The accompanying notes
are an integral part to these condensed financial statements.
The accompanying notes are an integral part
to these condensed financial statements.
The accompanying notes are an integral part
to these condensed financial statements.
Notes to Condensed Financial Statements
June 30, 2016
(Unaudited)
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
GulfSlope Energy, Inc. (the “Company,”
“GulfSlope,” “our” and words of similar import), a Delaware corporation, is an independent crude oil and
natural gas exploration and production company whose interests are concentrated in the United States Gulf of Mexico (“GOM”)
federal waters offshore Louisiana in less than 800 feet of water depth. The Company currently has under lease 17 federal Outer
Continental Shelf blocks (referred to as “prospect,” “portfolio” or “leases” in this Report)
and has licensed 2.2 million acres of three-dimensional (3-D) seismic data in its area of concentration.
Since March 2013, we have been singularly
focused on identifying and acquiring high-potential oil and gas prospects. We have licensed 3-D seismic data covering approximately
2.2 million acres and have evaluated this data using advanced interpretation technologies. As a result of these analyses, we have
identified and acquired leases on 16 prospects that we believe may contain economically recoverable hydrocarbon deposits, and we
plan to continue to conduct more refined analyses of our prospects as well as target additional lease and property acquisitions.
The analyses of both existing and potential prospects is a continuous process that often results in the high-grading, adding, and/or
deleting of certain prospects within an overall exploration portfolio.
Our activities have been focused exclusively
in the shelf area of the Gulf of Mexico. We have given preference to areas with water depths of 800 feet or less where production
infrastructure already exists, which we believe will allow for any discoveries to be developed faster and less expensively with
the goal to reduce economic risk while increasing returns. As of June 30, 2016, we have no production or proved reserves. We expect
that any drilling activities on our prospects will commence during 2017.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
The condensed financial statements included
herein are unaudited. However, these condensed financial statements include all adjustments (consisting of normal recurring adjustments),
which, in the opinion of management are necessary for a fair presentation of financial position, results of operations and cash
flows for the interim periods. The results of operations for interim periods are not necessarily indicative of the results to be
expected for an entire year. The preparation of financial statements in accordance with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed financial
statements and accompanying notes. Actual results could differ materially from those estimates.
Certain information, accounting policies,
and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) have been omitted in this Form 10-Q pursuant to certain rules and
regulations of the Securities and Exchange Commission (“SEC”). The condensed financial statements should be read in
conjunction with the audited financial statements for the year ended September 30, 2015, which were included in the Company’s
Annual Report on Form 10-K for the fiscal year ended September 30, 2015 and filed with the Securities and Exchange Commission on
December 29, 2015.
Cash and Cash Equivalents
GulfSlope considers highly liquid investments
with insignificant interest rate risk and original maturities to the Company of three months or less to be cash equivalents. Cash
equivalents consist primarily of interest-bearing bank accounts and money market funds. The Company’s cash positions represent
assets held in checking and money market accounts. These assets are generally available on a daily or weekly basis and are highly
liquid in nature.
Liquidity/Going Concern
The Company has incurred accumulated losses
as of June 30, 2016 of $32,882,718. Further losses are anticipated in developing our business. As a result, our auditors have expressed
substantial doubt about our ability to continue as a going concern. As of June 30, 2016, we had $132,163 of unrestricted cash on
hand. The Company estimates that it will need to raise a minimum of $3 million to meet its obligations and planned expenditures
through August 2017. The Company plans to finance its operations through the issuance of equity and debt, joint ventures including
farm-outs, or further sales of working interests in prospects. Our policy has been to periodically raise funds through sale of
equity on a limited basis, to avoid undue dilution while at the early stages of execution of our business plan. Short term needs
have been historically funded through loans from executive management and other related parties. There are no assurances that financing
will be available with acceptable terms, if at all. If the Company is not successful in obtaining adequate financing, operations
would need to be curtailed or ceased, including those associated with being a public reporting company. The financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Full Cost Method
The Company uses the full cost method of
accounting for oil and gas exploration and development activities. Under the full cost method of accounting, all costs associated
with the exploration for and development of oil and gas reserves are capitalized on a country-by-country basis into a single cost
center (“full cost pool”). Such costs include land acquisition costs, geological and geophysical (“G&G”)
expenses, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells and overhead
charges directly related to acquisition, exploration and development activities. All of the Company’s oil and gas properties
are located within the United States, its sole cost center.
The costs of unproved properties and related
capitalized costs are withheld from the depletion base until such time as they are either developed or abandoned. When proved reserves
are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to
costs subject to depletion and full cost ceiling calculations. Capitalized costs that are directly associated with unproved properties
acquired by the Company during the current quarter are included in the full cost pool. As of June 30, 2016, the Company had no
proved reserves.
Companies that use the full
cost method of accounting for oil and natural gas exploration and development activities are required to perform a ceiling
test calculation each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10.
The ceiling test is performed quarterly, on a country-by-country basis, utilizing the average of prices in effect on the
first day of the month for the preceding twelve-month period. The ceiling limits such pooled costs to the aggregate of the
present value of future net revenues attributable to proved crude oil and natural gas reserves discounted at 10% plus the
lower of cost or market value of unproved properties less any associated tax effects. If such capitalized costs exceed the
ceiling, the Company will record a write-down to the extent of such excess as a non-cash charge to earnings. Any such
write-down will reduce earnings in the period of occurrence and results in a lower depreciation, depletion and amortization
rate in future periods. A write-down may not be reversed in future periods even though higher oil and natural gas prices may
subsequently increase the ceiling. Our unproved properties are assessed periodically to ascertain whether an impairment has
occurred. See note 3 for June 30, 2016 for impairment of capitalized costs discussion.
Proceeds from property sales will
generally be credited to the full cost pool, with no gain or loss recognized, unless such a sale would significantly alter
the relationship between capitalized costs and the proved reserves attributable to these costs. A significant alteration
would typically involve a sale of 25% or more of the proved reserves related to a single full cost pool. See note 3 for
proceeds received for the quarter ended June 30, 2016.
Basic and Dilutive Earnings Per Share
Basic earnings (loss) per share (“EPS”)
is computed by dividing net income (loss) (the numerator) by the weighted average number of common shares outstanding for the period
(denominator). Diluted EPS is computed by dividing net income (loss) by the weighted average number of common shares and potential
common shares outstanding (if dilutive) during each period. Potential common shares include stock options, warrants, and restricted
stock. The number of potential common shares outstanding relating to stock options, warrants, and restricted stock is computed
using the treasury stock method.
As the Company has incurred losses for
the nine months ended June 30, 2016 and 2015, the potentially dilutive shares are anti-dilutive and are thus not added into the
loss per share calculations. As of June 30, 2016 and 2015, there were 81,885,606 and 54,125,467 potentially dilutive shares, respectively.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting
Standards Update No. 2014-09 (“ASU No. 2014-09”), which requires an entity to recognize the amount of revenue to which
it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue
recognition guidance in GAAP when it becomes effective. The new standard is effective for annual reporting periods beginning after
December 15, 2016. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect
transition method. The Company is evaluating the effect that ASU No. 2014-09 will have on its financial statements and related
disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing
financial reporting.
In August 2014, the FASB issued Accounting
Standard Update No. 2014-15 (“ASU No. 2014-15”),
Presentation of Financial Statements Going Concern (Subtopic 205-40)
which requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon
certain principles that are currently in U.S. auditing standards. Specifically, ASU No. 2014-15 provides a definition of the term
substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or
available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration
of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. ASU
No. 2014-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early
application is permitted. We are currently evaluating the accounting implication and do not believe the adoption of ASU 2014-15
to have material impact on our financial statements, although there may be additional disclosures upon adoption.
On February 25,
2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. The new guidance establishes the principles to report
transparent and economically neutral information about the assets and liabilities that arise from leases. The new guidance is
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and
early application is permitted for all organizations. The Company has not yet selected the period during which it will
implement this pronouncement, and it is currently evaluating the impact the adoption of ASU 2016-02 will have on its
financial statements.
In March 2016, the FASB issued Accounting
Standards Update (“ASU”) 2016-09,
“Compensation - Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting” (“ASU 2016-09”)
. ASU 2016-09 simplifies several aspects of accounting for
share-based payment award transactions, including income tax consequences, classification of awards as either liability or equity,
and classification on the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2016,
including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact
the adoption of ASU 2016-09 will have on its financial statements.
In March 2016, the FASB issued ASU No.
2016-06,
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging
Issues Task Force)
(“ASU 2016-06”), which clarifies the requirements for assessing whether contingent call (put)
options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts and
requires that an entity assess the embedded call (put) options solely in accordance with the four-step decision sequence in ASC
815. ASU 2016-06 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.
Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact the adoption
of ASU 2016-06 will have on its financial statements.
The Company has evaluated all other recent
accounting pronouncements and believes that none of them will have a significant effect on the Company’s financial statements.
NOTE 3 – OIL AND NATURAL GAS PROPERTIES
In March 2014, the Company was
awarded 21 blocks in the Central Gulf of Mexico Lease Sale 231, conducted by the Bureau of Ocean Energy Management
(“BOEM”). The Company paid total consideration of $8,126,972 for the leases and the first year lease rental
payments. In March 2015, the Company was awarded two blocks in the Central Gulf of Mexico Lease Sale 235 and paid total
consideration of $340,547 for the leases and the first year lease rental payments. During the quarter ended June 30, 2016,
the Company relinquished six of the lease blocks acquired in 2014. The relinquished leases are Ewing Bank 904 and 945, Garden
Banks 173, Eugene Island 395, Vermilion 393 and South Marsh Island 187. The capitalized lease costs of $2,610,678 associated
with these blocks were deducted as impairment of oil and natural gas properties. The Company also deducted $280,000 as an
impairment of certain capitalized exploration costs that were directly allocable to the relinquished blocks, for a total
impairment deduction of $2,890,678.
During the period October 1, 2014 to September
30, 2015, the Company incurred $3,231,780 in consulting fees and salaries and benefits associated with full-time geoscientists,
and $921,124 associated with technological infrastructure, third party hosting services and seismic data. The Company capitalized
these G&G costs because the Company acquired specific unevaluated properties related to these costs during the period. For
the year ended September 30, 2015, $93,052 of these G&G costs were specifically related to properties that were not yet acquired
and thus, were subject to the ceiling limitation test and immediately impaired.
During the period October 1, 2015 to June
30, 2016, the Company incurred $1,221,648 in consulting fees and salaries and benefits associated with full-time geoscientists,
and $437,527 associated with technological infrastructure, third party hosting services and seismic data. The Company capitalized
these G&G costs because the Company owned the specific properties related to these costs during this period. During the quarter
ended June 30, 2016 the Company impaired $280,000 of capitalized exploration costs directly allocable to the relinquished leases.
In May 2016, the Company entered into
a letter of intent (the “LOI”) with Texas South Energy, Inc. (“Texas South”) that sets out the terms
and conditions of a proposed farm-out arrangement (the “Farm-out”) to develop two shallow-depth oil and gas
prospects located on offshore Gulf of Mexico blocks currently leased by the Company. Through June 30, 2016 the Company
received $400,000 under the terms of the LOI. In accordance with full cost requirements, the Company recorded the proceeds
from the transaction as an adjustment to the capitalized costs of its oil & gas properties with no gain or
loss recognition. The LOI was subsequently amended (see Note 9).
These above capitalized exploration costs
net of accumulated impairment amounts, when added to our lease acquisition costs net of the sale of the working interests and impairment
amounts, result in $4,431,626, which is the amount of unproved oil and natural gas properties on the Company’s condensed
balance sheet at June 30, 2016.
NOTE 4 – RELATED PARTY TRANSACTIONS
During April through September
2013, the Company entered into convertible promissory notes whereby it borrowed a total of $6,500,000 from John Seitz, its
current chief executive officer. The notes are due on demand, bear interest at the rate of 5% per annum, and are convertible
into shares of common stock at a conversion price equal to $0.12 per share of common stock (the then offering price of shares
of common stock to unaffiliated investors). In May 2013, John Seitz converted $1,200,000 of the aforementioned debt
into 10,000,000 shares of common stock, which shares were issued in July 2013. In June of 2014, the Company entered into
a promissory note whereby it borrowed a total of $1,160,000 from Mr. Seitz. The note is not convertible, due on demand
and bears interest at a rate of 5% per annum. Additionally, during June through August 2015, the Company entered into
promissory notes with John Seitz whereby it borrowed a total of $1,250,000. The notes are not convertible, due on demand and
bear interest at the rate of 5% per annum. During the quarter ended March 2016, the Company executed promissory notes
totaling $126,000 with Mr. Seitz. These notes are due on demand, bear interest at the rate of 5% per annum, and the principal
amount is convertible at the option of the holder into securities issued by the Company in a future offering, at the same
price and terms received by investors. During the quarter ended June 30, 2016 the Company borrowed a total of $237,000
evidenced by promissory notes due on demand and bearing interest at the rate of 5% per annum. As of June 30, 2016 the total
amount owed to John Seitz, our CEO, is $8,073,000. There was a total of $678,999 of unpaid interest associated with these
loans included in accrued liabilities within our balance sheet as of June 30, 2016. Interest expense for the quarter ended
June 30, 2016 is $99,543.
In August 2015, the Company entered
into promissory notes whereby it borrowed a total of $245,000 from Dr. Ronald Bain, its current president and chief operating
officer, and his affiliate ConRon Consulting, Inc. These notes are not convertible, due on demand and bear interest at the
rate of 5% per annum. During February 2016, the Company entered into a promissory note for $22,000 with Dr. Bain. This note
is due on demand, bears interest at the rate of 5% per annum, and the principal amount is convertible at the option of the
holder into securities issued by the Company in a future offering, at the same price and terms received by investors. As of
June 30, 2016, the total amount owed to Dr. Bain and his affiliate was $267,000. There was a total of $11,224 of accrued
interest associated with these loans and the Company has recorded interest expense for the same amount. Interest expense for
the quarter ended June 30, 2016 is $3,375. Dr. Ronald Bain also entered into a $92,000 convertible promissory note with
associated warrants (“Bridge Financing”) under the same terms received by other investors (see Note 5).
During March 2016, the Company entered
into a promissory note for a total of $80,000 with the Morris Family Partnership, L.P., an affiliate of Mr. Paul Morris, a director
of the Company. The note is due on demand and bears interest at the rate of 5% per annum and the principal amount is convertible
at the option of the holder into securities issued by the Company in a future offering, at the same price and terms received by
investors. The $80,000 promissory note was converted into the Bridge Financing (see Note 5).
Domenica Seitz, CPA, related to
John Seitz, has provided accounting consulting services to the Company. During the three month period ended June 30,
2016, services provided were valued at $14,880 based on market-competitive salaries, time devoted and professional rates.
The Company has accrued these amounts, and they are reflected in the June 30, 2016 condensed financial statements.
John Seitz has not received a salary since
May 31, 2013, the date he commenced serving as our chief executive officer and accordingly, no amount has been accrued on our financial
statements. Prior to serving as Chief Executive Officer, John Seitz served as a Company consultant and the Company accrued and
subsequently paid $120,000 of consulting compensation owed to Mr. Seitz. As of June 30, 2016, Mr. Seitz beneficially owns 247,951,162
shares of the Company’s common stock (includes shares issuable upon conversion of the principal amount plus accrued interest
of convertible notes held by Mr. Seitz). The Company recognizes that his level of stock ownership significantly aligns his interests
with shareholders’ interests. From time to time, the Compensation Committee may consider compensation arrangements for Mr.
Seitz given his continuing contributions and leadership.
NOTE 5 –
BRIDGE
FINANCING – Convertible Promissory Notes WITH ASSOCIATED WARRANTS
On June 10, 2016, the Company issued eight
convertible promissory notes with associated warrants in a private placement to accredited investors for total gross proceeds of
$387,000. Two of the notes were to related parties for proceeds totaling $172,000, including the extinguishment of $70,000 worth
of related party payables. The convertible notes have a maturity of one year, bear an annual interest rate of 8% and can be converted
at the option of the holder at a conversion price of $0.025 per share. In addition, the convertible notes will automatically convert
if a qualified equity financing of at least $3 million occurs before maturity and such mandatory conversion price will equal the
effective price per share paid in the qualified equity financing. In addition to the convertible notes, the investors received
12.9 million warrants (5.7 million to the above mentioned related parties) with an exercise price of $0.03 and a term of the earlier
of three years or upon a change of control. The Company evaluated the various financial instruments under ASC 480 and ASC 815 and determined
no instruments or features required fair value accounting. Therefore, in accordance with ASC 470-20-25-2, the Company allocated
the proceeds between the convertible notes and warrants based on their relative fair values. This resulted in an allocation of
$231,239 to the warrants and $155,761 to the convertible notes. After such allocation, the Company evaluated the conversion option
to discern whether a beneficial conversion feature existed based upon comparing the effective exercise price of the convertible
notes to the fair value of the shares it is convertible into. The Company concluded a beneficial conversion feature existed and
measured such beneficial conversion feature at $155,761. Accordingly, at June 10, 2016, the debt discount associated with these
notes was $387,000. Such discount will be amortized using the effective interest rate method over the term (one year) of the convertible
notes. For the three months ended June 30, 2016 amortization of this discount totaled $22,266 and is included in interest expense
in the statement of operations.
NOTE 6 – COMMON STOCK/PAID IN
CAPITAL
In September 2014, the Company awarded
3,030,000 shares of restricted stock to six employees under the Company’s 2014 Omnibus Incentive Plan, one-half of which
vested in September 2015 and the remaining half vests in September 2016. As of June 30, 2016 there was $87,600 of unrecognized stock-based compensation cost related to restricted stock grants
that is expected to be expensed over a period of three months.
In March 2016, the Company issued 520,273
shares of common stock to one vendor as consideration for services rendered in the ordinary course of business.
As discussed in Note 5, during the three
months ended June 30, 2016, the Company issued 12.9 million warrants in conjunction with convertible notes payable. The warrants
have an exercise price of $0.03 and a term of the earlier of 3 years or upon a change of control. Based upon the allocation of
proceeds between the convertible notes payable and the warrants, approximately $231,239 was allocated to the warrants.
The fair value of the warrants were determined
using the Black Scholes valuation model with the following key assumptions:
Stock Price:
|
$0.054
|
Exercise Price:
|
$0.03
|
Term:
|
3 years
|
Risk Free Rate:
|
.87%
|
Volatility:
|
135%
|
NOTE 7– STOCK-BASED COMPENSATION
Stock-based compensation cost is measured
at the grant date, based on the estimated fair value of the award, and is recognized over the required vesting period. The Company
recognized $174,650 and $582,694 in stock-based compensation during the three and nine months ended June 30, 2016, and $212,639
and $643,376 in stock-based compensation during the three and nine months ended June 30, 2015, respectively. A portion of these
costs, $99,050 and $112,449, were capitalized to unproved properties and the remainder were recorded as general and administrative
expenses for the three months ended June 30, 2016 and 2015, respectively. For the nine months ended June 30, 2016 and 2015, $324,797
and $337,893, respectively, were capitalized to unproved properties.
The following table summarizes the Company’s
stock option activity during the three months ended June 30, 2016:
|
|
Number of Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average Remaining Contractual
Term (in years)
|
|
Outstanding at September 30, 2015
|
|
|
2,000,000
|
|
|
|
0.12
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
2,000,000
|
|
|
$
|
0.12
|
|
|
|
3.06
|
|
Vested
|
|
|
2,000,000
|
|
|
$
|
0.12
|
|
|
|
3.06
|
|
Exercisable at June 30, 2016
|
|
|
2,000,000
|
|
|
|
—
|
|
|
|
—
|
|
As of June 30, 2016 there was no unrecognized
stock-based compensation cost related to the stock option grant. There was no intrinsic value for options outstanding as of June
30, 2016.
NOTE 8– COMMITMENTS AND CONTINGENCIES
In March 2013, the Company licensed certain
seismic data pursuant to two agreements. With respect to the first agreement, as of September 30, 2015, the Company has paid $6,135,500
in cash, with no additional amount due. With respect to the second agreement, as June 30, 2016, the Company has paid $3,009,195
in cash and is obligated to pay $1,003,065 in 2016.
In May 2014, the Company entered
into an agreement with a seismic data reprocessing company in which the Company agreed to purchase reprocessing services, of
which $1.5 million would be paid in cash and the remaining amount by the issuance of two million shares of our common stock
using the valuation of $0.75 per share. As of June 30, 2016, the value of services provided was approximately $1,146,000. 50%
of this amount was paid or payable in cash and 50% was paid or payable in stock.
In October 2015, the Company purchased
a directors and officers’ insurance policy for $259,936 and financed $235,861 of the premium by executing a note payable.
The balance of the note payable at June 30, 2016 is $47,881. In May 2016 the Company purchased liability insurance and financed
$8,850 of the premium by executing a note payable. At June 30, 2016 the balance of the note payable is $8,060.
NOTE 9 – SUBSEQUENT EVENTS
As of August 12, 2016, the Company has
sold an additional $300,000 of convertible promissory notes pursuant to the Bridge Financing (See Note 5) for a total of $687,000
sold in 2016.
On August 1 2016, the Company entered into
an amended letter of intent (the “Amended LOI”) with Texas South Energy, Inc. (“Texas South”) that sets
out the terms and conditions of a proposed farm-out arrangement (the “Farm-out”) to develop certain shallow-depth oil
and gas prospects located on offshore Gulf of Mexico blocks currently leased by the Company (the “Shallow Prospects”).
The Shallow Prospects are located above 5,100 feet on Vermilion Area, South Addition Block 378 (Canoe Shallow) and Vermilion Area,
South Addition Block 375 (Selectron Shallow). Texas South will be assigned an 87.5% working interest in the Shallow Prospects in
exchange for (i) cash payments of $400,000, (ii) the assumption of annual rental obligations of $63,147, and (iii) funding the
costs for the drilling of two shallow wells to be commenced no later than December 31, 2017. Texas South has paid the Company $400,000.
The Company will operate the drilling of the first two wells. The Amended LOI does not include the Company’s deeper prospects
located on the same blocks. Also included in the LOI is an agreement on four blocks (Eugene Island 371, Ship Shoal 348, Ewing Bank
870, and Ewing Bank 914) designated as the Proton, Baryon and Alpha prospects. In exchange for aggregate payments of $536,720,
and the commitment to carry costs of additional seismic required to bring the prospects to a drill ready state, Texas South will
earn a 50% working interest to all depths in each prospect. The Company will remain the operator of record. Consummation of the
transactions contemplated by the Amended LOI (the “Closing”) is subject to further negotiation, the execution and delivery
by the parties of mutually acceptable definitive agreements (the “Definitive Agreements”) to include a Participation
Agreement and the Joint Operating Agreement, and the satisfaction of certain additional conditions. The Company, however, can give
no assurance that the Definitive Agreements will be entered into with Texas South, or that, even if the Definitive Agreements are
entered into by the parties, that the terms, provisions and conditions of the Definitive Agreements will be consistent with the
foregoing description of the proposed Farm-out or that the Closing will occur. The foregoing description of the Amended LOI does
not purport to be a complete description of the terms, provisions and conditions of such documents, and represents only a summary
of certain of the principal terms, provisions and conditions thereof.