UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark One)
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
Or
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
Commission file number 0-24012
DEEP WELL OIL & GAS, INC.
(Exact
name of registrant as specified in its charter)
Nevada |
|
98-0501168 |
(State
or other jurisdiction of incorporation or organization) |
|
(I.R.S.
Employer Identification No.) |
|
Suite
700, 10150 - 100 Street, Edmonton, Alberta, Canada |
|
T5J
0P6 |
(Address
of principal executive offices) |
|
(Zip
Code) |
Registrant’s
telephone number, including area code: (780) 409-8144
Former
name, former address and former fiscal year, if changed since last report: not applicable.
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No
☐
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No
☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer ☐ |
Accelerated
filer ☐ |
|
|
|
|
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
The
number of shares of common stock outstanding as of June 30, 2015 was 229,374,605.
TABLE
OF CONTENTS
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|
Page Number |
|
|
|
PART I – FINANCIAL INFORMATION |
|
|
|
|
ITEM 1. |
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) |
3 |
|
|
|
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
20 |
|
|
|
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
27 |
|
|
|
ITEM 4. |
CONTROLS AND PROCEDURES |
27 |
|
|
|
PART II – OTHER INFORMATION |
|
|
|
|
ITEM 1. |
LEGAL PROCEEDINGS |
27 |
|
|
|
ITEM 1A. |
RISK FACTORS |
27 |
|
|
|
ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
27 |
|
|
|
ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES |
27 |
|
|
|
ITEM 4. |
MINE SAFETY DISCLOSURES |
27 |
|
|
|
ITEM 5. |
OTHER INFORMATION |
28 |
|
|
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ITEM 6. |
EXHIBITS |
28 |
|
|
|
SIGNATURES |
29 |
ITEM 1. CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
DEEP WELL OIL & GAS, INC. (AND SUBSIDIARIES)
Condensed Consolidated Balance Sheets
June 30, 2015 and September 30, 2014
| |
June 30, | | |
September 30, | |
| |
2015 | | |
2014 | |
| |
(Unaudited) | | |
| |
| |
| | |
| |
ASSETS | |
| | |
| |
Current Assets | |
| | |
| |
Cash and cash equivalents | |
$ | 2,023,228 | | |
$ | 2,324,755 | |
Accounts receivable net of allowance of $Nil (September 30, 2014 - $Nil) | |
| 226,765 | | |
| 1,050,099 | |
Prepaid expenses | |
| 49,457 | | |
| 43,875 | |
| |
| | | |
| | |
Total Current Assets | |
| 2,299,450 | | |
| 3,418,729 | |
| |
| | | |
| | |
Long term investments | |
| 372,571 | | |
| 409,618 | |
Oil and gas properties, net, based on successful efforts method of accounting | |
| 19,613,425 | | |
| 19,604,050 | |
Property and equipment, net | |
| 217,697 | | |
| 259,198 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 22,503,143 | | |
$ | 23,691,595 | |
| |
| | | |
| | |
LIABILITIES | |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Accounts payable and accrued liabilities | |
$ | 182,794 | | |
$ | 714,198 | |
Accounts payable and accrued liabilities– related parties | |
| 7,101 | | |
| 16,977 | |
| |
| | | |
| | |
Total Current Liabilities | |
| 189,895 | | |
| 731,175 | |
| |
| | | |
| | |
Asset retirement obligations (Note
10) | |
| 435,415 | | |
| 469,013 | |
| |
| | | |
| | |
TOTAL LIABILITIES | |
| 625,310 | | |
| 1,200,188 | |
| |
| | | |
| | |
SHAREHOLDERS’ EQUITY | |
| | | |
| | |
Common Stock: (Note
11) | |
| | | |
| | |
Authorized: 600,000,000 shares at $0.001 par value | |
| | | |
| | |
Issued and outstanding: 229,374,605 shares | |
| | | |
| | |
(September 30, 2014 – 229,326,987 shares) | |
| 229,374 | | |
| 229,326 | |
Additional paid in capital | |
| 41,911,156 | | |
| 41,040,447 | |
Accumulated Deficit | |
| (20,262,697 | ) | |
| (18,778,366 | ) |
| |
| | | |
| | |
Total Shareholders’ Equity | |
| 21,877,833 | | |
| 22,491,407 | |
| |
| | | |
| | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | |
$ | 22,503,143 | | |
$ | 23,691,595 | |
See accompanying notes to the condensed consolidated financial
statements
DEEP WELL OIL & GAS, INC. (AND SUBSIDIARIES)
(Unaudited)
Condensed Consolidated Statements of Operations
and Comprehensive Income (Loss)
For the Three and Nine Months Ended June
30, 2015 and 2014
| |
Three Months Ended | | |
Three Months Ended | | |
Nine Months Ended | | |
Nine Months Ended | |
| |
June 30, 2015 | | |
June 30, 2014 | | |
June 30, 2015 | | |
June 30, 2014 | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | 219,346 | | |
$ | – | | |
$ | 449,147 | | |
$ | – | |
Royalty expenses | |
| (11,127 | ) | |
| – | | |
| (23,512 | ) | |
| – | |
Revenue, net of royalty | |
| 208,219 | | |
| – | | |
| 425,635 | | |
| – | |
| |
| | | |
| | | |
| | | |
| | |
Expenses | |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| 425,684 | | |
| – | | |
| 1,540,206 | | |
| – | |
Operating expenses covered by Farmout (Note 3) | |
| (217,465 | ) | |
| – | | |
| (1,114,571 | ) | |
| – | |
General and administrative | |
| 337,016 | | |
| 55,031 | | |
| 1,434,203 | | |
| 862,245 | |
Depreciation, accretion and depletion | |
| 21,721 | | |
| 25,790 | | |
| 64,541 | | |
| 74,315 | |
| |
| | | |
| | | |
| | | |
| | |
Net loss from operations | |
| (358,737 | ) | |
| (80,821 | ) | |
| (1,498,744 | ) | |
| (936,560 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income and expenses | |
| | | |
| | | |
| | | |
| | |
Rental and other income | |
| 3,432 | | |
| 4,347 | | |
| 10,635 | | |
| 15,813 | |
Interest income | |
| 1,081 | | |
| 2,091 | | |
| 3,778 | | |
| 9,009 | |
Loss on disposal of assets | |
| – | | |
| 387 | | |
| – | | |
| 387 | |
| |
| | | |
| | | |
| | | |
| | |
Net loss and comprehensive loss | |
$ | (354,224 | ) | |
$ | (73,996 | ) | |
$ | (1,484,331 | ) | |
$ | (911,351 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss per common share | |
| | | |
| | | |
| | | |
| | |
Basic and Diluted | |
$ | (0.00 | ) | |
$ | (0.00 | ) | |
$ | (0.00 | ) | |
$ | (0.00 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted Average Outstanding Shares (in thousands) | |
| | | |
| | | |
| | | |
| | |
Basic and Diluted | |
| 229,374 | | |
| 229,326 | | |
| 229,374 | | |
| 229,326 | |
See accompanying notes to the condensed consolidated financial
statements
DEEP WELL OIL & GAS, INC. (AND SUBSIDIARIES)
(Unaudited)
Condensed Consolidated Statements of Cash
Flows
For the Nine Months Ended June 30, 2015 and
2014
| |
June 30, | | |
June 30, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Operating Activities | |
| | |
| |
Net loss | |
$ | (1,484,331 | ) | |
$ | (911,351 | ) |
Items not affecting cash: | |
| | | |
| | |
Share based compensation | |
| 865,756 | | |
| 239,480 | |
Depreciation, accretion and depletion | |
| 64,541 | | |
| 74,315 | |
Bad debts | |
| – | | |
| 428 | |
Loss on disposal of assets | |
| – | | |
| (387 | ) |
Net changes in non-cash working capital (Note 13) | |
| 276,472 | | |
| (593,796 | ) |
| |
| | | |
| | |
Net Cash Used in Operating Activities | |
| (277,562 | ) | |
| (1,191,311 | ) |
| |
| | | |
| | |
Investing Activities | |
| | | |
| | |
Purchase of property and equipment | |
| – | | |
| (408 | ) |
Investment in oil and gas properties | |
| (31,637 | ) | |
| (3,635,922 | ) |
Long term investments | |
| 2,671 | | |
| (81,809 | ) |
| |
| | | |
| | |
Net Cash Used in Investing Activities | |
| (28,966 | ) | |
| (3,718,139 | ) |
| |
| | | |
| | |
Financing Activities | |
| | | |
| | |
Payments on loan payable – related parties | |
| – | | |
| (189,500 | ) |
Proceeds from issuance of common stock | |
| 5,001 | | |
| – | |
| |
| | | |
| | |
Net Cash Provided by (Used in) Financing Activities | |
| 5,001 | | |
| (189,500 | ) |
| |
| | | |
| | |
Decrease in cash and cash equivalents | |
| (301,527 | ) | |
| (5,098,950 | ) |
| |
| | | |
| | |
Cash and cash equivalents, beginning of period | |
| 2,324,755 | | |
| 7,633,009 | |
| |
| | | |
| | |
Cash and cash equivalents, end of period | |
$ | 2,023,228 | | |
$ | 2,534,059 | |
| |
| | | |
| | |
Supplemental Cash Flow Information: | |
| | | |
| | |
Cash paid for interest | |
$ | – | | |
$ | – | |
Cash paid for income taxes | |
$ | – | | |
$ | – | |
See accompanying notes to the condensed consolidated financial
statements
DEEP WELL OIL & GAS, INC. (AND SUBSIDIARIES)
(Unaudited)
Notes to the Condensed Consolidated Financial
Statements
June 30, 2015
1. |
NATURE OF BUSINESS AND BASIS OF PRESENTATION |
Nature of Business
Deep Well Oil & Gas, Inc. was
originally incorporated on July 18, 1988 under the laws of the state of Nevada as Worldwide Stock Transfer, Inc. (Worldwide Stock
Transfer, Inc. later changed its name to Allied Devices Corporation) and in connection with a plan of reorganization, effective
on September 10, 2003, the company was reorganized and changed its name to Deep Well Oil & Gas, Inc. (“Deep Well”).
These consolidated financial statements
have been prepared showing the name “Deep Well Oil & Gas, Inc. (and Subsidiaries)” (“the Company”)
and the post-split common stock, with $0.001 par value.
Basis of Presentation
The interim condensed consolidated
financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have
been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate
so as to make the information presented not misleading.
These interim condensed consolidated
financial statements follow the same significant accounting policies and methods of application as the Company’s annual consolidated
financial statements for the year ended September 30, 2014.
These statements reflect all adjustments,
consisting solely of normal recurring adjustments (unless otherwise disclosed) which, in the opinion of management, are necessary
for a fair presentation of the information contained therein. However, the results of operations for the interim periods may not
be indicative of results to be expected for the full fiscal year. It is suggested that these condensed consolidated financial statements
be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the year ended September 30, 2014.
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Consolidation
These condensed consolidated financial
statements include the accounts of two wholly owned subsidiaries: (1) Northern Alberta Oil Ltd. (“Northern”) from the
date of acquisition, being June 7, 2005, incorporated under the Business Corporations Act (Alberta), Canada; and (2) Deep Well
Oil & Gas (Alberta) Ltd., incorporated under the Business Corporations Act (Alberta), Canada on September 15, 2005. All inter-company
balances and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid
instruments with a maturity of three months or less at the time of issuance to be cash equivalents.
Allowance for Doubtful Accounts
The Company determines allowances
for doubtful accounts based on aging of specific accounts. Accounts receivable are stated at the historical carrying amounts net
of allowances for doubtful accounts and include only the amounts the Company deems to be collectable. The allowance for bad debts
was $nil and $nil at June 30, 2015 and September 30, 2014, respectively.
Crude oil and natural
gas properties
The Company uses the successful efforts
method of accounting for crude oil and natural gas properties whereby costs incurred to acquire mineral interests in crude oil
and natural gas properties, to drill and equip exploratory wells that find proved reserves, to drill and equip development wells,
and expenditures for enhanced recovery operations are capitalized. Geological and geophysical costs, seismic costs incurred for
exploratory projects, lease rentals and costs associated with unsuccessful exploratory wells or projects are expensed as incurred.
Costs of seismic studies that are utilized in development drilling within an area of proved reserves are capitalized as development
costs. To the extent a seismic project covers areas of both developmental and exploratory drilling, those seismic costs are proportionately
allocated between capitalized development costs and exploration expense. Maintenance, repairs and costs of injection are expensed
as incurred, except that the costs of replacements or renewals that expand capacity or improve production are capitalized.
Under the successful efforts method
of accounting, the Company capitalizes exploratory drilling, equipping and facility costs on the balance sheet pending determination
of whether the project has found proved reserves in economically producible quantities. The Company capitalizes costs associated
with the acquisition or construction of support equipment and facilities with the drilling and development costs to which they
relate. If proved reserves are assigned to a project, the associated capitalized costs become part of well equipment and facilities.
However, if proved reserves are not found in a project, the capitalized costs associated with the project are expensed, net of
any salvage value. Total capitalized costs pending the determination of proved reserves were approximately $19.6 million and $19.6
million at June 30, 2015 and September 30, 2014, respectively.
Property and Equipment
Property and equipment are stated
at cost less accumulated depreciation. Depreciation expense is computed using the declining balance method over the estimated useful
life of the asset. Only half of the depreciation rate is taken in the year of acquisition. The following is a summary of the depreciation
rates used in computing depreciation expense:
|
| |
% | |
|
Software | |
| 100 | |
|
Computer equipment | |
| 55 | |
|
Portable work camp | |
| 30 | |
|
Vehicles | |
| 30 | |
|
Road Mats | |
| 30 | |
|
Wellhead | |
| 25 | |
|
Office furniture and equipment | |
| 20 | |
|
Oilfield Equipment | |
| 20 | |
|
Tanks | |
| 10 | |
Expenditures for major repairs and
renewals that extend the useful life of the asset are capitalized. Minor repair expenditures are charged to expense as incurred.
Leasehold improvements are amortized over the greater of five years or the remaining life of the lease agreement.
Long-Lived Assets
Oil and Gas Properties
- Proved crude oil and natural gas properties are reviewed for impairment on a field-by-field basis each quarter, or when events
and circumstances indicate a possible decline in the recoverability of the carrying value of such field. The estimated future cash
flows expected in connection with the field are compared to the carrying amount of the field to determine if the carrying amount
is recoverable. If the carrying amount of the field exceeds its estimated undiscounted future cash flows, the carrying amount of
the field is reduced to its estimated fair value. Due to the unavailability of relevant comparable market data, a discounted cash
flow method is used to determine the fair value of proved properties. The discounted cash flow method estimates future cash
flows based on management’s estimates of future crude oil and natural gas production, commodity prices based on commodity
futures price strips, operating and development costs, and a risk-adjusted discount rate.
Non-producing crude oil and natural
gas properties primarily consist of undeveloped leasehold costs and costs associated with the purchase of certain proved undeveloped
reserves. Individually significant non-producing properties, if any, are assessed for impairment on a property-by-property basis
and, if the assessment indicates an impairment, a loss is recognized by providing a valuation allowance consistent with the level
at which impairment was assessed. For individually insignificant non-producing properties, impairment losses are recognized by
amortizing the portion of the properties’ costs which management estimates will not be transferred to proved properties over
the lives of the leases based on experience of successful drilling and the average holding period. The Company’s impairment
assessments are affected by economic factors such as the results of exploration activities, commodity price outlooks, anticipated
drilling programs, remaining lease terms, and potential shifts in business strategy employed by management.
Non Oil and Gas Assets - The Company
reviews for the impairment of long-lived assets annually and whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows
expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment is measured
as the amount by which the assets’ carrying value exceeds its fair value. No impairments to the Company’s long-lived
assets were identified or recorded in the nine months ended June 30, 2015 or in the fiscal year ended September 30, 2014.
Depreciation, Depletion and
Amortization
Depreciation, depletion and amortization
of capitalized drilling and development costs of producing crude oil and natural gas properties, including related support equipment
and facilities, are computed using the unit-of-production method on a field basis based on total estimated proved developed crude
oil and natural gas reserves. Amortization of producing leaseholds is based on the unit-of-production method using total estimated
proved reserves. In arriving at rates under the unit-of-production method, the quantities of recoverable crude oil and natural
gas reserves are established based on estimates made by the Company’s internal geologists and engineers and external independent
reserve engineers. Upon sale or retirement of properties, the cost and related accumulated depreciation, depletion and amortization
are eliminated from the accounts and the resulting gain or loss, if any, is recognized. Unit of production rates are revised whenever
there is an indication of a need, but at least in conjunction with annual reserve reports. Revisions are accounted for prospectively
as changes in accounting estimates.
Asset Retirement Obligations
The Company accounts for asset retirement
obligations by recording the fair value of the estimated future cost of the Company’s plugging and abandonment obligations.
The asset retirement obligation is recorded when there is a legal obligation associated with the retirement of a tangible long-lived
asset and the fair value of the liability can reasonably be estimated. Upon initial recognition of an asset retirement obligation,
the Company increases the carrying amount of the long-lived asset by the same amount as the liability. Over time, the liabilities
are accreted for the change in their present value through charges to oil and gas production and well operations costs. The initial
capitalized costs are depleted over the useful lives of the related assets through charges to depreciation, depletion, and amortization.
If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded to both the asset retirement
obligation and the asset retirement cost.
Revisions in estimated liabilities
can result from revisions of estimated inflation rates, escalating retirement costs, and changes in the estimated timing of settling
asset retirement obligations. As at June 30, 2015 and September 30, 2014, asset retirement obligations amount to $435,415 and $469,013,
respectively. The Company has posted bonds, where required, with the Government of Alberta based on the amount the government estimates
the cost of abandonment and reclamation to be.
Foreign Currency Translation
The functional currency of the Canadian
subsidiaries is the United States dollar. However, the Canadian subsidiaries transact in Canadian dollars. Consequently, monetary
assets and liabilities are remeasured into United States dollars at the exchange rate on the balance sheet date and non-monetary
items are remeasured at the rate of exchange in effect when the assets are acquired or obligations incurred. Revenues and expenses
are remeasured at the average exchange rate prevailing during the period. Foreign currency transaction gains and losses are included
in results of operations.
Accounting Method
The Company recognizes income and
expenses based on the accrual method of accounting.
Dividend Policy
The Company has not yet adopted a
policy regarding payment of dividends.
Financial, Concentration and
Credit Risk
The Company does not have any concentration
or related financial credit risk related to cash as most of the Company’s funds are maintained in a financial institution
which has its deposits fully guaranteed by the Government of Alberta.
The Company is not directly subject
to credit risk resulting from the concentration of its crude oil sales. For the period ending June 30, 2015 and for the year ended
September 30, 2014, the Company has recorded oil sales received from the operator of the Company’s producing properties.
The Company’s joint venture partner is the operator of the Company’s producing properties and it is the Company’s
joint venture partner who sells 100% of the Company’s oil production to one or more purchasers in the oil and gas industry.
The Company does not require collateral and management periodically evaluates the operator’s financial statements and the
collectability of oil sales receivables from the operator and believes that the Company’s oil sales receivables are fully
collectable and that the risk of loss is minimal.
Income Taxes
The Company utilizes the liability
method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on
the differences between financial reporting and the tax bases of the assets and liabilities, and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets
is recorded when it is more likely than not that such tax benefits will not be realized.
Due to the uncertainty regarding the
Company’s profitability, a valuation allowance has been recorded against the future tax benefits of its losses and no net
benefit has been recorded in the consolidated financial statements.
Revenue Recognition
The Company is in the business of
exploring for, developing, producing, and selling crude oil. Crude oil revenue is recognized when the product is taken from the
storage tanks on the lease and delivered to the purchaser and title transfers to the purchaser. Payment is generally received one
to three months after the sale has occurred.
Occasionally the Company may sell
specific leases, and the gain or loss associated with these transactions will be shown separately from the profit or loss from
the operations or sales of oil products. Such gain or losses will be measured and recognized when all of the following have occurred:
(1) there is persuasive evidence of an arrangement to sell; (2) the price of the sale is fixed or determinable; (3) the title to
the lease has transferred; and (4) collection is reasonably assured.
Advertising and Market Development
The Company expenses advertising and market development
costs as incurred.
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share
amounts are computed based on the weighted average number of shares actually outstanding. Diluted net income (loss) per share amounts
are computed using the weighted average number of common shares and common equivalent shares outstanding as if shares had been
issued on the exercise of the common share rights, unless the exercise becomes antidilutive and then the basic and diluted per
share amounts are the same. There were 1,855,000 common stock equivalents excluded from the calculation because their effect would
be antidilutive.
Financial Instruments
Financial instruments include cash
and cash equivalents, accounts receivable, long term investments, investment in equity securities, accounts payable and accounts
payable - related parties. The fair value of these financial instruments approximates their carrying value because of the short-term
maturity of these items unless otherwise noted. The fair value of the investment in equity securities cannot be determined as the
market value is not readily obtainable. The equity securities are reported using the cost method.
Environmental Requirements
At the report date, environmental
requirements related to the oil properties acquired are unknown and therefore an estimate of any future cost cannot be made.
Share-Based Compensation
The Company accounts for stock options
granted to directors, officers, employees and non-employees using the fair value method of accounting. The fair value of stock
options for directors, officers and employees are calculated at the date of grant and is expensed over the vesting period of the
options on a straight-line basis. For non-employees, the fair value of the options is measured on the earlier of the date at which
the counterparty performance is complete or the date at which the performance commitment is reached. The Company uses the Black-Scholes
model to calculate the fair value of stock options issued, which requires certain assumptions to be made at the time the options
are awarded, including the expected life of the option, the expected number of granted options that will vest and the expected
future volatility of the stock. The Company reflects estimates of award forfeitures at the time of grant and revises in subsequent
periods, if necessary, when forfeiture rates are expected to change.
Recently Adopted Accounting
Standards
The Company has evaluated recent accounting pronouncements
and their adoption has not had or is not expected to have a material impact on the Company's financial statements.
Estimates and Assumptions
Management uses estimates and assumptions
in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions
affect the reported amounts of the assets and liabilities, the disclosure of contingent assets and liabilities, and the reported
revenues and expenses. Actual results could vary from the estimates that were used in preparing these consolidated financial statements.
Significant estimates by management
include valuations of oil properties, valuation of accounts receivable, useful lives of long-lived assets, asset retirement obligations,
valuation of share-based compensation, and the realizability of future income taxes.
3. |
OIL AND GAS PROPERTIES |
The Company’s oil sands acreage
as of June 30, 2015, covers 43,015 gross acres (34,096 net acres) on 68 sections of land under nine oil sands leases. Until the
Company extends the leases “into perpetuity” based on the Alberta governmental regulations, the lease expiration dates
of the Company’s nine oil sands leases are as follows:
| 1) | 32 sections of land under 5 oil sands leases are set to expire on July 10, 2018; |
| 2) | 31 sections of land under 3 oil sands leases are set to expire on August 19, 2019; and |
| 3) | 5 sections of land under 1 oil sands lease are set expire on April 9, 2024. It is the Company’s
opinion that the Company has already met the governmental requirements for this lease and it will be applying to continue this
lease into perpetuity. |
Effective September 25, 2014, the
Company, through its subsidiary Deep Well Alberta, entered into a Purchase and Sale agreement with Classic Energy Inc. (“Classic”),
pursuant to which the Company acquired Classic’s 20% working interest in five sections in one Sawn Lake oil sands lease where
the Company already owned working interests. As of September 25, 2014, the Company increased its net acres in the Sawn Lake oil
sands properties from 33,463 to 34,096 net acres.
Lease Rental Commitments
The Company has acquired interests
in certain oil sands properties located in North Central Alberta, Canada. The terms include certain commitments related to oil
sands properties that require the payments of rents as long as the leases are non-producing. As of June 30, 2015, the Company’s
net payments due under this commitment are as follows:
|
| |
(Cdn $) | |
|
2015 | |
$ | 12,074 | |
|
2016 | |
$ | 48,294 | |
|
2017 | |
$ | 48,294 | |
|
2018 | |
$ | 48,294 | |
|
2019 | |
$ | 29,478 | |
|
Subsequent | |
$ | 22,400 | |
The government of Alberta owns this
land and the Company has acquired the rights to perform oil activities on these lands. If the Company meets the conditions of the
leases the Company will then be permitted to drill on and produce oil from the land into perpetuity. These conditions give the
Company until the expiration of the leases to meet the following requirements on its primary oil sands leases:
| 1) | drill 68 wells throughout the 68 sections; or |
| 2) | drill 44 wells within the 68 sections and having acquired and processed two miles of seismic on
each other undrilled section. |
The Company plans to meet the second
of these conditions. As at June 30, 2015 and September 30, 2014, the Company has an interest in ten wells, which can be counted
towards these requirements.
The Company has identified two
other wells drilled on these leases, which may be included in the satisfaction of this requirement. The Company has also acquired
and processed 25 miles of seismic on the leases, which can be counted towards these requirements. Our joint venture partner and
operator of the SAGD Project has also acquired additional seismic that can be used towards our MLE requirements.
The Company follows the successful
efforts method of accounting for costs of oil properties. Under this method, only those exploration and development costs that
relate directly to specific oil reserves are capitalized; costs that do not relate directly to specific reserves are charged to
expense. Producing, non-producing and unproven properties are assessed annually, or more frequently as economic events indicate,
for potential impairment.
This consists of comparing the carrying
value of the asset with the asset’s expected future undiscounted cash flows without interest costs. Estimates of expected
future cash flows represent management’s best estimate based on reasonable and supportable assumptions. Proven oil properties
are reviewed for impairment on a field-by-field basis. No impairment losses were recognized for the period ended June 30, 2015
(September 30, 2014 - $nil).
Capitalized costs of proven oil properties
will be depleted using the unit-of-production method when the property is placed in production.
Substantially all of the Company’s
oil activities are conducted jointly with others. The accounts reflect only the Company’s proportionate interest in such
activities.
Farmout Agreement
On July 31, 2013, the Company entered
into a Farmout agreement (the “Farmout Agreement”) with an additional joint venture partner (the “Farmee”)
to fund the Company’s share of the Alberta Energy Regulator (“AER”) approved SAGD Project at the Company’s
Sawn Lake heavy oil reservoir in North Central Alberta, Canada. In accordance with the Farmout Agreement the Farmee has agreed
to provide up to $40,000,000 in funding for the Company’s portion of the costs for the SAGD Project, in return for a net
25% working interest in 12 sections where the Company had a working interest of 50% (before the execution of the Farmout Agreement).
The Farmee will also provide funding to cover monthly operating expenses of the Company, of which the first such monthly payment
began in respect of the month of August 2013 and shall not to exceed $30,000 per month. In addition, until December 31, 2015, as
amended on November 17, 2014, the Farmee has the option to elect to obtain a working interest of 45% to 50% working interest in
the remaining 56 sections of land where the Company has working interests ranging from 90% to 100%, by committing an additional
$110,000,000 of financing to the development of the Company’s Sawn Lake oil sands properties. As of June 30, 2015, the Farmee
has not exercised this option.
Acquisition of Royalty Interests
On March 18, 2014 and June 27, 2014,
the Company, through its 100% wholly owned subsidiary company Northern Alberta Oil Ltd., entered into and subsequently closed two
Acquisition of Royalty Interest Agreements and General Indenture of Conveyance, Assignment and Transfer Agreements (collectively
the “Agreements”), with the Company’s joint venture partner (“JV Partner”) and one related party
(Mr. Malik Youyou), whereby the Company acquired and cancelled 5.5% of a disputed 6.5% overriding royalty claim (the “Purported
6.5% Royalty”) potentially on some lands owned by the Company. The Company’s counsel and vendor’s counsel negotiated
the terms and conditions of both the “Acquisition of Royalty Interest” and “General Indenture of Conveyance,
Assignment and Transfer” agreements. Although the Company does not confirm the validity of the Purported 6.5% Royalty, the
Company determined that it was in the best interests of its shareholders to come to an arrangement to acquire and cancel most of
the Purported 6.5% Royalty to prevent a potential encumbrance over its land or the possibility of future litigation resulting from
these alleged royalty claims. Pursuant to the terms and conditions of the Agreements to acquire the purported overriding royalty
interest claims, the Company paid the following consideration:
| (i) | US $2,435,124 (Cdn $2,697,600) was paid to the JV Partner for the purchase and transfer of an undivided
3% interest out of the Purported 6.5% Royalty. The consideration paid was the original cost (in Canadian dollars) that the JV Partner
paid to acquire its 3% interest in the Purported 6.5% Royalty. |
| (ii) | US $1,007,000 was paid to Mr. Malik Youyou, who is a director and majority shareholder of the Company,
for the purchase and transfer of an undivided 2.5% interest out of the Purported 6.5% Royalty. The consideration paid was for the
reimbursement of the original cost (in US dollars) that Mr. Youyou paid to acquire this 2.5% interest in the Purported 6.5% Royalty
from an arm’s length third party. |
4. | CAPITALIZATION OF COSTS INCURRED IN OIL AND GAS ACTIVITIES |
The Company accounts for the cost
of its oil sands projects and continues to capitalize project costs after the completion of drilling, equipping and facility construction
as long as sufficient progress is being made in assessing the oil sands reserves to justify the oil sands project as a producing
well.
For the period ended June 30, 2015,
the Company’s management determined that sufficient progress has been made in assessing its oil sands reserves for continued
capitalization of exploratory drilling, equipping and facility costs. In relation to this sufficient progress assessment of its
oil sands project the Company considered among other criteria; long lead times in getting regulatory approval for oil sands thermal
recovery projects, road bans, winter access only properties and governmental and environmental regulations which can and often
delay development of oil sands projects. Because of these and other factors, the Company’s oil sands project can take significantly
longer to complete than regular conventional drilling programs for lighter oil. To date the Company’s geological, engineering,
economic studies, and AER approved thermal recovery projects; including the Company’s now producing SAGD Project, continue
to lead them to believe that there is continuing progress toward bringing the project to commercial production. Therefore, the
Company has continued to capitalize its costs associated with its oil sands project.
For the Company’s oil sands
projects, exploratory drilling, equipping and facility costs are capitalized on the balance sheet under “Oil and Gas Properties”
line item, pending a determination of whether potentially economic oil sands reserves have been discovered by the drilling effort
to justify oil sands project as a producing well. The Company periodically assesses the exploration drilling, equipping and facility
capitalized costs for impairment and once a determination is made that a well is of no potential economic value, the costs related
to that oil sands project are expensed as dry hole and reported in exploration expense. No impairments to the Company’s long-lived
assets were identified or recorded in the nine months ended June 30, 2015 or in the fiscal year ended September 30, 2014.
The following table illustrates capitalized
costs relating to oil producing activities as of June 30, 2015 and September 30, 2014:
|
| |
June 30, 2015 | | |
September 30, 2014 | |
|
| |
| | |
| |
|
Unproved Oil and Gas Properties | |
$ | 19,671,471 | | |
$ | 19,651,296 | |
|
Proved Oil and Gas Properties | |
| 4,568 | | |
| 4,568 | |
|
Accumulated Depreciation and Depletion | |
| (62,614 | ) | |
| (51,814 | ) |
|
| |
| | | |
| | |
|
Net Capitalized Cost | |
$ | 19,613,425 | | |
$ | 19,604,050 | |
Depreciation and depletion expense
for the nine months ended June 30, 2015 and 2014 was $10,800 and $7,178, respectively.
5. |
EXPLORATION ACTIVITIES |
The following table presents information
regarding the Company’s costs incurred in the oil property acquisition, exploration and development activities for the nine
months ended June 30, 2015 and 2014:
|
| |
June 30, 2015 | | |
June 30, 2014 | |
|
Acquisition of Properties: | |
| | |
| |
|
Proved | |
$ | – | | |
$ | – | |
|
Unproved | |
| 20,175 | | |
| 3,660,626 | |
|
Exploration costs | |
| 27,356 | | |
| 21,813 | |
|
Development costs | |
| – | | |
| – | |
6. |
INVESTMENT IN EQUITY SECURITIES |
On February 25, 2005, the Company
acquired an interest in Signet Energy Inc. (“Signet” formerly Surge Global Energy, Inc.) as a result of a Farmout Agreement
dated February 25, 2005. Signet amalgamated with Andora Energy Corporation (“Andora”) in 2007.
As of November 19, 2008, the Company
converted its Signet shares into 2,241,558 shares of Andora, which represents an equity interest in Andora of approximately 2.24%
as of December 31, 2014, which is Andora’s fiscal year end. These shares are carried at a nominal value using the cost method
and their value is included under oil and gas properties on the Company’s balance sheet.
7. |
PROPERTY AND EQUIPMENT |
|
| |
June 30, 2015 | |
|
| |
| | |
Accumulated | | |
Net Book | |
|
| |
Cost | | |
Depreciation | | |
Value | |
|
Computer equipment | |
$ | 32,197 | | |
$ | 31,723 | | |
$ | 474 | |
|
Office furniture and equipment | |
| 34,130 | | |
| 28,055 | | |
| 6,075 | |
|
Software | |
| 5,826 | | |
| 5,826 | | |
| – | |
|
Leasehold improvements | |
| 4,936 | | |
| 4,936 | | |
| – | |
|
Portable work camp | |
| 170,580 | | |
| 151,764 | | |
| 18,816 | |
|
Vehicles | |
| 38,077 | | |
| 33,861 | | |
| 4,216 | |
|
Oilfield equipment | |
| 249,046 | | |
| 152,133 | | |
| 96,913 | |
|
Road mats | |
| 364,614 | | |
| 324,245 | | |
| 40,369 | |
|
Wellhead | |
| 3,254 | | |
| 2,278 | | |
| 976 | |
|
Tanks | |
| 96,085 | | |
| 46,227 | | |
| 49,858 | |
|
| |
$ | 998,745 | | |
$ | 781,048 | | |
$ | 217,697 | |
|
| |
September 30, 2014 | |
|
| |
| | |
Accumulated | | |
Net Book | |
|
| |
Cost | | |
Depreciation | | |
Value | |
|
Computer equipment | |
$ | 32,198 | | |
$ | 31,264 | | |
$ | 934 | |
|
Office furniture and equipment | |
| 34,130 | | |
| 26,880 | | |
| 7,250 | |
|
Software | |
| 5,826 | | |
| 5,826 | | |
| – | |
|
Leasehold improvements | |
| 4,936 | | |
| 4,936 | | |
| – | |
|
Portable work camp | |
| 170,580 | | |
| 146,211 | | |
| 24,369 | |
|
Vehicles | |
| 38,077 | | |
| 32,637 | | |
| 5,440 | |
|
Oilfield equipment | |
| 249,045 | | |
| 135,030 | | |
| 114,015 | |
|
Road mats | |
| 364,614 | | |
| 312,525 | | |
| 52,089 | |
|
Wellhead | |
| 3,254 | | |
| 2,053 | | |
| 1,201 | |
|
Tanks | |
| 96,085 | | |
| 42,185 | | |
| 53,900 | |
|
| |
$ | 998,745 | | |
$ | 739,547 | | |
$ | 259,198 | |
There was $41,501 of depreciation
expense for the period ended June 30, 2015 (June 30, 2014 - $54,361).
Long term investments consist of
cash held in trust by the AER which bears interest at a rate of prime minus 0.375% and has no stated date of maturity. These investments
are required by the AER to ensure there are sufficient future cash flows to meet the expected future asset retirement obligations
and are restricted for this purpose.
9. |
SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES |
Accounts payable – related parties
was $7,101 as of June 30, 2015 (September 30, 2014 - $16,977) for expenses to be reimbursed to directors.
This amount is unsecured, non-interest bearing, and has no fixed terms of repayment.
As of June 30, 2015, officers, directors,
their families, and their controlled entities have acquired 53.63% of the Company’s outstanding common capital stock. This
percentage does not include unexercised warrants or stock options.
The Company incurred expenses $112,590
to one related party, Concorde Consulting, an entity controlled by a director, for professional fees and consulting services provided
to the Company during the period ended June 30, 2015 (June 30, 2014 - $124,997). These amounts were fully paid as of June 30, 2015.
10. |
ASSET RETIREMENT OBLIGATIONS |
The total future asset retirement
obligation is estimated by management based on the Company’s net working interests in all wells and facilities, estimated
costs to reclaim and abandon wells and facilities and the estimated timing of the costs to be incurred in future periods. At June
30, 2015, the Company estimates the undiscounted cash flows related to asset retirement obligation to total approximately $622,593
(September 30, 2014 - $ 689,445). The fair value of the liability at June 30, 2015 is estimated to be $435,415 (September 30, 2014
- $ 469,013) using a risk free rate of 3.74% and an inflation rate of 2%. The actual costs to settle the obligation are expected
to occur in approximately 35 years.
Changes to the asset retirement obligation
were as follows:
|
| |
June 30, 2015 | | |
September 30, 2014 | |
|
Balance, beginning of period | |
$ | 469,013 | | |
$ | 446,155 | |
|
Liabilities incurred | |
| – | | |
| 73,395 | |
|
Effect of foreign exchange | |
| (45,837 | ) | |
| (64,079 | ) |
|
Disposal | |
| – | | |
| (4,045 | ) |
|
Accretion expense | |
| 12,239 | | |
| 17,587 | |
|
Balance, end of period | |
$ | 435,415 | | |
$ | 469,013 | |
As of June 30, 2015, the
Company had outstanding approximately 229,374,605 shares of common stock.
Warrants
On June 23, 2014, 47,618 common share purchase warrants
were transferred to a non-related party.
On October 3, 2014, a warrant holder
of the Company acquired 47,618 shares of the Company’s common stock, upon exercising warrants, at an exercise price of $0.105
per share of common stock for gross proceeds to the Company of $5,000.
The following
table summarizes the Company’s warrants outstanding as of June 30, 2015:
|
| |
Shares Underlying Warrants Outstanding | | |
Shares Underlying Warrants Exercisable | |
|
Range of Exercise Price | |
Shares Underlying Warrants Outstanding | | |
Weighted Average Remaining Contractual Life | | |
Weighted Average Exercise Price | | |
Shares Underlying Warrants Exercisable | | |
Weighted Average Exercise Price | |
|
| |
| | |
| | |
| | |
| | |
| |
|
$0.105 at June 30, 2015 | |
| 71,857,141 | | |
| 0.40 | | |
| 0.105 | | |
| 71,857,141 | | |
| 0.105 | |
|
$0.075 at June 30, 2015 | |
| 520,000 | | |
| 0.98 | | |
| 0.075 | | |
| 520,000 | | |
| 0.075 | |
|
| |
| 72,377,141 | | |
| 0.40 | | |
| 0.105 | | |
| 72,377,141 | | |
| 0.105 | |
The following
is a summary of warrant activity for the period ended June 30, 2015:
|
| |
Number of Warrants | | |
Weighted Average Exercise Price | | |
Intrinsic Value | |
|
| |
| | |
| | |
| |
|
Balance, September 30, 2014 | |
| 72,424,759 | | |
$ | 0.105 | | |
$ | 0.215 | |
|
Cancelled | |
| – | | |
| – | | |
| – | |
|
Granted | |
| – | | |
| – | | |
| – | |
|
Exercised | |
| 47,618 | | |
| 0.105 | | |
| – | |
|
Balance, June 30, 2015 | |
| 72,377,141 | | |
$ | 0.105 | | |
$ | – | |
|
| |
| | | |
| | | |
| | |
|
Outstanding Warrants, June 30, 2015 | |
| 72,377,141 | | |
$ | 0.105 | | |
$ | – | |
|
Exercisable Warrants, June 30, 2015 | |
| 72,377,141 | | |
$ | 0.105 | | |
$ | – | |
There were 72,377,141 warrants outstanding
as of June 30, 2015 (September 30, 2014 – 72,424,759), which have a historical fair market value of $1,738,336 (September
30, 2014 - $1,738,336).
Measurement Uncertainty for Warrants
The Company used the Black-Scholes
option pricing model (“Black-Scholes”) to value the options and warrants. This model was developed for use in estimating
the fair value of traded “European” options which are liquid and that have no vesting restrictions and are fully transferable.
The stock options that are granted to employees and directors and the warrants attached to the units issued by the Company are
non-transferable and some vest over time, and all are “American” options. Option pricing models require the input of
subjective assumptions including expected share price volatility. The fair value estimate can vary materially as a result of changes
in the assumptions. The following assumptions are used in the Black-Scholes option-pricing model:
Expected Term – Expected term
of 5 years represents the period that the Company’s stock-based awards are expected to be outstanding.
Expected Volatility – Expected
volatilities are based on historical volatility of the Company’s stock, adjusted where determined by management for unusual
and non-representative stock price activity not expected to recur. The expected volatility used ranged from 96% to 116%.
Expected Dividend – The Black-Scholes
valuation model calls for a single expected dividend yield as an input. The Company currently pays no dividends and does not expect
to pay dividends in the foreseeable future.
Risk-Free Interest rate – The
Company bases the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an
equivalent remaining term. The risk-free rate used ranged from 0.62% to 1.31%.
On November 28, 2005, and as amended
on December 4, 2014, the Board of Deep Well adopted the Deep Well Oil & Gas, Inc. Stock Option Plan (the “Plan’).
The Plan was approved by the majority of shareholders at the February 24, 2010 general meeting of shareholders. The Plan, is administered
by the Board, permits options to acquire shares of the Company’s common stock (the “Common Shares”) to be granted
to directors, senior officers and employees of the Company and its subsidiaries, as well as certain consultants and other persons
providing services to the Company or its subsidiaries.
The maximum number of shares, which
may be reserved for issuance under the Plan, may not exceed 10% of the Company’s issued and outstanding Common Shares, subject
to adjustment as contemplated by the Plan. The aggregate number of Common Shares with respect to which options may be vested to
any one person (together with their associates) under the plan, together with all other incentive plans of the Company in any one
year shall not exceed 2% of the total number of Common Shares outstanding, and in total may not exceed 6% of the total number of
Common Shares outstanding.
Prior to October 1, 2013, the Company
had a total of 4,350,000 options outstanding, that were previously granted to directors, consultants and an employee of the Company
on March 23, 2011 and June 20, 2013, to purchase up to 3,450,000 and 900,000 shares, respectively, each of common stock at exercise
prices ranging from $0.14 to $0.05, respectively, of which a total of 950,000 options granted on June 20, 2013 remain unvested.
On October 28, 2013, the Company granted
a contractor an option to purchase 250,000 shares of common stock at an exercise price of $0.30 per Common Share, all vesting immediately,
with a five-year life, for his services in connection with the Farmout Agreement dated July 31, 2013.
On December 4, 2013, the Company appointed
a new director to its Board and in connection with the appointment the Company granted the new director an option to purchase 450,000
shares each of common stock at an exercise price of $0.34 per Common Share, 150,000 vesting immediately and the remaining vesting
one-third on December 4, 2014, and one-third on December 4, 2015, with a five-year life.
On September 19, 2014, the Company
granted seven of its directors options to purchase 600,000 shares each of common stock at an exercise price of $0.38 per Common
Share, 200,000 vesting immediately and the remaining vesting one-third on September 19, 2015, and one-third on September 19, 2016,
with a five-year life.
On September 19, 2014, the Company
granted two consultants an option to purchase each 1,200,000 shares each of common stock at an exercise price of $0.38 per Common
Share, 600,000 vesting immediately and remaining vesting on September 19, 2015.
On September 19, 2014, the Company
granted one employee an option to purchase 180,000 shares each of common stock at an exercise price of $0.38 per Common Share,
60,000 vesting immediately and the remaining vesting one-third on September 19, 2015, and one-third on September 19, 2016, with
a five-year life.
On November 17, 2014, the Company
appointed a new director to its Board and in connection with the appointment the Company granted the new director an option to
purchase 600,000 shares each of common stock at an exercise price of $0.23 per Common Share, 200,000 vesting immediately and the
remaining vesting one-third on November 17, 2015, and one-third on November 17, 2016, with a five-year life.
For the period ended June 30, 2015,
the Company recorded share based compensation expense related to stock options in the amount of $865,756 (June 30, 2014 –
$239,480) on the stock options that were previously granted. As of June 30, 2015, there was remaining unrecognized compensation
cost of $491,074 related to the non-vested portion of these unit option awards. Compensation expense is based upon straight-line
depreciation of the grant-date fair value over the vesting period of the underlying unit option.
|
| |
Shares Underlying Options Outstanding | | |
Shares Underlying Options Exercisable | |
|
Range of Exercise Prices | |
Shares Underlying Options Outstanding | | |
Weighted Average Remaining Contractual Life | | |
Weighted Average Exercise Price | | |
Shares Underlying Options Exercisable | | |
Weighted Average Exercise Price | |
|
| |
| | |
| | |
| | |
| | |
| |
|
$0.14 at June 30, 2015 | |
| 900,000 | | |
| 0.73 | | |
$ | 0.14 | | |
| 900,000 | | |
$ | 0.14 | |
|
$0.05 at June 30, 2015 | |
| 3,450,000 | | |
| 2.98 | | |
| 0.05 | | |
| 3,450,000 | | |
| 0.05 | |
|
$0.30 at June 30, 2015 | |
| 250,000 | | |
| 3.33 | | |
| 0.30 | | |
| 250,000 | | |
| 0.30 | |
|
$0.34 at June 30, 2015 | |
| 450,000 | | |
| 3.43 | | |
| 0.34 | | |
| 300,000 | | |
| 0.34 | |
|
$0.38 at June 30, 2015 | |
| 6,780,000 | | |
| 4.22 | | |
| 0.38 | | |
| 2,660,000 | | |
| 0.38 | |
|
$0.23 at June 30, 2015 | |
| 600,000 | | |
| 4.39 | | |
| 0.23 | | |
| 200,000 | | |
| 0.23 | |
|
| |
| 12,430,000 | | |
| 3.59 | | |
$ | 0.26 | | |
| 7,760,000 | | |
$ | 0.20 | |
The aggregate intrinsic value of exercisable
options as of June 30, 2015, was $Nil (September 30, 2014 - $0.11).
The following is a summary of stock option activity as
at June 30, 2015:
|
| |
Number of Underlying Shares | | |
Weighted Average Exercise Price | | |
Weighted Average Fair Market Value | |
|
| |
| | |
| | |
| |
|
Balance, September 30, 2014 | |
| 11,830,000 | | |
$ | 0.26 | | |
$ | 0.21 | |
|
| |
| | | |
| | | |
| | |
|
Balance, June 30, 2015 | |
| 12,430,000 | | |
$ | 0.26 | | |
$ | 0.21 | |
|
| |
| | | |
| | | |
| | |
|
Exercisable, June 30, 2015 | |
| 7,760,000 | | |
$ | 0.20 | | |
$ | 0.16 | |
A summary of the options granted at
June 30, 2015 and September 30, 2014 and changes during the periods then ended is presented below:
|
| |
June 30, 2015 | | |
September 30, 2014 | |
|
| |
Shares | | |
Weighted Average Exercise Price | | |
Shares | | |
Weighted Average Exercise Price | |
|
| |
| | |
| | |
| | |
| |
|
Outstanding balance at beginning of period | |
| 11,830,000 | | |
$ | 0.26 | | |
| 900,000 | | |
$ | 0.14 | |
|
| |
| | | |
| | | |
| 3,450,000 | | |
| 0.05 | |
|
Granted- October 28, 2013 | |
| | | |
| | | |
| 250,000 | | |
| 0.30 | |
|
Granted- December 4, 2013 | |
| | | |
| | | |
| 450,000 | | |
| 0.34 | |
|
Granted- September 19, 2014 | |
| | | |
| | | |
| 6,780,000 | | |
| 0.38 | |
|
Granted- November 17, 2014 | |
| 600,000 | | |
| 0.38 | | |
| | | |
| | |
|
Vested- November 17, 2014 | |
| 200,000 | | |
| 0.38 | | |
| | | |
| | |
|
Vested- December 4, 2014 | |
| 150,000 | | |
| 0.34 | | |
| | | |
| | |
|
Vested- June 20, 2015 | |
| 950,000 | | |
| 0.05 | | |
| | | |
| | |
|
| |
| | | |
| | | |
| | | |
| | |
|
Outstanding at end of period | |
| 12,430,000 | | |
$ | 0.26 | | |
| 11,830,000 | | |
$ | 0.26 | |
|
Exercisable | |
| 7,760,000 | | |
| 0.20 | | |
| 6,460,000 | | |
| 0.21 | |
There were 4,670,000 unvested stock options outstanding
as of June 30, 2015 (September 30, 2014 – 5,370,000).
Measurement Uncertainty for Stock Options
The Company used the Black-Scholes
option pricing model (“Black-Scholes”) to value the options and warrants. This model was developed for use in estimating
the fair value of traded “European” options which are liquid and that have no vesting restrictions and are fully transferable.
The stock options that are granted to employees and directors and the warrants attached to the units issued by the Company are
non-transferable and some vest over time, and all are “American” options. Option pricing models require the input of
subjective assumptions including expected share price volatility. The fair value estimate can vary materially as a result of changes
in the assumptions. The following assumptions are used in the Black-Scholes option-pricing model:
Expected Term – Expected term
of 5 years represents the period that the Company’s stock-based awards are expected to be outstanding.
Expected Volatility – Expected
volatilities are based on historical volatility of the Company’s stock, adjusted where determined by management for unusual
and non-representative stock price activity not expected to recur. The expected volatility used ranged from 96% to 122%.
Expected Dividend – The Black-Scholes
valuation model calls for a single expected dividend yield as an input. The Company currently pays no dividends and does not expect
to pay dividends in the foreseeable future.
Risk-Free Interest rate – The
Company bases the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an
equivalent remaining term. The risk-free rate used ranged from 0.62% to 1.83%.
13. | CHANGES IN NON-CASH WORKING CAPITAL |
|
| |
Nine Months Ended | | |
Nine Months Ended | |
|
| |
June 30, 2015 | | |
June 30, 2014 | |
|
| |
| | |
| |
|
Accounts receivable | |
$ | 823,334 | | |
| (471,814 | ) |
|
Prepaid expenses | |
| (5,582 | ) | |
| 123,548 | |
|
Accounts payable | |
| (541,280 | ) | |
| (245,530 | ) |
|
| |
$ | 276,472 | | |
| (593,796 | ) |
Compensation to Directors
Since the acquisition of Northern
Alberta Oil Ltd., the Company and Northern have entered into the following contracts with the following companies for the services
of their officers:
| 1) | Portwest Investments Ltd. (“Portwest”), a company owned 100% by Dr. Horst A. Schmid
(the “Consultant”), for providing services to the Company as Chief Executive Officer and President for Cdn $12,500
per month. On July 1, 2005, the Company entered into a consulting agreement (the “Prior Agreement”) with Portwest,
as filed with the Company’s annual report on Form 10-KSB filed on February 23, 2007, and incorporated by reference herein.
On July 10, 2013, the Company and Portwest agreed to amend (the “Amending Agreement”) the Prior Agreement whereby the
following was settled and amended: |
| i. | Effective date of the Amending Agreement will be June 20, 2013; |
| ii. | Term of Agreement will be until December 31, 2014; |
| iii. | The fees payable to the Consultant in the Prior Agreement will be terminated and the Company will
grant the Consultant 5-year options on 1,000,000 of its common shares exercisable at $0.05 per share, which was the market price
at that time. One half of these shares were vested immediately and the remaining one half vested on June 20, 2014; |
| iv. | The Consultant received: |
| a. | Cdn $70,000, and |
| b. | 850,000 units of the Company’s shares and warrants at a price of $0.05 per unit, which was
the market price at the time. Each unit shall be comprised of one restricted Company common share and one 3 year full warrant entitling
Portwest to be able to purchase another share for $0.075. The warrants expire on June 20, 2016. |
As consideration for the execution
of the Amending Agreement and the Termination of parts of the Prior Agreement, and waiving Cdn $239,528 accrued by the Company
as owing to Portwest.
In the June 30, 2015 quarter end period,
no fees were owed or paid to Portwest. As of September 30, 2013, the Company had settled all outstanding amounts owed to Portwest.
| 2) | Concorde Consulting, a company owned 100% by Mr. Curtis J. Sparrow, for providing services as Chief
Financial Officer to the Company for Cdn $15,000 per month. As of June 30, 2015, the Company did not owe Concorde Consulting any
of this amount. |
Rental Agreement
See Note 17 subsequent events.
IGM Resources Corp vs. Deep
Well Oil & Gas, Inc., et al – DISMISSED
On February 11, 2014, the Court dismissed,
without any costs to the Company, the Plaintiff’s claims against Deep Well Oil & Gas, Inc. and its subsidiary Northern
Alberta Oil Ltd.
On March 10, 2005, I.G.M. Resources
Corp. (“the Plaintiff”) filed against Classic Energy Inc., 979708 Alberta Ltd., Deep Well Oil & Gas, Inc., Nearshore
Petroleum Corporation, Mr. Steven P. Gawne, Rebekah Gawne, Gawne Family Trust, 1089144 Alberta Ltd., John F. Brown, Diane Lynn
McClaflin, Cassandra Doreen Brown, Elissa Alexandra Brown, Brown Family Trust, Priority Exploration Ltd., Northern Alberta Oil
Ltd. and Gordon Skulmoski (the “IGM Defendants”) a Statement of Claim in the Court of Queen's Bench of Alberta Judicial
District of Calgary. This suit is a part of a series of lawsuits or actions undertaken by the Plaintiff against some of the other
above IGM Defendants.
The Plaintiff was a minority shareholder
of 979708 Alberta Ltd. ("979708"). 979708 was in the business of discovering, assembling and acquiring oil and gas prospects.
In 2002 and 2003, 979708 acquired oil and gas prospects in the Sawn Lake area of Alberta. On or about the 14th of July,
2003, all or substantially all the assets of 979708 were sold to Classic Energy Inc. The Plaintiff claims the value of the assets
sold was far in excess of the value paid for those assets. On April 23, 2004, Northern purchased Classic Energy Inc.'s assets,
some of which are under dispute by the Plaintiff. On June 7, 2005, Deep Well acquired all of the common shares of Northern thereby
giving Deep Well an indirect beneficial interest in the assets in which the Plaintiff is claiming an interest.
The Plaintiff was seeking an order
setting aside the transaction and returning the assets to 979708, compensation in the amount of Cdn $15,000,000, a declaration
of trust declaring that Northern and Deep Well hold all of the assets acquired from 979708 and any property acquired by use of
such assets, or confidential information of 979708, in trust for the Plaintiff.
16. | CRUDE OIL AND NATURAL GAS PROPERTY INFORMATION |
Results of Operations from Oil and Gas Producing
Activities
The following table sets forth the
results of the Company’s operations from oil producing activities from the Company’s Sawn Lake oil sands properties
located in Alberta, Canada, for the periods ending June 30, 2015 and 2014 and for the year ended September 30, 2014:
|
| |
June 30, 2015 | | |
June 30, 2014 | | |
September 30,
2014 | |
|
Oil sales after royalties | |
$ | 425,635 | | |
$ | – | | |
$ | 47,116 | |
|
| |
| | | |
| | | |
| | |
|
Production (Operating) expenses | |
| (425,635 | ) | |
| – | | |
| (47,115 | ) |
|
Exploration expenses | |
| (27,356 | ) | |
| – | | |
| (47,182 | ) |
|
Depreciation, accretion and depletion | |
| (62,907 | ) | |
| – | | |
| (97,646 | ) |
|
Oil sales less expenses | |
| (90,263 | ) | |
| – | | |
| (144,827 | ) |
|
| |
| | | |
| | | |
| | |
|
Income tax expenses | |
| – | | |
| – | | |
| – | |
|
Results of operations from producing activities | |
$ | (90,263 | ) | |
$ | – | | |
$ | (144,827 | ) |
For the periods ending June 30, 2015
and June 30, 2014, the Company booked oil revenue in the amount of $425,635 and $Nil, respectively, after deduction of royalties.
For the periods ending June 30, 2015 and June 30, 2014, the volumes of oil delivered were booked to be 17,043 and Nil barrels,
respectively, net to the Company, before royalties, with an average oil sales price of $26.35 per barrel for the period ending
June 30, 2015. Operating expenses are zero since at this time they were paid for under the Farmout Agreement. Transportation costs
are included in these operating costs. The total share of the material costs and operating expenses of the Company’s joint
SAGD Project, has been funded in accordance with the Farmout Agreement, at a net cost to the Company of $Nil. As required by the
Farmout Agreement, the Farmee has since paid Cdn $22.8 million to the operator of the SAGD Project for the Farmee’s share
and the Company’s share of the capital costs and start-up operating expenses of the SAGD Project up to June 30, 2015. These
costs include the capital costs of the drilling of the SAGD well pair; the purchase and transportation of equipment; installation
and construction of the steam plant facility; testing and commissioning; the purchase of the water source and disposal wells and
expenditures to connect these water wells with pipelines to the steam plant facility along with a fuel source tie-in pipeline;
emulsion treatment package; Phase 2 front end costs; and the start-up operating expenses associated with the steaming and production
of the SAGD well pair up to June 30, 2015.
Steam Assisted Gravity Drainage Demonstration Project
On July 30,
2013, the Company entered into a Steam Assisted Gravity Drainage Demonstration project (“SAGD Project”) to jointly
participate in an AER approved SAGD Project on one section of land where the Company now has a 25% working interest (after the
execution of the Farmout Agreement as defined below). The SAGD Project is located on section 30-91-12W5 of the Company’s
Peace River oil sands properties located in North Central Alberta, Canada (also known as the Sawn Lake heavy oil reservoir). On
August 15, 2013, and in accordance with the SAGD Project Agreement and the Amendment, the Company served notice (“Notice
of Election”) to of the operator of the Company’s election to participate in the SAGD Project. Upon signing the Notice
of Election the Company was required to pay in full the cash calls for the Company’s initial share of the capital costs of
the SAGD Project and in accordance with a Farmout Agreement dated July 31, 2013 the Company has since paid all cash calls in full
to the operator of the SAGD Project.
SAGD Project Phase 1 - The
SAGD Project started with the first phase (“Phase 1”) consisting of the drilling and completion of one SAGD well pair,
the construction of a facility for steam generation, water handling and oil treating, plus water source and disposal facilities,
and pipelines to connect the source wells and fuel tie-in to the SAGD facility. This first phase included start-up steam operations
of the SAGD facility with production commencing on September 16, 2014. The estimated capital costs to complete the SAGD Project
steam plant facility with one SAGD well pair has been estimated by the operator to be Cdn $32.8 million on a 100% working interest
basis, of which the Company’s share is covered under the Farmout Agreement (this estimate does not include start-up operating
expenses to produce bitumen from the first SAGD well pair).
SAGD Project Phase 2 - The
Phase 2 front end work includes preliminary engineering design, regulatory approval, environmental approval work and determining
regulatory requirements sufficient to define the work program, schedule and estimated cost of this second phase which is anticipated
to include the drilling of two additional SAGD well pairs and the associated expansion of the current SAGD steam plant.
Capitalized Costs Relating Specifically to the SAGD
Project
The Company entered into a Farmout
Agreement dated July 31, 2013, whereby the Company’s operating costs of the SAGD Project are paid in full by the Farmee in
accordance with the Farmout Agreement; therefore the Company has not capitalized any of the capital costs and operating expenses
paid by the Farmee to the operator of the SAGD Project. See Note 4 herein “Capitalization of Costs Incurred in Oil and Gas
Activities”.
Costs Incurred in Oil and Gas Property Acquisition,
Exploration, and Development
See Note 5 herein “Exploration
Activities”.
On July 27, 2015, the Company renewed
its Edmonton office lease commencing effective on July 1, 2015 and expiring on June 30, 2017. The quarterly payments due in Cdn
dollars are as follows:
|
2015 Q4 (July - September) | |
| 7,969 | |
|
2016 Q1 (October - December) | |
| 7,969 | |
|
2016 Q2 (January - March) | |
| 7,969 | |
|
2016 Q3 (April - June) | |
| 7,969 | |
|
2016 Q4 (July - September) | |
| 7,969 | |
|
2017 Q1 (October - December) | |
| 7,969 | |
|
2017 Q2 (January - March) | |
| 7,969 | |
|
2017 Q3 (April - June) | |
| 7,969 | |
On July 28, 2015, the Company’s
Board approved the extension of the expiration date of some warrants to purchase shares of the Company’s common stock. The
exercise price of the warrants remained unchanged at $0.105 per share. As a result of this extension, the expiration dates of the
warrants were amended from the original expiry date of November 23, 2015 to November 23, 2016, with all other terms of the original
warrants remaining in full force and effect. In consideration of extending the expiry date of this series of warrants, the number
of outstanding warrants was reduced from 71,857,141 to 52,155,221 common share purchase warrants.
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |
The
following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes.
For the purpose of this discussion, unless the context indicates another meaning, the terms: “Deep Well,” “Company,”
“we,” “us,” and “our” refer to Deep Well Oil & Gas, Inc. and its subsidiaries. This discussion
includes forward-looking statements that reflect our current views with respect to future events and financial performance that
involve risks and uncertainties. Our actual results, performance or achievements could differ materially from those anticipated
in the forward-looking statements as a result of certain factors including risks discussed in the “Cautionary Note Regarding
Forward-Looking Statements” below and elsewhere in this report, and under the heading “Risk Factors” and “Environmental
Laws and Regulations” disclosed in our annual report on Form 10-K for the fiscal year ended September 30, 2014, filed with
the Securities and Exchange Commission on January 13, 2015.
Our consolidated financial statements
and the supplemental information thereto are reported in United States dollars and are prepared based upon United States generally
accepted accounting principles (“US GAAP”). References in this quarterly report on Form 10-Q to “$” are
to United States dollars and references to “Cdn$” are to Canadian dollars. On August 11, 2015, the noon rate of exchange
for Canadian dollars expressed in US$ was Cdn$1.00 = US$0.7606 as reported by the Bank of Canada. The following table sets
forth the rates of exchange for the Cdn$, expressed in US dollars, in effect at the end of the following period and the average
noon rate of exchange during such period, based on the noon rates of exchange for such periods as reported by the Bank of Canada.
Period Ending June 30 | |
2015 | | |
2014 | |
Rate at end of the period | |
| 0.8017 | | |
| 0.9367 | |
Average rate for the three month period | |
| 0.8132 | | |
| 0.9170 | |
General
Overview
Deep
Well Oil & Gas, Inc., along with its subsidiaries through which it conducts business, is an emerging independent junior
oil and gas exploration and development company headquartered in Edmonton, Alberta, Canada. Our immediate corporate focus is
to develop the existing land base where we have working interests ranging from 25 % to 100% in the Peace River oil sands area
in Alberta, Canada. Our principal office is located at suite 700, 10150 - 100 Street, Edmonton, Alberta, Canada T5J 0P6, our
telephone number is (780) 409-8144, and our fax number is (780) 409-8146. Deep Well Oil & Gas, Inc. is a Nevada
corporation and trades on the OTCQB Venture Marketplace under the symbol DWOG. The OTCQB Venture Marketplace requires
companies to be fully compliant in their filing requirements under the U.S. Securities and Exchange Act and must meet
eligibility standards to trade on OTCQB, which include, but are not limited to, the submission of an annual verification and
management certification confirming that the listed company is current in its reporting requirements. We maintain a website
at www.deepwelloil.com or www.DWOG.com. The contents of our website are not part of the quarterly report on
Form 10-Q.
Results
of Operations
Since
the inception of our current business plan, our operations have consisted of various exploration and start-up activities relating
to our properties, including the acquisition of lease holdings, raising capital, locating joint venture partners, acquiring and
analyzing seismic data, complying with environmental regulations, providing project management, drilling, testing and analyzing
of wells to define our oil sands reservoir, and development planning of our Alberta Energy Regulatory (“AER”) approved
thermal recovery projects. In July 2013, we entered into a Steam Assisted Gravity Drainage Demonstration project (“SAGD
Project”) to jointly participate in an Alberta Energy Regulator (“AER”) approved SAGD Project, where we have
a 25% working interest, which began producing oil on September 16, 2014. The following table sets forth certain financial information:
| |
Three Months Ended | | |
Three Months Ended | | |
Nine Months Ended | | |
Nine Months Ended | |
| |
June 30, 2015 | | |
June 30, 2014 | | |
June 30, 2015 | | |
June 30, 2014 | |
Revenue | |
$ | 219,346 | | |
$ | – | | |
$ | 449,147 | | |
$ | – | |
Provincial Royalty expenses | |
| (11,127 | ) | |
| – | | |
| (23,512 | ) | |
| – | |
Revenue, net of royalty | |
| 208,219 | | |
| – | | |
| 425,635 | | |
| – | |
Expenses | |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| 425,684 | | |
| – | | |
| 1,540,206 | | |
| – | |
Operating expenses covered by Farmout (Note 3) | |
| (217,465 | ) | |
| – | | |
| (1,114,571 | ) | |
| – | |
General and administrative | |
| 61,297 | | |
| 14,251 | | |
| 568,447 | | |
| 622,765 | |
Share based compensation | |
| 275,719 | | |
| 40,780 | | |
| 865,756 | | |
| 239,480 | |
Depreciation, accretion and depletion | |
| 21,721 | | |
| 25,790 | | |
| 64,541 | | |
| 74,315 | |
Net loss from operations | |
| (358,737 | ) | |
| (80,821 | ) | |
| (1,498,744 | ) | |
| (936,560 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income and expenses | |
| | | |
| | | |
| | | |
| | |
Rental and other income | |
| 3,432 | | |
| 4,347 | | |
| 10,635 | | |
| 15,813 | |
Interest income | |
| 1,081 | | |
| 2,091 | | |
| 3,778 | | |
| 9,009 | |
Loss on disposal of assets | |
| – | | |
| 387 | | |
| – | | |
| 387 | |
Net loss and comprehensive loss | |
$ | (354,224 | ) | |
$ | (73,996 | ) | |
$ | (1,484,331 | ) | |
$ | (911,351 | ) |
Oil sales terminal at our joint SAGD Project
First
production of oil in the form of bitumen began on September 16, 2014. For the three month period ending June 30, 2015, we booked
oil revenue in the amount of $219,346 before deduction of royalties. For the three month period ending June 30, 2015, the volumes
of oil delivered were booked to be 6,892 barrels net to our Company, before royalties, with an average oil sales price of $31.83
per barrel (Cdn$39.14 per barrel). For the nine month period ending June 30, 2015, we booked oil revenue in the amount of $449,147
before deduction of royalties. For the nine month period ending June 30, 2015, the volumes of oil delivered were booked to be
17,043 barrels net to our Company, before royalties, with an average oil sales price of $26.35 per barrel (Cdn$31.60 per barrel).
The realized sales price of our oil is discounted for diluent, trucking, pipeline and additional treating costs from the West
Texas Intermediate (“WTI”) benchmark price, but paid in Canadian dollars. While oil prices have remained low, the
Canadian dollar has weakened and offset much of this impact. In addition, our fuel gas costs to operate our SAGD Project steam
facility plant have declined similarly to the decline in the WTI benchmark price. Our net operating margin after operating expenses
is zero since at this time any negative operating margins are paid for under the farmout agreement we entered into on July 31,
2013 (the “Farmout Agreement”) to fund our share of the SAGD Project. Transportation costs are included in these operating
costs. Therefore, the total share of the capital costs and operating expenses of our Company’s joint SAGD Project, has been
funded in accordance with the Farmout Agreement, at a net cost to our Company of $Nil. As required by the Farmout Agreement, the
Farmee (as defined below) has since paid Cdn$22.8 million to the operator of the SAGD Project for the Farmee’s share and
our share of the capital costs and start-up operating expenses of the SAGD Project up to June 30, 2015. These costs included the
drilling of the SAGD well pair; the purchase and transportation of equipment; installation and construction of the steam plant
facility; testing and commissioning; the purchase of the water source and disposal wells and expenditures to connect these water
wells with pipelines to the steam plant facility along with a fuel source tie-in pipeline; emulsion treatment package; Phase 2
front end costs; and the start-up operating expenses associated with the steaming and production of the SAGD well pair up to June
30, 2015.
For
the three months ended June 30, 2015, our general and administrative expenses increased by $281,985 compared to the three months
ended June 30, 2014, which was primarily due to (i) an increase of $234,939 in non-cash share based compensation charged to expense,
which was mainly due to vested stock options we granted in 2014 to our directors and contractors; and (ii) an increase of foreign
exchange loss of $51,253. We also received $90,000 during this quarter from one of our joint venture partners in accordance with
a Farmout Agreement to offset some of our monthly operational expenses. After adjusting for the non-cash items listed above, our
general and administrative expenses were $179,743 for the three months ended June 30, 2015 compared to $184,231 for the three
months ended June 30, 2014.
For
the nine months ended June 30, 2015, our general and administrative expenses increased by $571,958 compared to the nine months
ended June 30, 2014, which was primarily due to (i) an increase of $626,276 in non-cash share based compensation charged to expense,
which was mainly due to vested stock options we granted in 2014 to our directors and contractors as described above; (ii) an increase
of foreign exchange loss of $49,600; and (iii) an increase in engineering fees of $25,267. These increases in our general and
administrative expenses were offset by (i) a decrease in legal fees of $64,174; and (ii) a decrease of general office expenses.
We also received $270,000 during the last nine months from one of our joint venture partners in accordance with the Farmout Agreement,
to offset some of our monthly operational expenses. After adjusting for the non-cash items listed above, our general and administrative
expenses were $671,760 for the nine months ended June 30, 2015 compared to $774,366 for the nine months ended June 30, 2014.
For
the three months ended June 30, 2015, our depreciation, depletion, and accretion expense decreased by $4,069 compared to the three
months ended June 30, 2014, which was primarily due to the depreciating value of our assets. Depreciation expense is computed
using the declining balance method over the estimated useful life of the asset. In compliance with our accounting policy, only
half of the depreciation is taken in the year of acquisition. No significant asset purchases were made in the quarter ended June
30, 2015.
For
the nine months ended June 30, 2015, our depreciation and accretion expense decreased by $9,774 compared to the nine months ended
June 30, 2014, which was primarily due to the depreciating value of our assets. Depreciation expense is computed using the declining
balance method over the estimated useful life of the asset. In compliance with our accounting policy, only half of the depreciation
is taken in the year of acquisition. No significant depreciable asset purchases were made in the quarter ended June 30, 2015.
For
the three months ended June 30, 2015, there were no significant increases or decreases for rental and other income compared to
the three months ended June 30, 2014.
For
the nine months ended June 30, 2015, rental and other income decreased by $5,178 compared to the nine months ended June 30, 2014.
For
the three months ended June 30, 2015, interest income decreased by $1,010 compared to the three months ended June 30, 2014.
For
the nine months ended June 30, 2015, interest income decreased by $5,231 compared to the nine months ended June 30, 2014.
As
a result of the above transactions, we recorded an increase of $280,228 in our net loss and comprehensive loss from operations
for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. As discussed above, this increase was
primarily due to an increase in non-cash share based compensation expenses and foreign exchange losses.
As
a result of the above transactions, we recorded an increase of $572,980 in our net loss and comprehensive loss from operations
for the nine months ended June 30, 2015 compared to the nine months ended June 30, 2014. As discussed above, this increase was
primarily due to an increase in non-cash share based compensation expenses and foreign exchange losses.
Operations
As
previously disclosed, we entered into the Farmout Agreement with our new joint venture partner (the “Farmee”), to
fund our share of the SAGD Project. The SAGD Project is located on our Sawn Lake properties in the Peace River oil sands region
of Alberta. In accordance with the Farmout Agreement, the Farmee has agreed to provide up to $40,000,000 for the funding of our
portion of the costs for the SAGD Project, in return for a net 25% working interest in 12 sections where we had a working interest
of 50% before the execution of the Farmout Agreement. Also, the Farmee is required to provide funding to cover our monthly operating
expenses not to exceed $30,000 per month. In addition, as amended on November 17, 2014, the Farmee has the option to elect, prior
to December 31, 2015, to obtain additional working interests ranging from 45% to 50% in the remaining 56 sections of land where
we have working interests ranging from 90% to 100%, by committing an additional $110,000,000 of financing for the development
of our Sawn Lake oil sands properties.
The
first oil production from our joint SAGD Project commenced on September 16, 2014 from the first SAGD well pair. The SAGD well
pair was drilled to a vertical depth of approximately 650 meters with a horizontal length of 780 meters each. Steam injection
began in May 2014 and circulated for up to four months with production commencing in mid-September 2014 from the Bluesky oil sands
reservoir. The start of our bitumen sales averaged 221 barrels per day, half way through the 3rd thirty day period since the start-up
of production in September of 2014. Production from our joint SAGD Project has since increased significantly. For the month of
June 2015, bitumen sales averaged 385 barrels per day, with a Steam Oil Ratio (“SOR”) of 4.54. A single daily production
peak was achieved in June of 2015 at 443 barrels per day. All of these production numbers are on a 100% basis with our Company
owning a 25% working interest. Production from the SAGD Project is continuing to slowly ramp up and the steam chamber has not
yet reached the top of the Bluesky reservoir. Bitumen production on a 100% basis averaged 399 barrels per day (100 barrels per
day net to us) in July 2015 with a SOR of 4.4. Based on the operator's forecasts, the steam chamber is expected to reach the top
of the Bluesky reservoir by the end of September 2015 and maximum oil production is now expected to be reached by the end of November
of 2015.
|
|
|
The
objective of this initial SAGD well pair was to establish that this thermal technology is effective in producing oil from the
Bluesky reservoir formation and to provide valuable productivity information about the reservoir. Results to date indicate that
the use of SAGD technology is successful in producing oil in the form of bitumen from the Bluesky reservoir. Based on 100% working
interest (we have 25%), for the months of January, February and March of 2015, monthly gross oil sales averaged 252, 294 and 319
barrels of oil per day, respectively. In April the operator had to shut down production operations of the SAGD well pair to repair
the electrical submersible pump, and as a result of this temporary shut-in the SAGD well pair only produced for two weeks in the
month averaging 125 barrels of oil per day for the month of April (on a 100% basis). Production for the SAGD well pair resumed
on May 1, 2015. Based on 100% working interest (we have 25%), for the months of May and June of 2015, monthly gross oil sales
averaged 381 and 385 barrels of oil per day, respectively. These early stage production numbers along with the corresponding steam
oil ratios compare favorably to analogous reservoirs in thermal recovery projects operated by other companies of similar reservoir
types that we (and the operator of our joint SAGD Project) are monitoring and using as a basis of comparison. The capital costs
to complete the SAGD Project steam plant facility with one SAGD well will have been Cdn$36 million on a 100% working interest
basis for Phase 1 and the front end costs of Phase 2 (this estimate does not include operating expenses to produce bitumen from
the SAGD well pair), of which our share is covered under the Farmout Agreement.
The
drilling of an additional SAGD well pair and the associated expansion of the current SAGD plant facility has been deferred due
to the decline in oil prices. However, the operator of the SAGD Project has proceeded with the permitting and approvals for additional
well pairs in addition to the Phase 2 front-end work (purchasing of long lead items such as pipe), which includes work on preliminary
engineering design, regulatory approvals, environmental approval work and determining regulatory requirements sufficient to define
the work program.
On
March 18, 2014 and June 27, 2014, through our subsidiary company, Northern Alberta Oil Ltd. (“Northern”), we acquired
from one of our joint venture partners (“JV Partner”) and one related party (Mr. Malik Youyou), and subsequently cancelled,
5.5% of a disputed 6.5% overriding royalty claim (the “Purported 6.5% Royalty”) on some lands owned by us. Pursuant
to the terms and conditions of the agreements to acquire the purported overriding royalty interest claims, we paid the following
consideration:
| (i) | $2,435,124
to our JV Partner for the purchase and transfer of an undivided 3% interest out of the
Purported 6.5% Royalty. The consideration paid was the original cost (in Canadian dollars)
that our JV Partner paid to acquire its 3% interest in the Purported 6.5% Royalty. |
| (ii) | $1,007,000
to Mr. Malik Youyou, who is a director and majority shareholder of our Company, for the
purchase and transfer of an undivided 2.5% interest out of the Purported 6.5% Royalty.
The consideration paid was for the reimbursement of the original cost (in US dollars)
that Mr. Youyou paid to acquire this 2.5% interest in the Purported 6.5% Royalty from
an arm’s length third party. |
Although
we continue to deny the validity of the Purported 6.5% Royalty, we determined that it was in the best interests of our shareholders
to come to an arrangement to acquire and cancel what we could of the Purported 6.5% Royalty to prevent a potential encumbrance
over our land or the possibility of future litigation resulting from this alleged royalty claim.
In
August 2013, we received approval from the AER for our horizontal cyclic steam stimulation project (“HCSS Project”)
application. It is anticipated that we will develop a thermal demonstration project on our properties followed by a commercial
expansion project on one half section of land located on section 10-92-13W5 of our Sawn Lake oil sands properties where we currently
have a 90% working interest. This application, submitted in early 2012, was an application to modify our previously approved in-situ
demonstration project for a well to test thermal production on our Sawn Lake oil sands leases. This modification changed the vertical
cyclic steam stimulation (“CSS”) well earlier approved, into a thermal recovery project to test two wells that use
a horizontal application of CSS. Now that preliminary and several months of production testing data from our joint SAGD project
is available to us, we intend to use that information to start on the front end engineering of our HCSS Project where we plan
to drill two horizontal wells to test the use of HCSS technology. As we continue to receive further production performance data
from the operator we intend to further refine our HCSS Project development plan. We are currently in the process of scouting out
and surveying our plans for our proposed thermal project site on the north half of section 10-92-13W5, along with preforming an
environmental field assessment report for our project site location to acquire the mineral surface license for the proposed drilling
of two horizontal wells.
Currently,
we have a 90% working interest in 51 sections on six oil sands leases and a 100% working interest in five sections on one oil
sands lease in the Peace River oil sands area of Alberta, where we are the operator. In addition, we have a 25% working interest
in another 12 sections on two oil sands leases in the Peace River oil sands area of Alberta. These nine oil sands leases are contiguous
and cover 43,015 gross acres (17,408 gross hectares). The development progress of our properties is governed by several factors
such as federal and provincial governmental regulations. Long lead times in getting regulatory approval for thermal recovery projects
are commonplace in our industry. Road bans, winter access only roads and environmental regulations can and often do delay development
of similar projects. Because of these and other factors, our oil sands project could take significantly longer to complete than
regular conventional drilling programs for lighter oil. |
|
|
Liquidity
and Capital Resources
As
of June 30, 2015, our total assets were $22,503,143 compared to $23,691,595 as of September 30, 2014. This decrease of $1,188,452
in our total assets was primarily due to a decrease in our accounts receivable, as a result of a subsequent reimbursement of Cdn$1,200,000
from the Farmee in October 2014 for the SAGD Project winterization program.
Our
total liabilities as of June 30, 2015 were $625,310 compared to $1,200,188 as of September 30, 2014. This decrease of $574,878
in our total liabilities was primarily the result of our payment for outstanding accounts payable to the operator of the SAGD
Project for operating expenses, which was subsequently paid by the Farmee to us just before our 2014 year end, under the Farmout
Agreement.
Our
working capital (current liabilities subtracted from current assets) is as follows:
| |
Nine Months Ended | | |
Year Ended | |
| |
June 30,
2015 | | |
September 30, 2014 | |
Current Assets | |
$ | 2,299,450 | | |
$ | 3,418,729 | |
Current Liabilities | |
| 189,895 | | |
| 731,175 | |
Working Capital | |
$ | 2,109,555 | | |
$ | 2,687,554 | |
As
of June 30, 2015, we had working capital of $2,109,555 compared to a working capital of $2,687,554 as of September 30, 2014. This
decrease is mainly the result of (i) the net change of accounts receivable, offset by the decrease of accounts payable as described
above; and (ii) cash used for general and administrative expenses. As of June 30, 2015, we had no long-term third party debt other
than our estimated asset retirement obligations on oil and gas properties.
On
July 31, 2013, we entered into the Farmout Agreement to fund our share of the costs of our joint SAGD Project. As of June 30,
2015, we recorded $176,358 in accounts payable due to the operator for our working interest share of the outstanding monthly operating
expenses of the SAGD Project, of which all is reimbursable by the Farmee in accordance with the Farmout Agreement. Therefore,
this amount is also recorded in accounts receivable to be paid to us from the Farmee to cover our share of the costs of the SAGD
Project.
As
reported on our Consolidated Statement of Cash Flows under “Operating Activities”, for the nine months ended June
30, 2015, our net cash used in operating activities was $277,562 compared to $1,191,311 for the nine months ended June 30, 2014.
This decrease of $913,749 was primarily the result of non-cash working capital related to accounts receivable and accounts payable
as disclosed above.
As
reported on our Consolidated Statement of Cash Flows under “Investing Activities”, we had a decrease of $3,689,173
in the investment in our oil and gas properties for the nine months ended June 30, 2015, compared to the nine months ended June
30, 2014. This decrease is due to two Royalty purchases: (i) On March 18, 2014, $2,435,124 (Cdn$2,697,600) was paid to a JV Partner
for the purchase and transfer of an undivided 3% interest out of the Purported 6.5% Royalty. The consideration paid was the original
cost (in Canadian dollars) that the JV Partner paid to acquire its 3% interest in the Purported 6.5% Royalty; and (ii) On June
27, 2014, $1,007,000 was paid to Mr. Malik Youyou, who is a director and majority shareholder of our Company, for the purchase
and transfer of an undivided 2.5% interest out of the Purported 6.5% Royalty. The consideration paid was for the reimbursement
of the original cost (in US dollars) that Mr. Youyou paid to acquire this 2.5% interest in the Purported 6.5% Royalty from an
arm’s length third party.
As
reported on our Consolidated Statement of Cash Flows under “Financing Activities”, for the nine months ended June
30, 2015, we received $5,000 from one shareholder in exchange for 47,618 shares of our common stock upon the exercise by that
shareholder of warrants at an exercise price of $0.105 per common share.
Our
cash and cash equivalents as of June 30, 2015 was $2,023,228 compared to $2,534,059 as of June 30, 2014. This decrease of $510,831
in cash was primarily due to general and administrative expenses. As of June 30, 2015, we had no long-term debt other than our
estimated asset retirement obligations on oil and gas properties.
Our
current SAGD Project operating costs are covered by the Farmout Agreement. For our long-term operations, we anticipate that, among
other alternatives, we may raise funds during the next twenty-four months through sales of our equity securities. We also note
that if we issue more shares of our common stock, our shareholders will experience dilution in the percentage of their ownership
of common stock. We may not be able to raise sufficient funding from stock sales for long-term operations and if so, we may be
forced to delay our business plans until adequate funding is obtained.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements.
Cautionary
Note Regarding Forward-Looking Statements
This
quarterly report on Form 10-Q, including all referenced exhibits, contains “forward-looking statements” within the
meaning of the United States federal securities laws. All statements other than statements of historical facts included or incorporated
by reference in this report, including, without limitation, statements regarding our future financial position, business strategy,
projected costs and plans and objectives of management for future operations, are forward-looking statements. The words “may,
” “believe, ” “intend,” “will, ” “anticipate,” “expect ”,”
“estimate, ” “project, ” “future, ” “plan,” “strategy,” “probable,”
“possible,” or “continue,” and other expressions that are predictions of or indicate future events and
trends and that do not relate to historical matters, often identify forward-looking statements. For these statements, Deep Well
claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. The forward-looking statements in this quarterly report include, among others, statements with respect to:
| ● | our
current business strategy; |
| ● | our
future financial position and projected costs; |
| ● | our
projected sources and uses of cash; |
| ● | our
plan for future development and operations, including the building of all-weather roads; |
| ● | our
drilling and testing plans; |
| ● | our
proposed plans for further thermal in-situ development or demonstration project or projects; |
| ● | the
sufficiency of our capital in order to execute our business plan; |
| ● | our
reserves and resources estimates; |
| ● | the
timing and sources of our future funding. |
| ● | the
quantity and value of our reserves; |
| ● | the
intent to issue a distribution to our shareholders; |
| ● | our
or our operator’s objectives and plans for our current SAGD Project; |
| ● | our
plans for development of our Sawn Lake properties; |
| ● | production
levels from our current SAGD Project; |
| ● | costs
of our current SAGD Project; |
| ● | funding
from the Farmee to pay our costs for the SAGD project in connection with the Farmout
Agreement; |
| ● | additional
sources of funding from the Farmout Agreement; |
| ● | funding
from the Farmee to cover our monthly operating expenses; |
| ● | our
access and availability to third-party infrastructure; |
| ● | present
and future production of our properties; and |
| ● | expectations
regarding the ability of our Company and its subsidiaries to raise capital and to continually
add to reserves through acquisitions and development. |
These
forward-looking statements are based on the beliefs and expectations of our management and are subject to significant risks and
uncertainties. If underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results may differ
materially from current expectations and projections. Factors that could cause actual results to differ materially from those
set forward in the forward-looking statements include, but are not limited to:
| ● | changes
in general business or economic conditions; |
| ● | changes
in legislation or regulation that affect our business; |
| ● | our
ability to obtain necessary regulatory approvals and permits for the development of our
properties, including obtaining the required water licences from Alberta Environment
to withdraw water for our thermal operations; |
| ● | changes
to the greenhouse gas reduction program and other environmental and climate change regulations
adopted by provincial and or federal governments of Canada or are considering implementing,
which may also include cap and trade regimes, carbon taxes, increased efficiency standards,
which will increase compliance costs and may impose significant penalties for non-compliance; |
| ● | increase
in taxes and changes to existing legislation affecting governmental royalties or other
governmental initiatives; |
| ● | future
marketing and transportation of our produced bitumen; |
| ● | our
ability to receive approvals from the AER for additional tests to further evaluate the
wells on our lands; |
| ● | our
Farmout Agreement and joint operating agreements; |
| ● | opposition
to our regulatory requests by various third parties; |
| ● | actions
of aboriginals, environmental activists and other industrial disturbances; |
| ● | the
costs of environmental reclamation of our lands; |
| ● | availability
of labor or materials or increases in their costs; |
| ● | the
availability of sufficient capital to finance our business or development plans on terms
satisfactory to us; |
| ● | adverse
weather conditions and natural disasters affecting access to our properties and well
sites; |
| ● | risks
associated with increased insurance costs or unavailability of adequate coverage; |
| ● | volatility
in market prices for oil, bitumen, natural gas, diluent and natural gas liquids; |
| ● | changes
in labor, equipment and capital costs; |
| ● | future
acquisitions or strategic partnerships; |
| ● | the
risks and costs inherent in litigation; |
| ● | imprecision
in estimates of reserves, resources and recoverable quantities of oil, bitumen and natural
gas; |
| ● | product
supply and demand; |
| ● | changes
and amendments in the Canadian Oil and Gas Evaluation Handbook and or the Petroleum Resources
Management System to general disclosure of reserves and resources standards and specific
annual reserves and resources disclosure requirements for reporting issuers with oil
and gas activities; |
| ● | future
appraisal of potential bitumen, oil and gas properties may involve unprofitable efforts; |
| ● | the
ability to meet minimum level of requirements to continue our oil sands leases beyond
their expiry dates; |
| ● | changes
in general business or economic conditions; |
| ● | risks
associated with the finding, determination, evaluation, assessment and measurement of
bitumen, oil and gas deposits or reserves; |
| ● | geological,
technical, drilling and processing problems; |
| ● | third
party performance of obligations under contractual arrangements; |
| ● | failure
to obtain industry partner and other third party consents and approvals, when required; |
| ● | treatment
under governmental regulatory regimes and tax laws; |
| ● | royalties
payable in respect of bitumen, oil and gas production; |
| ● | unanticipated
operating events which can reduce production or cause production to be shut-in or delayed; |
| ● | incorrect
assessments of the value of acquisitions, and exploration and development programs; |
| ● | stock
market volatility and market valuation of the common shares of our Company; |
| ● | fluctuations
in currency and interest rates; and |
| ● | the
additional risks and uncertainties, many of which are beyond our control, referred to
elsewhere in this quarterly report and in our other SEC filings. |
The
preceding bullets outline some of the risks and uncertainties that may affect our forward-looking statements. For a full description
of risks and uncertainties, see the sections entitled “Risk Factors” and “Environmental Laws and Regulations”
of our annual report on Form 10-K for the fiscal year ended September 30, 2014, filed with the SEC on January 13, 2015. Should
one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may
vary materially from those anticipated, believed, estimated or expected. Any forward looking statement speaks only as of the date
on which it was made and, except as required by law, we disclaim any obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects
in subsequent reports on Forms 10-K, 10-Q, 8-K and any other SEC filing or amendments thereto should be consulted.
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We
are a smaller reporting company as defined by Rule 12b-2 under the Exchange Act and therefore we are not required to provide the
information required under this item.
ITEM 4. |
CONTROLS AND PROCEDURES |
Disclosure
Controls and Procedures
As
of the end of our fiscal quarter ended June 30, 2015, an evaluation of the effectiveness of our “disclosure controls and
procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) was carried
out under the supervision and with the participation of our principal executive officer and principal financial officer. Based
upon that evaluation, our principal executive officer and principal financial officer have concluded that as of the end of that
quarter, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our principal
executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
It
should be noted that while our principal executive officer and principal financial officer believe that our disclosure controls
and procedures provide a reasonable level of assurance that they are effective, they do not expect that our disclosure controls
and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how
well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met.
Changes
In Internal Control Over Financial Reporting
During
the fiscal quarter ended June 30, 2015 there were no changes in our internal control over financial reporting that materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART
II. OTHER INFORMATION
ITEM 1. |
LEGAL PROCEEDINGS |
None.
Although
we are a smaller reporting company as defined by Rule 12b-2 under the Exchange Act and are therefore not required to provide the
information required under this item, there have been no material changes in our risk factors from those disclosed in our annual
report on Form 10-K for the fiscal year ended September 30, 2014, filed with the SEC on January 13, 2015.
ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. |
MINE SAFETY DISCLOSURES |
Not
applicable.
ITEM 5. |
OTHER INFORMATION |
Information
to be Reported on Form 8-K
Deep
Well reported all information that was required to be disclosed on Form 8-K during the period covered by this quarterly report
on Form 10-Q.
On
July 28, 2015, we and certain holders of warrants to acquire shares of common stock approved the amendment of the warrants held
by those warrant holders. In consideration for extending the expiration date of the applicable warrants from November 23, 2015
to November 23, 2016, the aggregate number of shares of our common stock issuable upon exercise of the warrants was reduced from
71,857,141 to 52,155,221. Given the present oil and stock market condition, the warrants holders informed our Company of their
unwillingness to exercise their warrants on or before the original expiration date. Therefore, we agreed to extend the term of
the warrants but only for a reduced number of warrants at the same exercise price. This reduced number was determined by estimating
a value similar of the new extended warrants to the original, now forfeited warrants, with the same strike price, at the time
our management and the warrants holders agreed to the basic terms. These terms were subsequently discussed by our Company’s
Corporate Governance and Nominating Committee (our “Committee”), which recommended to our Board to accept the new
terms as set out between management and the warrants holders. Our Board subsequently agreed with our Committee’s recommendation.
No other amendments were made to the terms of the applicable warrants. The amended warrants are filed herewith as exhibits 4.1,
4.2 and 4.3
Shareholder
Nominations
Other
than the recent adoption of our corporate governance and nominating committee charters as previously disclosed in our annual report
on Form 10-K for the year ending September 30, 2014, there have been no changes to the procedures by which shareholders may recommend
nominees to our Company’s Board of Directors during the time period covered by this quarterly report on Form 10-Q.
Exhibit No. |
|
Description |
4.1 |
|
Warrant #31 Amending Agreement dated July 28, 2015, filed herewith. |
4.2 |
|
Warrant #32 Amending Agreement dated July 28, 2015, filed herewith. |
4.3 |
|
Warrant #35 Amending Agreement dated July 28, 2015, filed herewith. |
31.1 |
|
Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a). |
31.2 |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a). |
32.1 |
|
Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
32.2 |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
101 |
|
Interactive Data Files |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
DEEP WELL OIL & GAS, INC. |
|
|
|
|
By |
/s/ Horst A. Schmid |
|
|
Dr. Horst A. Schmid |
|
|
Chief Executive Officer and President |
|
|
(Principal Executive Officer) |
|
|
|
|
Date |
August 14, 2015 |
|
|
|
|
By |
/s/ Curtis Sparrow |
|
|
Mr. Curtis James Sparrow |
|
|
Chief Financial Officer |
|
|
(Principal Financial and Accounting Officer) |
|
|
|
|
Date |
August 14, 2015 |
29
Exhibit 4.1
AMENDING AGREEMENT No. 2
THIS AMENDMENT TO WARRANT
CERTIFICATE #31 (this “Amendment”) is executed as of July 28, 2015 between Deep Well Oil & Gas, Inc. (the
“Corporation”) and Mr. Malik Youyou. (collectively, the “Parties”).
RECITALS
WHEREAS pursuant
to a certain warrant agreement dated November 9, 2010, by and among the Corporation and Mr. Malik Youyou (an insider of the Corporation
“Mr. Youyou”), the Corporation issued a warrant certificate for an option to purchase up to an aggregate of 28,571,428
common shares of the Corporation’s common stock at a price of $0.105 USD per common share (“Warrant #31”);
AND WHEREAS pursuant
to an amending agreement effective October 10, 2013, the Parties mutually agreed to extend the original expiry date of Warrant
#31 to be November 23, 2015 (Amending Agreement #1);
AND WHEREAS the Parties
desire to amend and extend the expiration date of the amended Warrant #31 from November 23, 2015 to November 23, 2016;
AND WHEREAS in consideration
for extending the expiry date of Warrant #31 by one year, and as accepted on March 11, 2015 by Mr. Youyou, the Parties desire to
reduce the number of the warrant shares outstanding represented in Warrant #31 from 28,571,428 to 20,737,662 shares of common stock
of the Corporation so that the value of the warrant shares (at 10.5 Cents USD) has the same approximate value of the outstanding
warrant shares in the same series as set by the valuation date of February 20, 2015;
NOW, THEREFORE, in
consideration of the mutual covenants contained herein, the Parties do hereby agree as follows:
1. Defined Terms.
All capitalized terms used and not otherwise defined herein shall have the meaning ascribed
thereto in the original Warrant #31 except those Defined Terms that have been amended hereto.
2. Amendments.
(a) The definition of
“Expiry Date” is Section 1.1(f) of the original Warrant #31 and as amended in Amending Agreement #1 is deleted in its
entirety and replaced with the following:
“Expiry Date” means the
November 23, 2016 unless modified in accordance with section 3.3 and 3.8;
(b) The Parties hereby
approve and accept the consideration for extending the expiry date of Warrant #31 to be November 23, 2016, by effectively reducing
the number of the warrant shares outstanding represented in Warrant #31 from 28,571,428 to 20,737,662 shares of common stock of
the Corporation.
3. Entire Agreement;
Ratification. This Amendment constitutes the entire agreement among the Parties with respect to the subject matter hereof.
Except as expressly amended hereby, the terms of the original Warrant #31 are each hereby confirmed and ratified in all respects
by the Parties hereto and remain in full force and effect.
4. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the Parties hereto, and any of their respective subsidiaries,
affiliates, insurers, predecessors, successors, officers, directors, managers, employees, stockholders, members, agents, attorneys
or assigns.
5. Governing Law.
This Amendment shall be governed by and construed in accordance with the laws of the Province of Alberta and the laws of Canada
applicable therein. Each of the Parties hereby attorn to the non-exclusive jurisdiction of the courts of the Province of Alberta.
6. Counterparts.
This Amendment may be signed in counterparts, each of which shall be deemed an original but all of which together shall constitute
one and the same agreement.
7. Necessary Action.
Each party shall perform any further acts and execute and deliver any documents that may be reasonably necessary to carry out the
provisions of this Amendment.
IN WITNESS WHEREOF, the Parties have
executed this Amendment as of the date first written above.
|
DEEP WELL OIL & GAS, INC. |
|
|
|
By: |
/s/ Horst A. Schmid |
|
|
Name: Dr. Horst A. Schmid
Title: President & Chief Executive Officer |
|
|
|
|
WARRANT HOLDER |
|
|
|
|
By: |
/s/ Malik Youyou |
|
|
Name: Mr. Malik Youyou |
|
|
Title: |
Exhibit 4.2
AMENDING AGREEMENT No. 1
THIS AMENDMENT TO
WARRANT CERTIFICATE #32 (this “Amendment”) is executed as of July 28, 2015 between Deep Well Oil & Gas,
Inc. (the “Corporation”) and Mr. Malik Youyou. (collectively, the “Parties”).
RECITALS
WHEREAS pursuant
to a certain warrant agreement dated November 23, 2012, by and among the Corporation and Mr. Malik Youyou (an insider of the Corporation
“Mr. Youyou”), the Corporation issued a warrant certificate for an option to purchase up to an aggregate of 42,857,142
common shares of the Corporation’s common stock at a price of $0.105 USD per common share (“Warrant #32”);
AND WHEREAS
the Parties desire to amend and extend the expiration date of Warrant #32 from November 23, 2015 to November 23, 2016;
AND WHEREAS
in consideration for extending the expiry date of Warrant #32 by one year, and as accepted on March 11, 2015 by Mr. Youyou, the
Parties desire to reduce the number of the warrant shares outstanding represented in Warrant #32 from 42,857,142 to 31,106,494
shares of common stock of the Corporation so that the value of the warrant shares (at 10.5 Cents USD) has the same approximate
value of the outstanding warrant shares in the same series as set by the valuation date of February 20, 2015;
NOW, THEREFORE,
in consideration of the mutual covenants contained herein, the Parties do hereby agree as follows:
1. Defined Terms. All capitalized terms used and not otherwise defined herein
shall have the meaning ascribed thereto in the original Warrant #32 except those Defined Terms that have been amended hereto.
2. Amendments.
(a) The definition
of “Expiry Date” is Section 1.1(f) of the original Warrant #32 is deleted in its entirety and replaced with the following:
“Expiry Date” means the
November 23, 2016 unless modified in accordance with section 3.3 and 3.8;
(b) The Parties hereby
approve and accept the consideration for extending the expiry date of Warrant #32 to be November 23, 2016, by effectively reducing
the number of the warrant shares outstanding represented in Warrant #32 from 42,857,142 to 31,106,494 shares of common stock of
the Corporation.
3. Entire Agreement; Ratification. This Amendment constitutes the entire agreement among the Parties with respect to
the subject matter hereof. Except as expressly amended hereby, the terms of the original Warrant #32 are each hereby confirmed
and ratified in all respects by the Parties hereto and remain in full force and effect.
4. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Parties hereto, and any of their
respective subsidiaries, affiliates, insurers, predecessors, successors, officers, directors, managers, employees, stockholders,
members, agents, attorneys or assigns.
5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the Province of Alberta
and the laws of Canada applicable therein. Each of the Parties hereby attorn to the non-exclusive jurisdiction of the courts of
the Province of Alberta.
6. Counterparts.
This Amendment may be signed in counterparts, each of which shall be deemed an original but all of which together shall constitute
one and the same agreement.
7. Necessary Action. Each party shall perform any further acts and execute and deliver any documents that may be reasonably
necessary to carry out the provisions of this Amendment.
IN WITNESS WHEREOF, the Parties
have executed this Amendment as of the date first written above.
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DEEP WELL OIL & GAS, INC. |
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By: |
/s/ Horst A. Schmid |
|
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Name: Dr. Horst A. Schmid
Title: President & Chief Executive Officer |
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WARRANT HOLDER |
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By: |
/s/ Malik Youyou |
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Name: Mr. Malik Youyou |
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Title: |
Exhibit 4.3
AMENDING AGREEMENT No. 1
THIS AMENDMENT TO WARRANT
CERTIFICATE #35 (this “Amendment”) is executed as of July 28, 2015 between Deep Well Oil & Gas, Inc. (the
“Corporation”) and Cambridge Strategies, Inc. (collectively, the “Parties”).
RECITALS
WHEREAS pursuant
to a certain warrant agreement dated June 23, 2014, by and among the Corporation and Cambridge Strategies, Inc. (“Cambridge”
a company 50% owned by Mr. Satya Brata Das an insider of the Corporation), the Corporation issued a warrant certificate for an
option to purchase up to an aggregate of 428,571 common shares of the Corporation’s common stock at a price of $0.105 USD
per common share (“Warrant #35”);
AND WHEREAS the
Parties desire to amend and extend the expiration date of Warrant #35 from November 23, 2015 to November 23, 2016;
AND WHEREAS in consideration
for extending the expiry date of Warrant #35 by one year, and as accepted by Cambridge, the Parties desire to reduce the number
of the warrant shares outstanding represented in Warrant #35 from 428,571 to 311,065 shares of common stock of the Corporation
so that the value of the warrant shares (at 10.5 Cents USD) has the same approximate value of the outstanding warrant shares in
the same series as set by the valuation date of February 20, 2015;
NOW, THEREFORE,
in consideration of the mutual covenants contained herein, the Parties do hereby agree as follows:
1.
Defined Terms. All capitalized terms used and not otherwise defined herein
shall have the meaning ascribed thereto in the original Warrant #35 except those Defined Terms that have been amended hereto.
2. Amendments.
(a) The definition of “Expiry
Date” is Section 1.1(f) of the original Warrant #35 is deleted in its entirety and replaced with the following:
“Expiry Date” means the November
23, 2016 unless modified in accordance with section 3.3 and 3.8;
(b) The Parties hereby approve
and accept the consideration for extending the expiry date of Warrant #35 to be November 23, 2016, by effectively reducing the
number of the warrant shares outstanding represented in Warrant #35 from 428,571 to 311,065 shares of common stock of the Corporation.
3. Entire Agreement; Ratification. This Amendment constitutes the entire agreement among the Parties with respect to
the subject matter hereof. Except as expressly amended hereby, the terms of the original Warrant #35 are each hereby confirmed
and ratified in all respects by the Parties hereto and remain in full force and effect.
4. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Parties hereto, and any of their
respective subsidiaries, affiliates, insurers, predecessors, successors, officers, directors, managers, employees, stockholders,
members, agents, attorneys or assigns.
5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the Province of Alberta
and the laws of Canada applicable therein. Each of the Parties hereby attorn to the non-exclusive jurisdiction of the courts of
the Province of Alberta.
6. Counterparts. This Amendment may be signed in counterparts, each of which shall be deemed an original but
all of which together shall constitute one and the same agreement.
7. Necessary Action. Each party shall perform any further acts and execute and deliver any documents that may be reasonably
necessary to carry out the provisions of this Amendment.
IN WITNESS WHEREOF, the Parties have executed
this Amendment as of the date first written above.
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DEEP
WELL OIL & GAS, INC. |
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|
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By: |
/s/
Horst A. Schmid |
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Name:
Dr. Horst A. Schmid |
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|
Title:
President & Chief Executive Officer |
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|
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WARRANT
HOLDER |
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|
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By: |
/s/
Satya Brata Das |
|
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Cambridge
Strategies, Inc. |
|
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Name:
Mr. Satya Brata Das |
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Title: |
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities
Exchange Act of 1934
I, Dr. Horst A. Schmid, President and Chief Executive Officer of Deep Well
Oil & Gas, Inc., certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of Deep Well Oil & Gas, Inc. for the quarterly period ended June 30, 2015; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
|
d) |
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions): |
|
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information;
and |
|
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting. |
|
Date: |
August 14, 2015 |
|
|
|
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By: |
/s/ Horst A. Schmid |
|
|
Dr. Horst A. Schmid |
|
|
President and Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities
Exchange Act of 1934
I, |
Mr. Curtis James Sparrow, Chief Financial Officer of Deep Well Oil & Gas, Inc., certify that: |
1. |
I have reviewed this quarterly report on Form 10-Q of Deep Well Oil & Gas, Inc. for the quarterly period ended June 30, 2015; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
|
d) |
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions): |
|
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information;
and |
|
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting. |
|
Date: |
August 14, 2015 |
|
|
|
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By: |
/s/ Curtis Sparrow |
|
|
Mr. Curtis James Sparrow |
|
|
Chief Financial Officer |
Exhibit 32.1
Certification Pursuant To
18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act Of
2002
In connection with the Quarterly Report of
Deep Well Oil & Gas, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2015 as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Dr. Horst A. Schmid, President and Chief Executive Officer
of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that to the best of my knowledge:
(1) the Report fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report
fairly presents, in all material respects, the financial condition and result of operations of the Company.
A signed original of this written statement
required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.
|
Date: |
August 14, 2015 |
|
|
|
|
By: |
/s/ Horst A. Schmid |
|
|
Dr. Horst A. Schmid |
|
|
President and Chief Executive Officer |
Exhibit 32.2
Certification Pursuant To
18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act Of
2002
In connection with the Quarterly Report of
Deep Well Oil & Gas, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2015 as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Mr. Curtis James Sparrow, Chief Financial Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that to the best of my knowledge:
(1) the Report fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report
fairly presents, in all material respects, the financial condition and result of operations of the Company.
A signed original of this written statement
required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.
|
Date: |
August 14, 2015 |
|
|
|
|
By: |
/s/ Curtis Sparrow |
|
|
Mr. Curtis James Sparrow |
|
|
Chief Financial Officer |