The accompanying notes
are an integral part to these condensed financial statements.
The accompanying notes are an integral part
to these condensed financial statements.
The accompanying notes are an integral part
to these condensed financial statements.
Notes to Condensed Financial Statements
December 31, 2019
(Unaudited)
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
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 seven 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.
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, 2019, which were included in the Company’s Annual Report on
Form 10-K for the fiscal year ended September 30, 2019, and filed with the Securities and Exchange Commission on December 30, 2019.
Cash
GulfSlope considers highly liquid investments
with original maturities to the Company of three months or less to be cash equivalents. There were no cash equivalents at December
31, 2019 and September 30, 2018.
Liquidity/Going Concern
The Company has incurred accumulated
losses as of December 31, 2019 of $55.7 million, has negative working capital of $19.6 million and for the three months ended
December 31, 2019 generated losses of $0.2 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 December 31, 2019, we had $3.8 million
of unrestricted cash on hand, $3.1 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 February 2021. The $10.0 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 $13.3
million of current principal and interest as of December 31, 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.
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, the receivable and the underlying asset are assessed for recovery. As of December 31,
2019 and 2018, no allowance was recorded. Accounts receivable from oil and gas joint operations and joint ventures is $2.7 million
and $8.5 million at December 31, 2019 and 2018, respectively.
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. Overhead costs,
which includes employee compensation and benefits including stock-based compensation, incurred that are directly related to acquisition,
exploration and development activities are capitalized. Interest expense is capitalized related to unevaluated properties and wells
in process during the period in which the Company is incurring costs and expending resources to get the properties ready for their
intended purpose. For significant investments in unproved properties and major development projects that are not being currently
depreciated, depleted, or amortized and on which exploration or development activities are in progress, interest costs are capitalized.
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.
The
Company capitalizes exploratory well costs into oil and gas properties until a determination is made that the well has either found
proved reserves or is impaired. If proved reserves are found, the capitalized exploratory well costs are reclassified to proved
properties. The well costs are charged to expense if the exploratory well is determined to be impaired. The Company has drilled
two well bores and is currently evaluating such wells for proved reserves. Accordingly such costs are included as suspended well
costs at December 31, 2019 and it is expected that a final analysis will be completed in the next nine months at which time the
costs will be transferred to the full cost pool.
Asset Retirement Obligations
The Company’s asset retirement obligations
will represent the present value of the estimated future costs associated with plugging and abandoning oil and natural gas wells,
removing production equipment and facilities and restoring the seabed in accordance with the terms of oil and gas leases and applicable
state and federal laws. Determining asset retirement obligations requires estimates of the costs of plugging and abandoning oil
and natural gas wells, removing production equipment and facilities and restoring the sea bed as well as estimates of the economic
lives of the oil and gas wells and future inflation rates. The resulting estimate of future cash outflows will be discounted using
a credit-adjusted risk-free interest rate that corresponds with the timing of the cash outflows. Cost estimates will consider historical
experience, third party estimates, the requirements of oil and natural gas leases and applicable local, state and federal laws,
but do not consider estimated salvage values. Asset retirement obligations will be recognized when the wells drilled reach total
depth or when the production equipment and facilities are installed or acquired with an associated increase in proved oil and gas
property costs. Asset retirement obligations will be accreted each period through depreciation, depletion and amortization to their
expected settlement values with any difference between the actual cost of settling the asset retirement obligations and recorded
amount being recognized as an adjustment to proved oil and gas property costs. Cash paid to settle asset retirement obligations
will be included in net cash provided by operating activities from continuing operations in the statements of cash flows. On a
quarterly basis, when indicators suggest there have been material changes in the estimates underlying the obligation, the Company
reassesses its asset retirement obligations to determine whether any revisions to the obligations are necessary. At least annually,
the Company will assess all of its asset retirement obligations to determine whether any revisions to the obligations are necessary.
Future revisions could occur due to changes in estimated costs or well economic lives, or if federal or state regulators enact
new requirements regarding plugging and abandoning oil and natural gas wells. The Company has drilled two well bores and is
currently evaluating these wells. The two wellbores drilled in 2018 and 2019, were both plugged while the company continues to
evaluate well log data and therefore the costs related to the asset retirement obligation were incurred. Such costs were recognized
as capitalized oil and gas costs. The asset retirement obligation was completely extinguished in that if the wells prove not to
be commercially viable, there is no further cost needed to remediate the site.
Derivative Financial Instruments
The accounting treatment of derivative
financial instruments requires that the Company record certain embedded conversion
options and warrants as liabilities 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, restricted
stock and convertible notes payable. The number of potential common shares outstanding relating to stock options, warrants,
and restricted stock is computed using the treasury stock method. The number of potential common shares related to convertible
notes payable is determined using the if-converted method.
As the Company has incurred losses for
the three months ended December 31, 2019 and 2018, the potentially dilutive shares are anti-dilutive and are thus not added into
the loss per share calculations. As of December 31, 2019 and 2018, there were 437,801,338 and 223,537,733 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 was adopted by the Company on October 1, 2019. The standard was applied
utilizing a modified retrospective approach and is reflected in these financial statements. See Note 10.
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. The Company adopted this new standard effective January 1, 2019 with no material impact
to stock compensation issued to non-employees during the three months ended December 31, 2019.
The Company has evaluated all other recent
accounting pronouncements and believes that none of them will have a significant effect on the Company’s financial statements.
NOTE 3 – OIL AND NATURAL GAS PROPERTIES
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.
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) and encountered no problems while drilling. The well completed drilling in August
2018 and based on Logging-While-Drilling (LWD) and Isotube analysis of hydrocarbon samples, oil sands were encountered. 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. 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. A deeper subsalt prospect exists on the
Canoe lease block, for which the block was originally leased. 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 during the second 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 that depth, but hydrocarbon shows were encountered. Complex geomechanical conditions required two
by-pass wellbores, one sidetrack wellbore, and eight casing strings to reach that depth. Equipment limitations prevented further
drilling. In addition, the drilling rig had contractual obligations related to another operator. 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 pursuant to its insurance policy (the
“Policy”) with its insurance underwriters (the “Underwriters”). The total amount of the claim was approximately
$10.8 million for 100% working interest after the insurance deductible amount. The Company received approximately $2.5 million
of this amount and credited wells in process for approximately $0.9 million for the Company’s portion, and recorded an accrued
payable for approximately $1.6 million, pending evaluation of distributions to the working interest owners. During the quarter
ended December 31, 2019, the accrued payable was settled by the issuance to the working interest partner of approximately 38.4
million shares of the Company’s common stock.
In May 2019, the Tau well experienced a
second underground control of well event and as a result, the Company filed an insurance claim. The Underwriters have acknowledged
confirmation of coverage, subject to the Policy terms and conditions, related to a subsurface well occurrence that happened during
the drilling of the Company's Tau on May 5, 2019, during drilling operations at a measured depth of 15,254 feet. The Company subsequently
controlled the occurrence and ceased drilling operations and plugs were placed in the well to meet regulatory requirements prior
to rig release. Pursuant to the Policy terms and conditions, the Underwriters will reimburse GulfSlope for qualified actual costs
and expenses incurred to (i) regain control of the well, and (ii) restore or re-drill the well to 15,254 feet. Total costs and
expenses to regain control of the well are estimated at approximately $4.8 million (net of deductible) for 100% working interest
and approximately $2.6 million has been received as of December 31, 2019. GulfSlope’s share of this amount was approximately
$0.6 million.
As of December 31, 2019, the Company’s
oil and natural gas properties consisted of unproved properties, wells in process and no proved reserves. During the three months
ended December 31, 2019 and 2018, the company capitalized approximately $0.4 million and $0.1 million of interest expense to oil
and natural gas properties, respectively, and approximately $0.3 million and $0.3 million of general and administrative expenses,
capitalized to oil and natural gas properties, respectively.
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 December 31, 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 $2,191,739 of unpaid interest
associated with these loans included in accrued interest payable within the balance sheet as of December 31, 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 month period ended December 31, 2019 and
2018, the services provided were valued at $14,880, respectively. The amount owed to this related party totals $380,784 and
$365,904 at December 31 2019 and September 30, 2019, respectively. The Company has accrued these amounts, and they have been
reflected in related party payable in the December 31, 2019 financial statements.
See Note 5 for a description of the Delek
term loan replaced by convertible debenture.
NOTE 5 – TERM LOAN AND CONVERTIBLE
PROMISSORY NOTES
Bridge Financing
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, including $222,000 from related parties. These notes had a maturity
of one year (which has been extended to April 30, 2020), 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. The remaining note balances at December 31, 2019 and 2018 are $277,000, respectively,
with remaining unamortized debt discounts of $56,620 and zero, respectively. Debt discount amortization for the three months ended
December 31, 2019 and 2018 was approximately $43,000 and zero, respectively. Accrued interest for the quarter ended December 31,
2019, was approximately $6,000 and cumulative accrued interest was approximately $77,000.
Delek Note
On March 1, 2019, the Company entered into
a term loan agreement with Delek, where Delek agreed to provide the Company with multiple draw term loans in an aggregate stated
principal amount of up to $11.0 million, of which $10.0 million was initially advanced and subsequently converted to equity through
the exercise of a warrant. The maturity date of the facility was September 4, 2019, and until such time any loans would bear interest
at a rate per annum equal to 5.0% or 7% upon the occurrence of default. Amounts outstanding under the Term Loan Agreement are secured
by a security interest in substantially all of the properties and assets of the Company. On April 19, 2019, the Company borrowed
the remaining $1.0 million under this agreement.
The term loan facility expired as of
September 4, 2019, and in October 2019, the Company signed a Post-Drilling Agreement with Delek modifying this arrangement.
The Post-Drilling Agreement states that as payoff for the Company’s outstanding obligations of $1,000,000 plus accrued
interest (and additional fees of approximately $200,000), the Company shall issue a convertible note payable to Delek in the
amount of $1,220,548. The new note is convertible at the option of Delek at a conversion price of $0.05 per share, and in the
event of default the conversion rate adjusts to 60% of the lowest volume weighted average price in the previous 20 trading
days. Interest on the note accrues at 12% per annum (15% upon default) and the maturity of
the note is October 22, 2020. The Company has a right to prepay all principal and accrued interest prior to maturity. At
December 31, 2019, the accrued interest payable related to this note was approximately $30,000.
The Company accounted for this transaction
as an extinguishment of the prior note given the addition of the substantive conversion feature discussed above. In addition, The
Company concluded that the embedded conversion feature within the note requires derivative accounting treatment under ASC 815,
Derivatives and Hedging due to the potential variable conversion feature which lacks an explicit limit on the number of shares
that may require upon conversion. Accordingly, the Company valued the embedded conversion feature and host instrument at their
fair values of $479,498 and $1,220,548, respectively, and recognized a loss on extinguishment of $676,785. The fair value of the
host note was determined by discounting the future cash flows of the note at a market participant-based rate of interest. Further,
since the embedded conversion feature is a derivative liability, it is subsequently remeasured to fair value each reporting period.
The fair value of the embedded conversion option was $119,647 at December 31, 2019.
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:
|
|
October 17,
2019
|
|
December 31,
2019
|
|
Stock Price
|
|
$
|
0.041
|
|
$
|
0.025
|
|
Fixed Exercise Price
|
|
$
|
0.050
|
|
$
|
0.050
|
|
Volatility
|
|
|
138
|
%
|
|
110
|
%
|
Term (Years)
|
|
|
1.00
|
|
|
0.80
|
|
Risk Free Rate
|
|
|
1.59
|
%
|
|
1.59
|
%
|
June 2019 Convertible
Debenture
On June 21, 2019, the Company entered
into a securities purchase agreement to borrow up to $3,000,000 through the issuance convertible
debentures (“Convertible Debentures”) and associated warrants. On June
21, 2019, approximately $2,100,000 of Convertible Debentures were purchased with other tranches closing on August 7, 2019 for
$400,000 and November 6, 2019 for $500,000. All tranches 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, and in the event of default the conversion rate adjusts to 60% of the lowest volume
weighted average price in the previous 20 trading days.
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. In total the offering costs incurred related to this convertible debenture were
approximately $398,000 ($65,000 incurred during the three months ended December 31, 2019).
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 Company recognized gains of approximately $770,000 and $131,000 for the three months ended
December 31, 2019 related to the change in fair value of the embedded conversion feature and warrants, respectively.
In addition, during the three months
ended December 31, 2019, the lender converted $300,000 of principal and $83,637 of accrued interest. Given the embedded
conversion feature for the debenture is bifurcated for accounting purposes, this represents the issuance of common stock to
extinguish two liabilities. The common stock issued was recorded at its fair value on the dates of issuance ($548,391) and a
loss on extinguishment of debt was recognized for approximately $279,584.
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:
|
|
Conversions
for the quarter ended December 31, 2019
|
|
December 31,
2019
|
|
Stock Price
|
|
$
|
0.030 – 0.034
|
|
$
|
0.025
|
|
Fixed Exercise Price
|
|
$
|
0.050
|
|
$
|
0.050
|
|
Volatility
|
|
|
77- 115
|
%
|
|
82 -111
|
%
|
Term (Years)
|
|
|
0.5 - 0 .62
|
|
|
0.47 - 0.85
|
|
Risk Free Rate
|
|
|
1.58 – 1.62
|
%
|
|
1.59 – 1.60
|
%
|
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 convertible promissory
notes consisted of the following as of December 31, 2019.
|
Notes
|
Discount
|
Notes, Net of Discount
|
Convertible Notes Payable
|
$
|
4,147,548
|
|
$
|
(2,444,907
|
)
|
$
|
1,702,641
|
|
Total
|
$
|
4,147,548
|
|
$
|
(2,444,907
|
)
|
$
|
1,702,641
|
|
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 December 31, 2019:
Description
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant Other
Unobservable
Inputs
(Level 3)
|
|
|
Total Fair
Value as of
|
|
Derivative Financial Instrument at September 30, 2019
|
|
$
|
—
|
|
|
$
|
(3,534,456
|
)
|
|
$
|
—
|
|
|
$
|
(3,534,456
|
)
|
Derivative financial instrument(1)
|
|
|
—
|
|
|
|
(715,779
|
)
|
|
|
—
|
|
|
|
(715,779
|
)
|
Change in fair value for the three months ended December 31, 2019
|
|
|
|
|
|
|
1,224,527
|
|
|
|
|
|
|
|
1,224,527
|
|
Derivative Financial Instrument at December 31, 2019
|
|
$
|
—
|
|
|
$
|
(3,025,708
|
)
|
|
$
|
—
|
|
|
$
|
(3,025,708
|
)
|
|
(1)
|
Represents derivatives recorded resulting from the embedded conversion feature and warrants associated
with the convertible debentures purchased during the three months ended December 31, 2019.
|
Non-recurring fair value assessments include
impaired oil and natural gas property assessments and stock-based compensation. During the three months ended December 31, 2019,
the Company recorded stock-based compensation expense of $367,841 of which $186,675 was capitalized to oil and gas properties.
NOTE 7 – COMMON STOCK/PAID IN
CAPITAL
As discussed in Note 5, the Company issued
17,919,455 common shares with a fair value of $548,391 upon partial conversions of the notes and related accrued interest during
the three months ended December 31, 2019. The common shares were valued based upon the closing common share prices on the respective
conversion dates.
The Company issued 38,423,221 common
shares with a fair value of $1,536,929 to extinguish an accrued expense that totaled $1,613,775. The common shares were valued based
upon the closing common share price on the date of settlement resulting in a gain on the extinguishment of the obligation of
approximately $77,000.
During the three months ended December
31, 2018, 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:
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
|
%
|
NOTE 8 – STOCK-BASED COMPENSATION
During the three months ended December
31, 2019, upon the passing of a member of the management team, the Company modified a stock option grant for three million shares
made to said management team member in June 2018 to vest such award immediately. The Company recorded approximately $8,000 in additional
compensation expense related to this modification.
Stock-based compensation cost is measured
at the grant date, based on the estimated fair value of the award using the Black Scholes option pricing model, and is recognized
over the vesting period. The Company recognized $367,841 and $393,000 in stock-based compensation expense for the quarters ended
December 31, 2019 and 2018, respectively. A portion of these costs, $186,675 and $318,658
were capitalized to unproved properties for the three months ended December 31, 2019 and December 31, 2018, respectively, with
the remainder recorded as general and administrative expenses for each respective period.
The following table summarizes the Company’s
stock option activity during the three months ended December 31, 2019:
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Term
(In years)
|
|
Outstanding at September 30, 2019
|
|
|
104,500,000
|
|
|
$
|
0.0605
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
104,500,000
|
|
|
$
|
0.0605
|
|
|
|
2.07
|
|
Vested and expected to vest
|
|
|
104,500,000
|
|
|
$
|
0.0605
|
|
|
|
2.07
|
|
Exercisable at December 31, 2019
|
|
|
82,500,000
|
|
|
$
|
0.0565
|
|
|
|
1.92
|
|
As of December 31, 2019, there was approximately
$0.6 million of unrecognized stock-based compensation expense to be recognized over a period of four months.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
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 December 31, 2019 there is a derivative financial
instrument liability of approximately $0.6 million.
In November 2019, the Company purchased
a directors and officers’ insurance policy for approximately $241,000 and financed approximately $241,000 of the premium
by executing a note payable. The balance of the note payable at December 31, 2019, is approximately $201,000.
NOTE 10 – LEASES
Effective October 1, 2019, we adopted ASU
No. 2016-02, Leases (Topic 842), and all related amendments (“ASC 842”) using the modified retrospective approach.
In July 2018, the FASB approved an optional transition method that removed the requirement to restate prior period financial statements
upon adoption of the standard with a cumulative-effect adjustment to retained earnings in the period of adoption and we elected
to apply this transition method. As a result, the comparative period information has not been restated and continues to be reported
under the accounting standards in effect for the period presented. The adoption of ASC 842 had no impact to our previously reported
results of operations or cash flows.
The following table depicts the cumulative
effect of the changes made to our September 30, 2019 balance sheet for the adoption of ASC 842 effective on October 1, 2019:
|
Balance at
September 30, 2019
|
Impact of Adoption
of ASC 842
|
Adjusted Balance at
October 1, 2019
|
Assets:
|
|
|
|
Operating lease right of use assets
|
$0
|
$104,363
|
$104,363
|
|
|
|
|
Current Liabilities:
|
|
|
|
Other
(Deferred Credit Office Lease)
|
$42,746
|
($42,746)
|
—
|
Current portion of operating lease liabilities
|
$0
|
$74,114
|
$74,114
|
|
|
|
|
Noncurrent Liabilities:
|
|
|
|
Operating lease liabilities
|
$0
|
$56,565
|
$56,565
|
|
|
|
|
Equity:
|
|
|
|
Accumulated Deficit
|
($55,582,010)
|
$16,429
|
($55,565,581)
|
|
|
|
|
The adoption of ASC 842 primarily resulted
in the recognition of operating lease liabilities totaling $130,679, based upon the present value of the remaining minimum rental
payments using discount rates as of the adoption date. In addition, we recorded corresponding right-of-use assets totaling $104,363
based upon the operating lease liabilities adjusted for deferred rent and lease incentives. In addition, we recorded a $16,429
cumulative effect of initially adopting ASC 842 as an adjustment to the opening balance of accumulated deficit.
NOTE 11 – SUBSEQUENT EVENTS
Additional insurance proceeds of approximately
$0.07 million were received in January 2020 for 100% working interest related to the Tau well incident (see Note 3).