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
March 31, 2017
(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 company whose interests are concentrated in the United States Gulf of Mexico federal waters
offshore Louisiana. The Company currently has under lease 17 federal Outer Continental Shelf blocks (referred to as “prospect,”
“portfolio” or “leases” in this Report).
Since March 2013, we have been
singularly focused on identifying 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 17 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.
Our activities have been focused exclusively in the federal waters of the Gulf of Mexico. We have given preference to areas with
water depths of 450 feet or less where production infrastructure already exists. Sixteen of our seventeen prospects are in less
than 450 feet of water depth. We believe this will allow for any discoveries to be developed faster and less expensively, given
our goal to reduce economic risk while increasing returns.
As of March 31, 2017, we have
no proved reserves.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
The condensed financial statements
included herein are unaudited. However, these condensed financial statements include all adjustments (consisting of normal recurring
adjustments) which in the opinion of management, are necessary for a fair presentation of financial position, results of operations
and cash flows for the interim periods. The results of operations for interim periods are not necessarily indicative of the results
to be expected for an entire year. The preparation of financial statements in accordance with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed
financial statements and accompanying notes. Actual results could differ materially from those estimates.
Certain information, accounting
policies, and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) have been omitted 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, 2016, which were included in the
Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016 and filed with the Securities and Exchange
Commission on December 27, 2016.
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 March 31, 2017 of $34.9 million. Further losses are anticipated in developing our business. As a result, our auditor
expressed substantial doubt about our ability to continue as a going concern on its report for the year ended September 30, 2016.
As of March 31, 2017, we had $0.06 million of unrestricted cash on hand. Management has analyzed its cash needs for the 12
month period beginning from the filing date of these financial statements, and determined that the Company will need to raise a
minimum of $4 million to meet its obligations and planned expenditures through May 2018. The Company plans to finance its
operations through the issuance of equity, debt financings or joint ventures, further sale of working interests in prospects or
bridge financing. Our policy has been to periodically raise funds through the sale of equity on a limited basis, to avoid undue
dilution while at the early stages of execution of our business plan. Short term needs have been historically funded through
loans from executive management 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 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.
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 March 31, 2017, the Company’s
oil and gas properties consisted of unproved properties and no proved reserves.
Basic and Dilutive Earnings
Per Share
Basic earnings 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 six months ended March 31, 2017 and 2016, the potentially dilutive shares are anti-dilutive and are thus not added into
the loss per share calculations. As of March 31, 2017 and 2016, there were 159,353,071 and 52,947,389 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. 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 does not anticipate the adoption of this standard to have a material impact
on its financial statements.
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 now
effective, and has been adopted by the Company. See the liquidity and going concern section of Note 2 for the further discussion
on management’s analysis.
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”).
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 recorded 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 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 March 31, 2017 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 also received lease rental reimbursements of $63,147 under the
terms of this letter of intent.
The Company paid $0 and $632,665 in
gross annual lease rental payments to the BOEM for the six months ended March 31, 2017 and year ended September 30, 2016, respectively.
The Company’s share of these amounts are included in unproved properties.
For the year ended 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.
For the six months ended March 31, 2017,
the Company incurred $86,731 in consulting fees, salaries and benefits, $139,375 in stock option costs associated with geoscientists,
and $22,152 associated with technological infrastructure and third party hosting services. The Company capitalized these G&G
costs because the Company owned specific unevaluated properties that these costs relate to. These amounts when added to unproved
properties at September 30, 2016 result in $4,774,429 unproved properties at March 31, 2017.
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. Between June of 2014 and December 2015, the Company
entered into promissory notes whereby it borrowed a total of $2,410,000 from Mr. Seitz. The notes are not convertible, due on
demand and bear interest at a rate of 5% per annum. During January through September 2016, the Company entered into
promissory notes whereby it borrowed a total of $363,000 from Mr. Seitz. The notes are due on demand, bear interest at the
rate of 5% per annum, and the outstanding principal and interest is convertible at the option of the holder into securities
issued by the Company in a future offering, at the same price and terms received by unaffiliated investors. Additionally,
during the six months ended March 31, 2017, the Company entered into promissory notes with John Seitz whereby it borrowed a
total of $194,500. The notes are due on demand, bear interest at the rate of 5% per annum, and the outstanding principal and
interest is convertible at the option of the holder into securities issued by the Company in a future offering, at the
same price and terms received by unaffiliated investors. As of March 31, 2017 the total amount owed to John Seitz, our CEO,
is $8,267,500. There was a total of $987,861 of unpaid interest associated with these loans included in accrued interest
payable within our balance sheet as of March 31, 2017.
From August 2015 through February
2016 the Company entered into promissory notes whereby it borrowed a total of $267,000 from Dr. Ronald Bain, its 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. As of March 31, 2017, the total amount owed to Dr. Bain and his affiliate was $267,000.
There was a total of $21,385 of accrued interest associated with these loans and the Company has recorded interest expense for
the same amount. During the fiscal year ended September 30, 2016, 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).
Domenica Seitz, CPA, a
related party, has provided accounting consulting services to the Company. During the three and six month period ended March
31, 2017, services provided were $5,915 and $20,795, respectively. The Company has accrued these amounts, and they are reflected in
the March 31, 2017 condensed financial statements.
On November 15, 2016, a family
member of the CEO, a related party, entered into a $50,000 convertible promissory note with associated warrants (“Bridge
Financing”) under the same terms received by other investors (see Note 5).
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.
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.
On January 1, 2017, 1.25 million
restricted shares, that vested in September 2016, were issued to an employee.
On January 1, 2017, 33.5 million
stock options were granted to six employees and two directors of the Company. The CEO was not included in the award. The stock
options vested 50% on January 1, 2017 and the remaining 50% will vest on January 1, 2018, provided that the option holder continues
to serve as an employee or director on the vesting date. The stock options are exercisable for seven years from the original grant
date of January 1, 2017, until January 1, 2024.
NOTE 5 – BRIDGE FINANCING –
CONVERTIBLE PROMISSORY NOTES WITH ASSOCIATED WARRANTS
Between June and November 2016,
the Company issued eleven convertible promissory notes with associated warrants in a private placement to accredited investors
for total gross proceeds of $837,000. Three of the notes were to related parties for proceeds totaling $222,000, including the
extinguishment of $70,000 worth of related party payables. The convertible notes 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 27.9 million warrants (7.4 million to the above mentioned related parties) with an exercise price
of $0.03 and a term of the earlier of three years or upon a change of control. The Company evaluated the various financial instruments
under ASC 480 and ASC 815 and determined no instruments or features 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 $452,422 to the warrants and $384,578 to the convertible notes. After such allocation, the Company
evaluated the conversion option to discern whether a beneficial conversion feature existed based upon comparing the effective exercise
price of the convertible notes to the fair value of the shares they are convertible into. The Company concluded a beneficial conversion
feature existed and measured such beneficial conversion feature at $384,368. Accordingly, the debt discount associated with these
notes was $836,790. Such discount will be amortized using the effective interest rate method over the term (one year) of the convertible
notes. For the quarter ended March 31, 2017 amortization of this discount totaled $206,332 and is included in interest expense
in the statement of operations. Accrued interest expense for the quarter ended March 31, 2017 is $16, 740.
On December 28, 2016, the Company
issued a convertible promissory note with 500,000 shares of restricted stock and 550,000 warrants in a private placement to an
accredited investor for $50,000 in proceeds. The warrants have a five-year term and an exercise price of $0.10. The promissory
note has a face value of $55,555 and incurs a one-time upfront interest charge of six percent. The holder of the note has the option
to convert the note into shares of common stock at a conversion price of $0.02 per share. Approximately $450,000 of additional
funding is available under similar terms if the Company and the lender mutually agree to further tranches. The Company evaluated
the various financial instruments under ASC 480 and ASC 815 and determined no material instruments or features required fair value
accounting. Therefore, in accordance with ASC 470-20-25-2, the Company allocated the proceeds between the convertible note, restricted
common stock, and warrants based on their relative fair values. This resulted in an allocation of $8,460 to the restricted stock,
$7,969 to the warrants and $33,571 to the convertible note. After such allocation, the Company evaluated the conversion option
to discern whether a beneficial conversion feature existed based upon comparing the effective exercise price of the convertible
note to the fair value of the shares it is convertible into. The Company concluded a beneficial conversion feature existed and
measured such beneficial conversion feature at $33,571. Accordingly, at December 28, 2016, the debt discount associated with these
notes was $55,555. Such discount will be amortized using the effective interest rate method over the term (seven months) of the
convertible note. For the three months ended March 31, 2017 amortization of this discount totaled $23,585 and is included in interest
expense in the statement of operations. Accrued interest expense for the quarter ended March 31, 2017 is zero.
On March 14, 2017, the Company
issued a convertible promissory note with 1,000,000 shares of restricted stock and 1,100,000 warrants in a private placement to
an accredited investor for $100,000 in proceeds. The warrants have a five-year term and an exercise price of $0.10. The promissory
note has a face value of $111,111 and incurs a one-time upfront interest charge of six percent. The holder of the note has the
option to convert the note into shares of common stock at a conversion price of $0.02 per share. Approximately $350,000 of additional
funding is available under similar terms if the Company and the lender mutually agree to further tranches. The Company evaluated
the various financial instruments under ASC 480 and ASC 815 and determined no material instruments or features required fair value
accounting. Therefore, in accordance with ASC 470-20-25-2, the Company allocated the proceeds between the convertible note, restricted
common stock, and warrants based on their relative fair values. This resulted in an allocation of $17,250 to the restricted stock,
$14,051 to the warrants and $68,699 to the convertible note. After such allocation, the Company evaluated the conversion option
to discern whether a beneficial conversion feature existed based upon comparing the effective exercise price of the convertible
note to the fair value of the shares it is convertible into. The Company concluded a beneficial conversion feature existed and
measured such beneficial conversion feature at $68,699. Accordingly, at March 14, 2017, the debt discount associated with these
notes was $111,111. Such discount will be amortized using the effective interest rate method over the term (seven months) of the
convertible note. For the three months ended March 31, 2017 amortization of this discount totaled $8,827 and is included in interest
expense in the statement of operations. Accrued interest expense for the quarter ended March 31, 2017 is $6,666.
NOTE 6 – COMMON STOCK/PAID
IN CAPITAL
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, between June
and November 2016, the Company issued 27.9 million warrants in conjunction with convertible notes payable. The warrants have an
exercise price of $0.03 and a term of the earlier of 3 years or upon a change of control. Based upon the allocation of proceeds
between the convertible notes payable and the warrants, approximately $452,422 was allocated to the warrants.
The fair value of the warrants were determined using the
Black Scholes valuation model with the following key assumptions:
|
June 2016
|
July 2016
|
August 2016
|
November 2016
|
Number of Warrants Issued
|
12.9 million
|
10.0 million
|
3.3 million
|
1.7 million
|
Stock Price:
|
$0.054
|
$0.040
|
$0.032
|
$0.029
|
Exercise Price:
|
$0.03
|
$0.03
|
$0.03
|
$0.03
|
Term:
|
3 years
|
3 years
|
3 years
|
3 years
|
Risk Free Rate:
|
.87%
|
.80%
|
.88%
|
1.28%
|
Volatility:
|
135%
|
138%
|
137%
|
131%
|
In December 2016, 500,000 shares
of restricted stock were issued in conjunction with a financing transaction (see Note 5).
As discussed in Note 5, in December 2016, the Company issued
550,000 warrants in conjunction with a convertible note payable. The warrants have an exercise price of $0.10 and a term of the
earlier of 5 years or upon a change of control. Based upon the allocation of proceeds between the convertible note payable and
the warrants, approximately $7,969 was allocated to the warrants.
In March 2017, 1,000,000 shares
of restricted stock were issued in conjunction with a financing transaction (see Note 5).
As discussed in Note 5, in March 2017, the Company issued
1,100,000 warrants in conjunction with a convertible note payable. The warrants have an exercise price of $0.10 and a term of the
earlier of 5 years or upon a change of control. Based upon the allocation of proceeds between the convertible note payable and
the warrants, approximately $14,051 was allocated to the warrants.
The fair value of the warrants were determined using the
Black Scholes valuation model with the following key assumptions:
|
December 2016
|
March 2017
|
Number of Warrants Issued
|
550,000
|
1,100,000
|
Stock Price:
|
$0.028
|
$0.0279
|
Exercise Price:
|
$0.10
|
$0.10
|
Term:
|
5 years
|
5 years
|
Risk Free Rate:
|
2.02%
|
2.13%
|
Volatility:
|
155%
|
127%
|
NOTE 7– STOCK-BASED
COMPENSATION
On January 1, 2017, 33.5 million stock options were granted
to 6 employees and 2 directors of the Company. The CEO was not included in the award. The stock options vested 50% on January 1,
2017 and the remaining 50% will vest on January 1, 2018, provided that the option holder continues to serve as an employee or director
on the vesting date. The stock options are exercisable for seven years from the original grant date of January 1, 2017, until January
1, 2024.
The fair value of the stock-options were determined using
the Black Scholes valuation model with the following key assumptions:
|
January 1, 2017
|
Number of Stock Options Awarded
|
33,500,000
|
Stock Price:
|
$0.0278
|
Exercise Price:
|
$0.0278
|
Term:
|
4 years
|
Risk Free Rate:
|
1.71%
|
Volatility:
|
127%
|
The Company used the
historical volatility of its stock for the period March 21, 2013 (the date the exploration activities began) through January 1,
2017 for the Black Scholes computation. 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.
Stock-based compensation cost is measured at the grant date,
using the estimated fair value of the award, and is recognized over the required vesting period. The Company recognized $466,906
in stock-based compensation during the three and six months ended March 31, 2017, and $202,650 and $408,044 in stock-based compensation
during the three and six months ended March 31, 2016, respectively. A portion of these costs, $139,375 and $112,050, were
capitalized to unproved properties and the remainder were recorded as general and administrative expenses for the three months
ended March 31, 2017 and 2016, respectively. For the six months ended March 31, 2017 and 2016, $139,375 and $225,746, respectively,
were capitalized to unproved properties.
The following table summarizes the Company’s
stock option activity during the three months ended March 31, 2017:
|
|
Number of Options
|
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term
|
|
Outstanding at December 31, 2016
|
|
2,000,000
|
|
|
$
|
0.12
|
|
|
—
|
|
Granted
|
|
33,500,000
|
|
|
$
|
.0278
|
|
|
4 years
|
|
Exercised
|
|
—
|
|
|
|
—
|
|
|
—
|
|
Cancelled
|
|
—
|
|
|
|
—
|
|
|
—
|
|
Outstanding at March 31, 2017
|
|
35,500,000
|
|
|
$
|
.0330
|
|
|
|
3.9 years
|
|
Vested and expected to vest
|
|
18,750,000
|
|
|
$
|
.0330
|
|
|
|
3.9 years
|
|
Exercisable at March 31, 2017
|
|
18,750,000
|
|
|
|
.0330
|
|
|
|
—
|
|
As of March 31, 2017, remaining
expense to be recognized related to outstanding options was $280,144.
As of March 31, 2017 there was
$33,500 of intrinsic value for stock options outstanding as of March 31, 2017.
On January 1, 2017, 1.25 million restricted shares, that
vested in September 2016, were issued to an employee.
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 March 31, 2017, the Company has
paid $6,135,500 in cash, with no additional amount due. With respect to the second agreement, as of March 31, 2017, the Company
has paid $3,009,195 in cash and is obligated to pay $1,003,065 during fiscal 2017.
In October 2016, the Company purchased
a directors and officers insurance policy for $170,850 and financed $155,010 of the premium by executing a note payable. The balance
of the note payable at March 31, 2017 is $78,270.
NOTE 9 – SUBSEQUENT
EVENTS
The company entered into a promissory note with John Seitz in May 2017 whereby it borrowed a total of $27,000. The 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 unaffiliated investors.