Warrants, together with any transferee or assignee of Common Stock and/or Warrants, are collectively
referred to as the “Holders”. The Company and Delek GOM entered into the Registration Rights Agreement on March 25,
2019.
Pursuant to the Registration
Rights Agreement, upon the request of the Holders, the Company has agreed to prepare and file with the SEC a registration statement
covering the resale of all of the shares of the Common Stock and Warrants held by the Holders, other than (i) any such securities
that are already registered for resale pursuant to an effective registration statement or Rule 144 under the Securities Act, or
(ii) any shares of Common Stock or Warrants at such time the Holders collectively beneficially own less than 5% of the outstanding
shares of Common Stock (the “Registrable Securities”); and to use commercially reasonable efforts to cause such registration
statement to be declared effective under the Securities Act as soon as practicable. The registration statement must be filed no
later than (x) 30 days after the Company receives a written request from the Holders, or (y) if the staleness date of the Company’s
financial statements occurs during the 30-day window described in part (x), 30 calendar days following such staleness date (the
“Filing Deadline”). The registration statement must be declared effective by the earlier of (A) 75 trading days after
the date that the applicable registration statement is actually filed or (B) 75 days after the applicable Filing Deadline. Under
the terms of the Registration Rights Agreement, the Company is obligated to file additional registration statements or amendments
to existing registration statements under certain circumstances, including if the Company is not able to include all of the Registrable
Securities in the initial registration statement pursuant to the provisions of Rule 415 promulgated under the Securities Act.
The Registration Rights Agreement also obligates the Company to take certain actions to permit the Holders to effect underwritten
offerings from time to time, subject to certain limitations, and provides the Holders with “piggyback” registration
rights.
Registration Rights
Agreement with Convertible Debentures Purchasers
In connection with
the Company’s sale of convertible debentures in June 2019, we granted registration rights to purchasers, including YA II
PN, Ltd., of up to 156,000,000 shares of common stock. Under the registration rights agreements that we entered into with such
purchasers, we are obligated to file a resale registration statement with the SEC to register under the Securities Act the resale
of these 156,000,000 shares as soon as practicable and to obtain effectiveness of such registration statement as soon as practicable.
The registration statement of which this prospectus is a part is being filed in accordance with our obligations under this registration
rights agreement.
The
Company will be required to use its reasonable best efforts to keep the registration statement, or registration statements, continuously
effective until all of the shares covered thereby have been publicly sold, or until all such shares may be sold without restriction.
We have agreed to indemnify the selling holders of these shares against, or in certain circumstances to contribute to, certain
liabilities incurred by them in connection with the offering and sale of the shares pursuant to such registration statement, including
liabilities under the Securities Act.
Convertible
Note and Option
Pursuant
to the terms of the SPA, at the Issuance Date, the Company sold to Buyer a Convertible Debenture. The principal amount of the
Convertible Debenture is $2,100,000 (as reduced pursuant to redemption, conversion or otherwise, the “Principal”),
it has an annual interest rate equal to 8% (the interest paid on the outstanding Principal at the applicable interest rate, the
“Interest”) and a maturity date of June 21, 2020 (the “Maturity Date”), and may be extended at the option
of Buyer. At the Maturity Date the Company shall pay to the Holder (as defined in the Convertible Debenture) an amount in cash
representing all outstanding Principal and accrued and unpaid Interest.
Subject
to the terms of the Convertible Debenture, at any time after the Issuance Date, the Holder is entitled to convert at the Conversion
Rate (as defined below) any portion of the outstanding and unpaid Principal and accrued Interest (the “Conversion Amount”)
into fully paid and nonassessable shares of Common Stock. The number of shares of Common Stock issuable upon conversion of any
Conversion Amount is determined by dividing (x) such Conversion Amount by (y) the Conversion Price (the “Conversion Rate”).
The “Conversion Price” is the lesser of (x) $0.05 per share or (y) 80% of the lowest daily VWAP price (as reported
by Bloomberg, LP) for the ten (10) consecutive trading days immediately preceding the date of determination.
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.
Transfer
Agent
The
transfer agent for our Common Stock is VStock Transfer, LLC. They are located at 18 Lafayette Place, Woodmere, NY 11598.
BUSINESS
General
GulfSlope
Energy, Inc. is an independent crude oil and natural gas exploration and production company whose interests are concentrated in
the United States Gulf of Mexico federal waters. We are a technically driven company and we use our licensed 2.2 million acres
of three-dimensional (3-D) seismic data to identify, evaluate, and acquire assets with attractive economic profiles. GulfSlope
Energy commenced commercial operations in March 2013. GulfSlope Energy was originally organized as a Utah corporation in 2004
and became a Delaware corporation in 2012.
We
have focused our operations in the Gulf of Mexico because we believe this area provides us with favorable geologic and economic
conditions, including multiple reservoir formations, comprehensive geologic databases, extensive infrastructure, relatively favorable
royalty regime, and an attractive acquisition market and because our management and technical teams have significant experience
and technical expertise in this geologic province. Additionally, we licensed 2.2 million acres of advanced three-dimensional (3D)
seismic data, a significant portion of which has been enhanced by new, state-of-the-art reprocessing and noise attenuation techniques
including reverse time migration depth imaging. We use our broad regional seismic database and our reprocessing efforts to continuously
generate an inventory of high-quality prospects and since inception, we have generated a total of 25 prospects, advancing nine
of those prospects to drill ready status. The use of our extensive seismic database, coupled with our ability, knowledge, and
expertise to effectively reprocess this seismic data, allows us to further optimize our drilling program and to effectively evaluate
acquisition and joint venture opportunities. We consistently assess our prospect inventory in order to deploy capital as efficiently
as possible.
Competitive
Advantages
Experienced
management. Our management has significant experience in finding and developing oil and natural gas. Our team has a track
record of discovering and developing multi-billion dollar projects worldwide. The Company’s management team has over 200
years of combined industry experience exploring, discovering, and developing oil and natural gas. We successfully deployed a technical
team with over 150 years of combined industry experience exploring for and developing oil and natural gas in the development and
execution of our technical strategy. We believe the application of advanced geophysical techniques on a specific geographic area
with unique geologic features such as conventional reservoirs whose trapping configurations have been obscured by overlying salt
layers provides us with a competitive advantage.
Advanced
seismic image processing. Commercial improvements in 3-D seismic data imaging and the development of advanced processing
algorithms, including pre-stack depth, beam, and reverse time migration have allowed the industry to better distinguish hydrocarbon
traps and identify previously unknown prospects. Specifically, advanced processing techniques improve the definition of the seismic
data from a scale of time to a scale of depth, thus correctly locating the images in three dimensions. Our technical team has
significant experience utilizing advanced seismic image processing techniques in our core area, and applies the industry’s
most advanced noise reduction technology to generate clearer images.
Industry
leading position in our core area. We have licensed 2.2 million acres of 3D seismic data which covers over 440 OCS Federal
lease blocks on the highly prolific Louisiana outer shelf, offshore Gulf of Mexico. We believe the proprietary and state-of-the-art
reprocessing of our licensed 3-D seismic data, along with our proprietary and leading-edge geologic depositional reservoir sand
and petroleum trapping models, gives us an advantage in assembling a high quality drilling portfolio in our core area. We continuously
work to identify additional leasing opportunities to further enhance our drilling portfolio.
Technical
Strategy
We
believe that a major obstacle to identifying potential hydrocarbon accumulations globally has been the inability of seismic technology
to accurately image deeper geologic formations because of overlying massive, extensive, and complex salt bodies. Large and thick
laterally extensive subsurface salt layers highly distort the seismic ray paths traveling through them, which often has led to
misinterpretation of the underlying geology and the potential major accumulations of oil and gas. We believe the opportunity exists
for a technology-driven company to extensively apply advanced seismic acquisition and processing technologies, with the goal of
achieving attractive commercial discovery rates for exploratory wells, and their subsequent appraisal and development, potentially
having a very positive impact on returns on invested capital. These tools and techniques have been proven to be effective in deep
water exploration and production worldwide, and we are using them to drill targets below the salt bodies in an area of the shallower
waters of the GOM where industry activity has largely been absent for over 20 years. In fact, GulfSlope management led the early
industry teams in their successful efforts to discover and develop five new fields below the extensive salt bodies in our core
area during the 1990’s, which have produced over 125 million barrels of oil equivalent.
Our
technical approach to exploration and development is to deploy a team of highly experienced geo-scientists who have current and
extensive understanding of the geology and geophysics of the petroleum system within our core area, thereby decreasing the traditional
timing and execution risks of advancing up a learning curve. For data licensing, re-processing and interpretation, our technical
staff has prioritized specific geographic areas within our 2.2 million acres of seismic coverage, with the goal to optimize initial
capital outlays.
Modern
3-D seismic datasets with acquisition parameters that are optimal for improved imaging at multiple depths are readily available
in many of these sub-basins across our core area, and can be licensed on commercially reasonable terms. Critical to the technical
success is the application of the newest state-of-the-art seismic imaging technology available, in order to optimize delineation
of prospective structures and to detect the presence of hydrocarbon-charged reservoirs below many complex salt bodies geologic
features. An example of such a seismic technology is reverse time migration, which we believe to be the most accurate, fastest,
and yet affordable, seismic imaging technology for critical depth imaging available today.
Lease
and Acquisition Strategy
Our
prospect identification and analytical strategy is based on a thorough understanding of the geologic trends within our core
area. Exploration efforts have been focused in areas where lease acquisition opportunities are readily available. We entered
into two master 3-D license agreements, together covering approximately 2.2 million acres and we have completed advanced
processing on select areas within this licensed seismic area exceeding one million acres. We can expand this coverage and
perform further advanced processing, both with currently licensed seismic data and seismic data to be acquired. We have
sought to acquire and reprocess the highest resolution data available in the potential prospect’s direct
vicinity. This includes advanced imaging information to further our understanding of a particular reservoir’s
characteristics, including both trapping mechanics and fluid migration patterns. Reprocessing is accomplished through a
series of model building steps that incorporate the geometry of the geology to optimize the final image. Our integration of
existing geologic understanding and enhanced seismic processing and interpretation provides us with unique insights and
perspectives on existing producing areas and especially underexplored formations below and adjacent to salt bodies that are
highly prospective for hydrocarbon production.
We
currently hold seven leases that comprise five prospects and we will evaluate additional potential sources for growth opportunities
with companies that hold active leases in our core area. Our leases have a five-year primary term, expiring in 2020, 2022 and
2023. BOEM’s regulatory framework provides multiple options for leaseholders to apply to receive extensions of lease terms
under specified conditions. GulfSlope is exploring all options contained in BOEM’s regulatory framework. Additional prospective
acreage can be obtained through lease sales, farm-in, or purchase. As is consistent with a prudent and successful exploration
approach, we believe that additional seismic licensing, acquisition, processing, and/or interpretation may become highly advantageous,
in order to more precisely define the most optimal drillable location(s), particularly for development of discoveries.
We
continue to evaluate potential producing property acquisitions in the offshore GOM, taking advantage of our highly specialized
subsurface and engineering capabilities, knowledge, and expertise to identify attractive opportunities. Any merger or acquisition
is likely to be financed through a combination of debt and equity.
Drilling
and other Exploratory and Development Strategies
With
our success in the leasing of our targeted prospects, our plan has been to partner with other entities which could include oil
and gas companies and/or financial investors. Our goal is to diversify risk and minimize capital exposure to exploration drilling
costs. We expect a portion of our exploration costs to be paid by our partners through these transactions, in return for our previous
investment in prospect generation and delivery of an identified prospect on acreage we control. Such arrangements are a commonly
accepted industry method of proportionately recouping pre-drill cost outlays for seismic, land, and associated interpretation
expenses. We cannot assure you, however, that we will be able to enter into any such arrangements on satisfactory terms. In any
drilling, we expect that our retained working interest will be adjusted based upon factors such as geologic risk and well cost.
Early monetization of a discovered asset or a portion of a discovered asset is an option for the Company as a means to fund development
or additional exploration projects as an alternative to potential equity or debt offerings. However, if a reasonable value were
not received from the market at the discovery stage, then we may elect to retain (subject to lease terms) the discovery asset
undeveloped, until a reasonable offer is received in line with our perceived market value, or we may elect to seek development
partners on a promoted basis in order to substantially reduce capital development requirements. We will also evaluate and seek
to acquire producing properties that have a strategic relationship to our core area.
Oil
and Natural Gas Industry
The
oil and natural gas industry is a complex, multi-disciplinary sector that varies greatly across geographies. As a heavily regulated
industry, operating conditions are subject to political regimes and changing legislation. Governments can either induce or deter
investment in exploration and production, depending on legal requirements, fiscal and royalty structures and regulation. Beyond
political considerations, exploration and production for hydrocarbons is an extremely risky business with multiple failure modes.
Exploration and production wells require substantial investment and are long-term projects, sometimes exceeding twenty to thirty
years. Regardless of the effort spent on an exploration or production prospect, success is difficult to attain. Even though modern
equipment, including seismic equipment and advanced software has helped geologists find producing structures and map reservoirs,
they do not guarantee any outcome. Drilling is the only method to ultimately determine whether a prospect will be productive,
and even then, many complications can arise during drilling (e.g., those relating to drilling depths, pressure, porosity, weather
conditions, permeability of the formation and rock hardness, among others).
Typically,
there is a significant chance that exploratory wells will result in non-producing dry holes, leaving investors with the cost of
seismic data and a dry well, which can total millions of dollars. Even if oil or gas is produced from a particular well, there
is always the possibility that treatment, at additional cost, may be required to make production commercially viable. Further,
production profiles decline over time. In summary, oil and gas exploration and production is an industry with high risks and high
entry barriers.
Oil
and natural gas prices can have a significant impact on the commercial feasibility of a project. Certain projects may become feasible
with higher prices or, conversely, may falter with lower prices. Volatility in the price of oil, natural gas and other commodities
has increased and is likely to continue in the future. Beginning in late 2014, a significant decline in oil prices occurred, the
decline continued into 2016, and somewhat stabilized in mid-2017 near $50/bbl. 2018 brought additional volatility with prices
increasing to near $78/bbl and then falling in December to near $50/bbl. This volatility complicates the assessment of the commercial
viability of many oil and gas projects. Most governments have enforced strict regulations to uphold high standards of environmental
awareness; thus, holding companies to a high degree of responsibility vis-а-vis protecting the environment. Aside from such
environmental factors, oil and natural gas drilling is often conducted near populated areas. For a company to be successful in
its drilling endeavors, working relationships with local communities are crucial to promote business strategies and to avoid the
repercussions of disputes that might arise over local business operations. At this time, the Company does not have any production
or proved oil or natural gas reserves.
Governmental
Regulation
Our
future oil and natural gas operations will be subject to various federal, state, and local governmental regulations. Matters
subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning
operations, the spacing of wells, pooling of properties, occupational health and safety, and taxation. From time to time,
regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and
natural gas wells below actual production capacity in order to conserve supplies of oil and natural gas. The production,
handling, storage, transportation, and disposal of oil and gas, by-products thereof, and other substances and materials
produced or used in connection with oil and gas operations are also subject to regulation under federal, state, and local
laws and regulations relating primarily to the protection of human health and the environment. State and local laws and
regulations may affect the prices at which royalty owners are paid for their leases by requiring more stringent disclosure
and certification requirements, adjusting interest rates for late payments, raising legal and administrative costs and
imposing more costly default contractual terms. The requirements imposed by such laws and regulations are frequently changed
and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their
effect on our operations. Although the regulatory burden on the oil and natural gas industry increases our cost of doing
business and, consequently, affects our profitability, these burdens generally do not affect us any differently or to any
greater or lesser extent than they affect others in our industry with similar business models.
Environmental
laws provide for, among other things, restrictions and prohibitions on spills, releases, or emissions of various substances produced
in association with oil and natural gas operations. The laws also require that wells and facility sites be operated, maintained,
abandoned, and reclaimed to the satisfaction of the applicable regulatory authorities. Compliance with such laws can require significant
expenditures and a breach may result in the imposition of fines and penalties, the payment of which could have a material adverse
effect on our financial condition or results of operations. Environmental legislation is evolving in a manner expected to result
in stricter standards and enforcement, larger fines and liability, and potentially increased capital expenditures and operating
costs. The discharge of oil or natural gas or other pollutants into the air, soil, or water may give rise to liabilities to governments
and third parties and may require us to incur costs to remedy such discharge. No assurance can be given that environmental laws
will not result in a curtailment of any future production or a material increase in the costs of production, development, or exploration
activities or otherwise adversely affect our financial condition, results of operations, or prospects. We could incur significant
liability for damages, clean-up costs, and penalties in the event of discharges into the environment, environmental damage caused
by us, or previous owners of our property, or non-compliance with environmental laws or regulations. In addition to actions brought
by governmental agencies, we could face actions brought by private parties or citizens groups. Any of the foregoing could have
a material adverse effect on our financial results. Numerous departments and agencies, both federal and state, are authorized
by statute to issue, and have issued, rules and regulations binding upon the oil and natural gas industry and its individual members.
The Bureau of Ocean Energy Management (“BOEM”) and the Bureau of Safety and Environmental Enforcement (“BSEE”)
regulations, pursuant to the Outer Continental Shelf Lands Act (“OCSLA”), apply to our operations on Federal leases
in the Gulf of Mexico. The Federal Trade Commission, the Federal Energy Regulatory Commission (“FERC”), and the Commodity
Futures Trading Commission (“CFTC”) hold statutory authority to monitor certain segments of the physical and futures
energy commodities markets. These agencies have imposed broad regulations prohibiting fraud and manipulation of such markets.
With regard to our future physical sales of crude oil or other energy commodities, and any related hedging activities that we
undertake, we are required to observe the market-related regulations enforced by these agencies, which hold substantial enforcement
authority.
These
departments and agencies have authority to grant and suspend operations, and have authority to levy substantial penalties for
non-compliance. Failure to comply with such regulations, as interpreted and enforced, could have a material adverse effect on
our business, results of operations and financial condition.
On
April 22, 2010, the Deepwater Horizon, a semi-submersible deep water drilling rig operating in the U.S. Gulf of Mexico, sank after
a blowout and fire resulting in a significant flow of hydrocarbons from the BP Macondo well. Subsequent to the Deepwater Horizon
incident, the Bureau of Ocean Energy Management (“BOEM”) issued a series of Notice to Lessees (“NTLs”)
imposing new regulatory requirements and permitting procedures for new wells to be drilled in federal waters of the outer continental
shelf (“OCS”). These new regulatory requirements include the following:
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the
Environmental NTL, which imposes new and more stringent requirements for documenting the environmental impacts potentially
associated with the drilling of a new offshore well and significantly increases oil spill response requirements;
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the
Compliance and Review NTL, which imposes requirements for operators to secure independent reviews of well design, construction
and flow intervention processes and also requires certifications of compliance from senior corporate officers;
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the
Drilling Safety Rule, which prescribes tighter cementing and casing practices, imposes standards for the use of drilling fluids
to maintain well bore integrity and stiffens oversight requirements relating to blowout preventers and their components, including
shear and pipe rams; and
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the
Workplace Safety Rule, which requires operators to employ a comprehensive safety and environmental management system (“SEMS”)
to reduce human and organizational errors as root causes of work-related accidents and offshore spills and to have their SEMS
periodically audited by an independent third party auditor approved by the Bureau of Safety & Environmental Enforcement
(“BSEE”).
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Since
the adoption of these new regulatory requirements, the BOEM has been taking much longer to review and approve permits for new
wells than was common prior to the Deepwater Horizon incident. The new rules also increase the cost of preparing each permit application
and will increase the cost of each new well, particularly for wells drilled in deeper waters on the OCS.
Hurricanes
in the Gulf of Mexico can have a significant impact on oil and gas operations on the OCS. The effects from past hurricanes
have included structural damage to fixed production facilities, semi-submersibles and jack-up drilling rigs. The BOEM and the
BSEE continue to be concerned about the loss of these facilities and rigs as well as the potential for catastrophic damage to
key infrastructure and the resultant pollution from future storms. In an effort to reduce the potential for future
damage, the BOEM and the BSEE have periodically issued guidance aimed at improving platform survivability by taking into
account environmental and oceanic conditions in the design of platforms and related structures.
The
BOEM, BSEE and Office of National Resources Revenue are expected to continue to issue new safety and environmental guidelines
or regulations for drilling in the U.S. Gulf of Mexico, and other regulatory agencies could potentially issue new safety and environmental
guidelines or regulations in other geographic regions, and may take other steps that could increase the costs of exploration and
production, reduce the area of operations and result in permitting delays. We are monitoring legislation and regulatory developments;
however, it is difficult to predict the ultimate impact of any new guidelines, regulations or legislation.
Environmental
Regulation
The
operation of our future oil and natural gas properties will be subject to numerous federal, state and local laws and regulations
governing the discharge of materials into the environment or otherwise relating to environmental protection. Applicable U.S. federal
environmental laws include, but are not limited to, the Comprehensive Environmental Response, Compensation, and Liability Act
(“CERCLA”), the Clean Water Act (“CWA”) and the Clean Air Act (“CAA”). These laws and regulations
govern environmental cleanup standards, require permits for air, water, underground injection, waste disposal and set environmental
compliance criteria. In addition, state and local laws and regulations set forth specific standards for drilling wells, the maintenance
of bonding requirements in order to drill or operate wells, the spacing and location of wells, the method of drilling and casing
wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells, and the
prevention and cleanup of pollutants and other matters. Typically, operators maintain insurance against costs of clean-up operations,
but are not fully insured against all such risks. Additionally, Congress and federal and state agencies frequently revise the
environmental laws and regulations, and any changes that result in delay or more stringent and costly permitting, waste handling,
disposal and clean-up requirements for the oil and gas industry could have a significant impact on our operating costs. There
can be no assurance that future developments, such as increasingly stringent environmental laws or enforcement thereof, will not
cause us to incur material environmental liabilities or costs.
Failure
to comply with these laws and regulations may result in the assessment of administrative, civil and criminal fines and penalties
and the imposition of injunctive relief. Accidental releases or spills may occur in the course of the operations of our properties,
and we cannot assure you that we will not incur significant costs and liabilities as a result of such releases or spills, including
any third-party claims for damage to property, natural resources or persons.
Among
the environmental laws and regulations that could have a material impact on the oil and natural gas exploration and production
industry and our business are the following:
Waste
Discharges. The CWA and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants,
including spills and leaks of oil and other substances, into waters of the United States. The discharge of pollutants into regulated
waters is prohibited, except in accordance with the terms of a permit issued by the Environmental Protection Agency (“EPA”)
or an analogous state agency. The CWA and regulations implemented thereunder also prohibit the discharge of dredge and fill material
into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. Spill prevention,
control and countermeasure requirements of federal laws mandate preparation of detailed plans that address spill response, including
appropriate containment berms and similar structures to help prevent the contamination of navigable waters by a petroleum hydrocarbon
tank spill, rupture or leak. In addition, the CWA and analogous state laws require individual permits or coverage under general
permits for discharges of storm water runoff from certain types of facilities. Federal and state regulatory agencies can impose
administrative, civil and criminal penalties as well as other enforcement mechanisms for noncompliance with discharge permits
or other requirements of the CWA and analogous state laws and regulations.
Air
Emissions and Climate Change. Air emissions from our operations are subject to the Federal Clean Air Act (“CAA”)
and comparable state and local requirements. We may be required to incur certain capital expenditures in the future for air pollution
control equipment in connection with obtaining and maintaining operating permits and approvals for air emissions. In addition,
the EPA has developed, and continues to develop, stringent regulations governing emissions of toxic air pollutants at specified
sources.
Moreover,
the U.S. Congress and the EPA in addition to some state and regional efforts have in recent years considered legislation or regulations
to reduce emissions of greenhouse gases. These efforts have included consideration of cap-and-trade programs, carbon taxes, and
greenhouse gas monitoring and reporting programs. In the absence of federal greenhouse gas limitations, the EPA has determined
that greenhouse gas emissions present a danger to public health and the environment, and it has adopted regulations that, among
other things, restrict emissions of greenhouse gases under existing provisions of the CAA and may require the installation of
control technologies to limit emissions of greenhouse gases. These regulations would apply to any new or significantly modified
facilities that we construct in the future that would otherwise emit large volumes of greenhouse gases together with other criteria
pollutants. Also, certain of our operations are subject to EPA rules requiring the monitoring and annual reporting of greenhouse
gas emissions from specified offshore production sources.
Oil
Pollution Act. The Oil Pollution Act of 1990 (“OPA”) and regulations thereunder impose a variety of
requirements on “responsible parties” related to the prevention of oil spills and liability for damages resulting
from such spills in United States waters. A “responsible party” includes the owner or operator of an onshore
facility, pipeline or vessel, or the lessee or permittee of the area in which an offshore facility is located. OPA assigns
liability to each responsible party for oil cleanup costs and a variety of public and private damages. While liability limits
apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or
willful misconduct or resulted from violation of a federal safety, construction or operating regulation. If the party fails
to report a spill or to cooperate fully in the cleanup, liability limits likewise do not apply. Few defenses exist to
the liability imposed by OPA. OPA imposes ongoing requirements on a responsible party, including the preparation of oil spill
response plans and proof of financial responsibility to cover environmental cleanup and restoration costs that could be
incurred in connection with an oil spill.
National
Environmental Policy Act. Oil and natural gas exploration and production activities on federal lands are subject to the National
Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of Interior, to evaluate
major agency actions having the potential to significantly impact the environment. The process involves the preparation of either
an environmental assessment or environmental impact statement depending on whether the specific circumstances surrounding the
proposed federal action will have a significant impact on the human environment. The NEPA process involves public input through
comments, which can alter the nature of a proposed project either by limiting the scope of the project or requiring resource-specific
mitigation. NEPA decisions can be appealed through the court system, by process participants. This process may result in delaying
the permitting and development of projects, increase the costs of permitting and developing some facilities and could result in
certain instances in the cancellation of existing leases.
Worker
Safety. The Occupational Safety and Health Act (“OSH Act”) and comparable state statutes regulate the protection
of the health and safety of workers. The OSH Act’s hazard communication standard requires maintenance of information about
hazardous materials used or produced in operations and provision of such information to employees. Other OSH Act standards regulate
specific worker safety aspects of our operations. Failure to comply with OSH Act requirements can lead to the imposition of penalties.
Safe
Drinking Water Act. The Safe Drinking Water Act and comparable state statutes may restrict the disposal, treatment or release
of water produced or used during oil and gas development. Subsurface emplacement of fluids (including disposal wells or enhanced
oil recovery) is governed by federal or state regulatory authorities that in some cases, includes the state oil and gas regulatory
authority or the state’s environmental authority. These regulations may increase the costs of compliance.
Offshore
Drilling. In 2011, the U.S. Department of Interior issued new rules designed to improve drilling and workplace safety in
the U.S. Gulf of Mexico, and various congressional committees began pursuing legislation to regulate drilling activities and increase
liability. The BOEM, BSEE and Office of National Resources Revenue are expected to continue to issue new safety and environmental
guidelines or regulations for drilling in the U.S. Gulf of Mexico, and other regulatory agencies could potentially issue new safety
and environmental guidelines or regulations in other geographic regions, and may take other steps that could increase the costs
of exploration and production, reduce the area of operations and result in permitting delays. We are monitoring legislation and
regulatory developments; however, it is difficult to predict the ultimate impact of any new guidelines, regulations or legislation.
A prolonged suspension of drilling activity or permitting delays in the U.S. Gulf of Mexico and new regulations and increased
liability for companies operating in this sector, whether or not caused by a new incident in the region, could adversely affect
the business and planned operations of oil and gas companies.
Hazardous
Substances and Wastes. CERCLA, also known as the “Superfund law,” imposes liability, without regard to fault or
the legality of the original conduct, on certain classes of persons that are considered to be responsible for the release of a
“hazardous substance” into the environment. These persons include the owner or operator of the disposal site or sites
where the release occurred and companies that transported or disposed or arranged for the transport or disposal of the hazardous
substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject
to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment
and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file corresponding
common law claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.
Protected
and Endangered Species. Executive Order 13158, issued in May 2000, directs federal agencies to safeguard existing Marine
Protected Areas (“MPAs”) in the United States and establish new MPAs. The order requires federal agencies to avoid
harm to MPAs to the extent permitted by law and to the maximum extent practicable. It also directs the EPA to propose new regulations
under the Clean Water Act to ensure appropriate levels of protection for the marine environment. This order has the potential
to adversely affect our operations by restricting areas in which we may carry out future development and exploration projects
and/or causing us to incur increased operating expenses.
Competition
We
operate in a highly competitive environment for generating, evaluating and drilling prospects and for acquiring properties. Many
of our competitors are major or large independent oil and natural gas companies that possess and employ financial resources well
in excess of the Company’s resources. We believe that we may have to compete with other companies when acquiring leases
or oil and gas properties. These additional resources can be particularly important in reviewing prospects and purchasing properties.
Competitors may be able to evaluate and purchase a greater number of properties and prospects than our financial or personnel
resources permit. Competitors may also be able to pay more for prospects than we are able or willing to pay. Further, our competitors
may be able to expend greater resources on the existing and changing technologies that we believe will impact attaining success
in the industry. If we are unable to compete successfully in these areas in the future, our future growth may be diminished or
restricted. Furthermore, these companies may also be better able to withstand the financial pressures of unsuccessful drill attempts,
delays, sustained periods of volatility in financial or commodity markets and generally adverse global and industry-wide economic
conditions, and may be better able to absorb the burdens resulting from changes in relevant laws and regulations, which would
adversely affect our operations.
Employees
We
currently have six employees. We utilize consultants, as needed, to perform strategic, technical, operational and administrative
functions, and as advisors.
Legal
Proceedings
There
are currently no material pending legal proceedings to which the Company is a party or of which any of its property is the subject,
in which any of the above referenced directors or officers is a party adverse to the Company or has a material interest adverse
to the Company. Furthermore, during the past ten years, none of the Company’s officers or directors described above were
involved in any legal proceedings that are material to an evaluation of the ability or integrity of such directors and officers.
Property
We
lease office space at our corporate headquarters at 1331 Lamar St., Suite 1665, Houston, Texas 77010 on market terms through September
2021. We own office equipment, office furniture, and computer equipment.
We
are currently leasing seven prospective oil and gas blocks from the Bureau of Ocean Energy Management (“BOEM”) located
in Federal Waters offshore Louisiana. Our leases have a five-year primary term, expiring in 2020, 2022 and 2023. BOEM’s
regulatory framework provides multiple options for leaseholders to apply to receive extensions of lease terms under specified
conditions and we are exploring all options contained in BOEM’s regulatory framework. As of the date of this prospectus,
we have drilled oil and gas wells on two of our lease blocks.
Historical
Background
The
Company was incorporated under the laws of the State of Utah on December 12, 2003, as “Lostwood Professional Services, Inc.”
On July 21, 2004, the Company changed its name to “Plan A Promotions, Inc.” The Company became an SEC reporting company
in 2006, when a registration statement for its common stock was declared effective under the Exchange Act. At that time, the Company
was engaged in the business of selling promotional and marketing merchandise and apparel. Those operations were discontinued later
that year, and the Company was not engaged in any active business in the following years. In June 2011, the Company and certain
of its shareholders sold an aggregate of 9,700,000 shares of the Company’s common stock at a price of $0.01 per share to
certain accredited investors, which resulted in a change of control and management. Following the change of control, in April
2012 the Company changed its state of incorporation from the State of Utah to the State of Delaware, and changed its name to GulfSlope
Energy, Inc. Prior to March 2013, the Company had not been engaged in any substantive business activity since 2006.
General
Our
address is 1331 Lamar St., Suite 1665, Houston, Texas 77010, and our telephone number is (281) 918-4100. Our web site is www.gulfslope.com.
The information contained on our website is not incorporated by reference into this prospectus, and you should not consider any
information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase
our common stock. You may access and read our SEC filings through the SEC’s web site (http:www.sec.gov). This site contains
reports, proxy and information statements and other information regarding registrants, including us, that file electronically
with the SEC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion highlights the principal factors that have affected our financial condition and results of operations as
well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements. Please
see “Forward-Looking Statements” above for a discussion of the uncertainties, risks and assumptions associated with
these forward-looking statements. The following discussion and analysis of our financial condition and results of operations is
based on our consolidated financial statements, which have been prepared on the accrual basis of accounting, whereby revenues
are recognized when earned, and expenses are recognized when incurred. You should read this management’s discussion and
analysis of our financial condition and results of operations in conjunction with our historical financial statements included
elsewhere in this prospectus. In addition to the impact of the matters discussed in “Risk Factors,” our future results
could differ materially from our historical results due to a variety of factors, many of which are out of our control.
Overview
GulfSlope
Energy, Inc. is an independent oil and natural gas exploration and production company whose interests are concentrated in
the United States, Gulf of Mexico federal waters offshore Louisiana in 450 feet or less of water depth. The Company has under
lease seven federal Outer Continental Shelf blocks (referred to as “leases” in this report) and licensed 2.2
million acres of three-dimensional (3-D) seismic data in its area of concentration. Approximately half this data has been
reprocessed utilizing Reverse Time Migration (RTM) to more accurately define the imaging below salt. Since March 2013, we
have been singularly focused on identifying high-potential oil and natural 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, which will allow for any discoveries to
be developed rapidly and cost effectively with the 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 acquired in future lease
sales in water depths of less than 200 meters (approximately 656 feet) from 18.75% to 12.5%, which further enhances
the economics for the drilling of any leases acquired after August 2017 in these water depths. This reduced royalty applies
to three of the Company’s leases.
The
Company has invested significant technical person hours in the reprocessing and interpretation of seismic data. We believe the
proprietary reprocessing and interpretation and the contiguous nature of our licensed 3-D seismic data gives us an advantage over
other exploration and production (“E&P”) companies operating in our core area.
We
have historically operated our business with working capital deficits and these deficits have been funded by equity investments
and loans from management. As of June 30, 2019, we had $2.3 million of 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 Company plans to finance its operations through the issuance
of equity and/or debt financings. There are no assurances that financing will be available with acceptable terms, if at all.
Current
Operations
The
Company is currently conducting pre-drill operations on two prospects and we anticipate spudding one well in late 2019. The Company
continues to be active in the evaluation of potential mergers and acquisitions that it deems to be attractive opportunities. Any
such merger or acquisition is likely to be financed through a combination of debt and equity.
On
January 8, 2018, the Company signed comprehensive documents related to partnering with Delek and Texas South to participate in
the drilling of nine currently leased prospects. The initial phase (Phase I) consists of a commitment to drill the Canoe Prospect
(VR378) and the Tau Prospect (SS336 and SS351). The Company commenced drilling operations at the Canoe prospect in August 2018.
The well completed drilling in August 2018 and based on Logging-While-Drilling (LWD) and Isotube analysis of hydrocarbon samples,
oil sands were encountered in the northwest center of the block. The well was drilled to a total of 5,765 feet measured depth
(5,700 feet true vertical depth) and encountered no problems while drilling. A full integration of the well information and seismic
data is being performed for further evaluation of the shallow potential of the wellbore and the block, and to define commerciality
of these oil pays. The well was temporarily abandoned, and multiple open hole plugs were set across several intervals. The well
is equipped with a mud-line suspension system for possible future re-entry. A deeper subsalt prospect on the Canoe lease block,
for which the block was originally leased, is drill-ready, due to further seismic enhancement.
The
Tau Prospect is located approximately six miles northeast of the Mahogany Field, discovered in 1993. The Mahogany Field is recognized
as the first commercial discovery below allocthonous salt in the Gulf of Mexico. The Tau Prospect is defined by mapping of 3D
seismic reprocessed by RTM methods. Drilling operations on the Tau subsalt prospect commenced in September 2018. The wellbore
is designed to test multiple Miocene horizons trapped against a well-defined salt flank, including equivalent reservoir sands
discovered and developed at the nearby Mahogany Field. The surface location for Tau is located in 305 feet of water. Drilling
was completed in May 2019. In January 2019, the Tau well experienced an underground control of well event and as a result, we
filed an insurance claim with its insurance underwriters for a net amount of approximately $10.8 million for 100% working interest.
The insurance claim was subsequently approved. On May 13, 2019, GulfSlope announced the Tau well 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 prevent further drilling at
this time. In addition, the drilling rig has contractual obligations related to another operator. Due to these factors, the Company
has elected to temporarily abandon this well in a manner that would allow for re-entry at a later time. The Company is currently
evaluating various options related to future operations in this wellbore and testing of the deeper Tau prospect.
The
Company has completed the shallow hazard seismic survey for a third planned well and the detailed engineering and permitting process
for the drilling of that well. The exploration plan for this well was approved by BOEM in July 2019.
The
Company has incurred accumulated losses for the period from inception to June 30, 2019, of approximately $54.6 million, and
has a net capital deficiency. Further losses are anticipated in developing its business. As a result, there exists
substantial doubt about the Company’s ability to continue as a going concern. As of June 30, 2019, the Company had
approximately $2.3 million of unrestricted cash on hand, $2.0 million of this amount is for the payment of joint payables
from drilling operations. Our current capital on hand is insufficient to enable us to execute our business strategy beyond
December 2019. Though, our inability to complete the agreement to extend the maturity date of the $1.0 million
remaining balance of the Delek term loan due October 19, 2019 could further effect our liquidity and business plan. 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. These expenditures include the Company’s drilling costs, lease rentals to the BOEM, general and
administrative expenses, and costs associated with seismic acquisition and processing. The Company plans to finance the
Company through best-efforts equity and/or debt financings and farm-out agreements. The Company also plans to extend the
agreements associated with loans from related parties, the accrued interest payable on these loans, as well as the
Company’s accrued liabilities. However there can be no assurance that additional financing will be available, or if
available, will be on terms acceptable to the Company. If adequate working capital is not available, the Company may be
required to curtail or cease operations or the Company would need to sell assets or consider alternative plans up to
and including restructuring.
Significant
Accounting Policies
The
Company uses the full cost method of accounting for its oil and natural 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”), 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, capitalized exploration and acquisition
costs for unproved properties 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.
Property
and equipment are carried at cost. We assess the carrying value of our property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
A
more complete discussion of our critical accounting policies is included in our annual report on Form 10-K as of September 30,
2018, which was filed with the Securities and Exchange Commission on December 31, 2018.
Factors
Affecting Comparability of Future Results
Success
in Acquiring Oil and Gas Leases or Prospects. As a result of our 3-D seismic imaging and reprocessing, we currently hold
seven lease blocks in the U.S. Gulf of Mexico, which we believe may potentially contain economically recoverable reserves.
We
have No Proved Reserves. We have identified prospects based on available seismic and geological information that indicate
the potential presence of oil or gas, and we own the drilling and production rights for these prospects. Some of our current prospects
may require additional seismic data reprocessing and interpretation. Even when properly used and interpreted, seismic data and
visualization techniques are only tools used to assist geoscientists in identifying structures and hydrocarbon indicators and
do not enable the interpreter to have certainty as to whether hydrocarbons are, in fact, present in those structures. We do not
know if any prospect will contain oil or gas in sufficient quantities or quality to recover drilling and completion costs or to
be economically viable.
Success
in the Discovery and Development of Reserves. Because we have no operating history in the production of oil and gas, our
future results of operations and financial condition will be directly affected by our ability to discover and develop reserves
through our drilling activities.
Oil
and Gas Revenue. We have not yet commenced oil and gas production. If and when we do commence production, we expect to generate
revenue from such production. No oil and gas revenue is reflected in our historical financial statements.
General
and Administrative Expenses . We expect that our general and administrative expenses will increase in future periods when
we commence drilling operations.
Demand
and Price. The demand for oil and gas is susceptible to volatility related to, among other factors, the level of global economic
activity and may also fluctuate depending on the performance of specific industries. We expect that a decrease in economic activity,
in the United States and elsewhere, would adversely affect demand for any oil and gas we may produce. Since we have not generated
revenues, these key factors will only affect us if and when we produce and sell hydrocarbons.
For
a more complete discussion of the factors affecting comparability of our future results, see the “Risk Factors” above.
Three
Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018
There
was no revenue during the three months ended June 30, 2019 and June 30, 2018. We incurred approximately $4.3 million of impairment
of oil and natural gas properties for the three months ended June 30, 2019 and zero for the three months ended June 30, 2018.
This is due to the expiration of oil and gas leases for the three months ended June 30, 2019. General and administrative expenses
were $0.4 million for the three months ended June 30, 2019, compared to approximately $0.8 million for the three months ended
June 30, 2018. This decrease in expense is primarily due to a decrease in stock compensation expense. Interest expense was $2.1
million for the three months ended June 30, 2019 compared to $0.2 million for the three months ended June 30, 2018, primarily
due to the day one charge of approximately $1.7 million of interest as the derivative fair value relating to the convertible notes
exceeded the proceeds for the three months ended June 30, 2019. For the three months ended June 30, 2019 there was a loss of $0.1
million for a derivative financial instrument, compared to zero for the three months ended June 30, 2018.
Nine
Months Ended June 30, 2019 Compared to Nine Months Ended June 30, 2018
There
was no revenue during the nine months ended June 30, 2019 and June 30, 2018. We incurred approximately $4.3 million of impairment
of oil and natural gas properties for the nine months ended June 30, 2019 and zero for the nine months ended June 30, 2018, resulting
from the expiration of oil and gas leases during the period ended June 30, 2019. General and administrative expenses were approximately
$1.0 million for the nine months ended June 30, 2018, compared to approximately $1.2 million for the nine months ended June 30,
2018. This decrease was primarily due to a decrease in stock compensation expense of approximately $0.3 million. Interest expense
was $2.3 million for the nine months ended June 30, 2019 compared to $0.7 million for the nine months ended June 30, 2018. This
increase was primarily due to interest resulting from the day one charge of approximately $1.7 million of interest as the derivative
fair value relating to the convertible notes exceeded the proceeds for the nine months ended June 30, 2019 compared to June 30,
2018. Loss on debt extinguishment was approximately $5.1 million for the nine months ended June 30, 2019 and approximately $0.2
million for the nine months ended June 30, 2018. This increase was primarily due to a loan and subsequent warrant exercise resulting
in loan extinguishment and the loss on debt extinguishment. Loss on derivative financial instrument was $0.01 million and zero
for the nine months ended June 30, 2019.
Liquidity
and Capital Resources
The
Company has incurred accumulated losses for the period from inception to June 30, 2019, of approximately $54.6 million, and has
a negative working capital of $20.6 million. For the nine months ended June 30, 2019, the Company has generated losses of $12.7
million and negative cash flows from operations of $7 million. As of June 30, 2019, we had $2.3 million of cash on hand, $2.0
million of this amount is for joint payables from drilling operations. The Company estimates that it will need to raise a minimum
of $10 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 its operations through the issuance of equity and debt financings. Our policy has been to periodically raise funds through
the 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. There are no assurances that financing will
be available with acceptable terms, if at all. If the Company is not successful in obtaining financing, operations would need
to be curtailed or ceased. The accompanying financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
For
the nine months ended June 30, 2019, the Company used approximately $7.0 million of net cash in operating activities, compared
with approximately $2.7 million of net cash received in operating activities for the nine months ended June 30, 2018, due to approximately
$4.1 million decrease in deposits and an $11.5 million increase in receivables and a $8.8 million increase in accounts payable
and accrued liabilities. For the nine months ended June 30, 2019 we used approximately $9.1 million of cash in investing activities
compared with approximately $2.1 million of cash received in investing activities for the nine months ended June 30, 2018, primarily
due to a $9.8 million investment in oil and gas properties for the nine months ended June 30, 2019 and approximately $2.9 million
received for sale of working interest and offset by approximately $0.8 million investment in oil and gas properties for the nine
months ended June 30, 2018. For the nine months ended June 30, 2019 we received approximately $12.8 million of net cash from financing
activities, compared with approximately $0.1 million received in financing activities for the nine months ended June 30, 2018.
This increase is due to loan proceeds received during the nine months ended June 30, 2019.
We
will need to raise additional funds to cover expenditures planned after December 2019, as well as any additional, unexpected expenditures
that we may encounter. Though, our inability to complete the agreement to extend the maturity date of the $1.0 million
remaining balance of the Delek term loan due October 19, 2019 could further effect our liquidity and business plan. Future equity
financings may be dilutive to our stockholders. Alternative forms of future financings may include preferences or rights superior
to our common stock. Debt financings may involve a pledge of assets and will rank senior to our common stock. We have historically
financed our operations through private equity and debt financings. We do not have any credit or equity facilities available with
financial institutions, stockholders or third-party investors, and will continue to rely on best efforts financings. The failure
to raise sufficient capital could cause us to cease operations, or the Company would need to sell assets or consider alternative
plans up to and including restructuring.
Off-Balance
Sheet Arrangements
None.
MARKET
PRICE INFORMATION AND DIVIDEND POLICY
Our
common stock is quoted on the OTCBB and the OTCQB under the symbol “GSPE.” Shares of our common stock have historically
been thinly traded, and currently there is no active trading market for our common stock. As a result, our stock price as quoted
by the OTCBB or OTCQB may not reflect an actual or perceived value. The following table sets forth the approximate high and low
bid prices for our common stock for the last two fiscal years and interim periods. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual transactions.
|
|
High
|
|
|
Low
|
|
YEAR
2019
|
|
|
|
|
|
|
|
|
|
Quarter
ended June 30, 2019
|
$
|
0.069
|
|
|
$
|
0.028
|
|
|
Quarter
ended March 31, 2019
|
$
|
0.080
|
|
|
$
|
0.043
|
|
|
Quarter
ended December 31, 2018
|
$
|
0.071
|
|
|
$
|
0.030
|
|
|
|
|
|
|
|
|
|
|
YEAR
2018
|
|
|
|
|
|
|
|
|
|
Quarter
ended September 30, 2018
|
$
|
0.072
|
|
|
$
|
0.057
|
|
|
Quarter
ended June 30, 2018
|
$
|
0.120
|
|
|
$
|
0.100
|
|
|
Quarter
ended March 31, 2018
|
$
|
0.078
|
|
|
$
|
0.060
|
|
|
Quarter
ended December 31, 2017
|
$
|
0.045
|
|
|
$
|
0.039
|
|
|
|
|
|
|
|
|
|
|
YEAR
2017
|
|
|
|
|
|
|
|
|
|
Quarter
ended September 30, 2017
|
$
|
0.039
|
|
|
$
|
0.030
|
|
|
Quarter
ended June 30, 2017
|
$
|
0.018
|
|
|
$
|
0.018
|
|
|
Quarter
ended March 31, 2017
|
$
|
0.030
|
|
|
$
|
0.027
|
|
|
Quarter
ended December 31, 2016
|
$
|
0.065
|
|
|
$
|
0.058
|
|
As
of October 14, 2019, the closing price of our Common Stock was $0.044 per share.
Holders
The
number of record holders of the Company’s common stock, as of October 14, 2019, is approximately 190.
Dividends
The
Company has not declared any dividends with respect to its common stock and does not intend to declare any dividends in the foreseeable
future. The future dividend policy of the Company cannot be ascertained with any certainty. There are no material restrictions
limiting the Company’s ability to pay cash dividends on its common stock.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table sets forth information with respect to the equity compensation plans available to directors, officers, certain
employees and certain consultants of the Company at June 30, 2019.
|
|
(a)
|
|
(b)
|
|
(c)
|
Plan
category
|
|
Number of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights (1)
|
|
Weighted-average
exercise
price of
outstanding options,
warrants and rights
|
|
Number of securities
remaining available for
future
issuance under
equity
compensation
plans, excluding securities
reflected in column
(2)
|
Equity
compensation plans approved by security holders
|
|
|
104,500,000
|
|
|
$
|
0.0605
|
|
|
|
42,500,000
|
|
Equity
compensation plans not approved by security holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
104,500,000
|
|
|
|
|
|
|
|
42,500,000
|
|
(1)
|
This
column reflects the maximum number of shares of our common stock subject to stock option awards granted under the 2014 and
2018 Omnibus Incentive Plans outstanding and unvested.
|
(2)
|
This column reflects
the total number of shares of our common stock remaining available for issuance under the 2018 Omnibus Incentive Plan.
|
MANAGEMENT,
DIRECTORS AND SIGNIFICANT EMPLOYEES
Directors
of the corporation are elected by the stockholders and serve until a successor is elected and qualified. Officers of the
corporation are appointed by the Board and serves until a successor is duly appointed and qualified, or until he or he is
removed from office. The Board also appointed our officers in accordance with our bylaws and employment agreements negotiated
between the Board and the respective officer. Currently, there are no such employment agreements. Officers listed herein are
employed at the discretion of the Board and state employment law, where applicable.
Our
executive officers and directors and their respective ages, positions and biographical information are set forth below.
Name
|
Position
|
Age
|
John N. Seitz
|
Chairman, Chief
Executive Officer
|
67
|
John H. Malanga
|
Chief Financial
Officer
|
52
|
Charles G. Hughes
|
Vice President,
Land
|
62
|
Richard S. Langdon
|
Director
|
69
|
Paul L. Morris
|
Director
|
77
|
John
N. Seitz. Mr. Seitz has served as the Company’s chief executive officer and chairman of the board and director since
May 31, 2013, and served as a consultant to the Company from March 2013 through May 2013. Prior to joining the Company, Mr. Seitz
held positions of increasing responsibility at Anadarko Petroleum Corporation (NYSE: APC), serving most recently as a director
and as president and chief executive officer until 2003. Mr. Seitz also serves on the board of directors of ION Geophysical Corporation
(NYSE: IO), a leading technology focused seismic solutions company. Mr. Seitz is a Certified Professional Geological Scientist
from the American Institute of Professional Geologists and a licensed professional geoscientist with the State of Texas. Mr. Seitz
also serves as a trustee for the American Geological Institute Foundation. In 2000, the Houston Geological Society honored Mr.
Seitz as a “Legend in Wildcatting,” and he is a member of the All American Wildcatters. Mr. Seitz holds a Bachelor
of Science degree in Geology from the University of Pittsburgh, a Master of Science degree in Geology from Rensselaer Polytechnic
Institute, and has completed the Advanced Management Program at the Wharton School.
John
H. Malanga. Mr. Malanga has served as chief financial officer since July 2014 and is responsible for leading the financial
function of the organization, overseeing strategic planning and analysis, accounting and reporting, treasury, tax, audit and risk
management. From 2005 to 2014, Mr. Malanga worked as a senior investment banker with the energy firms of Weisser, Johnson &
Co. and Sanders Morris Harris Inc. Mr. Malanga began his investment banking career with Jefferies & Co. Over his career, he
has participated in capital markets, mergers and acquisitions, and financial advisory transactions with particular emphasis on
providing strategic and financial advice to emerging growth companies. Mr. Malanga holds a Bachelor of Science in Economics from
Texas A&M University and a Master in Business Administration with a concentration in finance from Rice University.
Charles
G. Hughes. Mr. Hughes has served as vice president land since April 2014. Mr. Hughes’ executive responsibilities include
all land and industry partner related matters. He formerly served as general manager – land and business development for
Marubeni Oil & Gas (USA), Inc. from 2007 to 2014. From 1980 to 2007, Mr. Hughes served in roles of increasing responsibility
both onshore and offshore in the Gulf of Mexico at Anadarko Petroleum Corporation. Mr. Hughes is a member and former Chairman
of the OCS Advisory Board, a member of the Association of Professional Landmen, the Houston Association of Professional Landmen
and the Professional Landmen’s Association of New Orleans. Mr. Hughes received his Bachelor of Business Administration in
Petroleum Land Management from the University of Texas.
Richard
S. Langdon. Richard S. Langdon has served as a director of the Company since March 2014. Mr. Langdon is currently the executive
vice president and chief financial officer of Altamont Energy, Inc., a newly formed privately held exploration and production
company. Mr. Langdon served as the president, chief executive officer and outside director of Badlands Energy, Inc. and its predecessor
entity, Gasco Energy, Inc. since May 2013 and Debtor-in Possession since August 2017. Prior to assuming the President and CEO
role, Mr. Langdon had served as a Gasco Energy Inc. outside board member since 2003. Mr. Langdon serves as a member of the board
of managers of Sanchez Midstream Partners, LP, and is a member of its Audit, Nominating and Corporate Governance and Conflicts
Committees. Mr. Langdon was the president and chief executive officer of KMD Operating Company, LLC (“KMD Operating”),
and its predecessor entity, Matris Exploration Company LP (“Matris Exploration”), both privately held exploration
and production companies, from July 2004 through December 2015. Mr. Langdon was executive vice president and chief operating officer
of KMD Operating, from August 2009, until the merger of Matris Exploration into KMD Operating in November 2011. From 1997 until
2002, Mr. Langdon served as executive vice president and chief financial officer of EEX Corporation, a publicly traded exploration
and production company that merged with Newfield Exploration Company in 2002. Prior to that, he held various positions with the
Pennzoil Companies from 1991 to 1996, including executive vice president - International Marketing - Pennzoil Products Company;
senior vice president - Business Development - Pennzoil Company and senior vice president - Commercial & Control - Pennzoil
Exploration & Production Company. Mr. Langdon graduated from the University of Texas at Austin with a Bachelor of Science
degree in Mechanical Engineering in 1972 and a Masters of Business Administration in 1974.
Paul
L. Morris. Mr. Morris has served as a director of the Company since March 2014. Mr. Morris founded Elk River Resources, LLC
in August 2013 to explore and develop oil and gas potential in the oil-producing regions of the southwest United States. Mr. Morris
has served as chairman and chief executive officer of Elk River Resources since inception. Prior to Elk River Resources, Mr. Morris
served as president and chief executive officer from 1988 to September 2013 of Wagner & Brown, Ltd., an independent oil and
gas company headquartered in Midland, Texas. With Wagner & Brown, Mr. Morris oversaw all company operations, including exploration
and production activities, in eight states as well as in France, England and Australia. Mr. Morris also oversaw affiliates involved
in natural gas gathering and marketing, crude oil purchasing and reselling, pipeline development, construction and operation,
and compressed natural gas (CNG) design, fabrication and operations. Mr. Morris served as president of Banner Energy from 1981
until 1988. Mr. Morris graduated from the University of Cincinnati with a Bachelor of Science degree in Mechanical Engineering
in 1964. Mr. Morris has also completed the Executive Management Program in the College of Business Administration of Penn State
University.
Board
Committees and Meetings
The
Board currently consists of three directors. Vacancies on the Board may be filled by a vote of a majority of the remaining directors,
although less than a quorum is present. A director elected by the Board to fill a vacancy shall serve for the remainder of the
term of that director until the director’s successor is elected and qualified. This includes vacancies created by an increase
in the number of directors. The Board has three standing committees: the Audit and Compliance Committee, the Compensation Committee,
and the Corporate Governance and Nominating Committee.
The
Company has no formal policy with regard to Board members’ attendance at annual meetings of security holders. The Company
held an annual shareholder meeting in May of 2018. During the fiscal year ended September 30, 2018, the Board held four meetings.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of the Exchange Act requires our directors and executive officers, and persons who beneficially own more than 10% of our
common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Directors,
executive officers and more than 10% stockholders are required by SEC regulations to provide us with copies of all Section 16(a)
forms they file. To our knowledge, based solely on a review of the copies of the reports furnished to us, all Section 16(a) filing
requirements applicable to our directors, officers and more than 10% beneficial owners were complied with during the year ended
September 30, 2018.
Code
of Ethics
We
have adopted a written code of ethics and whistleblower policy (the “Code of Ethics”) that applies to our principal
executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions.
We believe that the Code of Ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide
full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal
reporting of code violations; and provide accountability for adherence to the code. A copy of our Code of Ethics was previously
filed as an exhibit to our Annual Report on Form 10-K for the fiscal year ended 2012, and can be found at www.sec.gov.
Our Code of Ethics can also be found on our website at www.gulfslope.com. A copy of the Code of Ethics will be provided
to any person, without charge, upon request to the Secretary at 1331 Lamar St., Suite 1665, Houston, Texas 77010.
Involvement
in Certain Legal Proceedings
There
are currently no material pending legal proceedings to which the Company is a party or of which any of its property is the subject,
in which any of the above referenced directors or officers is a party adverse to the Company or has a material interest adverse
to the Company. Furthermore, during the past ten years, none of the Company’s officers or directors described above were
involved in any legal proceedings that are material to an evaluation of the ability or integrity of such directors and officers.
COMPENSATION
OF DIRECTORS AND EXECUTIVE OFFICERS
The
following tables contain compensation data for our named executive officers for the fiscal years ended September 30, 2018 and
2017:
Summary
Compensation Table
|
Name
and
Principal Position
|
|
|
Year
|
|
|
|
Salary
|
|
|
|
Bonus
|
|
|
|
Stock
Awards
|
|
|
|
Stock
Option Awards
|
|
|
|
All
Other
Compensation
|
|
|
|
Total
|
|
John N. Seitz
|
|
|
2018
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
CEO
|
|
|
2017
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
John H. Malanga
|
|
|
2018
|
|
|
|
36,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
560,250
|
|
|
|
—
|
|
|
|
596,250
|
|
CFO
|
|
|
2017
|
|
|
|
24,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
167,250
|
|
|
|
—
|
|
|
|
191,250
|
|
(1)
|
Mr.
Seitz is not currently receiving or accruing any compensation as of the date of this prospectus.
|
Employment
and Consulting Arrangements
Mr.
Seitz is not currently receiving or accruing any compensation as of the date of this prospectus.
On
January 1, 2016 all officers and all employees’ salaries were reduced due to budgetary constraints. A reduced annual salary
of approximately $24,000 plus benefits has been paid through May 2018. Beginning in May 2018 a monthly salary of approximately
$5,000 plus benefits was paid to all employees and officers. In January 2017, Mr. Malanga was awarded fifteen million stock options,
50% vested immediately the remainder vested in January of 2018. In June of 2018 Mr. Malanga was awarded eighteen million stock
options, 6 million vested immediately, 6 million will vest in June of 2019 and 6 million in June of 2020. The Company has seven
current employees and officers.
In
January 2017, 33,500,000 stock options were issued to employees, officers and board members. The options have an exercise price
of $0.0278 and 50% vested upon grant and 50% vested in January 2018, The options will expire in January 2024.
In
May 2018, 500,000 stock options with an exercise price of $0.065 were issued and in June 2018, 67,500,000 stock options with an
exercise price of $0.075 were issued to employees, officers and board members. 19 million stock options vested upon grant and
24 million will vest in June 2019, and 25 million will vest in June 2020. The options will expire on December 31, 2025.
Compensation
Policies and Practices as they Relate to the Company’s Risk Management
We
conducted a review of our compensation policies and procedures as they relate to an overall risk management policy. We do not
believe that any of our compensation policies and practices create risks that are reasonably likely to have a material adverse
effect on the Company.
Director
Compensation
During
2018, the directors of the Company were not compensated for their services as directors. In January of 2017 the Company’s
nonemployee directors were each awarded 2,500,000 stock options for the Company’s stock at an exercise price of $0.0278
per share, 50% vested in January 2017 and 50% vested in January of 2018. The stock options will expire in January 2024. In June
of 2018 the Company’s nonemployee directors were each awarded 4,500,000 stock options for the Company’s stock at an
exercise price of $0.075 per share, 1.5 million vested in June 2018, and 1.5 million vested in June 2019 and June 2020, respectively.
The stock options will expire in December 2025.
Grants
of Plan-Based Awards
The
Company’s shareholders approved the 2018 Omnibus Incentive Plan in May of 2018. Restricted stock and stock option awards
made after this date, to executives, employees, and directors were made pursuant to the plan.
Outstanding
Equity Awards at Fiscal Year End
In
October 2013, two million stock options were awarded with an exercise price of $0.12 and an expiration of October 2023. Fifty
percent vested upon grant and fifty percent vested one year later. In January 2017, 22 million stock options were awarded to GulfSlope
Energy executives, 5 million to directors, and 28.5 million to employees. The exercise price of the stock options is $0.0278 and
they expire in January 2024. Fifty percent of these options vested upon grant in January 2017 and fifty percent vested in January
2018. In May 2018, 0.5 million stock options were awarded and in June 2018, 67.5 million stock options were awarded to GulfSlope
Energy executives, employees and directors. The exercise price of the stock options is $0.075 and they expire in December 2025.
19 million of these options vested upon grant in June 2018, 24 million vested in June 2019, and 25 million will vest in June 2020,
provided the recipient remains employed at the Company.
Certain
Relationships and 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 $1.2 million 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 year ended September
30, 2017, the Company entered into promissory notes with John Seitz whereby it borrowed a total of $602,500. 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 September 30, 2018 and September 30, 2017 the total amount owed to John Seitz, our CEO, is $8,675,500. There
was a total of $1,641,086 and $1,201,286 of unpaid interest associated with these loans included in accrued interest within our
balance sheet as of September 30, 2018 and 2017, respectively.
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 former 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 September 30, 2018, the total amount owed to Dr. Bain and his
affiliate was $267,000. There was a total of $42,706 and $27,171 of accrued interest associated with these loans included within
our balance sheet as of September 30, 2018 and 2017, respectively. In June of 2016, Dr. Ronald Bain also entered into a $92,000
convertible promissory note with associated warrants under the same terms received by other investors (see Note 7 to the financial
statement as of and for the years ended September 30, 2018 and 2017).
On
November 15, 2016, a family member of the CEO, a related party, entered into a $50,000 convertible promissory note with associated
warrants under the same terms received by other investors (see Note 7 to the financial statement as of and for the years ended
September 30, 2018 and 2017).
Domenica
Seitz CPA, related to John Seitz, has provided accounting consulting services to the Company. During the years ended September
30, 2018 and 2017, the services provided were valued at $23,660 and $32,625, respectively. The Company has accrued these amounts
within accrued expenses and other payables, and they have been reflected in the September 30, 2018 and 2017 financial statements.
Delek owns approximately
22% of our outstanding stock, is a joint venture partner and is owed $1 million under a term loan agreement.
John
Seitz has not received a salary since May 31, 2013, the date he commenced serving as our CEO and accordingly, no amount has been
accrued on our financial statements.
PRINCIPAL
STOCKHOLDERS
The
following table sets forth the number and percentage of outstanding shares of common stock owned by: (a) each of our directors;
(b) each person who is known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; (c) the
named executive officers as defined in Item 402 of Regulation S-K; and (d) all current directors and executive officers, as a
group. As of October 14, 2019, there were 1,092,266,844 shares of common stock deemed issued and outstanding.
Unless
otherwise stated, beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Under this rule,
certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote
or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has
the right to acquire shares (for example, upon exercise of an option or warrant) within 60 days of the date as of which the information
is provided. In computing the percentage ownership of any person or group of persons, the number of shares beneficially owned
by such person or group of persons is deemed to include the number of shares beneficially owned by such person or the members
of such group by reason of such acquisition rights, and the total number of shares outstanding is also deemed to include such
shares (but not shares subject to similar acquisition rights held by any other person or group) for purposes of that calculation.
As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the
person’s actual voting power at any particular date. To our knowledge, except as indicated in the footnotes to this table
and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them. The address for each of the beneficial owners is the
Company’s address.
Name
of Beneficial Owner
|
|
Number
of Shares of Common Stock Beneficially Owned as of October 14, 2019
|
|
|
Percentage
of Class Beneficially Owned
|
|
Named
Executive Officers and Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
N. Seitz (1)
|
|
|
254,668,176
|
|
|
|
23.3
|
%
|
John
H. Malanga (3)
|
|
|
35,666,667
|
|
|
|
3.3
|
%
|
Richard
S. Langdon (4)
|
|
|
7,916,667
|
|
|
|
0.7
|
%
|
Paul
L. Morris (2)
|
|
|
9,228,038
|
|
|
|
0.8
|
%
|
All
directors & executive officers as a group (4 persons)
|
|
|
307,479,548
|
|
|
|
28.2
|
%
|
|
|
|
|
|
|
|
|
|
Shareholders
of Greater Than 5%:
|
|
|
|
|
|
|
|
|
Delek
GOM Investments, LLC
|
|
|
238,095,238
|
|
|
|
21.8
|
%
|
(1)
|
Includes
44,166,667 shares of common stock underlying the convertible demand note in the principal amount of $5.3 million and 9,241,300
shares underlying the convertible accrued interest in the amount of $1,108,956.
|
(2)
|
Includes
4,167 shares of common stock held by the Morris Family Limited Partnership LP, a partnership of which an entity controlled
by Mr. Morris is the general partner and 2,500,000 stock options awarded in January 2017, one-half vested in January of 2017
and one-half vested in January 2018. Includes 4,500,000 stock options awarded in June 2018, one-third vested in June of 2018,
one-third vested in June 2019 and one-third will vest in June 2020.
|
(3)
|
Includes
15,000,000 stock options awarded in January 2017, one-half vested in January of 2017 and one-half vested in January 2018.
Includes 18,000,000 stock options awarded in June 2018, one-third vested in June of 2018, one-third vested in June 2019 and
one-third will vest in June 2020.
|
(4)
|
Includes
2,500,000 stock options awarded in January 2017, one-half vested in January of 2017 and one-half vested in January 2018. Includes
4,500,000 stock options awarded in June 2018, one-third vested in June of 2018, one-third vested in June 2019 and one-third
will vest in June 2020.
|
DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our
directors and officers are indemnified to the fullest extent permitted under Delaware law. We have also purchased and maintain
directors and officers insurance which protects our officers and directors against any liabilities incurred in connection with
their service in such a capacity.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the foregoing, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person
of ours in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
EXPERTS
The
financial statements as of September 30, 2018 and 2017 and for the years then ended included in this Prospectus and in the Registration
Statement have been so included in reliance on the report of BDO USA, LLP, an independent registered public accounting firm (the
report on the financial statements contains an explanatory paragraph regarding the Company’s ability to continue as a going
concern) appearing elsewhere herein and in the Registration Statement, given on the authority of said firm as experts in auditing
and accounting.
LEGAL
MATTERS
The
validity of the shares of common stock registered for resale hereby will be passed upon by Mayer Brown LLP, Houston, Texas.
WHERE
YOU CAN FIND MORE INFORMATION
We have filed with
the SEC under the Securities Act, a Registration Statement on Form S-1 relating to the securities offered hereby. This prospectus
does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further
information with respect to our company and the securities we are offering by this prospectus you should refer to the Registration
Statement, including the exhibits and schedules thereto. You may inspect a copy of the Registration Statement without charge at
the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports,
proxy and information statements and other information regarding registrants that file electronically with the SEC. The SEC’s
internet address is http://www.sec.gov. We maintain a website at http://www.gulfslope.com. You may access our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act with the SEC free of charge at our website as soon as reasonably practicable after
such material is electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed through,
our website is not part of this prospectus. All documents subsequently filed by the us pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act before the termination of the offering shall be deemed to be incorporated by reference into the prospectus.
ITEM
11(e). FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE
OF CONTENTS
|
Page
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
Balance Sheets as of September 30, 2018 and 2017
|
F-3
|
Statements of Operations for the Years Ended September 30, 2018 and 2017
|
F-4
|
Statement of Stockholders’ Deficit for the Years Ended September 30, 2018 and 2017
|
F-5
|
Statements of Cash Flows for the Years Ended September 30, 2018 and 2017
|
F-6
|
Notes to Financial Statements for the Years Ended September 30, 2018 and 2017
|
F-7
|
|
|
Condensed Balance Sheets as of June 30, 2019 and September 30, 2018 (Unaudited)
|
F-21
|
Condensed Statements of Operations for the Three and Nine Months Ended June 30, 2019 and 2018 (Unaudited)
|
F-22
|
Condensed Statements of Stockholders’ Deficit for the Three Months Ended June 30, 2019 and 2018 (Unaudited)
|
F-23
|
Condensed Statements of Stockholders’ Deficit for the Nine Months Ended June 30, 2019 and 2018 (Unaudited)
|
F-24
|
Condensed Statements of Cash Flows for the Nine Months Ended June 30, 2019 and 2018 (Unaudited)
|
F-25
|
Notes to Condensed Unaudited Financial Statements
|
F-26
|
GulfSlope
Energy, Inc.
Report
of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
GulfSlope Energy, Inc.
Houston, Texas
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of GulfSlope Energy, Inc. (the “Company”) as of September 30, 2018 and
2017, the related statements of operations, stockholders’ deficit, and cash flows for the years then ended, and the related
notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly,
in all material respects, the financial position of the Company at September 30, 2018 and 2017, and the results of its operations
and its cash flows for the years then ended , in conformity with accounting principles generally accepted in the United
States of America.
Going
Concern Uncertainty
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described
in Note 2 to the financial statements, the Company has a net capital deficiency, and further losses are anticipated in developing
the Company’s business, which raise substantial doubt about its ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO
USA, LLP
We have
served as the Company’s auditor since 2016.
Salt Lake City, Utah
December 31, 2018
GulfSlope
Energy, Inc.
BALANCE
SHEETS
|
|
As of September 30,
|
|
|
2018
|
|
2017
|
Assets
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,621,814
|
|
|
$
|
6,426
|
|
Accounts Receivable, Net
|
|
|
6,286,796
|
|
|
|
—
|
|
Prepaid Expenses and Other Current Assets
|
|
|
32,042
|
|
|
|
40,573
|
|
Total Current Assets
|
|
|
11,940,652
|
|
|
|
46,999
|
|
Property and Equipment, net of depreciation
|
|
|
14,786
|
|
|
|
3,484
|
|
Oil and Natural Gas Properties, Full Cost Method of Accounting, Unproved Properties
|
|
|
8,112,784
|
|
|
|
1,887,879
|
|
Other Non-Current Assets
|
|
|
24,785
|
|
|
|
—
|
|
Total Non-Current Assets
|
|
|
8,152,355
|
|
|
|
1,891,363
|
|
Total Assets
|
|
$
|
20,093,007
|
|
|
$
|
1,938,362
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
7,591,236
|
|
|
$
|
476,244
|
|
Deposits from Joint Interest Owners
|
|
|
4,078,786
|
|
|
|
—
|
|
Related Party Payable
|
|
|
306,386
|
|
|
|
298,458
|
|
Accrued Interest Payable
|
|
|
1,732,239
|
|
|
|
1,318,188
|
|
Accrued Expenses and Other Payables
|
|
|
268,862
|
|
|
|
1,321,927
|
|
Loans from Related Parties
|
|
|
9,084,500
|
|
|
|
9,155,581
|
|
Notes Payable
|
|
|
—
|
|
|
|
3,690
|
|
Convertible Promissory Notes Payable
|
|
|
135,000
|
|
|
|
669,419
|
|
Derivative Financial Instrument
|
|
|
271,710
|
|
|
|
—
|
|
Funds Received from Capital Raise
|
|
|
965,800
|
|
|
|
—
|
|
Other
|
|
|
44,723
|
|
|
|
11,605
|
|
Total Current Liabilities
|
|
|
24,479,242
|
|
|
|
13,255,112
|
|
Total Liabilities
|
|
|
24,479,242
|
|
|
|
13,255,112
|
|
Commitments and Contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Preferred Stock; par value ($0.001); Authorized 50,000,000 shares, none issued or outstanding
|
|
|
—
|
|
|
|
—
|
|
Common Stock; par value ($0.001); Authorized 1,500,000,000 as of September 30, 2018 and 975,000,000 as of September 30, 2017; issued and outstanding 832,013,272 and 692,196,625, as of September 30, 2018 and 2017, respectively
|
|
|
832,013
|
|
|
|
692,196
|
|
Additional Paid-in Capital
|
|
|
36,640,009
|
|
|
|
27,212,577
|
|
Accumulated Deficit
|
|
|
(41,858,257
|
)
|
|
|
(39,221,523
|
)
|
Total Stockholders’ Deficit
|
|
|
(4,386,235
|
)
|
|
|
(11,316,750
|
)
|
Total Liabilities and Stockholders’ Deficit
|
|
$
|
20,093,007
|
|
|
$
|
1,938,362
|
|
The
accompanying notes are an integral part to these financial statements.
GulfSlope
Energy, Inc.
STATEMENTS
OF OPERATIONS
|
|
For the years ended
September 30,
|
|
|
2018
|
|
2017
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
Impairment of Oil and Natural Gas Properties
|
|
|
—
|
|
|
|
3,316,212
|
|
General & Administrative Expenses
|
|
|
1,220,247
|
|
|
|
964,309
|
|
Net Loss from Operations
|
|
|
(1,220,247
|
)
|
|
|
(4,280,521
|
)
|
Other Income/(Expenses):
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(780,513
|
)
|
|
|
(1,324,127
|
)
|
Interest Income
|
|
|
27,312
|
|
|
|
—
|
|
Loss on Derivative Financial Instrument
|
|
|
(136,827
|
)
|
|
|
—
|
|
Loss on Debt Extinguishment
|
|
|
(526,459
|
)
|
|
|
(89,701
|
)
|
Net Loss Before Income Taxes
|
|
|
(2,636,734
|
)
|
|
|
(5,694,349
|
)
|
Provision for Income Taxes
|
|
|
—
|
|
|
|
—
|
|
Net Loss
|
|
$
|
(2,636,734
|
)
|
|
$
|
(5,694,349
|
)
|
Loss Per Share – Basic and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
Weighted Average Shares Outstanding – Basic and Diluted
|
|
|
768,365,759
|
|
|
|
684,935,344
|
|
The
accompanying notes are an integral part to these financial statements.
GulfSlope
Energy, Inc.
STATEMENTS
OF STOCKHOLDERS’ DEFICIT
|
|
Common
|
|
Additional
Paid-in
|
|
Accumulated
|
|
Net
Stockholders’
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Deficit
|
Balance September 30, 2016
|
|
|
682,402,225
|
|
|
$
|
682,402
|
|
|
$
|
26,151,376
|
|
|
$
|
(33,527,174
|
)
|
|
$
|
(6,693,396
|
)
|
Common stock issued for services
|
|
|
1,250,000
|
|
|
|
1,250
|
|
|
|
(1,250
|
)
|
|
|
—
|
|
|
|
—
|
|
Common stock issued for cash received in prior period
|
|
|
—
|
|
|
|
—
|
|
|
|
653,670
|
|
|
|
—
|
|
|
|
653,670
|
|
Common stock issued resulting from anti-dilution provision
|
|
|
—
|
|
|
|
—
|
|
|
|
131,165
|
|
|
|
—
|
|
|
|
131,165
|
|
Restricted common stock issued to employees
|
|
|
—
|
|
|
|
—
|
|
|
|
81,861
|
|
|
|
—
|
|
|
|
81,861
|
|
Value of warrants in conjunction with convertible promissory notes
|
|
|
1,500,000
|
|
|
|
1,500
|
|
|
|
24,210
|
|
|
|
—
|
|
|
|
25,710
|
|
Value of beneficial conversion feature in conjunction with convertible promissory notes
|
|
|
7,044,400
|
|
|
|
7,044
|
|
|
|
120,844
|
|
|
|
—
|
|
|
|
127,888
|
|
Loss from extension of due date and issuance of Bridge Note extensions
|
|
|
—
|
|
|
|
—
|
|
|
|
50,701
|
|
|
|
—
|
|
|
|
50,701
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,694,349
|
)
|
|
|
(5,694,349
|
)
|
Balance at September 30, 2017
|
|
|
692,196,625
|
|
|
|
692,196
|
|
|
|
27,212,577
|
|
|
|
(39,221,523
|
)
|
|
|
(11,316,750
|
)
|
Common stock issued for services
|
|
|
84,348,985
|
|
|
|
84,349
|
|
|
|
5,122,404
|
|
|
|
—
|
|
|
|
5,206,753
|
|
Amortization of employee stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
1,857,531
|
|
|
|
—
|
|
|
|
1,857,531
|
|
Value of beneficial conversion feature in conjunction with convertible promissory notes
|
|
|
—
|
|
|
|
—
|
|
|
|
103,519
|
|
|
|
—
|
|
|
|
103,519
|
|
Value of warrants in conjunction with convertible promissory notes
|
|
|
—
|
|
|
|
—
|
|
|
|
47,387
|
|
|
|
—
|
|
|
|
47,387
|
|
Common stock issued for convertible promissory notes
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
47,093
|
|
|
|
—
|
|
|
|
49,093
|
|
Common stock issued for conversion of convertible promissory notes plus accrued interest
|
|
|
41,850,996
|
|
|
|
41,851
|
|
|
|
924,474
|
|
|
|
—
|
|
|
|
966,325
|
|
Common stock issued for warrants exercised
|
|
|
416,666
|
|
|
|
417
|
|
|
|
12,083
|
|
|
|
—
|
|
|
|
12,500
|
|
Common stock issued to settle debt
|
|
|
11,200,000
|
|
|
|
11,200
|
|
|
|
1,095,800
|
|
|
|
—
|
|
|
|
1,107,000
|
|
Value of warrants issued in conjunction with Bridge Note extensions
|
|
|
—
|
|
|
|
—
|
|
|
|
217,141
|
|
|
|
—
|
|
|
|
217,141
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,636,734
|
)
|
|
|
(2,636,734
|
)
|
Balance at September 30, 2018
|
|
|
832,013,272
|
|
|
$
|
832,013
|
|
|
$
|
36,640,009
|
|
|
$
|
(41,858,257
|
)
|
|
$
|
(4,386,235
|
)
|
The
accompanying notes are an integral part to these financial statements.
GulfSlope
Energy, Inc.
STATEMENTS
OF CASH FLOWS
|
|
September 30,
|
|
|
2018
|
|
2017
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,636,734
|
)
|
|
$
|
(5,694,349
|
)
|
Adjustments to Reconcile Net Loss to Cash Provided by (Used in) Operating Activities:
|
|
|
|
|
|
|
|
|
Impairment of Oil and Natural Gas Properties
|
|
|
—
|
|
|
|
3,316,212
|
|
Change in Allowance For Doubtful Accounts Receivable
|
|
|
—
|
|
|
|
(128,024
|
)
|
Depreciation
|
|
|
4,724
|
|
|
|
20,804
|
|
Debt Discount Amortization
|
|
|
254,501
|
|
|
|
810,540
|
|
Loss on Debt Extinguishment
|
|
|
526,459
|
|
|
|
89,701
|
|
Stock Based Compensation
|
|
|
1,036,654
|
|
|
|
458,543
|
|
Stock Issued for Services
|
|
|
503,076
|
|
|
|
—
|
|
Change in fair value of Derivatives
|
|
|
136,827
|
|
|
|
—
|
|
Changes in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
(Increase) Decrease in Accounts Receivable
|
|
|
(6,286,796
|
)
|
|
|
191,171
|
|
(Increase) Decrease in Prepaid Expenses and Other Current Assets
|
|
|
146,488
|
|
|
|
156,927
|
|
Increase (Decrease) in Deposits from Joint Interest Owners
|
|
|
4,078,786
|
|
|
|
—
|
|
Increase (Decrease) in Accounts Payable
|
|
|
5,914,705
|
|
|
|
(30,205
|
)
|
Increase (Decrease) in Related Party Payable
|
|
|
7,928
|
|
|
|
32,626
|
|
Increase (Decrease) in Accrued Interest Payable
|
|
|
520,375
|
|
|
|
509,139
|
|
Increase (Decrease) in Accrued Liabilities and Other Payables
|
|
|
633,865
|
|
|
|
—
|
|
Increase (Decrease) in Other
|
|
|
44,723
|
|
|
|
—
|
|
Net Cash Provided by (Used in) Operating Activities
|
|
|
4,885,581
|
|
|
|
(266,915
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Leases Purchased / Lease Rentals Paid
|
|
|
(280,268
|
)
|
|
|
(284,089
|
)
|
Proceeds From Sale of Working Interest
|
|
|
2,884,651
|
|
|
|
26,400
|
|
Capitalized Exploration and Wells In Process Costs
|
|
|
(1,904,618
|
)
|
|
|
(175,931
|
)
|
Deposits and Equipment Purchases
|
|
|
(22,050
|
)
|
|
|
—
|
|
Net Cash Provided by (Used in) Investing Activities
|
|
|
677,715
|
|
|
|
(433,620
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from Related Party Loans
|
|
|
—
|
|
|
|
652,500
|
|
Payments on Note Payable
|
|
|
(160,408
|
)
|
|
|
(159,653
|
)
|
Proceeds from Convertible Promissory Notes and Warrants
|
|
|
212,500
|
|
|
|
150,000
|
|
Net Cash Provided by (Used in) Financing Activities
|
|
|
52,092
|
|
|
|
642,847
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash
|
|
|
5,615,388
|
|
|
|
(57,688
|
)
|
Beginning Cash Balance
|
|
|
6,426
|
|
|
|
64,114
|
|
|
|
|
|
|
|
|
|
|
Ending Cash Balance
|
|
$
|
5,621,814
|
|
|
$
|
6,426
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Cash Flow Activities
|
|
|
|
|
|
|
|
|
Cash Paid for Interest
|
|
$
|
5,636
|
|
|
$
|
4,448
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
Prepaid Asset Financed Through Notes Payable
|
|
$
|
156,718
|
|
|
$
|
159,188
|
|
Accrued Liabilities, Convertible Notes and Accrued Interest Settled Through Issuance of Common Stock
|
|
|
1,896,999
|
|
|
|
—
|
|
Purchase of Capital Expenditures
|
|
|
|
|
|
|
|
|
Included in Accounts Payable
|
|
|
1,223,792
|
|
|
|
49,177
|
|
Through Stock Based Compensation to Employees
|
|
|
820,877
|
|
|
|
195,127
|
|
Through Issuance of Common Stock
|
|
|
4,880,000
|
|
|
|
—
|
|
GulfSlope
Energy, Inc.
Notes
to the Financial Statements
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
GulfSlope
Energy, Inc. (the “Company” or “GulfSlope”) is an independent oil and natural gas exploration company
whose interests are concentrated in the United States Gulf of Mexico federal waters offshore Louisiana. The Company has leased
14 federal Outer Continental Shelf blocks (referred to as “prospect,” “portfolio” or “leases”)
and licensed three-dimensional (3-D) seismic data in its area of concentration.
(b) Basis
of Presentation
The
accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United
States (“GAAP”) and the instructions to Form 10-K and Regulation S-X published by the US Securities and Exchange Commission
(the “SEC”). The accompanying financial statements include the accounts of the Company.
(c) Going
Concern
The
Company’s financial statements have been presented on the basis that it is a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses through September
30, 2018 of $41.9 million, has a lack of cash on-hand not from joint interest owners, and a working capital deficit. These factors
raise substantial doubt as to the Company’s ability to continue as a going concern. Management intends to raise additional
operating funds through equity and/or debt offerings. Management also plans to extend the agreements associated with loans from
related parties, the accrued interest payable on these loans, as well as the Company’s accrued liabilities. However, there
can be no assurance that additional financing will be available, or if available, will be on terms acceptable to the Company.
If adequate working capital is not available, the Company may be required to curtail or cease operations or the Company would
need to sell assets or consider alternative plans up to and including restructuring.
(d) Cash
The
Company considers all short-term highly liquid investments with an original maturity at the date of purchase of three months or
less to be cash equivalents. There were no cash equivalents at September 30, 2018 and 2017, respectively.
(e) Accounts
Receivable
The
Company records an accounts receivable for operations expense reimbursements due from joint interest partners. The Company estimates
allowances for doubtful accounts based on the aged receivable balances and historical losses. If the Company determines any account
to be uncollectible based on significant delinquency or other factors, it is immediately written off. As of September 30, 2018
and 2017, no allowance was recorded. Accounts receivable from joint operations are $6.7 million at September 30, 2018.
(f) Full
Cost Method
The
Company uses the full cost method of accounting for its oil and gas exploration and development activities. 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 September 30, 2018, the Company’s oil and gas properties consisted of unproved properties, wells in process and no proved
reserves.
(g) Property
and Equipment
Property
and equipment are carried at cost and include expenditures for new equipment and those expenditures that substantially increase
the productive lives of existing equipment and leasehold improvements. Maintenance and repair costs are expensed as incurred.
Property and equipment are depreciated on a straight-line basis over the assets’ estimated useful lives. Fully depreciated
property and equipment still in use are not eliminated from the accounts.
The
Company assesses the carrying value of its property and equipment for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing estimated undiscounted cash
flows, expected to be generated from such assets, to their net book value. If net book value exceeds estimated cash flows, the
asset is written down to its fair value, determined by the estimated discounted cash flows from such asset. When an asset is retired
or sold, its cost and related accumulated depreciation and amortization are removed from the accounts. The difference between
the net book value of the asset and proceeds on disposition is recorded as a gain or loss in our statements of operations in the
period in which they occur.
(h) Income
Taxes
Deferred
tax assets and liabilities are recognized for the temporary differences between the financial reporting basis and tax basis of
the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled.
A valuation allowance is provided if, based on the weight of available evidence, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The Company’s policy is to recognize potential interest and penalties
accrued related to unrecognized tax benefits as a component of income tax expense.
(i) Stock-Based
Compensation
The
Company records expenses associated with the fair value of stock-based compensation. For fully vested and restricted stock grants,
the Company calculates the stock based compensation expense based upon estimated fair value on the date of grant. For stock warrants
and options, the Company uses the Black-Scholes option valuation model to calculate stock based compensation at the date of grant.
Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in
these assumptions can materially affect the fair value estimate.
(j) Stock
Issuance
The
Company records the stock-based compensation awards issued to non-employees and other external entities for goods and services
at either the fair market value of the goods received or services rendered or the instruments issued in exchange for such services,
whichever is more readily determinable.
(k) Earnings
per Share
Basic
earnings per share (“EPS”) is computed by dividing net income (loss) by the weighted average number of common shares
outstanding for the period. 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,
convertible notes and restricted stock. The number of potential common shares outstanding relating to stock options, warrants,
and restricted stock is computed using the treasury stock or if-converted method. As the Company has incurred losses for the years
ended September 30, 2018 and 2017, the potentially dilutive shares are anti-dilutive and thus not added into the EPS calculations.
As of September 30, 2018 and 2017, there were 213,089,281 and 164,345,443 potentially dilutive shares, respectively.
(l) Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
(m) Impact
of New Accounting Standards
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 replaces most existing revenue recognition guidance. ASU 2014-09 will be effective for us October 1, 2018. Once implemented,
the Company can use one of two retrospective application methods for prior periods. The Company has completed its evaluation of
the provisions of this standard and concluded that the adoption will not result in any adjustment to beginning accumulated deficit
as the Company does not have any revenues. The Company will adopt this new standard effective October 1, 2018 using the modified
retrospective method of adoption as permitted by the standard. The adoption of Topic 606 will have no material impact on our financial
position, results of operations, stockholders’ equity, or cash flows, but will impact disclosures when the Company has revenue.
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.
The Jumpstart Our Business Startups Act,
or JOBS Act, provides that an emerging growth company can take advantage of the extended transition period for complying with
new or revised accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards
until those standards would otherwise apply to private companies. However, the Company has elected not to take advantage of such
extended transition period, and as a result, will comply with new or revised accounting standards on the relevant dates on which
adoption of such standards is required for non-emerging growth companies.
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
2 – LIQUIDITY/GOING CONCERN
The
Company has incurred accumulated losses as of September 30, 2018 of $41.9 million, and has a net capital deficiency. Further losses
are anticipated in developing our business, and there exists substantial doubt about the Company’s ability to continue as
a going concern. As of September 30, 2018, the Company had $5.6 million of unrestricted cash on hand, $4.5 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 $8
million to meet its obligations and planned expenditures through December 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. If the Company is not successful in obtaining
financing, 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.
NOTE
3 – OIL AND NATURAL GAS PROPERTIES
In
January 2018, the Company entered into a strategic partnership with Delek Group Ltd. (“Delek”), and Texas South Energy,
Inc. (“Texas South”) (collectively, the “Parties”) and executed a participation 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 exploratory costs associated with drilling each well. The Company
will be required to fund 20% of any 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. 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 will assign an eight-tenths of one percent of eight/eights net profits interest in certain of the Company’s oil
and gas leases to include Vermilion Area, South Addition 378, Ship Shoal Area, South Addition 336, and Ship Shoal Area, South
Addition 351, to Hi-View Investment Partners, LLC (“Hi-View”) in consideration for oil and gas consulting services
provided pursuant to a non-exclusive consulting engagement dated October 25, 2017, by and between Hi-View, the Company, and Texas
South (the “Advisory Agreement”). Hi-View will be entitled to additional assignments on the same terms and conditions
as described above related to any of the Leases whereby Delek elects to participate in drilling of an exploratory well. In addition,
the Company issued an aggregate of eighty million shares of Common Stock to Hi-View in consideration for oil and gas consulting
services provided in facilitating the Delek farm out agreement. The value of the shares of $4.8 million determined using the share
price on March 29, 2018, the date the shares were owed to Hi-View per the agreement which was the date of the funding obligation
of the first well, was capitalized to unproved properties.
The
Company, as the operator of two wells being 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.
The first of the two wells has been drilled and is being evaluated. The second well was spud in September 2018 and is currently
being drilled.
The
Company paid $376,368 in gross annual lease rental payments to the BOEM for the year ended September 30, 2017. The Company’s
share of these amounts is included in unproved properties. In August 2017, the Company competitively bid on one block in the Central
Gulf of Mexico Lease Sale 249 conducted by BOEM. The Company was the high bidder on the block and paid $26,398, which represents
20% of the total lease bonus amount. On September 29, 2017 the Company’s bid was accepted. After payment in October 2017
of $140,591, which represents the remaining 80% lease bonus and first year rentals, the Company was awarded the lease block in
October 2017.
In
August 2017, the Company entered into a letter agreement with Texas South that sets out the terms of an agreement for the Company’s
Tau prospect. In exchange for $166,989, Texas South acquired an undivided 20% interest in the prospect. In accordance with full
cost requirements, the Company recorded the proceeds from the transaction as an adjustment to the capitalized costs of its oil
and gas properties with no gain or loss recognition.
In
October 2017, the Company executed the second amendment to the March 2014 farm-out agreement with Texas South under which Texas
South acquired 20% of Gulfslope’s interest in two prospects for $329,062.
On
January 1, 2018, the Company executed the third amendment to the March 2014 farm-out agreement with Texas South under which Texas
South acquired 20% of GulfSlope’s interest in two prospects for $225,000.
For
the year ended September 30, 2017, the Company incurred $172,094 in consulting fees, salaries and benefits, $195,127 in stock
option costs associated with geoscientists, and $53,014 associated with technological infrastructure and third party hosting services.
As these G&G costs relate to specific company-owned unevaluated properties, the Company capitalized these G&G costs to
unproved properties.
For
the year ended September 30, 2018, the Company incurred $229,267 in consulting fees, salaries and benefits associated with geoscientists,
$820,877 in stock option costs associated with geoscientists and engineers, $53,934 associated with technological infrastructure
and third party hosting, and $138,729 in capitalized acquisition costs. The Company capitalized these G&G costs to unproved
properties.
NOTE
4 – PROPERTY AND EQUIPMENT
Property
and equipment consist of the following as of September 30, 2018 and 2017:
|
|
2018
|
|
2017
|
Office equipment and computers
|
|
$
|
133,089
|
|
|
$
|
143,897
|
|
Furniture and fixtures
|
|
|
16,280
|
|
|
|
16,280
|
|
Leasehold improvements
|
|
|
5,756
|
|
|
|
4,054
|
|
Total
|
|
|
155,125
|
|
|
|
164,231
|
|
Less: accumulated depreciation
|
|
|
(140,339
|
)
|
|
|
(160,747
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
14,786
|
|
|
$
|
3,484
|
|
Depreciation
is computed on a straight-line basis over the estimated useful lives of the assets, which were as follows:
|
Life
|
Office equipment
and computers
|
3
years
|
Furniture and fixtures
|
5
years
|
Leasehold improvements
|
Shorter
of 5 years or related lease term
|
Depreciation
expense was $4,724 and $20,804 for the years ended September 30, 2018 and 2017, respectively.
NOTE
5 – INCOME TAXES
The
provision for income taxes consists of the following as of September 30, 2018 and 2017:
|
|
9/30/2018
|
|
|
9/30/2017
|
|
FEDERAL
|
|
$
|
|
|
|
$
|
|
|
Current
|
|
|
—
|
|
|
|
—
|
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
STATE
|
|
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
|
—
|
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
TOTAL PROVISION
|
|
$
|
—
|
|
|
$
|
—
|
|
The difference
between the actual income tax provision versus tax computed at the statutory rate is as follows for the years ended September
30, 2018 and 2017, respectively:
|
|
9/30/2018
|
|
|
9/30/2017
|
|
Expected
provision (based on statutory rate of 21% in 2018 and 15% in 2017)
|
|
$
|
(553,714
|
)
|
|
$
|
(854,152
|
)
|
Effect
of:
|
|
|
|
|
|
|
|
|
Increase
in valuation allowance
|
|
|
2,696,631
|
|
|
|
732,562
|
|
Non-deductible
expense
|
|
|
53,493
|
|
|
|
121,590
|
|
Rate
change
|
|
|
(2,305,270
|
)
|
|
|
—
|
|
Other,
net
|
|
|
108,860
|
|
|
|
—
|
|
Total
actual provision
|
|
$
|
—
|
|
|
$
|
—
|
|
On
December 22, 2017, the President of the United States (“the President”) signed into law the tax bill commonly referred
to as the “Tax Cuts and Job Act” (“TCJA”), significantly changing federal income tax laws. According to
ASC section 740, “Income Taxes,” a company is required to record the effects of an enacted tax law or rate change
in the period of enactment, which is the date the bill is signed by the President and becomes law. The TCJA did not have a significant
impact on the financial statements as the change in the deferred income tax assets and liabilities was fully offset by a change
in the valuation allowance. The Company does not have any material uncertain tax positions. The Company’s policy is to recognize
interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense (benefit). For the years
ended September 30, 2018 and 2017, the Company did not recognize any interest or penalties, nor did we have any interest or penalties
accrued as of September 30, 2018 and 2017 relating to unrecognized benefits. Deferred income tax assets and liabilities at September
30, 2018 and 2017 consist of the following:
|
|
9/30/2018
|
|
|
9/30/2017
|
|
DEFERRED
TAX ASSETS (LIABILITIES)
|
|
|
|
|
|
|
Net
operating losses
|
|
$
|
7,131,636
|
|
|
$
|
5,611,276
|
|
Exploration
costs
|
|
|
(1,503,472
|
)
|
|
|
(931,289
|
)
|
Oil
and natural gas leases
|
|
|
2,192,654
|
|
|
|
691,336
|
|
Stock
based compensation
|
|
|
411,287
|
|
|
|
138,278
|
|
Accrued
interest and expenses not paid
|
|
|
271,190
|
|
|
|
246,360
|
|
Derivative
financial instrument
|
|
|
(57,059
|
)
|
|
|
—
|
|
Differences
in book/tax depreciation
|
|
|
13,573
|
|
|
|
7,215
|
|
Net
deferred tax asset
|
|
$
|
8,459,809
|
|
|
$
|
5,763,176
|
|
Valuation
allowance
|
|
|
(8,459,809
|
)
|
|
|
(5,763,176
|
)
|
NET
DEFERRED TAXES
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company’s valuation allowance increased $2,696,633 during the year ended September 30, 2018 and $732,562 during the year
ended September 30, 2017.
At
September 30, 2018, the Company had approximately $34.0 million of NOLs, 95% of which will expire from 2032 to 2037. All of the
Company’s NOLs are allowable as a deduction against 100 percent of future taxable income since they were generated prior
to the effective date of limitations imposed by the TCJA.
The
tax years ended September 30, 2015 through 2018 are open for examination for federal income tax purposes and by other major taxing
jurisdictions to which we are subject.
NOTE
6 – 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 year ended September
30, 2017, the Company entered into promissory notes with John Seitz whereby it borrowed a total of $602,500. 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 September 30, 2018 and September 30, 2017 the total amount owed to John Seitz, our CEO, is $8,675,500. There
was a total of $1,641,086 and $1,201,286 of unpaid interest associated with these loans included in accrued interest within our
balance sheet as of September 30, 2018 and 2017, respectively.
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 former 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 September 30, 2018, the total amount owed to Dr. Bain and his
affiliate was $267,000. There was a total of $42,706 and $27,171 of accrued interest associated with these loans included within
our balance sheet as of September 30, 2018 and 2017, respectively. In June of 2016, Dr. Ronald Bain also entered into a $92,000
convertible promissory note with associated warrants under the same terms received by other investors (see Note 7).
On
November 15, 2016, a family member of the CEO, a related party, entered into a $50,000 convertible promissory note with associated
warrants under the same terms received by other investors (see Note 7).
Domenica
Seitz CPA, related to John Seitz, has provided accounting consulting services to the Company. During the years ended
September 30, 2018 and 2017, the services provided were valued at $23,660 and $32,625, respectively. The Company has accrued
these amounts within accrued expenses and other payables, and they have been reflected in the September 30, 2018 and 2017
financial statements.
John
Seitz has not received a salary since May 31, 2013, the date he commenced serving as our CEO and accordingly, no amount has been
accrued on our financial statements.
NOTE
7 – NOTES PAYABLE
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), 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 represented embedded derivatives. 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
approximately $452,000 to the warrants and approximately $385,000 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 approximately $385,000. Accordingly, the debt discount
associated with these notes was approximately $837,000. Such discount was amortized using the effective interest rate method over
the term (one year) of the convertible notes.
Upon
maturity of eight of the eleven promissory notes in June 2017, the Company issued 3,225,000 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. 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 approximately $51,000 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. In July and August 2017,
the three remaining promissory notes issued in July, August and November 2016 were extended until January 15, 2018 and issued
3,750,000 extension warrants (equal to 25% of the original warrant amount). The Company evaluated this transaction including considering
the fair value of the warrants issued and concluded that modification 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, was less than 10% of the present value of
future cash flows of the old note. When an instrument is modified, any incremental increase in value (in this case the warrants)
should be added to the discount of the notes and such discount should be amortized to interest expense using the effective interest
rate method over the new remaining life of the note. The fair value of the warrants, approximately $39,000, was determined using
the Black-Scholes option pricing model.
Upon
revised maturity of the eleven promissory notes on January 15, 2018, the Company issued 2,790,000 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. The Company evaluated this transaction 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 approximately $217,000 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. In June 2018, the maturity
date of all of the notes was extended to January 15, 2019.
For
the year ended September 30, 2018, the amortization of the discounts associated with the Bridge Financing Notes was approximately
$30,000. Six of the Bridge Financing Notes with a principal balance of $560,000 plus accrued interest of $86,525 were converted
during the year ended September 30, 2018. The remaining note balance at September 30, 2018 is $277,000. See Note 9 for a summary
of the warrants outstanding relating to the Bridge Financing Notes.
On
December 28, 2016, the Company issued a convertible promissory note (together with the convertible promissory notes issued below,
the “Financing Notes”) 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 approximately $56,000, which includes 10% original issue discount (“OID”) 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 represented embedded derivatives. 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 approximately $8,000 to the restricted stock, approximately $8,000 to the warrants
and approximately $34,000 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 approximately $34,000. Accordingly, at December 28, 2016, the debt discount associated with these
notes was approximately $56,000. Such discount was amortized using the effective interest rate method over the term (seven months)
of the convertible note. For the year ended September 30, 2017 amortization of this discount totaled $56,000 and is included in
interest expense in the statement of operations. The note, related OID and accrued interest were converted into approximately
5.5 million shares of GulfSlope Energy common stock in a series of conversions beginning on July 10, 2017 and ending with a conversion
on September 18, 2017 on which date all were paid in full.
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 approximately $111,000, which includes 10% original issue discount (“OID”),
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 represented embedded derivatives. 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 approximately $17,000 to the restricted stock, approximately
$14,000 to the warrants and approximately $69,000 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 approximately $69,000. Accordingly, at March 14, 2017, the debt discount associated
with these notes was approximately $111,000. Such discount will be amortized using the effective interest rate method over the
term (seven months) of the convertible note. For the year ended September 30, 2017 amortization of this discount totaled approximately
$106,000 and is included in interest expense in the statement of operations. In September 2017, $30,000 was converted into 1.5
million shares of stock, leaving a note balance of $81,111 at September 30, 2017. The remaining balance and accrued interest were
converted in October 2017 at which time all was paid in full.
On
October 16, 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 $110,000, which includes 10% original issue discount (“OID”),
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 $250,000 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 represented embedded derivatives. 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 approximately $21,000 to the restricted stock, approximately
$20,000 to the warrants and approximately $59,000 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 approximately $59,000. Accordingly, at October 16, 2017, the debt discount associated
with these notes was $110,000. Such discount was amortized using the effective interest rate method over the term (seven months)
of the convertible note. In April 2018 the note and accrued interest was converted into 5.8 million shares of common stock and
paid in full.
On
December 15, 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 $110,000, which includes 10% original issue discount (“OID”),
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 $150,000 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 represented embedded derivatives. 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 approximately $28,000 to the restricted stock, approximately
$27,000 to the warrants and approximately $45,000 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 approximately $45,000. Accordingly, at December 15, 2017, the debt discount associated
with these notes was $110,000. Such discount was amortized using the effective interest rate method over the term (seven months)
of the convertible note. In June 2018 the note and accrued interest was converted into 5.8 million shares of common stock and
paid in full.
See
Note 9 for a summary of the warrants outstanding relating to the Financing Notes.
NOTE
8 – 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 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).
|
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 GulfSlope Energy, Inc.’s liabilities that were accounted
for at fair value on a recurring basis as of September 30, 2018 (no financial assets or liabilities were accounted for at fair
value on a recurring basis as of September 30, 2017):
|
|
|
Fair
Value Measurements Using
|
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
Total
Carrying
|
|
Description
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
Value
as of
|
|
|
|
|
(In
thousands)
|
Derivative
Financial Instrument
|
|
|
$
|
—
|
|
|
$
|
(271,710
|
)
|
|
$
|
—
|
|
|
$
|
(271,710
|
)
|
Total as of Total
as of September 30, 2018
|
|
|
$
|
—
|
|
|
$
|
(271,710
|
)
|
|
$
|
—
|
|
|
$
|
(271,710
|
)
|
During
the years ended September 30, 2018 and 2017, the Company did not have any assets or liabilities measured at fair value on a non-recurring
basis.
NOTE
9 - COMMON STOCK/PAID IN CAPITAL
At
our annual shareholder meeting in May of 2018 our shareholders approved increasing the number of authorized shares of common stock
from 975,000,000 to 1,500,000,000. The number of authorized shares of preferred stock was not changed and is 50,000,000.
As
discussed in Note 7, during the year ended September 30, 2016, the Company issued 26.2 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 3 years or upon a change of
control. In November 2016, the Company issued 1.7 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 3 years or upon a change of control. In 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. In January 2018, the maturity date of all of the Bridge Financing Notes was extended to April 16, 2018
in exchange for the issuance of 10% additional warrants. The warrants have an exercise price of $0.10 and the same expiration
date (three years from original transaction) as the original warrants. In June 2018, a majority of the Bridge Note holders extended
their notes to January 15, 2019, thus extending all the remaining Bridge Notes to this date. The fair value of the warrants was
determined using the Black Scholes valuation model with the following key assumptions:
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
|
|
|
July
2017
|
|
|
August
2017
|
|
|
January
2018
|
|
Warrants
Issued
|
|
12.9
million
|
|
|
10.0
million
|
|
|
3.3
million
|
|
|
1.7
million
|
|
|
3.2
million
|
|
|
2.5
million
|
|
|
1.25
million
|
|
|
2.8
Million
|
|
Stock
Price:
|
|
0.054
|
(1)
|
|
0.040
|
(1)
|
|
0.032
|
(1)
|
|
0.029
|
(1)
|
|
0.025
|
(1)
|
|
0.019
|
(1)
|
|
0.016
|
(1)
|
|
0.11
|
(1)
|
Exercise
Price
|
|
0.03
|
|
|
0.03
|
|
|
0.03
|
|
|
0.03
|
|
|
0.03
|
|
|
0.03
|
|
|
0.03
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
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.
|
A
summary of warrants, issued in conjunction with the Bridge Financing Notes and outstanding at September 30, 2018:
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
Date
Issued
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life (Yrs)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
|
June
2016
|
|
$
|
0.03
|
|
|
|
12,566,667
|
|
|
|
.69
|
|
|
|
$
|
0.03
|
|
|
|
12,566,667
|
|
|
|
$
|
0.03
|
|
|
July
2016
|
|
$
|
0.03
|
|
|
|
10,000,000
|
|
|
|
.79
|
|
|
|
$
|
0.03
|
|
|
|
10,000,000
|
|
|
|
$
|
0.03
|
|
|
August
2016
|
|
$
|
0.03
|
|
|
|
3,333,333
|
|
|
|
.88
|
|
|
|
$
|
0.03
|
|
|
|
3,333,333
|
|
|
|
$
|
0.03
|
|
|
November
2016
|
|
$
|
0.03
|
|
|
|
1,666,667
|
|
|
|
1.13
|
|
|
|
$
|
0.03
|
|
|
|
1,666,667
|
|
|
|
$
|
0.03
|
|
|
June
2017
|
|
$
|
0.03
|
|
|
|
3,141,667
|
|
|
|
.69
|
|
|
|
$
|
0.03
|
|
|
|
3,141,667
|
|
|
|
$
|
0.03
|
|
|
July
2017
|
|
$
|
0.03
|
|
|
|
2,500,000
|
|
|
|
.79
|
|
|
|
$
|
0.03
|
|
|
|
2,500,000
|
|
|
|
$
|
0.03
|
|
|
August
2017
|
|
$
|
0.03
|
|
|
|
833,333
|
|
|
|
.88
|
|
|
|
$
|
0.03
|
|
|
|
833,333
|
|
|
|
$
|
0.03
|
|
|
August
2017
|
|
$
|
0.03
|
|
|
|
416,667
|
|
|
|
1.13
|
|
|
|
$
|
0.03
|
|
|
|
416,667
|
|
|
|
$
|
0.03
|
|
|
January
2018
|
|
$
|
0.10
|
|
|
|
2,790,000
|
|
|
|
.78
|
|
|
|
$
|
0.10
|
|
|
|
2,790,000
|
|
|
|
$
|
0.10
|
|
|
In
December 2016 and March 2017 the Company issued 500,000 and 1,000,000 shares of GulfSlope Energy stock, respectively to an investor
as part of a financing transaction (see Financing Notes in Note 7). In December 2016 and March 2017 the Company issued 550,000
and 1,100,000 warrants to purchase stock at $0.10 per share to an investor as part of a financing transaction (see Financing Notes
in Note 7). The warrants have a term of 5 years.
In
October 2017 and December 2017 the Company issued 1,000,000 and 1,000,000 shares of GulfSlope Energy stock, respectively to an
investor as part of a financing transaction (see Financing Notes in Note 7). In October 2017 and December 2017 the Company issued
1,100,000 and 1,100,000 warrants to purchase stock at $0.10 per share to an investor as part of a financing transaction (see Financing
Notes in Note 7). The warrants have a term of 5 years.
A
summary of the Financing Note warrants, issued in conjunction with the Financing Notes and outstanding at September 30, 2018:
|
|
|
|
|
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
|
|
|
|
3.25
|
|
|
$
|
0.10
|
|
|
|
550,000
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
3.46
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
4.04
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
4.21
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
|
Beginning
in August 2018, the Company began negotiating a capital raise which is expected to consist of the issuance of common shares and
warrants. The specific terms of the capital raise have not been finalized including the number of shares and warrants to be received
by each investor. Through September 30, 2018, approximately $970,000 has been received from investors related to this capital
raise; however, the agreements have not been finalized, and no shares or equity have been issued. As such, the funds received
have been recorded as a liability on the balance sheet as of September 30, 2018.
In
September 2018, the Company issued approximately 4 million shares of common stock valued at approximately $231,000 on the date
of grant and 2 million warrants valued at $80,000 utilizing the Black Scholes model with an exercise price of $0.15 per share
in settlement of a liability for services rendered.
NOTE
10 – STOCK-BASED COMPENSATION
On
January 1, 2017, 33.5 million stock options were granted to employees, officers and 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.
In
May 2018, 500,000 stock options were granted to an employee. In June 2018, 33.5 million stock options were granted to employees,
officers and directors of the Company. The CEO was not included in the award. Approximately 33% of the stock options vested on
June 1, 2018 and approximately 33% will vest on June 1, 2019 and 2020, respectively, provided that the option holder continues
to serve as an employee or director on the vesting date. The stock options are exercisable from the original grant date until
December 31, 2025.
Stock-based
compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized over the vesting
period. The Company recognized $1,857,531 and $653,669 in stock-based compensation expense for the years ended September 30, 2018
and 2017, respectively. A portion of these costs allocable to the Company’s exploration activities, $820,877 and $195,125
were capitalized to unproved properties and the remainder was recorded as general and administrative expenses, for the years ended
September 30, 2018 and 2017, respectively.
The
following table summarizes the Company’s stock option activity during the year ended September 30, 2018:
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
|
Average
Intrinsic
Value
|
|
Outstanding
at beginning of period
|
|
|
35,500,000
|
|
|
$
|
0.033
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
68,000,000
|
|
|
|
0.075
|
|
|
|
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Outstanding at
end of period
|
|
|
103,500,000
|
|
|
$
|
0.0605
|
|
|
|
3.32
|
|
|
$
|
1.2
million
|
|
Vested and expected
to vest
|
|
|
103,500,000
|
|
|
$
|
0.0605
|
|
|
|
3.32
|
|
|
$
|
1.2
million
|
|
Exercisable at
end of period
|
|
|
54,500,000
|
|
|
$
|
0.0475
|
|
|
|
—
|
|
|
$
|
1.3
million
|
|
The
Company uses the Black-Scholes option-pricing model to estimate the fair value of options granted. The weighted-average fair values
of stock options granted for the years ended September 30, 2018 and 2017 were based on the following assumptions at the date of
grant as follows:
|
|
2018
|
|
|
2017
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected stock
price volatility
|
|
|
145.2
|
%
|
|
|
127.2
|
%
|
Risk-free interest
rate
|
|
|
2.7
|
%
|
|
|
1.71
|
%
|
Expected life of
options
|
|
|
7
years
|
|
|
|
4
years
|
|
Weighted-average
grant date fair value
|
|
$
|
0.065
|
|
|
$
|
0.022
|
|
The
Company used its historical stock trading price volatility for the last four years. 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.
As
of September 30, 2018 there was $2.7 million of unrecognized stock-based compensation cost related to the stock option grants
expected to be amortized over a weighted average period of three years.
NOTE
11 – COMMITMENTS AND CONTINGENCIES
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.
In
July 2018 the Company entered into a 39 month lease for approximately 5,000 square feet of office space in 4 Houston Center in
downtown Houston. 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 $150,000 in cash, future cash payments of $7,500 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 September 30, 2018 there is a fair value liability of $271,710.
NOTE
12 – SUBSEQUENT EVENTS
In
October 2018, the Company purchased an insurance policy for $159,995 and financed $146,310 of the premium by executing a note
payable.
In
October 2018, the Company paid the 80% lease bonus payment and the first year rentals in the amount of $139,809 and was awarded
Gulf of Mexico lease block Eugene Island, South Addition 371.
In
November 2018, the Company paid the 80% lease bonus payment and the first year rentals in the amount of $187,809 and was awarded
Gulf of Mexico lease block Vermillion, South Addition 376.
GulfSlope
Energy, Inc.
Condensed
Balance Sheets
As
of June 30, 2019 and September 30, 2018
(Unaudited)
|
|
June 30,
2019
|
|
September 30,
2018
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,299,930
|
|
|
$
|
5,621,814
|
|
Prepaid Expenses and Other Current Assets
|
|
|
57,494
|
|
|
|
32,042
|
|
Accounts Receivable, net
|
|
|
14,164,519
|
|
|
|
6,286,796
|
|
Total Current Assets
|
|
|
16,521,943
|
|
|
|
11,940,652
|
|
Property and Equipment, Net of Depreciation
|
|
|
10,901
|
|
|
|
14,786
|
|
Oil and Natural Gas Properties, Full Cost Method of Accounting Unproved Properties
|
|
|
17,318,916
|
|
|
|
8,112,784
|
|
Other Non-Current Assets
|
|
|
3,699,319
|
|
|
|
24,785
|
|
Total Non-Current Assets
|
|
|
21,029,136
|
|
|
|
8,152,355
|
|
Total Assets
|
|
$
|
37,551,079
|
|
|
$
|
20,093,007
|
|
Liabilities and Stockholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
19,376,643
|
|
|
$
|
7,591,236
|
|
Deposits from Joint Interest Owners
|
|
|
—
|
|
|
|
4,078,786
|
|
Related Party Payable
|
|
|
351,025
|
|
|
|
306,386
|
|
Accrued Interest Payable
|
|
|
2,102,729
|
|
|
|
1,732,239
|
|
Accrued Expenses and Other Payables
|
|
|
1,507,541
|
|
|
|
268,862
|
|
Loans from Related Parties
|
|
|
8,725,500
|
|
|
|
9,084,500
|
|
Notes Payable
|
|
|
307,666
|
|
|
|
—
|
|
Term Loan
|
|
|
716,265
|
|
|
|
—
|
|
Convertible Promissory Notes Payable, net of Debt Discount
|
|
|
84,515
|
|
|
|
135,000
|
|
Funds Received from Capital Raise
|
|
|
—
|
|
|
|
965,800
|
|
Derivative Financial Instrument
|
|
|
3,917,008
|
|
|
|
271,710
|
|
Other
|
|
|
53,510
|
|
|
|
44,723
|
|
Total Current Liabilities
|
|
|
37,142,402
|
|
|
|
24,479,242
|
|
Total Liabilities
|
|
|
37,142,402
|
|
|
|
24,479,242
|
|
Commitments and Contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred Stock; par value ($0.001); Authorized 50,000,000 shares none issued or outstanding
|
|
|
—
|
|
|
|
—
|
|
Common Stock; par value ($0.001); Authorized 1,500,000 shares; issued and outstanding 1,092,266,844 and 832,013,272, June 30, 2019 and September 30, 2018 , respectively
|
|
|
1,092,266
|
|
|
|
832,013
|
|
Additional Paid-in-Capital
|
|
|
53,890,767
|
|
|
|
36,640,009
|
|
Accumulated Deficit
|
|
|
(54,574,356
|
)
|
|
|
(41,858,257
|
)
|
Total Stockholders’ Equity (Deficit)
|
|
|
408,677
|
|
|
|
(4,386,235
|
)
|
Total Liabilities and Stockholders’ Equity (Deficit)
|
|
$
|
37,551,079
|
|
|
$
|
20,093,007
|
|
The
accompanying notes are an integral part to these condensed financial statements.
GulfSlope Energy, Inc.
Condensed
Statements of Operations
For
the Three and Nine Months Ended June 30, 2019 and 2018
(Unaudited)
|
|
For the Three
Months
Ended
June 30, 2019
|
|
For the Three
Months
Ended
June 30, 2018
|
|
For the Nine
Months
Ended
June 30, 2019
|
|
For the Nine
Months
Ended
June 30, 2018
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Impairment of Oil and Natural Gas Properties
|
|
|
4,252,539
|
|
|
|
—
|
|
|
|
4,252,539
|
|
|
|
|
|
General & Administrative Expenses
|
|
|
439,242
|
|
|
|
785,990
|
|
|
|
955,901
|
|
|
|
1,176,455
|
|
Net Loss from Operations
|
|
|
(4,691,781
|
)
|
|
|
(785,990
|
)
|
|
|
(5,208,440
|
)
|
|
|
(1,176,455
|
)
|
Other Income/(Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense, net
|
|
|
(2,080,620
|
)
|
|
|
(207,335
|
)
|
|
|
(2,284,928
|
)
|
|
|
(659,901
|
)
|
Loss on Debt Extinguishment
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,099,340
|
)
|
|
|
(217,141
|
)
|
Gain (Loss) on Derivative Financial Instrument
|
|
|
(106,399
|
)
|
|
|
—
|
|
|
|
(123,391
|
)
|
|
|
—
|
|
Net Loss Before Income Taxes
|
|
|
(6,878,800
|
)
|
|
|
(993,325
|
)
|
|
|
(12,716,099
|
)
|
|
|
(2,053,497
|
)
|
Provision for Income Taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net Loss
|
|
$
|
(6,878,800
|
)
|
|
$
|
(993,325
|
)
|
|
$
|
(12,716,099
|
)
|
|
$
|
(2,053,497
|
)
|
Loss Per Share - Basic and Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
Weighted Average Shares Outstanding – Basic and Diluted
|
|
|
1,090,288,822
|
|
|
|
785,008,992
|
|
|
|
946,785,438
|
|
|
|
750,498,503
|
|
The
accompanying notes are an integral part to these condensed financial statements.
GulfSlope
Energy, Inc.
Condensed
Statements of Stockholders’ Equity (Deficit)
(unaudited)
For
the Three Months Ended June 30, 2019
|
|
Common Stock
|
|
Additional Paid-
|
|
Accumulated
|
|
Net Shareholders’
|
|
|
Shares
|
|
Amount
|
|
In Capital
|
|
Deficit
|
|
Equity (Deficit)
|
Balance at March 31, 2019
|
|
|
1,089,433,510
|
|
|
$
|
1,089,433
|
|
|
$
|
52,794,028
|
|
|
$
|
(47,695,556
|
)
|
|
$
|
6,187,905
|
|
Stock Based Compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
415,111
|
|
|
|
—
|
|
|
|
415,111
|
|
Warrants Issued in Debt Transaction
|
|
|
—
|
|
|
|
—
|
|
|
|
447,383
|
|
|
|
—
|
|
|
|
447,383
|
|
Bridge Note Warrant Extensions
|
|
|
—
|
|
|
|
—
|
|
|
|
152,078
|
|
|
|
—
|
|
|
|
152,078
|
|
Stock Issued for Warrant Exercise
|
|
|
2,833,334
|
|
|
|
2,833
|
|
|
|
82,167
|
|
|
|
—
|
|
|
|
85,000
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,878,800
|
)
|
|
|
(6,878,800
|
)
|
Balance at June 30, 2019
|
|
|
1,092,266,844
|
|
|
$
|
1,092,266
|
|
|
$
|
53,890,767
|
|
|
$
|
(54,574,356
|
)
|
|
$
|
408,677
|
|
For
the Three Months Ended June 30, 2018
|
|
Common Stock
|
|
Additional Paid-
|
|
Accumulated
|
|
Net Shareholders’
|
|
|
Shares
|
|
Amount
|
|
In Capital
|
|
Deficit
|
|
Equity (Deficit)
|
Balance at March 31, 2018
|
|
|
778,820,050
|
|
|
$
|
778,820
|
|
|
$
|
32,618,329
|
|
|
$
|
(40,281,695
|
)
|
|
$
|
(6,884,546
|
)
|
Stock Based Compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1,371,150
|
|
|
|
—
|
|
|
|
1,371,150
|
|
Common Stock Issued To Settle Debt
|
|
|
1,200,000
|
|
|
|
1,200
|
|
|
|
85,800
|
|
|
|
—
|
|
|
|
87,000
|
|
Common Stock Issued For Conversion Of Convertible Promissory Notes Plus Accrued Interest
|
|
|
33,780,462
|
|
|
|
33,780
|
|
|
|
752,431
|
|
|
|
—
|
|
|
|
786,211
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(993,325
|
)
|
|
|
(993,325
|
)
|
Balance at June 30, 2018
|
|
|
813,800,512
|
|
|
$
|
813,800
|
|
|
$
|
34,827,710
|
|
|
$
|
(41,275,020
|
)
|
|
$
|
(5,633,510
|
)
|
The accompanying notes are an integral part to these condensed financial statements.
GulfSlope
Energy, Inc.
Condensed
Statements of Stockholders’ Equity (Deficit)
(unaudited)
For
the Nine Months Ended June 30 2019
|
|
Common Stock
|
|
Additional Paid-
|
|
Accumulated
|
|
Net Shareholders’
|
|
|
Shares
|
|
Amount
|
|
In Capital
|
|
Deficit
|
|
Equity (Deficit)
|
Balance at September 30, 2018
|
|
|
832,013,272
|
|
|
$
|
832,013
|
|
|
$
|
36,640,009
|
|
|
$
|
(41,858,257
|
)
|
|
$
|
(4,386,235
|
)
|
Stock Based Compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1,217,213
|
|
|
|
—
|
|
|
|
1,217,213
|
|
Warrants Issued in Debt Transaction
|
|
|
—
|
|
|
|
—
|
|
|
|
5,090,470
|
|
|
|
—
|
|
|
|
5,090,470
|
|
Stock Issued in Capital Raise
|
|
|
19,325,000
|
|
|
|
19,325
|
|
|
|
946,925
|
|
|
|
—
|
|
|
|
966,250
|
|
Bridge Notes Warrant Extension
|
|
|
—
|
|
|
|
—
|
|
|
|
152,078
|
|
|
|
—
|
|
|
|
152,078
|
|
Stock Issued for Warrant Exercise
|
|
|
240,928,572
|
|
|
|
240,928
|
|
|
|
9,844,072
|
|
|
|
—
|
|
|
|
10,085,000
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,716,099
|
)
|
|
|
(12,716,099
|
|
Balance at June 30, 2019
|
|
|
1,092,266,844
|
|
|
$
|
1,092,266
|
|
|
$
|
53,890,767
|
|
|
$
|
(54,574,356
|
)
|
|
$
|
408,677
|
|
For
the Nine Months Ended June 30, 2018
|
|
Common Stock
|
|
Additional Paid-
|
|
Accumulated
|
|
Net Shareholders’
|
|
|
Shares
|
|
Amount
|
|
In Capital
|
|
Deficit
|
|
Equity (Deficit)
|
Balance at September 30, 2017
|
|
|
692,196,625
|
|
|
$
|
692,196
|
|
|
$
|
27,212,577
|
|
|
$
|
(39,221,523
|
)
|
|
$
|
(11,316,750
|
)
|
Stock Based Compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1,464,531
|
|
|
|
—
|
|
|
|
1,464,531
|
|
Common Stock Issued To Settle Debt
|
|
|
1,200,000
|
|
|
|
1,200
|
|
|
|
85,800
|
|
|
|
—
|
|
|
|
87,000
|
|
Common Stock Issued for Services
|
|
|
80,293,425
|
|
|
|
80,294
|
|
|
|
4,814,961
|
|
|
|
—
|
|
|
|
4,895,255
|
|
Common Stock Issued for Convertible Promissory Note
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
47,094
|
|
|
|
—
|
|
|
|
49,094
|
|
Value of Beneficial Conversion Feature in Conjunction with Convertible Promissory Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
103,519
|
|
|
|
—
|
|
|
|
103,519
|
|
Value of Warrants in Conjunction with Convertible Promissory Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
47,386
|
|
|
|
—
|
|
|
|
47,386
|
|
Common Stock Issued for Conversion of Convertible Promissory Note and Accrued Interest
|
|
|
38,110,462
|
|
|
|
38,110
|
|
|
|
834,701
|
|
|
|
—
|
|
|
|
872,811
|
|
Value of Warrants issued with Bridge Note Extensions
|
|
|
—
|
|
|
|
—
|
|
|
|
217,141
|
|
|
|
—
|
|
|
|
217,141
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,053,497
|
)
|
|
|
(2,053,497
|
)
|
Balance at June 30, 2018
|
|
|
813,800,512
|
|
|
$
|
813,800
|
|
|
$
|
34,827,710
|
|
|
$
|
(41,275,020
|
)
|
|
$
|
(5,633,510
|
)
|
The
accompanying notes are an integral part to these condensed financial statements.
GulfSlope
Energy, Inc.
Condensed
Statements of Cash Flows
For
the Nine Months Ended June 30, 2019 and 2018
(Unaudited)
|
|
For the Nine
Months Ended
June 30, 2019
|
|
For the Nine
Months Ended
June 30, 2018
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(12,716,099
|
)
|
|
$
|
(2,053,497
|
)
|
Adjustments to Reconcile Net Loss to Net Cash (Used In) Provided By Operating Activities:
|
|
|
|
|
|
|
|
|
Impairment of Oil and Natural Gas Properties
|
|
|
4,252,539
|
|
|
|
—
|
|
Depreciation
|
|
|
3,884
|
|
|
|
3,712
|
|
Stock Based Compensation
|
|
|
558,018
|
|
|
|
850,798
|
|
Loss on Derivative Financial Instruments
|
|
|
123,391
|
|
|
|
—
|
|
Stock Issued for Services
|
|
|
—
|
|
|
|
17,145
|
|
Debt Discount Amortization
|
|
|
249,670
|
|
|
|
254,501
|
|
Loss Recorded to Interest Expense for Issuance of Convertible Notes
|
|
|
1,726,149
|
|
|
|
—
|
|
Loss on Debt Extinguishment
|
|
|
5,099,340
|
|
|
|
217,141
|
|
Changes in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
(Increase)/Decrease in Accounts Receivable
|
|
|
(11,552,257
|
)
|
|
|
(627,552
|
)
|
(Increase)/Decrease in Prepaid Expenses
|
|
|
120,858
|
|
|
|
96,688
|
|
Increase/(Decrease) in Deposits from Joint Interest Owners
|
|
|
(4,078,786
|
)
|
|
|
3,015,000
|
|
Increase/(Decrease) in Accounts Payable
|
|
|
7,532,813
|
|
|
|
607,156
|
|
Increase/(Decrease) in Related Party Payable
|
|
|
44,638
|
|
|
|
2,011
|
|
Increase/(Decrease) in Accrued Expenses and Other Payables
|
|
|
1,238,679
|
|
|
|
(100,000
|
)
|
Increase/(Decrease) in Other
|
|
|
8,787
|
|
|
|
—
|
|
Increase/(Decrease) in Accrued Interest
|
|
|
370,490
|
|
|
|
400,212
|
|
Net Cash (Used In) Provided By Operating Activities
|
|
|
(7,017,885
|
)
|
|
|
2,683,315
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Equipment Purchases
|
|
|
—
|
|
|
|
(3,244
|
)
|
Deposits
|
|
|
—
|
|
|
|
(24,785
|
)
|
Insurance proceeds received
|
|
|
660,629
|
|
|
|
—
|
|
Investments in Oil and Gas Properties
|
|
|
(9,762,984
|
)
|
|
|
(752,814
|
)
|
Proceeds From Sale of Working Interest
|
|
|
—
|
|
|
|
2,884,651
|
|
Net Cash (Used In) Provided By Investing Activities
|
|
|
(9,102,355
|
)
|
|
|
2,103,808
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from Term Loan
|
|
|
11,000,000
|
|
|
|
—
|
|
Proceeds from Convertible Promissory Notes
|
|
|
1,819,000
|
|
|
|
200,000
|
|
Proceeds from Exercise of Warrants
|
|
|
85,000
|
|
|
|
—
|
|
Payments on Note Payable
|
|
|
(105,644
|
)
|
|
|
(116,882
|
)
|
Net Cash Provided By Financing Activities
|
|
|
12,798,356
|
|
|
|
83,118
|
|
Net Increase/(Decrease) in Cash
|
|
|
(3,321,884
|
)
|
|
|
4,870,241
|
|
Beginning Cash Balance
|
|
|
5,621,814
|
|
|
|
6,426
|
|
Ending Cash Balance
|
|
$
|
2,299,930
|
|
|
$
|
4,876,667
|
|
Supplemental Schedule of Cash Flow Activities:
|
|
|
|
|
|
|
|
|
Cash Paid for Interest
|
|
$
|
3,903
|
|
|
$
|
5,188
|
|
Non-Cash Financing and Investing Activities:
|
|
|
|
|
|
|
|
|
Prepaid Asset Financed by Note Payable
|
|
$
|
146,310
|
|
|
$
|
156,718
|
|
Debt Issuance Costs in Accounts Payable
|
|
$
|
555,923
|
|
|
$
|
—
|
|
Capital Expenditures Included in Accounts Payable
|
|
$
|
—
|
|
|
$
|
3,088
|
|
Stock-Based Compensation Capitalized to Unproved Properties
|
|
$
|
659,646
|
|
|
$
|
613,733
|
|
Stock Issued for Consulting Services Capitalized to Unproved Properties
|
|
$
|
—
|
|
|
$
|
4,880,000
|
|
Loans Extinguished through Exercise of Warrants
|
|
$
|
10,000,000
|
|
|
$
|
—
|
|
Stock Issued for Settlement of Accounts Payable & Accrued Expenses
|
|
$
|
—
|
|
|
$
|
73,505
|
|
Wells In Process Included in Accounts Payable
|
|
$
|
3,696,671
|
|
|
$
|
85,127
|
|
Stock Issued to Settle Convertible Promissory Notes and Accrued Interest
|
|
$
|
—
|
|
|
$
|
872,812
|
|
Funds Received from Capital Raise Transferred to Equity
|
|
$
|
965,800
|
|
|
$
|
—
|
|
Bridge Note Warrant Extension Recorded to Additional Paid-In-Capital
|
|
$
|
152,078
|
|
|
$
|
—
|
|
Derivative Liability Recorded at Issuance of Convertible Promissory Notes
|
|
$
|
3,521,907
|
|
|
$
|
—
|
|
The
accompanying notes are an integral part to these condensed financial statements.
GulfSlope
Energy, Inc.
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 insignificant interest rate risk and 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 Buyer up to an aggregate of $3 million 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 Buyer 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 Carrying
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 convertible
notes payable. 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 were 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
|
|
|
2.8
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 will vest 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
|
|
|
|
—
|
|
|
|
|
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
|
|
|
55,000,000
|
|
|
$
|
0.0475
|
|
|
|
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 $1.5 million of unrecognized stock-based compensation to be recognized over a period of 1.0 years.
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 in 4 Houston Center
in downtown Houston. 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.
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).
GulfSlope
Energy, Inc.
444,095,238
Shares of Common Stock
Prospectus
November
5, 2019
No
dealer, salesperson or any other person is authorized to give any information or make any representations in connection with this
offering other than those contained in this prospectus and, if given or made, the information or representations must not be relied
upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy
any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any
securities by anyone in any jurisdiction in which the offer or solicitation is not authorized or is unlawful.
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