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 12 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)
Going Concern
The
Company’s financial statements have been presented on the basis that it is a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses through September
30, 2017 of $39.2 million. This factor raises doubt as to the Company’s ability to continue as a going concern. Management
intends to raise additional operating funds through equity and/or debt offerings. However there can be no assurance that additional
financing will be available, or if available,
will be on terms acceptable to the Company.
If adequate working capital is not available, the Company may be required to curtail its operations.
(d)
Cash and Cash Equivalents
The
Company considers all short-term highly liquid investments with an original maturity at the date of purchase of three months or
less to be cash equivalents. There were no cash equivalents at September 30, 2017 and September 30, 2016, respectively.
(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. For the year ended September
30, 2017, this allowance was reversed upon collection of the receivable.
(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, 2017, 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 the income tax provision.
(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, 2017 and 2016, the potentially dilutive shares are anti-dilutive
and thus not added into the EPS calculations. As of September 30, 2017 and 2016, there were 164,345,443 and 109,893,291
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 $6,426 as of September 30, 2017. The Company had $64,114 of unrestricted cash as of September
30, 2016.
(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 2014-15 is effective for the Company’s fiscal year beginning October 1, 2017, and interim periods
within the fiscal year. The Company has early adopted this standard for the fiscal year ended September 30, 2017. Management’s
assessment is that the financial statements for the year ended September 30, 2017 have been prepared on a basis such that there
is substantial doubt about the Company’s ability to continue as a going concern. See Note 1(c).
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, 2017 of $39.2 million, and has a net capital deficiency. Further losses
are anticipated in developing our business, and there exists substantial doubt about the Company’s ability to continue as
a going concern. As of September 30, 2017, the Company had $6,426 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
2018. 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 and 2015, the Company was awarded a total of 23 Outer Continental Shelf blocks in the Central Gulf of Mexico. During
the year ended September 30, 2016, the Company relinquished six of the lease blocks acquired. 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 for the year ended September 30, 2016. During the year ended September 30, 2017,
the Company relinquished six lease blocks. The capitalized lease costs of $2,054,212 associated with these blocks were recorded
as impairment of oil and natural gas properties. The Company also deducted $1,262,000 as an impairment of certain capitalized
exploration costs that were directly allocable to the 2017 relinquished blocks, for a total impairment deduction of $3,316,212.
In September 2017, the Company was notified by Bureau of Ocean Energy Management (“BOEM”) that its August bid for
an additional Outer Continental Shelf Block was accepted. As of September 30, 2017 the Company holds eleven Outer Continental
Shelf blocks and the Company’s bid was accepted on an additional block that was subsequently awarded in October 2017.
In
May 2016, the Company entered into a letter of intent (the “LOI”) with Texas South Energy, Inc. (“TSE”
or “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 also received lease rental reimbursements of $63,147 for 2016 and $63,147 for 2017
under the terms of this letter agreement.
The
Company paid $376,368 and $632,665 in gross annual lease rental payments to the BOEM for the year ended September 30, 2017 and
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.
In
August 2017, the Company competitively bid on one block in the Central Gulf of Mexico Lease Sale 249 conducted by BOEM. The
Company was the high bidder on the one block and paid $26,398, which represents 20% of the total lease bonus amount. On
September
29, 2017 t
he Company’s
bid was accepted. After payment of, $140,591, which represents the remaining 80% lease bonus and first year rentals, the Company
was awarded the lease block in October 2017.
In
August 2017, the Company entered into a letter agreement with Texas South that sets out the terms of a farm-out agreement for
the Company’s Tau prospect. In exchange for $166,989 TSE will acquire an undivided 20% interest in the prospect. Through
September 30, 2017, GulfSlope has received $26,400. 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.
For
the year ended September 30, 2017, the Company incurred $172,094 in consulting fees, salaries and benefits, $195,125 in stock
option costs associated with geoscientists, and $53,014 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 capitalized amounts when added to the amount paid in 2017 for lease rental and lease acquisition payments of $402,766
and netted with the 2017 receipts from working interest portion of annual rentals of $118,679 and the amount received through
September 30, 2017 for sale of working interest of $26,400 as well as the relinquished leases impairment amount of $3,316,212
results in unproved oil and gas properties of $1,887,879 reflected on our balance sheet at September 30, 2017.
In
September 2017, GulfSlope Energy, Inc.
and
Texas South Energy, Inc.,
(collectively,
the “Farmors”) announced that they have jointly executed an exclusive letter of intent (“LOI”) with a large
international oil and gas company (the “Partner”) to jointly drill and develop the Farmors oil and gas prospects located
offshore Gulf of Mexico.
NOTE 4
– PROPERTY AND EQUIPMENT
Property and
equipment consist of the following as of September 30, 2017 and 2016:
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Office equipment and computers
|
|
$
|
143,897
|
|
|
$
|
143,897
|
|
Furniture and fixtures
|
|
|
16,280
|
|
|
|
16,280
|
|
Leasehold improvements
|
|
|
4,054
|
|
|
|
4,054
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
164,231
|
|
|
|
164,231
|
|
Less: accumulated
depreciation
|
|
|
(160,747
|
)
|
|
|
(139,943
|
)
|
|
|
|
|
|
|
|
|
|
Net
property and equipment
|
|
$
|
3,484
|
|
|
$
|
24,288
|
|
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 $20,804 and $46,228 for the years ended September 30, 2017 and 2016, respectively.
NOTE 5
- INCOME TAXES
The
actual income tax provision for continuing operations is as follows as of September 30, 2017 and 2016, respectively:
|
|
9/30/2017
|
|
|
9/30/2016
|
|
Expected provision (based
on statutory rate of 15%)
|
|
$
|
(854,152
|
)
|
|
$
|
(776,387
|
)
|
Effect of:
|
|
|
|
|
|
|
|
|
Increase (decrease) in valuation allowance
|
|
|
732,562
|
|
|
|
740,576
|
|
State minimum tax, net of federal benefit
|
|
|
|
|
|
|
—
|
|
Non-deductible expense
|
|
|
121,590
|
|
|
|
29,555
|
|
Net operating loss adjustment
|
|
|
—
|
|
|
|
—
|
|
Rate Change
|
|
|
—
|
|
|
|
—
|
|
Other, net
|
|
|
—
|
|
|
|
6,256
|
|
Total actual provision
|
|
$
|
—
|
|
|
$
|
—
|
|
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 below. 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, 2017 and 2016, the Company did not recognize any interest or
penalties, nor did we have any interest or penalties accrued as of September 30, 2017 and 2016 relating to unrecognized benefits.
The provision
for income taxes consists of the following as of September 30, 2017 and 2016:
|
|
|
9/30/2017
|
|
|
|
9/30/2016
|
|
FEDERAL
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
STATE
|
|
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
|
—
|
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
TOTAL PROVISION
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred income
tax assets and liabilities at September 30, 2017 and 2016 consist of the following temporary differences:
|
|
|
9/30/2017
|
|
|
|
9/30/2016
|
|
DEFERRED
TAX ASSETS
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
Noncurrent
|
|
|
|
|
|
|
|
|
Net
operating losses
|
|
|
5,611,276
|
|
|
|
3,965,535
|
|
Exploration
costs
|
|
|
(931,289
|
)
|
|
|
(809,244
|
)
|
Gain
recognized on sale of working interest
|
|
|
691,336
|
|
|
|
1,414,901
|
|
Stock
based compensation
|
|
|
138,278
|
|
|
|
74,709
|
|
Accrued
interest and expenses not paid
|
|
|
246,360
|
|
|
|
320,147
|
|
Allowance
for doubtful receivable
|
|
|
—
|
|
|
|
19,204
|
|
Differences
in book/tax depreciation
|
|
|
7,215
|
|
|
|
5,362
|
|
Total
noncurrent
|
|
|
5,723,176
|
|
|
$
|
4,990,614
|
|
Valuation
Allowance
|
|
|
(5,723,176
|
)
|
|
|
(4,990,614
|
)
|
NET
DEFERRED TAX ASSET
|
|
|
—
|
|
|
|
—
|
|
DEFERRED
TAX LIABILITIES
|
|
|
—
|
|
|
|
—
|
|
NET
DEFERRED TAXES
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company’s
valuation allowance has increased $ 732,562 during the year ended September 30, 2017 and $740,576 during the year ended September
30, 2016.
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
|
|
6,777,040
|
|
9/30/2036
|
|
10,047,031
|
|
9/30/2037
|
$
|
37,408,509
|
|
Total
|
The
tax years ended September 30, 2014 through 2017 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. 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 year ended September
30, 2017, the Company entered into promissory notes with John Seitz whereby it borrowed a total of $602,500. 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 September 30, 2017 and September 30, 2016 the total amount owed to John Seitz, our CEO, is $8,675,500 and $8,073,000,
respectively. There was a total of $1,201,286 and $782,154 of unpaid interest associated with these loans included in accrued
interest within our balance sheet as of September 30, 2017 and 2016, respectively.
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 September 30, 2017, and 2016 the total amount owed to Dr. Bain
and his affiliate was $267,000. There was a total of $28,171 and $14,635 of accrued interest associated with these loans included
within our balance sheet as of September 30, 2017 and 2016, respectively. In June of 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 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).
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 7).
Domenica
Seitz CPA, related to John Seitz, has provided accounting consulting services to the Company. During the twelve month periods
ended September 30, 2017 and 2016, the services provided were valued at $32,625 and $59,510, respectively. The Company has accrued
these amounts, and they have been reflected in the September 30, 2017 and 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 and an employee of the Company.
NOTE
7 – 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 $384,368 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 year ended September 30, 2017 and 2016 the amortization
of this discount totaled $649,143 and $196,249 and is included in interest expense in the statement of operations. Accrued interest
expense for the year ended September 30, 2017 and September 30, 2016 was $66,471, and $15,593.
Upon
maturity of eight of the eleven promissory notes in June 2017, the Company issued 3,225,000 extension warrants (equal to 25% of
the original warrant amount) to the holders of the notes to extend the terms to January 15, 2018. The Company evaluated this modification
including considering the fair value of the warrants issued and concluded that extinguishment accounting was required as the present
value of future cash flows from the new note, including the fair value of the warrants issued to extend, exceeded the present
value of future cash flows of the old note by more than 10%. The fair value of the warrants was deemed to be $50,701 and such
amount was recognized immediately as a loss on extinguishment of debt. The fair value of the warrants was determined using the
Black-Scholes option pricing model.
In
July and August 2017, the three remaining promissory notes issued in July, August and November 2016 were extended until January
15, 2018 and issued 3,750,000 extension warrants (equal to 25% of the original warrant amount). The Company evaluated this
transaction including considering the fair value of the warrants issued and concluded that modification accounting was required
as the present value of future cash flows from the new note, including the fair value of the warrants issued to extend, are less
than 10% of the present value of future cash flows of the old note. When an instrument is modified, any incremental increase in
value (in this case the warrants) should be added to the discount of the notes and such discount should be amortized to interest
expense using the effective interest rate method over the new remaining life of the note. The fair value of the warrants, $38,946,
was determined using the Black-Scholes option pricing model.
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, which includes 10% original issue discount (“OID”) 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 was amortized
using the effective interest rate method over the term (seven months) of the convertible note. For the year ended September 30,
2017 amortization of this discount totaled $55,555 and is included in interest expense in the statement of operations. Accrued
interest expense for the year ended September 30, 2017 is $3,333. The note, related OID and accrued interest were converted into
approximately 5.5 million shares of GulfSlope Energy common stock in a series of conversions beginning on July 10, 2017 and ending
with a conversion on September 18, 2017 on which date all were paid in full.
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, which includes 10% original issue discount (“OID”),
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 year
ended September 30, 2017 amortization of this discount totaled $105,841 and is included in interest expense in the statement of
operations. Accrued interest expense for the year ended September 30, 2017 is $6,666. In September 2017, $30,000 was converted
into 1.5 million shares of stock, leaving a note balance of $81,111 at September 30, 2017.
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, an inducement grant, 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.
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 year ended September 30, 2016, the Company issued 26.2 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
$431,527 was allocated to the warrants. In November 2016, the Company issued 1.7 million warrants in conjunction with a convertible
note 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
$20,895 was allocated to the warrants. In June through August 2017, the maturity date of all of the Bridge Financing Notes was
extended to January 15, 2018 in exchange for the issuance of 25% additional warrants. The warrants have an exercise price of $0.03
and the same expiration date (three years from original transaction) as the original 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
|
|
|
June
2017
|
|
|
July
2017
|
|
|
August
2017
|
|
Warrants
Issued
|
|
12.9
million
|
|
|
10.0
million
|
|
|
3.3
million
|
|
|
1.7
million
|
|
|
3.2
million
|
|
|
2.5
million
|
|
|
1.25
million
|
|
Stock
Price:
|
|
$
|
0.054
|
(1)
|
|
$
|
0.040
|
(1)
|
|
$
|
0.032
|
(1)
|
|
$
|
0.029
|
(1)
|
|
$
|
0.025
|
(1)
|
|
$
|
0.019
|
(1)
|
|
$
|
0.016
|
(1)
|
Exercise
Price
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
Term
|
|
|
3
years
|
|
|
|
3
years
|
|
|
|
3
years
|
|
|
|
3
years
|
|
|
|
2
years
|
|
|
|
2
years
|
|
|
|
2
years
|
|
Risk
Free Rate
|
|
|
.87
|
%
|
|
|
.80
|
%
|
|
|
.88
|
%
|
|
|
1.28
|
%
|
|
|
1.35
|
%
|
|
|
1.35
|
%
|
|
|
1.33
|
%
|
Volatility
|
|
|
135
|
%
|
|
|
138
|
%
|
|
|
137
|
%
|
|
|
131
|
%
|
|
|
135
|
%
|
|
|
136
|
%
|
|
|
135
|
%
|
(1)
Fair market value on the date of agreement
A
summary of Bridge Financing Note warrants, issued in June through November 2016 and outstanding at September 30, 2017:
|
|
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
Date
Issued
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average Remaining Contractual Life (Yrs)
|
|
|
Weighted
Average Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average Exercise Price
|
|
June
2016
|
|
$
|
0.03
|
|
|
|
12,900,000
|
|
|
|
1.7
|
|
|
$
|
0.03
|
|
|
|
12,900,000
|
|
|
$
|
0.03
|
|
July
2016
|
|
$
|
0.03
|
|
|
|
10,000,000
|
|
|
|
1.8
|
|
|
$
|
0.03
|
|
|
|
10,000,000
|
|
|
$
|
0.03
|
|
August
2016
|
|
$
|
0.03
|
|
|
|
3,333,333
|
|
|
|
1.9
|
|
|
$
|
0.03
|
|
|
|
3,333,333
|
|
|
$
|
0.03
|
|
November
2016
|
|
$
|
0.03
|
|
|
|
1,666,667
|
|
|
|
2.1
|
|
|
$
|
0.03
|
|
|
|
1,666,667
|
|
|
$
|
0.03
|
|
A
summary of Bridge Financing Note warrants, issued in June through August 2017 in exchange for extending the due date to January
15, 2018 and outstanding at September 30, 2017:
|
|
|
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
Date
Issued
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Remaining
Contractual Life (Yrs)
|
|
|
Weighted
Average Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average Exercise Price
|
|
June
2016
|
|
$
|
0.03
|
|
|
|
3,225,000
|
|
|
|
1.7
|
|
|
$
|
0.03
|
|
|
|
3,225,000
|
|
|
$
|
0.03
|
|
July
2016
|
|
$
|
0.03
|
|
|
|
2,500,000
|
|
|
|
1.8
|
|
|
$
|
0.03
|
|
|
|
2,500,000
|
|
|
$
|
0.03
|
|
August
2016
|
|
$
|
0.03
|
|
|
|
833,333
|
|
|
|
1.9
|
|
|
$
|
0.03
|
|
|
|
833,333
|
|
|
$
|
0.03
|
|
August
2016
|
|
$
|
0.03
|
|
|
|
416,667
|
|
|
|
2.1
|
|
|
$
|
0.03
|
|
|
|
416,667
|
|
|
$
|
0.03
|
|
In
December 2016 and March 2017 the Company issued 500,000 and 1,000,000 shares of GulfSlope Energy stock, respectively to Lucas
Hoppel as part of a financing transaction (see Note 7).
In
December 2016 and March 2017 the Company issued 550,000 and 1,100,000 warrants to purchase stock at $0.10 per share to Lucas Hoppel
as part of a financing transaction (see Note 7). The warrants have a term of 5 years.
A
summary of Hoppel Financing Note warrants, issued in December 2016 through March 2017:
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Remaining
Contractual Life (Yrs)
|
|
|
Weighted
Average Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average Exercise Price
|
|
$
|
0.10
|
|
|
|
550,000
|
|
|
|
4.3
|
|
|
$
|
0.10
|
|
|
|
550,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
4.5
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
NOTE 9
– STOCK-BASED COMPENSATION
On January
1, 2017, 33.5 million stock options were granted to employees, officers and 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.
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 $653,669 and $670,294 in stock-based compensation expense for the years ended September
30, 2017 and 2016, respectively. A portion of these costs allocable to the Company’s exploration activities, $195,125
and $387,196 were capitalized to unproved properties and the remainder was recorded as general and administrative expenses, for
the years ended September 30, 2017 and 2016, respectively.
The
following table summarizes the Company’s stock option activity during the year ended September 30, 2017:
|
|
Number of Options
|
|
Weighted Average Exercise
Price
|
|
Weighted Average Remaining
Contractual Term (Years)
|
|
Average Intrinsic Value
|
Outstanding at beginning of period
|
|
|
2,000,000
|
|
|
$
|
0.1200
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
33,500,000
|
|
|
|
0.0278
|
|
|
|
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Outstanding at end of period
|
|
|
35,500,000
|
|
|
$
|
0.033
|
|
|
|
6.00
|
|
|
$
|
231,150
|
|
Vested and expected to vest
|
|
|
35,500,000
|
|
|
$
|
0.033
|
|
|
|
6.00
|
|
|
$
|
231,150
|
|
Exercisable at end of period
|
|
|
18,750,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
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, 2017 were based on the following assumptions at the date of grant as
follows:
Expected
dividend yield
|
|
|
0
|
%
|
Expected
stock price volatility
|
|
|
127.23
|
%
|
Risk-free
interest rate
|
|
|
1.71
|
%
|
Expected
life of options
|
|
|
4
years
|
|
Weighted-average
grant date fair value
|
|
$
|
0.0223
|
|
The
Company used its historical stock trading price volatility for the last four years. 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, 2017 there was $93,381 of unrecognized stock-based compensation cost related to the stock option grants and no
unrecognized stock-based compensation cost related to 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, 2017, the Company has paid
$3,009,195 in cash and is obligated to pay $1,003,065.
NOTE 11
– SUBSEQUENT EVENTS
In October 2017, Lucas
Hoppel initiated a series of conversions of the March 2017 Promissory note, under contractual terms, into 4.33 million shares
of GulfSlope stock resulting in a zero note balance and zero accrued interest payable for the March 2017 Promissory note.
In
October 2017, the Company purchased an insurance policy for $171,360 and financed $156,718 of the premium by executing a note
payable.
In
October 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 $110,000 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 $200,000 of additional funding is available under similar terms if the Company and the lender mutually agree to
further tranches.
In
October 2017, the Company paid the 80% lease bonus payment and the first year rentals in the amount of $140,591 and was awarded
Gulf of Mexico lease block Ship Shoal Area, South Addition 351.
In
October 2017, the Company executed a second amendment to the March 2014 farm out agreement with Texas South Energy, Inc. (“TSE”)
in which TSE will acquire 20% of GSPE’s interest in Eugene Island, South Addition Block 397 and Green Canyon, Block 4 for
$329,062 to be paid $100,000 by October 6, 2017; $50,000 by November 30, 2017; $50,000 by January 30, 2018; and $129,062 by April
1, 2018. The first two payments due, totaling $150,000 have been received through the filing of this report.
In
October 2017, the Company entered into a six month office space lease agreement.
In
December 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 $110,000 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 $100,000 of additional funding is available under similar terms if the Company and the lender mutually agree to
further tranches.
GulfSlope
Energy, Inc.
and
Texas South Energy, Inc
.
(collectively,
the “Farmors”) and a large international oil and gas company (the “Partner”) have agreed to extend the term
of the September LOI to January 8, 2018, or such later time as they mutually agree, pursuant to the exclusive letter of intent
(“LOI”) previously signed by the parties to jointly drill and develop the Farmors’ oil and gas prospects located
offshore Gulf of Mexico.
The Tax Cuts and Jobs Act of 2017 was signed into law
on
December 22, 2017
by
President
Donald J. Trump. The law includes significant changes to the U.S. corporate income tax system, including a Federal corporate rate
reduction from 35% to 21%, limitations on the deductibility of interest expense and executive compensation, and the transition
of U.S. international taxation from a worldwide tax system to a territorial tax system. We are in the process of analyzing the
final legislation and determining an estimate of the financial impact.