The accompanying notes are an integral part
to these financial statements.
The accompanying notes are an integral part
to these financial statements.
The accompanying notes are an integral part
to these financial statements.
The accompanying notes are an integral part
to these financial statements.
Notes to the Financial Statements
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(a) Organization
GulfSlope Energy, Inc. (the “Company”,
“GulfSlope”, “us”, “we”, or “our”), is an independent oil and natural gas exploration
company whose interests are concentrated in the United States Gulf of Mexico federal waters offshore Louisiana. The
Company has leased 17 federal Outer Continental Shelf blocks (referred to as “prospect,” “portfolio” or
“leases”) and licensed three-dimensional (3-D) seismic data in its area of concentration.
(b) Basis of Presentation
The accompanying financial statements have
been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and the instructions
to Form 10-K and Regulation S-X published by the US Securities and Exchange Commission (the “SEC”). The accompanying
financial statements include the accounts of the Company.
(c) Cash and Cash Equivalents
The Company 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 a checking account. These assets are generally available on a daily or weekly basis and are
highly liquid in nature.
(d) Restricted Cash
At September 30, 2016 and 2015 the Company
has no restricted cash.
(e) Accounts Receivable
The Company records an accounts receivable for lease rental
reimbursements due from joint interest lease holders. The Company estimates allowances for doubtful accounts based on the aged
receivable balances and historical losses. If the Company determines any account to be uncollectible based on significant
delinquency or other factors, it is immediately written off. An allowance for bad debts has been provided based on estimated
losses amounting to $128,024 as of September 30, 2016.
(f) Full Cost Method
The Company uses the full cost method of
accounting for its oil and gas exploration and development activities as defined by the Securities and Exchange Commission (“SEC”).
Under the full cost method of accounting, all costs associated with successful and unsuccessful exploration and development activities
are capitalized on a country-by-country basis into a single cost center (“full cost pool”). Such costs include property
acquisition costs, geological and geophysical (“G&G”) costs, carrying charges on non-producing properties, costs
of drilling both productive and non-productive wells and overhead charges directly related to acquisition, exploration and development
activities. Proceeds from property sales will generally be credited to the full cost pool, with no gain or loss recognized, unless
such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these
costs. A significant alteration would typically involve a sale of 25% or more of the proved reserves related to a single
full cost pool.
Proved properties are amortized on a country-by-country basis
using the units of production method (UOP). The UOP calculation multiplies the percentage of estimated proved reserves produced
each quarter by the cost of those reserves. The amortization base in the UOP calculation includes the sum of proved property, net
of accumulated depreciation, depletion and amortization (DD&A), estimated future development costs (future costs to access
and develop proved reserves), and asset retirement costs, less related salvage value.
The costs of unproved properties and related capitalized costs
(such as G&G costs) are withheld from the amortization calculation until such time as they are either developed or abandoned. Unproved
properties and properties under development are reviewed for impairment at least quarterly and are determined through an evaluation
considering, among other factors, seismic data, requirements to relinquish acreage, drilling results, remaining time in the commitment
period, remaining capital plan, and political, economic, and market conditions. In countries where proved reserves exist, exploratory
drilling costs associated with dry holes are transferred to proved properties immediately upon determination that a well is dry
and amortized accordingly. In countries where a reserve base has not yet been established, impairments are charged to earnings.
Companies that use the full cost method
of accounting for oil and natural gas exploration and development activities are required to perform a ceiling test calculation
each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is
performed quarterly, on a country-by-country basis, utilizing the average of prices in effect on the first day of the month for
the preceding twelve month period. The 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.
As of September 30, 2016, the Company’s
oil and gas properties consisted of unproved properties and no proved reserves.
(g) Capitalized Interest
Interest is capitalized on the cost of
unevaluated oil and gas properties that are excluded from amortization and actively being evaluated, if any.
(h) Property and Equipment
Property and equipment are carried at cost
and include expenditures for new equipment and those expenditures that substantially increase the productive lives of existing
equipment and leasehold improvements. Maintenance and repair costs are expensed as incurred. Property and equipment are depreciated
on a straight-line basis over the assets’ estimated useful lives. Fully depreciated property and equipment still in use are
not eliminated from the accounts.
The Company assesses the carrying value
of its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability is measured by comparing estimated undiscounted cash flows, expected to be generated
from such assets, to their net book value. If net book value exceeds estimated cash flows, the asset is written down to its
fair value, determined by the estimated discounted cash flows from such asset. When an asset is retired or sold, its cost
and related accumulated depreciation and amortization are removed from the accounts. The difference between the net book value
of the asset and proceeds on disposition is recorded as a gain or loss in our statements of operations in the period in which they
occur.
(i) Income Taxes
The Company applies the provisions of FASB
Accounting Standard Codification (ASC) 740 Income Taxes. This standard requires an asset and liability approach for financial accounting
and reporting for income taxes, and the recognition of deferred tax assets and liabilities for the temporary differences between
the financial reporting basis and tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in
effect when such amounts are realized or settled. A valuation allowance is provided if, based on the weight of available evidence,
it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company’s
policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits as a component of income tax
expense (benefit).
(j) Stock-Based Compensation
The Company records expenses associated
with the fair value of stock-based compensation. For fully vested and restricted stock grants, the Company calculates the
stock based compensation expense based upon estimated fair value on the date of grant. For stock warrants and options, the Company
uses the Black-Scholes option valuation model to calculate stock based compensation at the date of grant. Option pricing models
require the input of highly subjective assumptions, including the expected price volatility. Changes in these assumptions can materially
affect the fair value estimate.
(k) Stock Issuance
The Company records the stock-based compensation
awards issued to non-employees and other external entities for goods and services at either the fair market value of the goods
received or services rendered or the instruments issued in exchange for such services, whichever is more readily determinable,
using the measurement date guidelines enumerated in FASB ASC 505-50-30.
(l) Earnings per Share – Basic and
Diluted
Basic earnings per share (EPS) is computed
by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS
is computed by dividing net income (loss) by the weighted average number of common shares and potential common shares outstanding
(if dilutive) during each period. Potential common shares include stock options, warrants, 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 years ended September 30, 2016 and 2015, the potentially dilutive shares are anti-dilutive and thus not added into the EPS
calculations. As of September 30, 2016 and 2015, there were 109,893,291 and 51,824,819 potentially dilutive shares,
respectively.
(m) Statement of Cash Flows
For purposes of the Statements of Cash
Flows, the Company considers cash on deposit in the bank to be cash. The Company had unrestricted cash of $64,114 as
of September 30, 2016. The Company had $1,428,014 unrestricted cash as of September 30, 2015.
(n) Use of Estimates
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
(o) Impact of New Accounting Standards
In May 2014, the FASB issued Accounting
Standards Update No. 2014-09 (“ASU No. 2014-09”), which requires an entity to recognize the amount of revenue to which
it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue
recognition guidance in GAAP when it becomes effective. As amended, the new standard is effective for annual reporting periods
beginning after December 15, 2017. 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 ending after December 15, 2016, and interim periods within those years, 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 2 - LIQUIDITY/GOING CONCERN
The Company has incurred accumulated losses
as of September 30, 2016 of $33,527,174 ,and has a net capital deficiency. Further losses are anticipated in developing our business. As
a result, the Company’s auditors have expressed substantial doubt about the Company’s ability to continue as a going
concern. As of September 30, 2016, the Company had $64,114 of unrestricted cash on hand. The Company estimates
that it will need to raise a minimum of $4 million to meet its obligations and planned expenditures through December 2017. The
Company also plans to extend the agreements associated with loans from related parties, the accrued interest payable on these loans,
as well as the Company’s accrued liabilities. The Company plans to finance the Company through equity and/or debt financings
and/or farm-out agreements. There are no assurances that financing will be available with acceptable terms, if at all. If
the Company is not successful in obtaining financing, operations would need to be curtailed or ceased. The financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
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”).
In March 2015, the Company was awarded two blocks in the Central Gulf of Mexico Lease Sale 235. 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.
In March 2014, the Company entered into
a farm-out letter agreement with Texas South relating to five prospects located within the blocks the Company bid on at the Central
Gulf of Mexico Lease Sale 231. Under the terms of the farm-out letter agreement, Texas South acquired a 20% working
interest in these five prospects for $10 million. In accordance with full cost requirements, the Company recorded the proceeds
from the transaction as an adjustment to capitalized costs with no gain recognition. Texas South is obligated to pay its proportionate
share of the net annual rental costs related to the prospects. The Company will be the operator of record.
In May 2016, the Company entered into a
letter of intent (the “LOI”) with 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 September 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 Company paid $632,665 and $807,755
in gross annual lease rental payments to the BOEM for the year ended September 30, 2016 and 2015, respectively. The Company’s
share of these amounts are included in unproved properties.
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 properly
capitalized these G&G costs because the Company acquired specific unevaluated properties during the period that these costs
relate to. At March 31, 2015, a portion of these costs, $93,052, specifically related to properties that were not yet
acquired were subject to the ceiling limitation test and immediately impaired. These remaining capitalized amounts when
added to the amount paid for our 2014 and 2015 lease bonus and lease rental payments of $9,275,274 and netted with the 2014 and
2015 receipts from sale of a working interest of $10,000,000 results in unproved oil and gas properties of $5,557,183, reflected
on our balance sheet at September 30, 2015.
During the period October 1, 2015 to September
30, 2016, the Company incurred $1,354,674 in consulting fees and salaries and benefits associated with full-time geoscientists,
and $463,497 associated with technological infrastructure, third party hosting services and seismic data. The Company capitalized
these G&G costs because the Company owned specific unevaluated properties that these costs relate to. At June 30,
2016, a portion of these costs, $280,000, specifically related to leases relinquished in June 2016 were immediately impaired. These
remaining capitalized amounts when added to the amount paid in 2016 for lease rental payments of $632,665 and netted with the 2016
receipts from sale of a working interest of $400,000 as well as the relinquished leases impairment amount of $2,610,678 subtracting
lease rentals receivable of $191,171 results in unproved oil and gas properties of $4,526,171, reflected on our balance sheet at
September 30, 2016.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of September
30, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Office equipment and computers
|
|
$
|
143,897
|
|
|
$
|
143,897
|
|
Furniture and fixtures
|
|
|
16,280
|
|
|
|
16,280
|
|
Leasehold improvements
|
|
|
4,053
|
|
|
|
4,054
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
164,230
|
|
|
|
164,231
|
|
Less: accumulated depreciation
|
|
|
(139,942
|
)
|
|
|
(93,716
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
24,288
|
|
|
$
|
70,515
|
|
Depreciation is computed on a straight-line basis over the estimated
useful lives of the assets, which were as follows:
|
|
|
Life
|
Office equipment and computers
|
3 years
|
Furniture and fixtures
|
5 years
|
Leasehold improvements
|
Shorter of 5 years or related lease term
|
Depreciation expense was $46,226 and $51,934 for the years ended
September 30, 2016 and 2015, respectively.
NOTE 5 - INCOME TAXES
The provision for income taxes consists of the following as
of September 30, 2016 and 2015:
|
|
9/30/2016
|
|
|
9/30/2015
|
|
FEDERAL
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
STATE
|
|
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
|
31,002
|
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
TOTAL PROVISION
|
|
$
|
—
|
|
|
$
|
31,002
|
|
Deferred income tax assets and liabilities at September 30,
2016 and 2015 consist of the following temporary differences:
|
|
9/30/2016
|
|
|
9/30/2015
|
|
DEFERRED TAX ASSETS
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
Noncurrent
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
|
3,965,535
|
|
|
|
3,095,457
|
|
Exploration costs
|
|
|
(809,244
|
)
|
|
|
(282,550
|
)
|
Gain recognized on sale of working interest
|
|
|
1,414,901
|
|
|
|
1,404,763
|
|
Stock based compensation
|
|
|
74,709
|
|
|
|
33,414
|
|
Accrued interest and expenses not paid
|
|
|
320,147
|
|
|
|
—
|
|
Allowance for doubtful receivable
|
|
|
19,204
|
|
|
|
|
|
Differences in book/tax depreciation
|
|
|
5,362
|
|
|
|
—
|
|
Total noncurrent
|
|
|
4,990,614
|
|
|
$
|
4,251,084
|
|
Valuation Allowance
|
|
|
(4,990,614
|
)
|
|
|
(4,251,084
|
)
|
NET DEFERRED TAX ASSET
|
|
|
—
|
|
|
|
—
|
|
DEFERRED TAX LIABILITIES
|
|
|
—
|
|
|
|
—
|
|
NET DEFERRED TAXES
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company’s valuation allowance has increased $740,576
during the year ended September 30, 2016 and $552,168 during the year ended September 30, 2015.
The following is a summary of federal net operating loss carryforwards
and their expiration dates:
Amount
|
|
Expiration
|
$
|
3,203
|
|
9/30/2024
|
|
7,695
|
|
9/30/2025
|
|
18,447
|
|
9/30/2026
|
|
16,876
|
|
9/30/2027
|
|
17,986
|
|
9/30/2028
|
|
8,596
|
|
9/30/2029
|
|
7,713
|
|
9/30/2030
|
|
64,097
|
|
9/30/2031
|
|
513,914
|
|
9/30/2032
|
|
7,155,229
|
|
9/30/2033
|
|
11,567,666
|
|
9/30/2034
|
|
1,203,016
|
|
9/30/2035
|
|
5,852,461
|
|
9/30/2036
|
$
|
26,436,899
|
|
Total
|
The actual income tax provision for continuing operations is
as follows as of September 30, 2016 and 2015, respectively:
|
|
9/30/2016
|
|
|
9/30/2015
|
|
Expected provision (based on statutory rate)
|
|
$
|
(776,387
|
)
|
|
$
|
(553,737
|
)
|
Effect of:
|
|
|
|
|
|
|
|
|
Increase (decrease) in valuation allowance
|
|
|
740,576
|
|
|
|
552,168
|
|
State minimum tax, net of federal benefit
|
|
|
—
|
|
|
|
31,002
|
|
Non-deductible expense
|
|
|
29,555
|
|
|
|
1,081
|
|
Net operating loss adjustment
|
|
|
—
|
|
|
|
—
|
|
Rate Change
|
|
|
—
|
|
|
|
—
|
|
Other, net
|
|
|
6,256
|
|
|
|
488
|
|
Total actual provision
|
|
$
|
—
|
|
|
$
|
31,002
|
|
The Company has not made any adjustments
to deferred tax assets or liabilities. The Company did not identify any material uncertain tax positions of the Company on returns
that have been filed or that will be filed. The Company has not had operations and is carrying a large Net Operating Loss as disclosed
above. Since this Net Operating Loss will not produce a tax benefit for several years, even if examined by taxing authorities and
disallowed entirely, there would be no effect on the financial statements.
The Company’s policy is to recognize
potential interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense (benefit). For
the years ended September 30, 2016 and 2015, the Company did not recognize any interest or penalties, nor did we have any interest
or penalties accrued as of September 30, 2016 and 2015 relating to unrecognized benefits.
The tax years ended September 30, 2013
through 2016 are open for examination for federal income tax purposes and by other major taxing jurisdictions to which we are subject.
NOTE 6 - RELATED PARTY TRANSACTIONS
During April through September 2013, the
Company entered into convertible promissory notes whereby it borrowed a total of $6,500,000 from John Seitz, its current chief
executive officer. The notes are due on demand, bear interest at the rate of 5% per annum, and are convertible into shares of common
stock at a conversion price equal to $0.12 per share of common stock (the then offering price of shares of common stock to unaffiliated
investors). In May 2013, John Seitz converted $1,200,000 of the aforementioned debt into 10,000,000 shares of common stock, which
shares were issued in July 2013. 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 fiscal year ended September 2016,
the Company executed promissory notes totaling $363,000 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. As of September 30, 2016 the total amount owed to John Seitz,
our CEO, is $8,073,000. There was a total of $782,154 and $383,068 of unpaid interest associated with these loans included in accrued
interest within our balance sheet as of September 30, 2016 and 2015, respectively.
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 September 30, 2016, the total amount of demand notes owed to Dr. Bain and his affiliate was $267,000. There was a total of
$14,635 and $1,463 of accrued interest associated with these loans included within our balance sheet as of September 30, 2016
and 2015, respectively. 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 7).
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 7).
Domenica Seitz CPA, related to John Seitz,
has provided accounting consulting services to the Company. During the twelve month periods ended September 30, 2016 and 2015,
the services provided were valued at $59,510 based on market-competitive salaries, time devoted and professional rates. The Company
has accrued this amount, and it has been reflected in the September 30, 2016 financial statements.
John Seitz has not received a salary since
May 31, 2013, the date he commenced serving as our CEO and accordingly, no amount has been accrued on our financial statements.
Kevin Bain, son of Dr. Bain, is a geoscientist,
employee of the Company.
All employees of the Company (including
executive management), who are all shareholders of the Company have been paid a reduced salary plus benefits beginning on January
1, 2016.
NOTE 7 – 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 year ended September 30, 2016 amortization of this discount totaled $119,811 and is included in interest expense
in the statement of operations.
In July and August 2016 the Company issued
two convertible promissory notes with associated warrants in a private placement to accredited investors for total gross proceeds
of $400,000. 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 13.3 million
warrants 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 $200,288 to the warrants and $199,712 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 $199,712. Accordingly,
the debt discount associated with these notes was $400,000. Such discount will be amortized using the effective interest rate method
over the term (one year) of the convertible notes. For the year ended September 30, 2016 amortization of this discount totaled
$76,438 and is included in interest expense in the statement of operations.
NOTE 8 - COMMON STOCK/PAID IN CAPITAL
In March 2014, the Company issued an aggregate
of 1,500,000 shares of restricted stock to an employee and two non-employee directors. The restricted stock is subject
to vesting pursuant to which one-half vested in March 2015 and the remaining one-half vested in March 2016.
In May 2014, the Company awarded 550,000
shares of restricted stock to an employee, one-half of which vested in May 2015 and the remaining half vested in May 2016.
In July 2014, John H. Malanga, chief financial
officer and chief accounting officer, was awarded an inducement grant of 2,500,000 shares of restricted stock, with a fair value
on the date of the award of $600,000, one-half of which vested in July 2015 and the remaining half vested in July 2016.
In August 2014, an employee was awarded
an inducement grant of 200,000 shares of restricted stock one-half of which vested in August 2015 and the remaining half vested
in August 2016.
In September 2014, the Company awarded
3,030,000 shares of restricted stock to six employees, one-half of which vested in September 2015 and the remaining half vested
in September 2016.
On April 17, 2015, the Company sold 5,000,000
shares of common stock to two accredited investors in a private placement at a price of $0.10 per share, for gross proceeds
of $500,000. The common stock sold has anti-dilution protection that will adjust the price per share in the event that the Company
closes on a common stock financing at an effective price of less than $0.10 per share. This anti-dilution provision was in effect
through December 31, 2015. As a result of the anti-dilution provision, 5,000,000 additional shares were owed to the
two accredited investors as of September 30, 2015. These shares were issued in December 2015.
During the fiscal year ended September
30, 2015 the Company issued 1,579,607 shares of its common stock to three vendors as consideration for services rendered in the
ordinary course of business.
In September 2015, the Company sold 4,600,000
shares of common stock to an accredited investor in a private placement at a purchase price of $0.05 per share for gross proceeds
of $230,000. As of September 30, 2015 these shares were not yet issued and have been included in additional paid-in
capital – shares to be issued on our balance sheet. The shares were issued in December 2015.
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 7, during the three
months ended June 30, 2016, the Company issued 12.9 million warrants in conjunction with convertible notes payable (Bridge Financing
Notes). The warrants have an exercise price of $0.03 and a term of the earlier of 3 years or upon a change of control. 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:
|
|
June 2016 Warrants
|
|
Stock Price:
|
|
$
|
0.054
|
(1)
|
Exercise Price
|
|
$
|
0.03
|
|
Term
|
|
|
3 years
|
|
Risk Free Rate
|
|
|
.87
|
%
|
Volatility
|
|
|
135
|
%
|
(1)
Fair market value on the date of agreement
|
|
|
|
|
As discussed in Note 7, during the three months ended September
30, 2016, the Company issued 13.3 million warrants in conjunction with convertible notes payable (Bridge Financing Notes). The
warrants have an exercise price of $0.03 and a term of the earlier of 3 years or upon a change of control. Based upon the allocation
of proceeds between the convertible notes payable and the warrants, approximately $200,288 was allocated to the warrants.
The fair value of the warrants were determined using the Black
Scholes valuation model with the following key assumptions:
|
|
July 2016 Warrants
|
|
|
August 2016 Warrants
|
|
Stock Price:
|
|
$
|
0.040
|
(1)
|
|
$
|
0.032
|
(1)
|
Exercise Price
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
Term
|
|
|
3 years
|
|
|
|
3 years
|
|
Risk Free Rate
|
|
|
.80
|
%
|
|
|
.88
|
%
|
Volatility
|
|
|
138
|
%
|
|
|
137
|
%
|
(1) Fair market value on the date of agreement
|
|
|
|
|
|
A summary of Bridge Financing Note
warrants outstanding as of September 30, 2016:
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Exercise Price
|
|
|
Number Outstanding
|
|
|
Weighted Average Remaining Contractual Life (Yrs)
|
|
|
Weighted Average Exercise Price
|
|
|
Number Exercisable
|
|
|
Weighted Average Exercise Price
|
|
$
|
0.03
|
|
|
|
12,900,000
|
|
|
|
2.7
|
|
|
$
|
0.03
|
|
|
|
12,900,000
|
|
|
$
|
0.03
|
|
$
|
0.03
|
|
|
|
10,000,000
|
|
|
|
2.8
|
|
|
$
|
0.03
|
|
|
|
10,000,000
|
|
|
$
|
0.03
|
|
$
|
0.03
|
|
|
|
3,333,333
|
|
|
|
2.9
|
|
|
$
|
0.03
|
|
|
|
3,333,333
|
|
|
$
|
0.03
|
|
NOTE 9 – 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 $670,294 and $856,125 in stock-based compensation expense for the years ended September 30, 2016 and 2015, respectively.
A portion of these costs allocable to the Company’s exploration activities, $387,196 and $450,351 were capitalized
to unproved properties and the remainder was recorded as general and administrative expenses, for the years ended September 30,
2016 and 2015, respectively.
The following table summarizes the Company’s
stock option activity during the year ended September 30, 2016:
|
|
Number
of Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (In years)
|
|
|
Average
Intrinsic Value
|
|
Outstanding at beginning of period
|
|
|
2,000,000
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Outstanding at end of period
|
|
|
2,000,000
|
|
|
$
|
0.12
|
|
|
|
2.80
|
|
|
$
|
—
|
|
Vested and expected to vest
|
|
|
2,000,000
|
|
|
$
|
0.12
|
|
|
|
2.80
|
|
|
$
|
—
|
|
Exercisable at end of period
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
The Company uses the Black-Scholes option-pricing
model to estimate the fair value of options granted. The weighted-average fair values of stock options granted for the year ended
September 30, 2014 were based on the following assumptions at the date of grant as follows:
Expected dividend yield
|
|
|
0
|
%
|
Expected stock price volatility
|
|
|
79.02
|
%
|
Risk-free interest rate
|
|
|
1.53
|
%
|
Expected life of options
|
|
|
5.75 years
|
|
Weighted-average grant date fair value
|
|
$
|
0.08
|
|
The Company used a variety of comparable
and peer companies to determine the expected volatility. The Company has no historical data regarding the expected life of the
options and therefore used the simplified method of calculating the expected life. The risk free rate was calculated using
the U.S. Treasury constant maturity rates similar to the expected life of the options, as published by the Federal Reserve. The
Company has no plans to declare any future dividends.
As of September 30, 2016 there was no unrecognized
stock-based compensation cost related to the stock option grant and no unrecognized stock-based compensation cost related to the
restricted stock grants.
NOTE 10– COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become
involved in litigation relating to claims arising out of its operations in the normal course of business. No legal proceedings,
government actions, administrative actions, investigations or claims are currently pending against us or involve the Company.
In March 2013, the Company licensed certain
seismic data pursuant to an agreement and as of September 30, 2016, the Company has paid $3,009,195 in cash and is obligated to
pay $1,003,065 during 2017.
NOTE 11 – SUBSEQUENT EVENTS
In October 2016, the Company purchased
an insurance policy for $170,850 and financed $155,010 of the premium by executing a note payable.
In November 2016, the Company sold an additional
$50,000 convertible promissory note pursuant to the Bridge Financing Agreements described in Note 7. This amount when added to
the Bridge Financing Note balance at September 30, 2016 results in a total of $837,000 Bridge Notes through the filing date of
this report.
The company entered into a promissory note
with Mr. John Seitz whereby it borrowed a total of $78,000 in December 2016. The note is due on demand, not convertible
and bears interest at the rate of 5% per annum