UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
|
FORM
S-1
REGISTRATION
STATEMENT
UNDER THE SECURITIES ACT OF 1933
|
GULFSLOPE
ENERGY, INC.
(Exact name of registrant as specified in its charter)
|
Delaware
(State or other jurisdiction of
incorporation or organization)
|
1311
(Primary Standard Industrial
Classification Code Number)
|
16-1689008
(I. R. S. Employer
Identification Number)
|
1331 Lamar St., Suite 1665
Houston, Texas 77010
(281) 918-4100
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
|
John N. Seitz
Chief Executive Officer
1331 Lamar St., Suite 1665
Houston, Texas 77010
(281) 918-4100
(Name, address, including zip code, and telephone number, including area code, of agent for service)
|
With
copy to:
William
T. Heller IV, Esq.
Joseph M. Magro, Esq.
Mayer Brown LLP
700 Louisiana Street, Suite 3400
Houston, TX 77002-2730
Tel: (713) 238-2684
Fax: (713) 238-4618
As
soon as practicable after this Registration Statement becomes effective
(Approximate date of commencement of proposed sale to the public)
If
any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933 check the following box: ☐
If
this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration statement number of the earlier effective registration statement
for the same offering: ☐
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filed, a non-accelerated filer, or a smaller
reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated
filed,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer ☐
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Accelerated
filer ☐
|
|
Non-accelerated
filer ☐
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Smaller reporting
company ☒
|
|
Emerging growth
company ☒
|
|
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
☒
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of
Securities
to Be Registered
|
Amount
Being
Registered
|
Proposed
Maximum
Offering
Price
Per
Share
|
Proposed
Maximum
Aggregate
Offering
Price
|
Amount
of
Registration
Fee
|
Common
Stock, par value $0.001
|
156,000,000
|
$0.04
(1)
|
$6,240,000
|
$756.29
|
Common
Stock, par value $0.001
|
50,000,000
|
$0.04
(2)
|
$2,000,000
|
$242.40
|
TOTAL
(3)
|
206,000,000
|
$0.04
|
$8,240,000
|
$998.69
|
|
(1)
|
Estimated
solely for the purpose of computing the amount of the registration fee pursuant to Rule
457(c) promulgated under the Securities Act of 1933, except for the shares issuable upon
exercise of warrants, which is pursuant to Rule 457(g).
|
|
(2)
|
Estimated
solely for the purpose of computing the amount of the registration fee pursuant to Rule
457(g) for the shares issuable upon exercise of warrants.
|
|
(3)
|
Pursuant
to Rule 416 under the Securities Act of 1933, the Registrant is also registering such
additional indeterminate number of shares as may become necessary to adjust the number
of shares as a result of a stock split, stock dividend or similar adjustment of its outstanding
common stock.
|
The
registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until
the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become
effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this
prospectus is not complete and may be amended. The selling security holders may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to
sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not
permitted.
|
PRELIMINARY
PROSPECTUS
SUBJECT
TO COMPLETION
Prospectus
dated ______, 2019
GULFSLOPE
ENERGY, INC.
206,000,000
Shares of Common Stock
This
prospectus relates to the sale of up to 206,000,000 shares of our common stock which may be resold from time to time by the selling
security holders identified in this prospectus. The selling security holders acquired the shares of common stock offered by this
prospectus in a private placement which first closed in June 2019. We are registering the offer and sale of the shares of common
stock to satisfy registration rights we have granted. See “Selling Security Holders” beginning on page [●] in
this prospectus for a complete description of the selling security holders.
The
selling security holders will receive all proceeds from the sale of our common stock, and therefore we will not receive any of
the proceeds from their sale of shares of our common stock. The shares which may be resold by the selling security holders constituted
approximately 10% of our issued and outstanding common stock on the date of this prospectus.
The
market for the common stock is limited, sporadic and volatile. The selling security holders are offering these shares of common
stock. The selling security holders may sell all or a portion of these shares from time to time in market transactions through
any market on which our common stock is then traded, in negotiated transactions or otherwise, and at prices and on terms that
will be determined by the then prevailing market price or at negotiated prices directly or through a broker or brokers, who may
act as agent or as principal or by a combination of such methods of sale. The selling security holders will receive all proceeds
from the sale of the common stock. For additional information on the methods of sale, you should refer to the section entitled
“Plan of Distribution.”
Our
common stock is quoted on both the OTC Bulletin Board (“OTCBB”) and the OTCQB quotation systems under the symbol “GSPE.”
The last bid price of our common stock on
______
, 2019 was $[●] per share.
T
his
investment involves a high degree of risk. You should purchase shares only if you can afford a complete loss of your investment.
You should read this prospectus in its entirety and carefully consider the risk factors beginning on page [●] of this prospectus
and the financial data and related notes incorporated by reference before deciding to invest in the shares.
We
are an “emerging growth company” under applicable Securities and Exchange Commission rules and are eligible for reduced
public company reporting requirements. See “Summary—Implications of being an Emerging Growth Company.”
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or
determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The
date of this prospectus _______, 2019
TABLE OF CONTENTS
You
should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information
that is different. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any jurisdiction
where the offer or sale of these securities is not permitted. You should assume that the information contained in this prospectus
is accurate as of the date on the front of this prospectus only. Our business, financial condition, results of operations and
prospects may have changed since that date. This prospectus will be updated as required by law.
PROSPECTUS
SUMMARY
GULFSLOPE
ENERGY, INC.
SUMMARY
This
summary highlights selected information about GulfSlope and this offering. This summary is not complete and does not contain all
of the information that may be important to you. You should read carefully the entire prospectus, including “Risk Factors”
and the other information contained or incorporated by reference in this prospectus before making an investment decision. Unless
otherwise indicated or the context otherwise requires “we,” “us,” “our,” “GulfSlope”,
or “Company” refer to GulfSlope Energy, Inc.
The
Company
GulfSlope
Energy, Inc. is an independent crude oil and natural gas exploration and production company whose interests are concentrated in
the United States Gulf of Mexico federal waters. We are a technically driven company and we use our licensed 2.2 million acres
of three-dimensional (3-D) seismic data to identify, evaluate, and acquire assets with attractive economic profiles. GulfSlope
Energy commenced commercial operations in March 2013. GulfSlope Energy was originally organized as a Utah corporation in 2004
and became a Delaware corporation in 2012.
We
have focused our operations in the Gulf of Mexico because we believe this area provides us with favorable geologic and economic
conditions, including multiple reservoir formations, comprehensive geologic databases, extensive infrastructure, relatively favorable
royalty regime, and an attractive acquisition market and because our management and technical teams have significant experience
and technical expertise in this geologic province. Additionally, we licensed 2.2 million acres of advanced three-dimensional (3D)
seismic data, a significant portion of which has been enhanced by new, state-of-the-art reprocessing and noise attenuation techniques
including reverse time migration depth imaging. We use our broad regional seismic database and our reprocessing efforts to continuously
generate an inventory of high-quality prospects and since inception, we have generated a total of 25 prospects, advancing nine
of those prospects to drill ready status. The use of our extensive seismic database, coupled with our ability, knowledge, and
expertise to effectively reprocess this seismic data, allows us to further optimize our drilling program and to effectively evaluate
acquisition and joint venture opportunities. We consistently assess our prospect inventory in order to deploy capital as efficiently
as possible.
Competitive
Advantages
Experienced
management.
Our management has significant experience in finding and developing oil and natural gas. Our team has a track
record of discovering and developing multi-billion dollar projects worldwide. Our management team has over 200 years of combined
industry experience exploring, discovering, and developing oil and natural gas. We successfully deployed a technical team with
over 150 years of combined industry experience exploring for and developing oil and natural gas in the development and execution
of our technical strategy. We believe the application of advanced geophysical techniques on a specific geographic area with unique
geologic features such as conventional reservoirs whose trapping configurations have been obscured by overlying salt layers provides
us with a competitive advantage.
Advanced
seismic image processing.
Commercial improvements in 3-D seismic data imaging and the development of advanced processing
algorithms, including pre-stack depth, beam, and reverse time migration have allowed the industry to better distinguish hydrocarbon
traps and identify previously unknown prospects. Specifically, advanced processing techniques improve the definition of the seismic
data from a scale of time to a scale of depth, thus correctly locating the images in three dimensions. Our technical team has
significant experience utilizing advanced seismic image processing techniques in our core area, and applies the industry’s
most advanced noise reduction technology to generate clearer images.
Industry
leading position in our core area.
We have licensed 2.2 million acres of 3D seismic data which covers over 440 OCS Federal
lease blocks on the highly prolific Louisiana outer shelf, offshore Gulf of Mexico. We believe the proprietary and state-of-the-art
reprocessing of our licensed 3-D seismic data, along with our proprietary and leading-edge geologic depositional reservoir sand
and petroleum trapping models, gives us an advantage in assembling a high quality drilling portfolio in our core area. We continuously
work to identify additional leasing opportunities to further enhance our drilling portfolio.
Key
Management
John
N. Seitz.
Mr. Seitz has served as the Company’s chief executive officer and chairman of the board and director since
May 31, 2013, and served as a consultant to the Company from March 2013 through May 2013. Prior to joining the Company, Mr. Seitz
held positions of increasing responsibility at Anadarko Petroleum Corporation (NYSE: APC), serving most recently as a director
and as president and chief executive officer until 2003. Mr. Seitz also serves on the board of directors of ION Geophysical Corporation
(NYSE: IO), a leading technology focused seismic solutions company. Mr. Seitz is a Certified Professional Geological Scientist
from the American Institute of Professional Geologists and a licensed professional geoscientist with the State of Texas. Mr. Seitz
also serves as a trustee for the American Geological Institute Foundation. In 2000, the Houston Geological Society honored Mr.
Seitz as a “Legend in Wildcatting,” and he is a member of the All American Wildcatters. Mr. Seitz holds a Bachelor
of Science degree in Geology from the University of Pittsburgh, a Master of Science degree in Geology from Rensselaer Polytechnic
Institute, and has completed the Advanced Management Program at the Wharton School.
John
H. Malanga.
Mr. Malanga has served as chief financial officer since July 2014 and is responsible for leading the financial
function of the organization, overseeing strategic planning and analysis, accounting and reporting, treasury, tax, audit and risk
management. From 2005 to 2014, Mr. Malanga worked as a senior investment banker with the energy firms of Weisser, Johnson &
Co. and Sanders Morris Harris Inc. Mr. Malanga began his investment banking career with Jefferies & Co. Over his career, he
has participated in capital markets, mergers and acquisitions, and financial advisory transactions with particular emphasis on
providing strategic and financial advice to emerging growth companies. Mr. Malanga holds a Bachelor of Science in Economics from
Texas A&M University and a Master in Business Administration with a concentration in finance from Rice University.
Dwight
M. Moore.
Mr. Moore has served as vice president and secretary of the Company since May 2013, and most recently served as
vice president- corporate development for ION Geophysical Corporation (NYSE: IO) from 2008 to 2013. From 2006-07, Mr. Moore was
manager of offshore business development at Murphy Oil Corporation (NYSE: MUR). From 1987 to 2003, Mr. Moore held positions at
Anadarko Petroleum (NYSE: APC) and from 1978 to 1987, at Diamond Shamrock/Maxus Energy (NYSE: YPF). Mr. Moore has served as president
of the Houston Geological Society, as treasurer of the American Association of Petroleum Geologists (AAPG), and recently served
as the chairman of the AAPG Investment Committee. Mr. Moore is also a licensed professional geoscientist with the State of Texas,
an AAPG Certified Petroleum Geologist, and holds two bachelor degrees with Honors, in Geology and Business Administration-Finance
and Economics from Southern Methodist University and its Cox School of Business.
Charles
G. Hughes.
Mr. Hughes has served as vice president land since April 2014. Mr. Hughes’ executive responsibilities include
all land and industry partner related matters. He formerly served as general manager – land and business development for
Marubeni Oil & Gas (USA), Inc. from 2007 to 2014. From 1980 to 2007, Mr. Hughes served in roles of increasing responsibility
both onshore and offshore in the Gulf of Mexico at Anadarko Petroleum Corporation. Mr. Hughes is a member and former Chairman
of the OCS Advisory Board, a member of the Association of Professional Landmen, the Houston Association of Professional Landmen
and the Professional Landmen’s Association of New Orleans. Mr. Hughes received his Bachelor of Business Administration in
Petroleum Land Management from the University of Texas.
Richard
S. Langdon.
Richard S. Langdon has served as a director of the Company since March 2014. Mr. Langdon is currently the executive
vice president and chief financial officer of Altamont Energy, Inc., a newly formed privately held exploration and production
company. Mr. Langdon served as the president, chief executive officer and outside director of Badlands Energy, Inc. and its predecessor
entity, Gasco Energy, Inc. since May 2013 and Debtor-in Possession since August 2017. Prior to assuming the President and CEO
role, Mr. Langdon had served as a Gasco Energy Inc. outside board member since 2003. Mr. Langdon serves as a member of the board
of managers of Sanchez Midstream Partners, LP, and is a member of its Audit, Nominating and Corporate Governance and Conflicts
Committees. Mr. Langdon was the president and chief executive officer of KMD Operating Company, LLC (“KMD Operating”),
and its predecessor entity, Matris Exploration Company LP (“Matris Exploration”), both privately held exploration
and production companies, from July 2004 through December 2015. Mr. Langdon was executive vice president and chief operating officer
of KMD Operating, from August 2009, until the merger of Matris Exploration into KMD Operating in November 2011. From 1997 until
2002, Mr. Langdon served as executive vice president and chief financial officer of EEX Corporation, a publicly traded exploration
and production company that merged with Newfield Exploration Company in 2002. Prior to that, he held various positions with the
Pennzoil Companies from 1991 to 1996, including executive vice president - International Marketing - Pennzoil Products Company;
senior vice president - Business Development - Pennzoil Company and senior vice president - Commercial & Control - Pennzoil
Exploration & Production Company. Mr. Langdon graduated from the University of Texas at Austin with a Bachelor of Science
degree in Mechanical Engineering in 1972 and a Masters of Business Administration in 1974.
Paul
L. Morris.
Mr. Morris has served as a director of the Company since March 2014. Mr. Morris founded Elk River Resources, LLC
in August 2013 to explore and develop oil and gas potential in the oil-producing regions of the southwest United States. Mr. Morris
has served as chairman and chief executive officer of Elk River Resources since inception. Prior to Elk River Resources, Mr. Morris
served as president and chief executive officer from 1988 to September 2013 of Wagner & Brown, Ltd., an independent oil and
gas company headquartered in Midland, Texas. With Wagner & Brown, Mr. Morris oversaw all company operations, including exploration
and production activities, in eight states as well as in France, England and Australia. Mr. Morris also oversaw affiliates involved
in natural gas gathering and marketing, crude oil purchasing and reselling, pipeline development, construction and operation,
and compressed natural gas (CNG) design, fabrication and operations. Mr. Morris served as president of Banner Energy from 1981
until 1988. Mr. Morris graduated from the University of Cincinnati with a Bachelor of Science degree in Mechanical Engineering
in 1964. Mr. Morris has also completed the Executive Management Program in the College of Business Administration of Penn State
University.
Implications
of being an Emerging Growth Company
As
a company with less than $1 billion in revenue during our last fiscal year, we qualify as an “emerging growth company”
as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage
of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions
include:
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●
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Only
two years of audited financial statements in addition to any required unaudited interim
financial statements with correspondingly reduced “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” disclosure.
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●
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Reduced
disclosure about our executive compensation arrangements.
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●
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Not
having to obtain non-binding advisory votes on executive compensation or golden parachute
arrangements.
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●
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Exemption
from the auditor attestation requirement in the assessment of our internal control over
financial reporting.
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As
an “emerging growth company” under the JOBS Act, we are permitted to delay the adoption of new or revised accounting
pronouncements applicable to public companies until such pronouncements are made applicable to private companies. However, we
have elected not to take advantage of such extended transition period, and as a result, we will comply with new or revised accounting
standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107
of the JOBS Act provides that our decision to not take advantage of the extended transition period for complying with new or revised
accounting standards is irrevocable.
We
may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company.
We would cease to be an emerging growth company if we have more than $1 billion in annual revenue, we have more than $700 million
in market value of our stock held by non-affiliates, or we issue more than $1 billion of non-convertible debt over a three-year
period. We may choose to take advantage of some but not all of these reduced burdens. We have taken advantage of these reduced
reporting burdens in this prospectus, and the information that we provide may be different than what you might get from other
public companies in which you hold stock.
Recent
Developments
Drilling
of Canoe and Tau Prospects
We
are currently the operator of two wells drilled in the Gulf of Mexico. We commenced drilling operations at the Canoe prospect
in August 2018 and drilling was completed later that month. The well was drilled to a total of 5,765 feet measured depth (5,700
feet true vertical depth) and no problems were encountered while drilling. Based on Logging-While-Drilling and Isotube analysis
of hydrocarbon samples, oil sands were encountered in the northwest center of the block. A full integration of the well information
and seismic data is being performed for further evaluation of the shallow potential of the wellbore and the block, and to define
commerciality of these oil pays. The well was temporarily abandoned and multiple open-hole plugs were set across several intervals.
The well is equipped with a mud-line suspension system for possible future re-entry. A deeper subsalt prospect on the Canoe lease
block, for which the block was originally leased, is not yet drill-ready and is pending further seismic enhancement.
The
second well, Tau prospect, is located approximately six miles northeast of the Mahogany Field, discovered in 1993. The
Mahogany Field is recognized as the first commercial discovery below allocthonous salt in the Gulf of Mexico. The Tau
Prospect is defined by mapping of 3D seismic reprocessed by RTM methods. Drilling operations on the Tau subsalt prospect
commenced in September 2018. The wellbore is designed to test multiple Miocene horizons trapped against a well-defined salt
flank, including equivalent reservoir sands discovered and developed at the nearby Mahogany Field. The surface location for
Tau is located in 305 feet of water. In January 2019, the Tau well experienced an underground control of well event and as a
result, we filed an insurance claim with its insurance underwriters for a net amount of approximately $10.8 million for 100%
working interest. The insurance claim was subsequently approved, and approximately $8 million was received in April and May
2019. On May 13, 2019, we announced the Tau well was drilled to a measured depth of 15,254 feet, as compared to the
originally permitted 29,857 foot measured depth. Producible hydrocarbon zones were not established to the current depth,
but hydrocarbon shows were encountered. Complex geomechanical conditions required two by-pass wellbores, one sidetrack
wellbore, and eight casing strings to reach the current depth. We were unable to continue drilling due to equipment
limitations and contractual obligations related to the drilling rig for another operator. Due to these factors, we elected to
temporarily abandon this well in a manner that would allow for re-entry at a later time. We are currently evaluating various
options related to future operations in this wellbore and testing of the deeper Tau prospect.
Term
Loan
On March 1, 2019,
we entered into a Term Loan Agreement by and among GulfSlope, as borrower, and Delek, as lender. In the Term Loan Agreement, Delek
agreed to provide us with multiple draw term loans in an aggregate stated principal amount of up to $11.0 million (the “Term
Loan Facility” and the loans thereunder, the “Loans”). The maturity date of the Term Loan Facility is six months
following the closing date of the Term Loan Agreement. Until such maturity date, the Loans under the Term Loan Agreement shall
bear interest at a rate per annum equal to 5.0%, payable in arrears on the maturity date. If an event of default occurs, all Loans
under the Term Loan Agreement shall bear interest at a rate equal to 7.0%, payable on demand. In connection with the Term Loan
Agreement, the Company entered into: (i) a Subordination Agreement (the “Subordination Agreement”) by and among GulfSlope,
as borrower, John N. Seitz, as subordinated lender (the “Subordinated Lender”), and Delek, as senior lender; (ii) a
Security Agreement (the “Security Agreement”) among GulfSlope, as debtor, and Delek, as lender; and (iii) warrants
to purchase 238,095,238 shares of Common Stock, at an exercise price of $0.042 per share issued to Delek GOM. We may elect, at
our option, to prepay borrowings outstanding under the Term Loan Agreement in multiples of $100,000 and not less than $500,000
without premium or penalty. We are required to prepay the Loans with any net cash proceeds resulting from an asset sale, receipt
of insurance proceeds from certain casualty events, proceeds from equity issuances or incurrence of indebtedness other than the
Loans (subject to a $500,000 carve-out to be applied toward our general corporate purposes) or receipt of any cash proceeds from
any payments, refunds, rebates or other similar payments and amounts under the joint operating agreement. Amounts outstanding under
the Term Loan Agreement are secured by a security interest in substantially all of our properties and assets. We had borrowed a
total of $11.0 million under the Term Loan Facility and issued to Delek GOM warrants to purchase 261,904,762 shares of Common Stock;
and Delek GOM exercised warrants for 238,095,238 shares of Common Stock through a Loan Reduction Exercise, thereby leaving $1 million
of outstanding obligations to Delek GOM. In connection with the Term Loan, we entered into a registration rights agreement with
Delek pursuant to which we have agreed to register the shares of Common Stock issued to them for public resale upon request.
Issuance
of Convertible Debentures
On
June 21, 2019, we entered into a Securities Purchase Agreement (“SPA”) with a qualified institutional buyer (“Buyer”).
Under the terms of the SPA, we will issue and sell to Buyer up to an aggregate of $3,000,000 of convertible debentures (“Convertible
Debentures”), which shall be convertible (as converted, the “Conversion Shares”) into shares of Common Stock,
of which $2,100,000 were purchased upon the signing of the SPA (the “First Closing”), $400,000 shall be purchased
upon the filing of a registration statement with the SEC registering the resale of the Conversion Shares by the Buyers, and $500,000
shall be purchased on or about the date the registration statement has first been declared effective by the SEC (collectively,
the “Offering”). The Convertible Debenture bears an annual interest rate equal to 8% and a maturity date of June 21,
2020, which may be extended at the option of Buyer. At maturity, the Company is obligated to pay the holder an amount in cash
representing all outstanding principal and accrued and unpaid interest. Subject to the terms of the Convertible Debenture, at
any time the Holder is entitled to convert any portion of the outstanding and unpaid principal and accrued interest into fully
paid and nonassessable shares of Common Stock of the Company. The number of shares of Common Stock issuable upon conversion is
determined by dividing the amount to be converted by the lesser of (x) $0.05 per share or (y) 80% of the lowest daily VWAP price
(as reported by Bloomberg, LP) for the ten (10) consecutive trading days immediately preceding the date of determination. At the
First Closing, the Company also issued to Buyer warrants to purchase an aggregate of 50.0 million shares of Common Stock at an
exercise price of $0.04 per share. The warrants expire on the fifth (5
th
) anniversary after issuance.
In
connection with the issuance of the Convertible Debenture and warrants, we entered into registration rights agreement pursuant
to which we have, among other things, agreed to file a registration statement with the SEC within thirty days of the SPA registering
for public resale the shares of Common Stock underlying the Convertible Debenture and warrants.
Risk
Factors
Investing
in our common stock involves risks that include the speculative nature of oil and natural gas exploration, competition, volatile
oil and natural gas prices and other material factors. You should read carefully the section of this prospectus entitled “Risk
Factors” beginning on page 8 for an explanation of these risks before investing in our common stock. In particular, the
following considerations may offset our competitive strengths or have a negative effect on our strategy or operating activities,
which could cause a decrease in the price of our common stock and a loss of all or part of your investment:
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●
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Our
business is difficult to evaluate because of our limited operating history;
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●
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Failure
to enter into leases with BOEM on our prospects;
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●
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Failure
to enter into strategic partnerships, joint operating agreements and farm out agreements
needed to exploit our prospects;
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●
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Failure
to raise sufficient capital needed to implement our business plan;
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●
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Difficulties
managing the growth of our business may adversely affect our financial condition and
results of operations;
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●
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Failure
to develop our prospects;
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●
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Our
exploration and development operations require substantial capital that we may be unable
to obtain, which could lead to a loss of properties and a decline in our reserves;
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●
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Our
future success depends on our ability to find, develop or acquire oil and natural gas
reserves;
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●
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The
volatility of oil and natural gas prices due to factors beyond our control greatly affects
our profitability;
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●
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Our
prospects are all in the Gulf of Mexico, making us vulnerable to risks associated with
a concentration of operations in a single geographic area; and
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●
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Our
operations are subject to various governmental regulations which require compliance that
can be burdensome and expensive;
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Corporate
Information
Our
address is 1331 Lamar St., Suite 1665, Houston, Texas 77010, and our telephone number is (281) 918-4100. Our web site can be accessed
at www.gulfslope.com. The contents of our website do not form a part of, and are not incorporated by reference in, this prospectus
or any Offering Statement that we have filed with the SEC. You may access and read our SEC filings through the SEC’s web
site (www.sec.gov), which contains reports, proxy and information statements and other information regarding registrants, including
us, that file electronically with the SEC.
About
This Offering
Common
stock offered by selling security holders
|
A
total of up to 206,000,000 shares of common stock. The selling security holders may from time to time sell some, all or none
of the shares of common stock pursuant to which this prospectus is a part.
|
Shares
outstanding prior to the offering
|
1,092,266,844
shares as of July 19, 2019
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Shares
to be outstanding after the offering
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1,298,266,844
shares
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Use
of proceeds
|
The
selling security holders will receive all of the proceeds from the sale of shares of our common stock. We will not receive
any proceeds from the sale of the common stock.
|
Risk
Factors
|
The
securities offered hereby involve a high degree of risk. See “Risk Factors.”
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Stock
symbol
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GSPE
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RISK
FACTORS
Investing
in our common stock involves a high degree of risk. You should carefully consider each of the following risks, together with all
other information set forth in this prospectus, including the consolidated financial statements and the related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2018, as updated in our Quarterly Reports on Form 10-Q for the fiscal quarters ended December 31, 2018
and March 31, 2019, before deciding whether to invest in our common stock.. The risks and uncertainties described below are not
the only ones we face. Other risks and uncertainties, including those that we do not currently consider material, may impair our
business. If any of the adverse developments discussed below actually occur, our business, financial condition, operating results
or cash flows could be materially and adversely affected. This could cause the value of our common stock to decline, and you may
lose all or part of your investment.
Risks
Related to Our Business and Financial Condition
Our
business plan requires substantial additional capital through the Offering, which we may be unable to raise on acceptable terms,
if at all, which may in turn limit our ability to execute our business strategy.
We
have planned operating expenditures through June 2020, of approximately $10.0 million, which includes $6.0 million for drilling
related capital expenditures, $1.5 million of other operations related expenditures to include but not limited to bonus payments
for new leases and lease rentals to the BOEM and seismic reprocessing costs, and $2.5 million in general and administrative expenses.
We will need to raise additional capital in 2019 and may be required to enter into debt and equity financing arrangements and
joint ventures. There is no assurance that we will be able to raise the capital necessary to fund our business plan and our operations
through June 2020. Failure to raise the required capital to fund our 2019 operations, on favorable terms or at all, will have
a material adverse effect on us, and will likely cause us to curtail operations or suspend our 2019 business plan.
We
expect our capital outlays and operating expenditures to increase substantially over at least the next several years as we expand
our operations. Lease acquisition costs and drilling operations are very expensive, and if we are to expand our operations after
2019 we will need to raise substantial additional capital through additional equity offerings, strategic alliances or debt financing.
Our
future capital requirements will depend on many factors, including:
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the
number, location, terms and pricing of our anticipated lease acquisitions;
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our
financing of the lease acquisitions and associated bonding;
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our
ability to enter into partnerships and farm-outs with other oil and gas E&P companies
and/or financial investors on satisfactory terms;
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location
of any drilling activities, whether onshore or offshore, as well as the depth of any
wells to be drilled;
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cost
of additional seismic data to license as well as the reprocessing cost;
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the
scope, rate of progress and cost of any exploration and production activities;
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oil
and natural gas prices;
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our
ability to locate and acquire hydrocarbon reserves;
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our
ability to produce those oil or natural gas reserves;
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access
to oil and gas services and existing pipeline infrastructure;
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the
terms and timing of any drilling and other production-related arrangements that we may
enter into;
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the
cost and timing of governmental approvals and/or concessions;
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the
cost, number, and access to qualified industry professionals we employ; and
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the
effects of competition by larger companies operating in the oil and gas industry.
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To
the extent we are able to raise capital through equity financings, they may be dilutive to our stockholders. Alternative forms
of future financings may include preferred stock with preferences or rights superior to our common stock. Debt financings may
involve a pledge of assets and will rank senior to our common stock. We have historically financed our operations through best
efforts private equity and debt financings. We do not have any credit or equity facilities available with financial institutions,
stockholders or third party investors, and will continue to rely on best efforts financings. There is no assurance that we can
raise the capital necessary to expand our operations. Failure to raise the required capital to fund operations, on favorable terms
or at all, will have a material adverse effect on us, and will likely cause us to curtail or cease operations.
Our
financial statements express substantial doubt about our ability to continue as a going concern, raising questions as to our continued
existence.
We
have incurred losses since our inception resulting in an accumulated deficit of approximately $48.4 million at March 31,
2019, and we have a net capital deficiency. Further losses are anticipated as we continue to develop our business. To
continue as a going concern, we estimate that we will need approximately $10 million to meet our obligations and planned
operating expenditures through June 2020. The $10 million is comprised primarily of capital project expenditures as well as
general and administrative expenses. It does not include any amounts due under outstanding debt obligations, which amounted
to $10.9 million of current principal and interest as of March 31, 2019. We plan to finance our operations through equity and/or
debt financings, and strategic alliances. There are no assurances that financing will be available with acceptable terms, if
at all. If we are not successful in obtaining financing, our operations would need to be curtailed or ceased or the
Company would need to sell assets or consider alternative plans up to and including restructuring.
If we fail to establish and maintain proper internal
controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.
We are required to comply
with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”). Section 404 requires
that we document and test our internal control over financial reporting and issue management’s assessment of our internal
control over financial reporting. In our annual report for the year ended September 30, 2018, we identified and disclosed material
weaknesses related to the failure to record interest on an interest bearing payable and failure to accurately value a fair value
financial instrument issued in settlement of a liability. These errors are a result of insufficient control activities related
to the review and monitoring of Company contracts to ensure the proper accounting for such contracts. In an attempt to remediate
the material weaknesses, we have made significant advancements to our processes and internal controls surrounding non-routine and
complex arrangements to strengthen our financial reporting processes.
If we fail to comply with
the requirements of Section 404 of the Sarbanes-Oxley Act, the accuracy and timeliness of the filing of our annual and quarterly
reports may be materially adversely affected and could cause investors to lose confidence in our reported financial information,
which could have a negative effect on the trading price of our Common Stock.
We
have no proved reserves and areas that we decide to drill may not yield oil and natural gas in commercial quantities or quality,
or at all.
We have no proved
reserves. We have identified prospects based on available seismic and geological information that indicates the potential presence
of oil and natural gas. However, the areas we decide to drill may not yield oil and natural gas in commercial quantities or quality,
or at all. Most of our current prospects are in various stages of evaluation that will require substantial additional seismic
data reprocessing and interpretation. Even when properly used and interpreted, 3-D seismic data and visualization techniques are
only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not enable the
interpreter to know whether hydrocarbons are, in fact, present in those structures. We have drilled two wells, one of which is
currently being evaluated. Accordingly, we do not know if our prospects will contain oil and natural gas in sufficient quantities
or quality to recover drilling and completion costs or to be economically viable. Even if oil and natural gas is found on our
prospects in commercial quantities, construction costs of pipelines and other transportation costs may prevent such prospects
from being economically viable. If one or more of our prospects do not prove to be successful, our business, financial condition
and results of operations will be materially adversely affected.
We
are substantially dependent on certain members of our management and technical team.
Investors
in our common stock must rely upon the ability, expertise, judgment and discretion of our management and the success of our technical
team in identifying and acquiring leasehold interests, as well as discovering and developing any oil and gas reserves. Our performance
and success are dependent, in part, upon key members of our management and technical team, and their loss or departure could be
detrimental to our future success. In making a decision to invest in our common stock, you must be willing to rely to a significant
extent on our management’s discretion and judgment. The loss of any of our management and technical team members could have
a material adverse effect on our business prospects, results of operations and financial condition, as well as on the market price
of our common stock. We may not be able to find replacement personnel with comparable skills. If we are unable to attract and
retain key personnel, our business may be adversely affected. We do not currently maintain key-man insurance on any member of
the management team.
The
seismic data we use are subject to non-exclusive license arrangements and may be licensed to our competitors, which could adversely
affect the execution of our acquisition strategy and business plan.
Our
3-D seismic license agreements are non-exclusive, industry-standard agreements. Accordingly, the licensor of such seismic data
has the right to license the same data that we acquired to our competitors, which could adversely affect our acquisition strategy
and the execution of our business plan. We are not authorized to assign any of our rights under our license agreements, including
a transaction with a potential joint venture partner or acquirer, without complying with the terms of the license agreements and
a payment to the licensor (by us or the acquirer in the event of a change of control transaction or our partner in a joint venture
transaction). However, our interpretation of this seismic data and importantly, reprocessing and the modeling of certain seismic
data utilized to identify and technically support oil and gas prospects, is unique and proprietary to the Company.
We
are an oil and natural gas exploration company with limited operating history, and there can be no assurance that we will be successful
in executing our business plan. We may never attain profitability.
We
commenced our business activity in March 2013, when we entered into 3-D license agreements covering approximately 2.2 million
acres, and have entered into additional 3-D license agreements with seismic companies to acquire additional data and reprocess
seismic data. While we intend to engage in the drilling, development, and production of oil and natural gas in the future, we
currently have no reserves or production. As we are a relatively new business, we are subject to all the risks and uncertainties,
which are characteristic of a new business enterprise, including the substantial problems, expenses and other difficulties typically
encountered in the course of its business, in addition to normal business risks, as well as those risks that are specific to the
oil and gas industry. Investors should evaluate us in light of the delays, expenses, problems and uncertainties frequently encountered
by companies developing markets for new products, services and technologies. We may never overcome these obstacles.
We
may be unable to access the capital markets to obtain additional capital that we will require to implement our business plan,
which would restrict our ability to grow.
Our current capital
on hand is insufficient to enable us to execute our business strategy beyond September 2019. Because we are a company with limited
resources, we may not be able to compete in the capital markets with much larger, established companies that have ready access
to capital. Our ability to obtain needed financing may be impaired by conditions and instability in the capital markets (both generally
and in the oil and gas industry in particular), our status as a new enterprise without a demonstrated operating history, the location
of our leases and prices of oil and natural gas on the commodities markets (which will impact the amount of financing available
to us), and/or the loss of key consultants and management. Further, if oil and/or natural gas prices on the commodities markets
continue to decrease, then potential revenues, if any, will decrease, which may increase our requirements for capital. Some of
the future contractual arrangements governing our operations may require us to maintain minimum capital (both from a legal and
practical perspective), and we may lose our contractual rights if we do not have the required minimum capital. If the amount of
capital we can raise is not sufficient, we may be required to curtail or cease our operations.
We
have a limited operating history with significant losses and expect losses to continue for the foreseeable future.
We
have incurred annual operating losses since our inception. As a result, at March 31, 2019, we had an accumulated deficit of approximately
$48.4 million. We had no revenues in 2018 and do not anticipate generating revenues in fiscal 2019, or in subsequent periods unless
we are successful in discovering economically recoverable oil or gas reserves. We expect that our operating expenses will increase
as we develop our projects. We expect continued losses in fiscal year 2019, and thereafter until future discoveries are brought
online and we begin producing oil and gas.
The
terms of the definitive documents governing the Term Loan Facility may restrict our operations, particularly our ability to respond
to changes or take certain actions. If we are unable to repay the Term Loan Facility as it becomes due, we may be unable to continue
as a going concern.
On
March 1, 2019, we entered into a Term Loan Agreement by and among GulfSlope, as borrower, and Delek, as lender. In the Term Loan
Agreement, Delek agreed to provide us with multiple draw term loans in an aggregate stated principal amount of up to $11.0 million
(the “Term Loan Facility” and the loans thereunder, the “Loans”). Borrowings under the Term Loan Facility
mature in six months and bear interest at the rate of 5.0% and are secured by the assets of the Company. As of the date of this
prospectus there is $1.0 million outstanding under the Term Loan Facility and no additional amounts available to be borrowed.
The
definitive documents governing the Term Loan Facility contain a number of restrictive covenants that impose operating and financial
restrictions on us and limit our ability to engage in acts that may be in our long-term best interest, including restrictions
on the ability to: incur indebtedness, grant liens, undergo certain fundamental changes, dispose of assets, make investments,
enter into transactions with affiliates, and make certain restricted payments, in each case subject to limitations and exceptions
to be set forth in the definitive documentation for the Term Loan Facility. The definitive documentation governing the Term Loan
Facility also contains customary events of default that include, among other things, certain payment defaults, covenant defaults,
cross-defaults to other indebtedness, change of control defaults, judgment defaults, and bankruptcy and insolvency defaults. Such
events of default may allow the creditor to accelerate the related debt and may result in the acceleration of any other debt to
which a cross-acceleration or cross-default provision applies which could have a material adverse effect on our business, operations
and financial results. Furthermore, if we are unable to repay the amounts due and payable under the definitive documentation governing
our Term Loan Facility, the lender could proceed against the collateral granted to them to secure that indebtedness which could
force us into bankruptcy or liquidation. In the event our lender accelerated the repayment of the borrowings, we may not have
sufficient assets to repay that indebtedness. Any acceleration of amounts due under the Term Loan Facility would likely have a
material adverse effect on us and would threaten our ability to continue as a going concern. As a result of these restrictions,
we may be limited in how we conduct business; unable to continue our business operations; unable to raise additional debt or equity
financing to operate during general economic or business downturns; or unable to compete effectively or to take advantage of new
business opportunities.
Our
lack of diversification increases the risk of an investment in our common stock.
Our
business will focus on the oil and gas industry in commercially advantageous offshore areas of the United States. Larger companies
have the ability to manage their risk by diversification. However, we lack diversification, in terms of both the nature and geographic
scope of our business. As a result, factors affecting our industry, or the regions in which we operate, will likely impact us
more acutely than if our business were diversified.
Strategic
relationships upon which we rely are subject to change, which may diminish our ability to conduct our operations.
Our
ability to successfully bid on and acquire properties, to discover resources, to participate in drilling opportunities and to
identify and enter into commercial arrangements with customers and partners, depends on developing and maintaining close working
relationships with industry participants and on our ability to select and evaluate suitable properties. Further, we must consummate
transactions in a highly competitive environment. These realities are subject to change and may impair our ability to grow.
To
develop our business, we will endeavor to use the relationships of our management and to enter into strategic relationships, which
may take the form of joint ventures with other private parties or with local government bodies or contractual arrangements with
other oil and gas companies, including those that supply equipment and other resources that we will use in our business. We may
not be able to establish these strategic relationships, or if established, we may not be able to maintain them. In addition, the
dynamics of our relationships with strategic partners may require that we incur expenses or undertake activities we would not
otherwise incur or undertake in order to fulfill our obligations to these partners or maintain our relationships. If our strategic
relationships are not established or maintained, our business prospects may be limited, which could diminish our ability to conduct
our operations.
Competition
in obtaining rights to explore and develop oil and gas reserves may impair our business.
The
oil and gas industry is extremely competitive. Present levels of competition for oil and gas leases and drilling rights are high
worldwide. Other oil and gas companies with greater resources may compete with us by bidding for leases and drilling rights, as
well as other properties and services we may need to operate our business. Additionally, other companies may compete with us in
obtaining capital from investors. Competitors include larger, established exploration and production companies, which have access
to greater financial and other resources than we have currently, and may be more successful in the recruitment and retention of
qualified employees and may conduct their own refining and petroleum marketing operations, giving them a competitive advantage.
In addition, actual or potential competitors may be strengthened through the acquisition of additional assets and interests. Because
of some or all of these factors, we may not be able to compete.
We
may not be able to effectively manage our growth, which may harm our future profitability.
We
are currently not profitable however, our strategy envisions building and expanding our business in order to become profitable.
If we fail to effectively manage our growth, our financial results will be adversely affected. Growth may place a strain on our
management systems and resources. We must continue to refine and expand our business development capabilities, our systems, processes,
and our access to financing sources. As we grow, we must continue to hire, train, supervise and manage new employees. We cannot
assure you that we will be able to:
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expand
our systems effectively or efficiently or in a timely manner;
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optimally
allocate our human resources; or
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identify
and hire qualified employees or retain valued employees.
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If
we are unable to manage our growth and our operations, our financial results could be adversely affected, which could prevent
us from ever attaining profitability.
Any
change to government regulation/administrative practices may have a negative impact on our ability to operate profitably.
The
laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency impacting
any jurisdiction where we might conduct our business activities, including the BOEM and EPA, may be changed, applied or interpreted
in a manner which may fundamentally alter the ability of the Company to conduct business. The actions, policies or regulations,
or changes thereto, of any government body or regulatory agency or other special interest groups, may have a detrimental effect
on us. Any or all of these situations may have a negative impact on our ability to operate profitably. Additionally, certain bonding
and/or insurance may be required in jurisdictions in which we chose to have operations, increasing our costs to operate.
Risks
Related to Our Industry
An
extended decline in oil prices and significant fluctuations in energy prices may continue indefinitely, affecting the commercial
viability of our projects and negatively affecting our business prospects and viability.
The
commercial viability of our projects is highly dependent on the price of oil and natural gas. Prices also affect our ability to
borrow money or raise additional capital. We will need to obtain additional financing to fund our activities. Our ability to do
so may be adversely affected by an extended decline in oil prices. If we are unable to obtain such financing when needed, on commercially
reasonable terms, we may be required to cease our operations, which could have a materially adverse impact on the market price
of our stock. An extended decline in oil prices may have a material adverse effect on our planned operations, financial condition
and level of expenditures that we may ultimately have to make for the development of any oil and natural gas reserves we may acquire.
The
oil and gas markets are very volatile, and we cannot predict future oil and natural gas prices. Historically, oil and natural
gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty
and a variety of additional factors that are beyond our control. In addition, the prices we receive for any future production
and the levels of any future production and reserves will depend on numerous factors beyond our control. These factors include,
but are not limited to, the following:
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changes
in global supply and demand for oil and natural gas by both refineries and end users;
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the
ability of the members of the Organization of Petroleum Exporting Countries to agree
to and maintain oil price and production controls;
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the
price and volume of imports of foreign oil and natural gas;
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political
and economic conditions, including embargoes, in oil-producing countries or affecting
other oil-producing activity;
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the
level of global oil and gas exploration and production activity;
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the
level of global oil and gas inventories;
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government
policies to discourage use of fuels that emit GHGs and encourage use of alternative energy;
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technological
advances affecting energy consumption;
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domestic
and foreign governmental regulations and taxes;
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proximity
and capacity of oil and gas pipelines and other transportation facilities;
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the
price and availability of competitors’ supplies of oil and gas in captive market
areas;
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the
introduction, price and availability of alternative forms of fuel to replace or compete
with oil and natural gas;
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import
and export regulations for LNG and/or refined products derived from oil and gas production
from the US;
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speculation
in the price of commodities in the commodity futures market;
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the
availability of drilling rigs and completion equipment; and
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the
overall economic environment.
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Further,
oil and natural gas prices do not necessarily fluctuate in direct relationship to each other. The price of oil has been extremely
volatile, and we expect this volatility to continue for the foreseeable future. For example, during the period from January 1,
2014 to December 31, 2018, NYMEX West Texas Intermediate oil prices ranged from a high of $107.95 per bbl to a low of $26.19 per
bbl. Average daily prices for NYMEX Henry Hub gas ranged from a high of $8.15 per MMBtu to a low of $1.49 per MMBtu during the
same period. This near term volatility may affect future prices in 2019 and beyond. The volatility of the energy markets makes
it difficult to predict future oil and natural gas price movements with any certainty.
Exploration
for oil and natural gas is risky and may not be commercially successful, impairing our ability to generate revenues.
Oil
and natural gas exploration involves a high degree of risk. These risks are more acute in the early stages of exploration. We
may not discover oil or natural gas in commercially viable quantities. It is difficult to project the costs of implementing an
exploratory drilling program due to the inherent uncertainties of drilling in unknown formations, the costs associated with encountering
various drilling conditions, such as over pressured zones (which may lead to blowouts, fires, and explosions) and tools lost in
the hole, and changes in drilling plans, locations as a result of prior exploratory wells or additional seismic data and interpretations
thereof, and final commercial terms negotiated with partners. Developing exploratory oil and gas properties requires significant
capital expenditures and involves a high degree of financial risk. The budgeted costs of drilling, completing, and operating exploratory
wells are often exceeded and can increase significantly when drilling costs rise. Drilling may be unsuccessful for many reasons,
including title problems, adverse weather conditions (which may be more frequent as climate changes), cost overruns, equipment
shortages, mechanical difficulties, and environmental hazards (including spills and toxic gas releases). There is no assurance
that we will successfully complete any wells or if successful, that the wells would be economically successful. Moreover, the
successful drilling or completion of any oil or gas well does not ensure a profit on investment. Exploratory wells bear a much
greater risk of loss than development wells. We cannot assure you that our exploration, exploitation and development activities
will result in profitable operations, the result of which will materially adversely affect our business.
Oil
and natural gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays
in excess of those anticipated, causing an adverse effect on the Company.
Oil
and natural gas operations are subject to national, state, and local laws relating to the protection of the environment, including
laws regulating removal of natural resources from the ground, spill response capabilities, and the discharge of materials into
the environment. Oil and natural gas operations are also subject to national, state, and local laws and regulations, which seek
to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Environmental standards
imposed by national, state or local authorities may be changed and any such changes may have material adverse effects on our activities.
Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus
causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages which
we are unlikely to insure against fully due to prohibitive premium costs and other reasons. To date, we have not been required
to spend any amounts on compliance with environmental regulations; however, we may be required to expend substantial sums in the
future as we develop projects, and this may affect our ability to begin, maintain, or expand our operations.
We
may be dependent upon third party operators of any oil and natural gas properties we may acquire.
Third
parties may act as the operators of our oil and natural gas wells and control the drilling and operating activities to be conducted
on our properties, if and when such assets are acquired. Therefore, we may have limited control over certain decisions related
to activities on our properties relating to the timing, costs, procedure, and location of drilling or production activities, which
could affect the Company’s results.
Our
leases may be terminated if we are unable to make future lease payments or if we do not drill in a timely manner.
The
failure to timely affect all lease related payments could cause the leases to be terminated by the BOEM. Net lease rental obligations
on our existing prospects are expected to be approximately $0.5 million in fiscal year 2019. Our leases have a five-year primary
term, expiring in 2020, 2022 and 2023. Each lease may be extended by drilling a well capable of producing hydrocarbons and submitting
a Plan of Production approved by the regulatory authorities. In addition, the terms of our leases may be extended for an additional
three years, provided a well is spud targeting hydrocarbons with a true vertical depth in excess of 25,000 feet within the primary
term of the lease. In addition, the terms of our leases may also be extended by the granting of a Subsalt Lease Term Extension,
should we elect to apply and qualify for said extension on any lease(s). If we are not successful in raising additional capital,
we may be unable to successfully exploit our properties, and we may lose the rights to develop these properties upon the expiration
of our leases. If not successful in securing extensions, those leases will be subject to the competitive bid process in the twice
a year BOEM OCS Lease Sales.
We
may not be able to develop oil and natural gas reserves on an economically viable basis.
To
the extent that we succeed in discovering oil and/or natural gas reserves, we cannot assure that these reserves will be capable
of production levels we project or in sufficient quantities to be commercially viable. On a long-term basis, our viability depends
on our ability to find, develop and commercially produce oil and gas reserves, assuming we acquire leases or drilling rights.
Our future reserves, if any, will depend not only on our ability to develop then-existing properties, but also on our ability
to identify and acquire additional suitable producing properties or prospects, to find markets for the oil and natural gas we
develop and to effectively distribute our production into markets.
Future
oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not
produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure
a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental
damage could greatly increase the cost of operations and various field operating conditions may adversely affect the production
from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-downs of wells resulting
from extreme weather conditions, problems in storage and distribution and adverse geological and mechanical conditions. While
we will endeavor to effectively manage these conditions, we cannot be assured of doing so optimally, and we will not be able to
eliminate them completely in any case. Therefore, these conditions could adversely impact our operations.
We
may not be able to obtain drilling rigs and other equipment and geophysical service crews necessary to exploit any oil and natural
gas resources we may acquire.
We
may not be able to procure the necessary drilling rigs and related services and equipment or the cost of such items may be prohibitive.
Our ability to comply with future license obligations or otherwise generate revenues from the production of operating oil and
natural gas wells could be hampered as a result of this, and our business could suffer.
Environmental
risks may adversely affect our business.
All
phases of the oil and natural gas business present environmental risks and hazards and are subject to environmental regulation
pursuant to a variety of federal, state and local laws and regulations. Environmental legislation provides for, among other things,
restrictions and prohibitions on spills, releases or emissions of various substances produced in association with oil and natural
gas operations, including products, byproducts, and wastes. The legislation also requires that wells and facility location be
sited, operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Compliance with
such legislation can require significant expenditures, and a breach may result in the imposition of fines and penalties, some
of which may be material. Environmental legislation is evolving in a manner we expect may result in stricter standards and enforcement,
larger fines and liability, prevention of the right to operate or participate in leasing, and potentially increased capital expenditures
and operating costs. The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities
to foreign governments and third parties and may require us to incur costs to remedy such discharge. The application of environmental
laws to our business may cause us to curtail our production or increase the costs of our production, development or exploration
activities.
Any
insurance that we may acquire will likely be inadequate to cover liabilities we may incur.
Our
involvement in the exploration for, and development of, oil and natural gas properties may result in our becoming subject to liability
for pollution, blow-outs, property damage, personal injury or other hazards. Although we intend to obtain insurance in accordance
with industry standards to address such risks, such insurance has limitations and so will be unlikely to cover the full extent
of such liabilities. In addition, such risks may not, in all circumstances be insurable or, in certain circumstances, we may choose
not to obtain insurance to protect against specific risks due to the high premiums associated with such insurance or for other
reasons. The payment of such uninsured liabilities would reduce the funds available to us. If we suffer a significant event that
is not fully insured or if the insurer of such event is not solvent or denies coverage, we could be required to divert funds from
capital investment or other uses towards covering our liability for such events.
We
are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational
disruption or financial loss.
The
oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain exploration, development,
production, processing and distribution activities. For example, we depend on digital technologies to interpret seismic data,
conduct reservoir modeling and record financial and other data. Our industry faces various security threats, including cyber-security
threats. Cyber-security attacks in particular are increasing and include, but are not limited to, malicious software, attempts
to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems,
unauthorized release of confidential or otherwise protected information and corruption of data. Although to date we have not experienced
any material losses related to cyber-security attacks, we may suffer such losses in the future. Moreover, the various procedures
and controls we use to monitor and protect against these threats and to mitigate our exposure to such threats may not be sufficient
in preventing security threats from materializing. If any of these events were to materialize, they could lead to losses of intellectual
property and other sensitive information essential to our business and could have a material adverse effect on our business prospects,
reputation and financial position.
Risks
Related to our Common Stock
There
is a limited trading market for our shares. You may not be able to sell your shares if you need money.
Our common stock
is traded on the OTC Markets (QB Marketplace Tier), an inter-dealer automated quotation system for equity securities. During the
three calendar months preceding filing of this report, the average daily trading volume of our common stock was approximately
1,229,000 shares. As of July 22, 2019, we had approximately 192 record holders of our common stock (not including an indeterminate
number of stockholders whose shares are held by brokers in “street name”). There has been limited trading activity
in our stock, and when it has traded, the price has fluctuated widely. We consider our common stock to be “thinly traded”
and any last reported sale prices may not be a true market-based valuation of the common stock. Stockholders may experience difficulty
selling their shares if they choose to do so because of the illiquid market and limited public float for our common stock. This
situation is attributable to a number of factors, including, but not limited to:
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we
are a small company that is relatively unknown to stock analysts, stock brokers, institutional
investors and others in the investment community that generate or influence sales volume;
and
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stock
analysts, stock brokers and institutional investors may be risk-averse and reluctant
to follow a company such as ours that faces substantial doubt about its ability to continue
as a going concern or to purchase or recommend the purchase of our shares until such
time as we become more viable.
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As
a result, an investor may find it difficult to dispose of, or to obtain accurate quotations of the price of our common stock.
Accordingly, investors must assume they may have to bear the economic risk of an investment in our common stock for an indefinite
period of time, and may lose their entire investment. There can be no assurance that a more active market for our common stock
will develop, or if one should develop, there is no assurance that it will be sustained. This severely limits the liquidity of
our common stock and would likely have a material adverse effect on the market price of our common stock and on our ability to
raise additional capital.
We
may issue preferred stock.
Our
Certificate of Incorporation authorizes the issuance of up to 50 million shares of “blank check” preferred stock with
designations, rights and preferences determined from time to time by the Board of Directors. Accordingly, our Board of Directors
is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting, or other
rights, which could adversely affect the voting power or other rights of the holders of the common stock. In the event of issuance,
the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change
in control of the Company. Although we have no present intention to issue any shares of its authorized preferred stock, there
can be no assurance that we will not do so in the future.
Future
sales of our common stock could lower our stock price.
We
will likely sell additional shares of common stock to fund working capital obligations in future periods. We cannot predict the
size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock
will have on the market price of our common stock. Sales of substantial amounts of our common stock, or the perception that such
sales could occur, may adversely affect prevailing market prices for our common stock. Moreover, sales of our common stock by
existing shareholders could also depress the price of our common stock. For instance, we have issued instruments that are convertible
into or exercisable for 335 million shares of our Common Stock, which may have conversion or exercise rights that are at prices
lower than the trading price of our Common Stock. In particular, the holder of the $2.1 million in Convertible Debentures we have
issued may convert at any time a price equal to the lesser of (x) $0.05 per share or (y) 80% of the lowest daily VWAP of a share
of our Common Stock (as reported by Bloomberg, LP) for the ten (10) consecutive trading days immediately preceding the date of
determination.
Our
issuance of additional shares of Common Stock, or options or warrants to purchase those shares, would dilute your proportionate
ownership and voting rights.
We
are authorized to issue up to 1,550,000,000 shares of capital stock, comprising 1,500,000,000 shares of Common Stock, par value
$0.001 per share, and 50,000,000 shares of preferred stock, par value $0.001 per share (“Preferred Stock”). We have
issued and outstanding, as of March 31, 2019, 1,089,433,510 shares of Common Stock and 0 shares of Preferred Stock, plus another
approximately 335 million shares may be issued by us if all of the securities we have issued that are exercisable for, or convertible
into, shares of Common Stock are exercised or converted. Our board of directors (the “Board”) may generally issue
shares of Common Stock, Preferred Stock or options or warrants to purchase those shares without further approval by our shareholders,
based upon such factors as the Board may deem relevant at that time. See “Description of Capital Stock.” It is likely
that we will be required to issue a large amount of additional securities to raise capital to further our development. It is also
likely that we will issue a large amount of additional securities to directors, officers, employees and consultants as compensatory
grants in connection with their services, both in the form of stand-alone grants or under our stock plans. We cannot assure you
that we will not issue additional shares of Common Stock, Preferred Stock, or options or warrants to purchase those shares, under
circumstances we may deem appropriate at the time.
Our
common stock is subject to the “penny stock” rules of the SEC and FINRA, which makes transactions in our common stock
cumbersome and may reduce the value of an investment in the stock.
The
SEC has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as
any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share,
subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
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that
a broker or dealer approve a person’s account for transactions in penny stocks;
and
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the
broker or dealer receives from the investor a written agreement to the transaction, setting
forth the identity and quantity of the penny stock to be purchased.
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In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
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obtain
financial information and investment experience and objectives of the person; and
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make
a reasonable determination that the transactions in penny stocks are suitable for that
person and the person has sufficient knowledge and experience in financial matters to
be capable of evaluating the risks of transactions in penny stocks.
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The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which, in highlight form sets forth:
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the
basis on which the broker or dealer made the suitability determination; and
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that
the broker or dealer received a signed, written agreement from the investor prior to
the transaction.
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Generally,
brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make
it more difficult for investors to dispose of common stock and cause a decline in the market value of stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to
be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny
stocks.
In
addition to the “penny stock” rules promulgated by the SEC, FINRA has adopted rules that require a broker-dealer to
have reasonable grounds for believing that an investment is suitable for a customer when recommending the investment to that customer.
Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable
efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information.
Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will
not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their
customers buy our common stock, which may limit investors’ ability to buy and sell our stock and have an adverse effect
on the market for our shares.
The
price of our common stock will remain volatile, which could lead to losses by investors and costly securities litigation.
The
trading price of our common stock is likely to be highly volatile and could fluctuate in response to factors such as:
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actual
or anticipated variations in our operating results including but not limited to leasing,
drilling, and discovery of oil and gas;
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the
price of oil and gas;
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announcements
of developments by us, our strategic partners or our competitors;
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announcements
by us or our competitors of significant acquisitions, strategic partnerships, joint ventures
or capital commitments;
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adoption
of new accounting standards affecting our Company’s industry;
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additions
or departures of key personnel;
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sales
of our common stock or other securities in the open market;
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our
ability to acquire seismic data and other intellectual property on commercially reasonable
terms and to defend such intellectual property from third party claims;
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the
effects of government regulation, permitting and other legal requirements, including
new legislation or regulation;
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other
events or factors, many of which are beyond our control.
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The
stock market is subject to significant price and volume fluctuations. In the past, following periods of volatility in the market
price of companies’ securities, securities class action litigation has often been initiated against those companies. Litigation
initiated against us, whether or not successful, could result in substantial costs and diversion of our management’s attention
and resources, which could harm our business and financial condition.
We
do not anticipate paying any dividends on our common stock.
Cash
dividends have never been declared or paid on our common stock, and we do not anticipate such a declaration or payment for the
foreseeable future. We cannot assure stockholders of a positive return on their investment when they sell their shares, nor can
we assure that stockholders will not lose the entire amount of their investment in the Company.
Our
certificate of incorporation could make a merger, tender offer, or proxy contest difficult.
Our shareholders
have approved an amendment and restatement of our certificate of incorporation to (i) eliminate the ability of stockholders to
act by written consent and (ii) to classify the board of directors into three classes with staggered terms. These amendments may
discourage, delay or prevent a change in control.
Any
of the risk factors discussed herein could have a significant material adverse effect on our business, results of operations,
financial condition, or liquidity. Readers of this prospectus should not consider any descriptions of these risk factors to be
a complete set of all potential risks that could affect GulfSlope. These factors should be carefully considered together with
the other information contained in this prospectus and materials filed by us with the SEC and incorporated herein by reference.
Further, any of these risks are interrelated and could occur under similar business and economic conditions, and the occurrence
of certain of them may in turn cause the emergence or exacerbate the effect of others. Such a combination could materially increase
the severity of the impact of these risks on our business, results of operations, financial condition, or liquidity.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Included
in this prospectus are “forward-looking” statements, as well as historical information. Although we believe that the
expectations reflected in these forward-looking statements are reasonable, we can give no assurance that the expectations reflected
in these forward-looking statements will prove to be correct. Our actual results could differ materially from those anticipated
in forward-looking statements as a result of certain factors, including matters described in the section titled “Risk Factors.”
Forward-looking statements include those that use forward-looking terminology, such as the words “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “may,” “project,” “plan,”
“will,” “shall,” “should,” and similar expressions, including when used in the negative. Although
we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements
involve risks and uncertainties and no assurance can be given that actual results will be consistent with these forward-looking
statements. Important factors that could cause our actual results, performance or achievements to differ from these forward-looking
statements include the factors described in the “Risk Factors” section and elsewhere in this prospectus.
All
forward-looking statements attributable to us are expressly qualified in their entirety by these and other factors. We undertake
no obligation to update or revise these forward-looking statements, whether to reflect events or circumstances after the date
initially filed or published, to reflect the occurrence of unanticipated events or otherwise.
USE
OF PROCEEDS
The
selling security holders are selling shares of common stock covered by this prospectus for their own account. We will not receive
any of the proceeds from the resale of these shares.
DETERMINATION
OF OFFERING PRICE
We
are not selling any of the common stock that we are registering. The common stock will be sold by the selling security holders
as detailed in this prospectus. Such selling security holders may sell the common stock at the market price as of the date of
sale or a price negotiated in a private sale. Our common stock is listed for quotation on both the OTCBB and the OTCQB quotation
systems under the symbol “GSPE.”
SELLING
SECURITY HOLDERS
The
following table details the name of each selling stockholder, the number of shares owned by that selling stockholder, and the
number of shares that may be offered by each selling stockholder for resale under this prospectus. The selling security holders
may sell up to 206,000,000 shares of our common stock from time to time in one or more offerings under this prospectus. Because
the selling stockholder may offer all, some or none of the shares it holds, and because, based upon information provided to us,
there are currently no agreements, arrangements, or understandings with respect to the sale of any of the shares, no definitive
estimate as to the number of shares that will be held by the selling stockholder after the offering can be provided. The selling
shareholder has informed us that it is not a registered broker-dealer and does not have any written or oral agreement or understanding,
directly or indirectly, with any person to distribute the securities. Furthermore, unless otherwise indicated below, the selling
shareholder is not an affiliates of broker-dealers. The following table has been prepared on the assumption that all shares offered
under this prospectus will be sold to parties unaffiliated with the selling security holder.
Name
of Selling Stockholder
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Number
of
Shares of
Common Stock
Owned
Prior to the
Offering(1)
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Shares
of
Common
Stock
Included in
Prospectus
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Number
of
Shares of
Common Stock
Owned
After the
Offering(2)
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Percentage
of
Ownership
After
Completion
of Offering
(2)(3)
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YA
II PN, Ltd.
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54,504,155
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206,000,000
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0
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0%
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(1)
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The
number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 of the Exchange Act, and the information
is not necessarily indicative of beneficial ownership for any other purpose. Under such rule, beneficial ownership includes 0
shares as to which the selling security holders has sole or shared voting power or investment power and also includes 54,504,155
shares, which the selling security holders has the right to acquire within 60 days. Under the terms of the convertible debentures
and warrants, the holders do not have the right to convert the debentures or exercise the warrants to the extent that after giving
effect to such conversion or exercise, the holder (together with its affiliates) would beneficially own in excess of 4.99% of
the shares of our common stock outstanding. Matthew Beckman is Manager of Yorkville Advisors Global II, LLC, the General Partner
of Yorkville Advisors Global, LP, the investment manager of YA II PN Ltd and has voting and dispositive power over the shares.
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(2)
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Assumes
the sale of all shares of common stock registered pursuant to this prospectus, although
the selling security holders are under no obligations known to us to sell any shares
of common stock at this time.
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(3)
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This
percentage is based upon 1,092,266,844 shares issued and outstanding as of July 19, 2019,
plus the additional shares that the selling stockholder is deemed to beneficially own.
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PLAN
OF DISTRIBUTION
The
selling security holders and any of their pledgees, donees, transferees, assignees and successors-in-interest may, from time to
time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are
traded or in private transactions. These sales may be at fixed or negotiated prices. The selling security holders may use any
one or more of the following methods when selling shares:
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ordinary
brokerage transactions and transactions in which the broker-dealer solicits investors;
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block
trades in which the broker-dealer will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the transaction;
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purchases
by a broker-dealer as principal and resale by the broker-dealer for its account;
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an
exchange distribution in accordance with the rules of the applicable exchange;
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privately
negotiated transactions;
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to
cover short sales made after the date that this Registration Statement is declared effective
by the Commission;
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broker-dealers
may agree with the selling security holders to sell a specified number of such shares
at a stipulated price per share;
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a
combination of any such methods of sale; and
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any
other method permitted pursuant to applicable law.
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The
selling security holders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling security holders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any broker-dealer acts as agent for the purchaser of shares,
from the purchaser) in amounts to be negotiated. The selling security holders do not expect these commissions and discounts to
exceed what is customary in the types of transactions involved.
The
selling security holders may from time to time pledge or grant a security interest in some or all of the Shares owned by them,
if permitted by applicable laws and regulations, and, if they default in the performance of their secured obligations, the pledgees
or secured parties may offer and sell shares of common stock from time to time under this prospectus, or under an amendment to
this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of selling
security holders to include the pledgee, transferee or other successors in interest as selling security holders under this prospectus.
Each
selling shareholder has informed us that he, she or it is not a registered broker-dealer and does not have any written or oral
agreement or understanding, directly or indirectly, with any person to distribute the securities. Certain of the selling shareholders
are affiliates of broker-dealers. Each such selling shareholder has represented to us that it acquired the securities to be resold
pursuant to this prospectus in the ordinary course of its business and, at the time of the acquisition, such selling shareholder
had no agreements or understandings, directly or indirectly, with any person to distribute the securities. Upon the Company being
notified in writing by a Selling Stockholder that any material arrangement has been entered into with a broker-dealer for the
sale of common stock through a block trade, special offering, exchange distribution or secondary distribution or a purchase by
a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act,
disclosing (i) the name of each such Selling Stockholder and of the participating broker-dealer(s), (ii) the number of shares
involved, (iii) the price at which such shares of common stock were sold, (iv) the commissions paid or discounts or concessions
allowed to such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not conduct any investigation to verify
the information set out or incorporated by reference in this prospectus, and (vi) other facts material to the transaction. In
addition, upon the Company being notified in writing by a Selling Stockholder that a donee or pledge intends to sell more than
500 shares of common stock, a supplement to this prospectus will be filed if then required in accordance with applicable securities
law.
The
selling security holders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees
or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
The
selling security holders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters”
within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers
or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, that can be attributed to
the sale of Securities will be paid by the Selling Stockholder and/or the purchasers. Each Selling Stockholder has represented
and warranted to the Company that it acquired the securities subject to this registration statement in the ordinary course of
such Selling Stockholder’s business and, at the time of its purchase of such securities such Selling Stockholder had no
agreements or understandings, directly or indirectly, with any person to distribute any such securities.
The
Company has advised each Selling Stockholder that it may not use shares registered on this Registration Statement to cover short
sales of common stock made prior to the date on which this Registration Statement shall have been declared effective by the Commission.
If a Selling Stockholder uses this prospectus for any sale of the common stock, it will be subject to the prospectus delivery
requirements of the Securities Act. The selling security holders will be responsible to comply with the applicable provisions
of the Securities Act and Exchange Act, and the rules and regulations thereunder promulgated, including, without limitation, Regulation
M, as applicable to such selling security holders in connection with resales of their respective shares under this Registration
Statement.
The
Company is required to pay all fees and expenses incident to the registration of the shares, but the Company will not receive
any proceeds from the sale of the common stock. The Company has agreed to indemnify the selling security holders against certain
losses, claims, damages and liabilities, including liabilities under the Securities Act. If the selling security holders use this
prospectus for any sale of the common stock, they will be subject to the prospectus delivery requirements of the Securities Act.
DESCRIPTION
OF OUR CAPITAL STOCK
We
are authorized to issue up to 1,550,000,000 shares of capital stock, comprising 1,500,000,000 shares of Common Stock, par value
$0.001 per share, and 50,000,000 shares of preferred stock, par value $0.001 per share (“Preferred Stock”).
Common
Stock
As
of July 19, 2019, there are 1,092,266,844 shares of our Common Stock issued and outstanding.
Voting
Each
holder of our Common Stock is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of stockholders.
Any action at a meeting at which a quorum is present will be decided by a majority of the votes cast. Cumulative voting for the
election of directors is not permitted.
Dividends
Holders
of our Common Stock are entitled to receive dividends when, as and if declared by the Board out of funds legally available for
payment, subject to the rights of holders, if any, of our preferred stock. Any decision to pay dividends on our Common Stock will
be at the discretion of the Board. The Board may or may not determine to declare dividends in the future. See “Dividend
Policy.” The Board’s determination to issue dividends will depend upon our profitability and financial condition,
and other factors that the Board deems relevant.
Liquidation
Rights
In
the event of a voluntary or involuntary liquidation, dissolution or winding up of our company, the holders of our Common Stock
will be entitled to share ratably on the basis of the number of shares held in any of the assets available for distribution after
we have paid in full all of our debts and after the holders of all outstanding preferred stock, if any, have received their liquidation
preferences in full.
Preferred
Stock
As
of the date of this Prospectus, there are no shares of our Preferred Stock issued and outstanding.
The
Board is expressly authorized from time to time to designate one or more series of the Preferred Stock, to issue the Preferred
Stock as Preferred Stock of any such series, and in connection with the designation of each such series to fix by resolution or
resolutions providing for the issue of shares thereof the voting and other powers, if any, and the designations, preferences and
relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof to the
fullest extent now or hereafter permitted by Delaware law. All series of Preferred Stock shall rank equally and be identical in
all respects except as set forth in the Board’s resolutions providing for the issue of such stock.
Limitations
on Liability and Indemnification of Officers and Directors
Delaware
law authorizes corporations to limit or eliminate (with a few exceptions) the personal liability of directors to corporations
and their stockholders for monetary damages for breaches of directors’ fiduciary duties as directors. Our articles of incorporation
and bylaws include provisions that eliminate, to the extent allowable under Delaware law, the personal liability of directors
or officers for monetary damages for actions taken as a director or officer, as the case may be. Our articles of incorporation
and bylaws also provide that we must indemnify and advance reasonable expenses to our directors and officers to the fullest extent
permitted by Delaware law. We are also expressly authorized to carry directors’ and officers’ insurance for our directors,
officers, employees and agents for some liabilities. We currently maintain directors’ and officers’ insurance covering
certain liabilities that may be incurred by directors and officers in the performance of their duties.
The
limitation of liability and indemnification provisions in our articles of incorporation and bylaws may discourage stockholders
from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions may also have the effect of reducing
the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise
benefit us and our stockholders. In addition, your investment may be adversely affected to the extent that, in a class action
or direct suit, we pay the costs of settlement and damage awards against directors and officers pursuant to the indemnification
provisions in our articles of incorporation and bylaws.
There
is currently no pending litigation or proceeding involving any of directors, officers or employees for which indemnification is
sought.
Registration
Rights
In
connection with the Company’s sale of convertible debentures in June 2019, we granted registration rights to purchasers
of up to 156,000,000 shares of common stock. Under the registration rights agreements that we entered into with such purchasers,
we are obligated to file a resale registration statement with the SEC to register under the Securities Act the resale of these
156,000,000 shares as soon as practicable and to obtain effectiveness of such registration statement as soon as practicable. The
registration statement of which this prospectus is a part is being filed in accordance with our obligations under this registration
rights agreement.
The
Company will be required to use its reasonable best efforts to keep the registration statement, or registration statements, continuously
effective until all of the shares covered thereby have been publicly sold, or until all such shares may be sold without restriction.
We have agreed to indemnify the selling holders of these shares against, or in certain circumstances to contribute to, certain
liabilities incurred by them in connection with the offering and sale of the shares pursuant to such registration statement, including
liabilities under the Securities Act.
Convertible
Note and Option
Pursuant
to the terms of the SPA, at the Issuance Date, the Company sold to Buyer a Convertible Debenture. The principal amount of the
Convertible Debenture is $2,100,000 (as reduced pursuant to redemption, conversion or otherwise, the “Principal”),
it has an annual interest rate equal to 8% (the interest paid on the outstanding Principal at the applicable interest rate, the
“Interest”) and a maturity date of June 21, 2020 (the “Maturity Date”), and may be extended at the option
of Buyer. At the Maturity Date the Company shall pay to the Holder (as defined in the Convertible Debenture) an amount in cash
representing all outstanding Principal and accrued and unpaid Interest.
Subject
to the terms of the Convertible Debenture, at any time after the Issuance Date, the Holder is entitled to convert at the Conversion
Rate (as defined below) any portion of the outstanding and unpaid Principal and accrued Interest (the “Conversion Amount”)
into fully paid and nonassessable shares of Common Stock. The number of shares of Common Stock issuable upon conversion of any
Conversion Amount is determined by dividing (x) such Conversion Amount by (y) the Conversion Price (the “Conversion Rate”).
The “Conversion Price” is the lesser of (x) $0.05 per share or (y) 80% of the lowest daily VWAP price (as reported
by Bloomberg, LP) for the ten (10) consecutive trading days immediately preceding the date of determination.
Transfer
Agent
The
transfer agent for our Common Stock is VStock Transfer, LLC. They are located at 18 Lafayette Place, Woodmere, NY 11598.
BUSINESS
General
GulfSlope
Energy, Inc. is an independent crude oil and natural gas exploration and production company whose interests are concentrated in
the United States Gulf of Mexico federal waters. We are a technically driven company and we use our licensed 2.2 million acres
of three-dimensional (3-D) seismic data to identify, evaluate, and acquire assets with attractive economic profiles. GulfSlope
Energy commenced commercial operations in March 2013. GulfSlope Energy was originally organized as a Utah corporation in 2004
and became a Delaware corporation in 2012.
We
have focused our operations in the Gulf of Mexico because we believe this area provides us with favorable geologic and economic
conditions, including multiple reservoir formations, comprehensive geologic databases, extensive infrastructure, relatively favorable
royalty regime, and an attractive acquisition market and because our management and technical teams have significant experience
and technical expertise in this geologic province. Additionally, we licensed 2.2 million acres of advanced three-dimensional (3D)
seismic data, a significant portion of which has been enhanced by new, state-of-the-art reprocessing and noise attenuation techniques
including reverse time migration depth imaging. We use our broad regional seismic database and our reprocessing efforts to continuously
generate an inventory of high-quality prospects and since inception, we have generated a total of 25 prospects, advancing nine
of those prospects to drill ready status. The use of our extensive seismic database, coupled with our ability, knowledge, and
expertise to effectively reprocess this seismic data, allows us to further optimize our drilling program and to effectively evaluate
acquisition and joint venture opportunities. We consistently assess our prospect inventory in order to deploy capital as efficiently
as possible.
Competitive
Advantages
Experienced
management.
Our management has significant experience in finding and developing oil and natural gas. Our team has a track
record of discovering and developing multi-billion dollar projects worldwide. The Company’s management team has over 200
years of combined industry experience exploring, discovering, and developing oil and natural gas. We successfully deployed a technical
team with over 150 years of combined industry experience exploring for and developing oil and natural gas in the development and
execution of our technical strategy. We believe the application of advanced geophysical techniques on a specific geographic area
with unique geologic features such as conventional reservoirs whose trapping configurations have been obscured by overlying salt
layers provides us with a competitive advantage.
Advanced
seismic image processing.
Commercial improvements in 3-D seismic data imaging and the development of advanced processing
algorithms, including pre-stack depth, beam, and reverse time migration have allowed the industry to better distinguish hydrocarbon
traps and identify previously unknown prospects. Specifically, advanced processing techniques improve the definition of the seismic
data from a scale of time to a scale of depth, thus correctly locating the images in three dimensions. Our technical team has
significant experience utilizing advanced seismic image processing techniques in our core area, and applies the industry’s
most advanced noise reduction technology to generate clearer images.
Industry
leading position in our core area.
We have licensed 2.2 million acres of 3D seismic data which covers over 440 OCS Federal
lease blocks on the highly prolific Louisiana outer shelf, offshore Gulf of Mexico. We believe the proprietary and state-of-the-art
reprocessing of our licensed 3-D seismic data, along with our proprietary and leading-edge geologic depositional reservoir sand
and petroleum trapping models, gives us an advantage in assembling a high quality drilling portfolio in our core area. We continuously
work to identify additional leasing opportunities to further enhance our drilling portfolio.
Technical
Strategy
We
believe that a major obstacle to identifying potential hydrocarbon accumulations globally has been the inability of seismic technology
to accurately image deeper geologic formations because of overlying massive, extensive, and complex salt bodies. Large and thick
laterally extensive subsurface salt layers highly distort the seismic ray paths traveling through them, which often has led to
misinterpretation of the underlying geology and the potential major accumulations of oil and gas. We believe the opportunity exists
for a technology-driven company to extensively apply advanced seismic acquisition and processing technologies, with the goal of
achieving attractive commercial discovery rates for exploratory wells, and their subsequent appraisal and development, potentially
having a very positive impact on returns on invested capital. These tools and techniques have been proven to be effective in deep
water exploration and production worldwide, and we are using them to drill targets below the salt bodies in an area of the shallower
waters of the GOM where industry activity has largely been absent for over 20 years. In fact, GulfSlope management led the early
industry teams in their successful efforts to discover and develop five new fields below the extensive salt bodies in our core
area during the 1990’s, which have produced over 125 million barrels of oil equivalent.
Our
technical approach to exploration and development is to deploy a team of highly experienced geo-scientists who have current and
extensive understanding of the geology and geophysics of the petroleum system within our core area, thereby decreasing the traditional
timing and execution risks of advancing up a learning curve. For data licensing, re-processing and interpretation, our technical
staff has prioritized specific geographic areas within our 2.2 million acres of seismic coverage, with the goal to optimize initial
capital outlays.
Modern
3-D seismic datasets with acquisition parameters that are optimal for improved imaging at multiple depths are readily available
in many of these sub-basins across our core area, and can be licensed on commercially reasonable terms. Critical to the technical
success is the application of the newest state-of-the-art seismic imaging technology available, in order to optimize delineation
of prospective structures and to detect the presence of hydrocarbon-charged reservoirs below many complex salt bodies geologic
features. An example of such a seismic technology is reverse time migration, which we believe to be the most accurate, fastest,
and yet affordable, seismic imaging technology for critical depth imaging available today.
Lease
and Acquisition Strategy
Our
prospect identification and analytical strategy is based on a thorough understanding of the geologic trends within our core area.
Exploration efforts have been focused in areas where lease acquisition opportunities are readily available. We entered into two
master 3-D license agreements, together covering approximately 2.2 million acres and we have completed advanced processing on
select areas within this licensed seismic area exceeding one million acres. We can expand this coverage and perform further advanced
processing, both with currently licensed seismic data and seismic data to be acquired. We have sought to acquire and reprocess
the highest resolution data available in the potential prospect’s direct vicinity. This includes advanced imaging information
to further our understanding of a particular reservoir’s characteristics, including both trapping mechanics and fluid migration
patterns. Reprocessing is accomplished through a series of model building steps that incorporate the geometry of the geology to
optimize the final image. Our integration of existing geologic understanding and enhanced seismic processing and interpretation
provides us with unique insights and perspectives on existing producing areas and especially underexplored formations below and
adjacent to salt bodies that are highly prospective for hydrocarbon production.
We
currently hold seven leases that comprise five prospects and we will evaluate additional potential sources for growth opportunities
with companies that hold active leases in our core area. Our leases have a five-year primary term, expiring in 2020, 2022 and
2023. BOEM’s regulatory framework provides multiple options for leaseholders to apply to receive extensions of lease terms
under specified conditions. GulfSlope is exploring all options contained in BOEM’s regulatory framework. Additional prospective
acreage can be obtained through lease sales, farm-in, or purchase. As is consistent with a prudent and successful exploration
approach, we believe that additional seismic licensing, acquisition, processing, and/or interpretation may become highly advantageous,
in order to more precisely define the most optimal drillable location(s), particularly for development of discoveries.
We
continue to evaluate potential producing property acquisitions in the offshore GOM, taking advantage of our highly specialized
subsurface and engineering capabilities, knowledge, and expertise to identify attractive opportunities. Any merger or acquisition
is likely to be financed through a combination of debt and equity.
Drilling
and other Exploratory and Development Strategies
With
our success in the leasing of our targeted prospects, our plan has been to partner with other entities which could include oil
and gas companies and/or financial investors. Our goal is to diversify risk and minimize capital exposure to exploration drilling
costs. We expect a portion of our exploration costs to be paid by our partners through these transactions, in return for our previous
investment in prospect generation and delivery of an identified prospect on acreage we control. Such arrangements are a commonly
accepted industry method of proportionately recouping pre-drill cost outlays for seismic, land, and associated interpretation
expenses. We cannot assure you, however, that we will be able to enter into any such arrangements on satisfactory terms. In any
drilling, we expect that our retained working interest will be adjusted based upon factors such as geologic risk and well cost.
Early monetization of a discovered asset or a portion of a discovered asset is an option for the Company as a means to fund development
or additional exploration projects as an alternative to potential equity or debt offerings. However, if a reasonable value were
not received from the market at the discovery stage, then we may elect to retain (subject to lease terms) the discovery asset
undeveloped, until a reasonable offer is received in line with our perceived market value, or we may elect to seek development
partners on a promoted basis in order to substantially reduce capital development requirements. We will also evaluate and seek
to acquire producing properties that have a strategic relationship to our core area.
Oil
and Natural Gas Industry
The
oil and natural gas industry is a complex, multi-disciplinary sector that varies greatly across geographies. As a heavily regulated
industry, operating conditions are subject to political regimes and changing legislation. Governments can either induce or deter
investment in exploration and production, depending on legal requirements, fiscal and royalty structures and regulation. Beyond
political considerations, exploration and production for hydrocarbons is an extremely risky business with multiple failure modes.
Exploration and production wells require substantial investment and are long-term projects, sometimes exceeding twenty to thirty
years. Regardless of the effort spent on an exploration or production prospect, success is difficult to attain. Even though modern
equipment, including seismic equipment and advanced software has helped geologists find producing structures and map reservoirs,
they do not guarantee any outcome. Drilling is the only method to ultimately determine whether a prospect will be productive,
and even then, many complications can arise during drilling (e.g., those relating to drilling depths, pressure, porosity, weather
conditions, permeability of the formation and rock hardness, among others).
Typically,
there is a significant chance that exploratory wells will result in non-producing dry holes, leaving investors with the cost of
seismic data and a dry well, which can total millions of dollars. Even if oil or gas is produced from a particular well, there
is always the possibility that treatment, at additional cost, may be required to make production commercially viable. Further,
production profiles decline over time. In summary, oil and gas exploration and production is an industry with high risks and high
entry barriers.
Oil
and natural gas prices can have a significant impact on the commercial feasibility of a project. Certain projects may become feasible
with higher prices or, conversely, may falter with lower prices. Volatility in the price of oil, natural gas and other commodities
has increased and is likely to continue in the future. Beginning in late 2014, a significant decline in oil prices occurred, the
decline continued into 2016, and somewhat stabilized in mid-2017 near $50/bbl. 2018 brought additional volatility with prices
increasing to near $78/bbl and then falling in December to near $50/bbl. This volatility complicates the assessment of the commercial
viability of many oil and gas projects. Most governments have enforced strict regulations to uphold high standards of environmental
awareness; thus, holding companies to a high degree of responsibility vis-а-vis protecting the environment. Aside from such
environmental factors, oil and natural gas drilling is often conducted near populated areas. For a company to be successful in
its drilling endeavors, working relationships with local communities are crucial to promote business strategies and to avoid the
repercussions of disputes that might arise over local business operations. At this time, the Company does not have any production
or proved oil or natural gas reserves.
Governmental
Regulation
Our
future oil and natural gas operations will be subject to various federal, state, and local governmental regulations. Matters subject
to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations,
the spacing of wells, pooling of properties, occupational health and safety, and taxation. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas wells below actual
production capacity in order to conserve supplies of oil and natural gas. The production, handling, storage, transportation, and
disposal of oil and gas, by-products thereof, and other substances and materials produced or used in connection with oil and gas
operations are also subject to regulation under federal, state, and local laws and regulations relating primarily to the protection
of human health and the environment. State and local laws and regulations may affect the prices at which royalty owners are paid
for their leases by requiring more stringent disclosure and certification requirements, adjusting interest rates for late payments,
raising legal and administrative costs and imposing more costly default contractual terms. The requirements imposed by such laws
and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance
with these requirements or their effect on our operations. Although the regulatory burden on the oil and natural gas industry
increases our cost of doing business and, consequently, affects our profitability, these burdens generally do not affect us any
differently or to any greater or lesser extent than they affect others in our industry with similar business models.
Environmental
laws provide for, among other things, restrictions and prohibitions on spills, releases, or emissions of various substances produced
in association with oil and natural gas operations. The laws also require that wells and facility sites be operated, maintained,
abandoned, and reclaimed to the satisfaction of the applicable regulatory authorities. Compliance with such laws can require significant
expenditures and a breach may result in the imposition of fines and penalties, the payment of which could have a material adverse
effect on our financial condition or results of operations. Environmental legislation is evolving in a manner expected to result
in stricter standards and enforcement, larger fines and liability, and potentially increased capital expenditures and operating
costs. The discharge of oil or natural gas or other pollutants into the air, soil, or water may give rise to liabilities to governments
and third parties and may require us to incur costs to remedy such discharge. No assurance can be given that environmental laws
will not result in a curtailment of any future production or a material increase in the costs of production, development, or exploration
activities or otherwise adversely affect our financial condition, results of operations, or prospects. We could incur significant
liability for damages, clean-up costs, and penalties in the event of discharges into the environment, environmental damage caused
by us, or previous owners of our property, or non-compliance with environmental laws or regulations. In addition to actions brought
by governmental agencies, we could face actions brought by private parties or citizens groups. Any of the foregoing could have
a material adverse effect on our financial results. Numerous departments and agencies, both federal and state, are authorized
by statute to issue, and have issued, rules and regulations binding upon the oil and natural gas industry and its individual members.
The Bureau of Ocean Energy Management (“BOEM”) and the Bureau of Safety and Environmental Enforcement (“BSEE”)
regulations, pursuant to the Outer Continental Shelf Lands Act (“OCSLA”), apply to our operations on Federal leases
in the Gulf of Mexico. The Federal Trade Commission, the Federal Energy Regulatory Commission (“FERC”), and the Commodity
Futures Trading Commission (“CFTC”) hold statutory authority to monitor certain segments of the physical and futures
energy commodities markets. These agencies have imposed broad regulations prohibiting fraud and manipulation of such markets.
With regard to our future physical sales of crude oil or other energy commodities, and any related hedging activities that we
undertake, we are required to observe the market-related regulations enforced by these agencies, which hold substantial enforcement
authority.
These
departments and agencies have authority to grant and suspend operations, and have authority to levy substantial penalties for
non-compliance. Failure to comply with such regulations, as interpreted and enforced, could have a material adverse effect on
our business, results of operations and financial condition.
On
April 22, 2010, the Deepwater Horizon, a semi-submersible deep water drilling rig operating in the U.S. Gulf of Mexico, sank after
a blowout and fire resulting in a significant flow of hydrocarbons from the BP Macondo well. Subsequent to the Deepwater Horizon
incident, the Bureau of Ocean Energy Management (“BOEM”) issued a series of Notice to Lessees (“NTLs”)
imposing new regulatory requirements and permitting procedures for new wells to be drilled in federal waters of the outer continental
shelf (“OCS”). These new regulatory requirements include the following:
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the
Environmental NTL, which imposes new and more stringent requirements for documenting
the environmental impacts potentially associated with the drilling of a new offshore
well and significantly increases oil spill response requirements;
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the
Compliance and Review NTL, which imposes requirements for operators to secure independent
reviews of well design, construction and flow intervention processes and also requires
certifications of compliance from senior corporate officers;
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the
Drilling Safety Rule, which prescribes tighter cementing and casing practices, imposes
standards for the use of drilling fluids to maintain well bore integrity and stiffens
oversight requirements relating to blowout preventers and their components, including
shear and pipe rams; and
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the
Workplace Safety Rule, which requires operators to employ a comprehensive safety and
environmental management system (“SEMS”) to reduce human and organizational
errors as root causes of work-related accidents and offshore spills and to have their
SEMS periodically audited by an independent third party auditor approved by the Bureau
of Safety & Environmental Enforcement (“BSEE”).
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Since
the adoption of these new regulatory requirements, the BOEM has been taking much longer to review and approve permits for new
wells than was common prior to the Deepwater Horizon incident. The new rules also increase the cost of preparing each permit application
and will increase the cost of each new well, particularly for wells drilled in deeper waters on the OCS.
Hurricanes
in the Gulf of Mexico can have a significant impact on oil and gas operations on the OCS. The effects from past hurricanes have
included structural damage to fixed production facilities, semi-submersibles and jack-up drilling rigs. The BOEM and the BSEE
continue to be concerned about the loss of these facilities and rigs as well as the potential for catastrophic damage to key infrastructure
and the resultant pollution from future storms. In an effort to reduce the potential for future damage, the BOEM and the BSEE
have periodically issued guidance aimed at improving platform survivability by taking into account environmental and oceanic conditions
in the design of platforms and related structures.
The
BOEM, BSEE and Office of National Resources Revenue are expected to continue to issue new safety and environmental guidelines
or regulations for drilling in the U.S. Gulf of Mexico, and other regulatory agencies could potentially issue new safety and environmental
guidelines or regulations in other geographic regions, and may take other steps that could increase the costs of exploration and
production, reduce the area of operations and result in permitting delays. We are monitoring legislation and regulatory developments;
however, it is difficult to predict the ultimate impact of any new guidelines, regulations or legislation.
Environmental
Regulation
The
operation of our future oil and natural gas properties will be subject to numerous federal, state and local laws and regulations
governing the discharge of materials into the environment or otherwise relating to environmental protection. Applicable U.S. federal
environmental laws include, but are not limited to, the Comprehensive Environmental Response, Compensation, and Liability Act
(“CERCLA”), the Clean Water Act (“CWA”) and the Clean Air Act (“CAA”). These laws and regulations
govern environmental cleanup standards, require permits for air, water, underground injection, waste disposal and set environmental
compliance criteria. In addition, state and local laws and regulations set forth specific standards for drilling wells, the maintenance
of bonding requirements in order to drill or operate wells, the spacing and location of wells, the method of drilling and casing
wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells, and the
prevention and cleanup of pollutants and other matters. Typically, operators maintain insurance against costs of clean-up operations,
but are not fully insured against all such risks. Additionally, Congress and federal and state agencies frequently revise the
environmental laws and regulations, and any changes that result in delay or more stringent and costly permitting, waste handling,
disposal and clean-up requirements for the oil and gas industry could have a significant impact on our operating costs. There
can be no assurance that future developments, such as increasingly stringent environmental laws or enforcement thereof, will not
cause us to incur material environmental liabilities or costs.
Failure
to comply with these laws and regulations may result in the assessment of administrative, civil and criminal fines and penalties
and the imposition of injunctive relief. Accidental releases or spills may occur in the course of the operations of our properties,
and we cannot assure you that we will not incur significant costs and liabilities as a result of such releases or spills, including
any third-party claims for damage to property, natural resources or persons.
Among
the environmental laws and regulations that could have a material impact on the oil and natural gas exploration and production
industry and our business are the following:
Waste
Discharges
. The CWA and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants,
including spills and leaks of oil and other substances, into waters of the United States. The discharge of pollutants into regulated
waters is prohibited, except in accordance with the terms of a permit issued by the Environmental Protection Agency (“EPA”)
or an analogous state agency. The CWA and regulations implemented thereunder also prohibit the discharge of dredge and fill material
into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. Spill prevention,
control and countermeasure requirements of federal laws mandate preparation of detailed plans that address spill response, including
appropriate containment berms and similar structures to help prevent the contamination of navigable waters by a petroleum hydrocarbon
tank spill, rupture or leak. In addition, the CWA and analogous state laws require individual permits or coverage under general
permits for discharges of storm water runoff from certain types of facilities. Federal and state regulatory agencies can impose
administrative, civil and criminal penalties as well as other enforcement mechanisms for noncompliance with discharge permits
or other requirements of the CWA and analogous state laws and regulations.
Air
Emissions and Climate Change
. Air emissions from our operations are subject to the Federal Clean Air Act (“CAA”)
and comparable state and local requirements. We may be required to incur certain capital expenditures in the future for air pollution
control equipment in connection with obtaining and maintaining operating permits and approvals for air emissions. In addition,
the EPA has developed, and continues to develop, stringent regulations governing emissions of toxic air pollutants at specified
sources.
Moreover,
the U.S. Congress and the EPA in addition to some state and regional efforts have in recent years considered legislation or regulations
to reduce emissions of greenhouse gases. These efforts have included consideration of cap-and-trade programs, carbon taxes, and
greenhouse gas monitoring and reporting programs. In the absence of federal greenhouse gas limitations, the EPA has determined
that greenhouse gas emissions present a danger to public health and the environment, and it has adopted regulations that, among
other things, restrict emissions of greenhouse gases under existing provisions of the CAA and may require the installation of
control technologies to limit emissions of greenhouse gases. These regulations would apply to any new or significantly modified
facilities that we construct in the future that would otherwise emit large volumes of greenhouse gases together with other criteria
pollutants. Also, certain of our operations are subject to EPA rules requiring the monitoring and annual reporting of greenhouse
gas emissions from specified offshore production sources.
Oil
Pollution Act
. The Oil Pollution Act of 1990 (“OPA”) and regulations thereunder impose a variety of requirements
on “responsible parties” related to the prevention of oil spills and liability for damages resulting from such spills
in United States waters. A “responsible party” includes the owner or operator of an onshore facility, pipeline or
vessel, or the lessee or permittee of the area in which an offshore facility is located. OPA assigns liability to each responsible
party for oil cleanup costs and a variety of public and private damages. While liability limits apply in some circumstances, a
party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted
from violation of a federal safety, construction or operating regulation. If the party fails to report a spill or to cooperate
fully in the cleanup, liability limits likewise do not apply. Few defenses exist to the liability imposed by OPA. OPA imposes
ongoing requirements on a responsible party, including the preparation of oil spill response plans and proof of financial responsibility
to cover environmental cleanup and restoration costs that could be incurred in connection with an oil spill.
National
Environmental Policy Act
. Oil and natural gas exploration and production activities on federal lands are subject to the National
Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of Interior, to evaluate
major agency actions having the potential to significantly impact the environment. The process involves the preparation of either
an environmental assessment or environmental impact statement depending on whether the specific circumstances surrounding the
proposed federal action will have a significant impact on the human environment. The NEPA process involves public input through
comments, which can alter the nature of a proposed project either by limiting the scope of the project or requiring resource-specific
mitigation. NEPA decisions can be appealed through the court system, by process participants. This process may result in delaying
the permitting and development of projects, increase the costs of permitting and developing some facilities and could result in
certain instances in the cancellation of existing leases.
Worker
Safety
. The Occupational Safety and Health Act (“OSH Act”) and comparable state statutes regulate the protection
of the health and safety of workers. The OSH Act’s hazard communication standard requires maintenance of information about
hazardous materials used or produced in operations and provision of such information to employees. Other OSH Act standards regulate
specific worker safety aspects of our operations. Failure to comply with OSH Act requirements can lead to the imposition of penalties.
Safe
Drinking Water Act
. The Safe Drinking Water Act and comparable state statutes may restrict the disposal, treatment or release
of water produced or used during oil and gas development. Subsurface emplacement of fluids (including disposal wells or enhanced
oil recovery) is governed by federal or state regulatory authorities that in some cases, includes the state oil and gas regulatory
authority or the state’s environmental authority. These regulations may increase the costs of compliance.
Offshore
Drilling
. In 2011, the U.S. Department of Interior issued new rules designed to improve drilling and workplace safety in the
U.S. Gulf of Mexico, and various congressional committees began pursuing legislation to regulate drilling activities and increase
liability. The BOEM, BSEE and Office of National Resources Revenue are expected to continue to issue new safety and environmental
guidelines or regulations for drilling in the U.S. Gulf of Mexico, and other regulatory agencies could potentially issue new safety
and environmental guidelines or regulations in other geographic regions, and may take other steps that could increase the costs
of exploration and production, reduce the area of operations and result in permitting delays. We are monitoring legislation and
regulatory developments; however, it is difficult to predict the ultimate impact of any new guidelines, regulations or legislation.
A prolonged suspension of drilling activity or permitting delays in the U.S. Gulf of Mexico and new regulations and increased
liability for companies operating in this sector, whether or not caused by a new incident in the region, could adversely affect
the business and planned operations of oil and gas companies.
Hazardous
Substances and Wastes.
CERCLA, also known as the “Superfund law,” imposes liability, without regard to fault or
the legality of the original conduct, on certain classes of persons that are considered to be responsible for the release of a
“hazardous substance” into the environment. These persons include the owner or operator of the disposal site or sites
where the release occurred and companies that transported or disposed or arranged for the transport or disposal of the hazardous
substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject
to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment
and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file corresponding
common law claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.
Protected
and Endangered Species
. Executive Order 13158, issued in May 2000, directs federal agencies to safeguard existing Marine Protected
Areas (“MPAs”) in the United States and establish new MPAs. The order requires federal agencies to avoid harm to MPAs
to the extent permitted by law and to the maximum extent practicable. It also directs the EPA to propose new regulations under
the Clean Water Act to ensure appropriate levels of protection for the marine environment. This order has the potential to adversely
affect our operations by restricting areas in which we may carry out future development and exploration projects and/or causing
us to incur increased operating expenses.
Competition
We
operate in a highly competitive environment for generating, evaluating and drilling prospects and for acquiring properties. Many
of our competitors are major or large independent oil and natural gas companies that possess and employ financial resources well
in excess of the Company’s resources. We believe that we may have to compete with other companies when acquiring leases
or oil and gas properties. These additional resources can be particularly important in reviewing prospects and purchasing properties.
Competitors may be able to evaluate and purchase a greater number of properties and prospects than our financial or personnel
resources permit. Competitors may also be able to pay more for prospects than we are able or willing to pay. Further, our competitors
may be able to expend greater resources on the existing and changing technologies that we believe will impact attaining success
in the industry. If we are unable to compete successfully in these areas in the future, our future growth may be diminished or
restricted. Furthermore, these companies may also be better able to withstand the financial pressures of unsuccessful drill attempts,
delays, sustained periods of volatility in financial or commodity markets and generally adverse global and industry-wide economic
conditions, and may be better able to absorb the burdens resulting from changes in relevant laws and regulations, which would
adversely affect our operations.
Employees
We
currently have seven employees. We utilize consultants, as needed, to perform strategic, technical, operational and administrative
functions, and as advisors.
Legal
Proceedings
There
are currently no material pending legal proceedings to which the Company is a party or of which any of its property is the subject,
in which any of the above referenced directors or officers is a party adverse to the Company or has a material interest adverse
to the Company. Furthermore, during the past ten years, none of the Company’s officers or directors described above were
involved in any legal proceedings that are material to an evaluation of the ability or integrity of such directors and officers.
Property
We
lease office space at our corporate headquarters at 1331 Lamar St., Suite 1665, Houston, Texas 77010 on market terms through September
2021. We own office equipment, office furniture, and computer equipment.
We
are currently leasing seven prospective oil and gas blocks from the Bureau of Ocean Energy Management (“BOEM”) located
in Federal Waters offshore Louisiana. Our leases have a five-year primary term, expiring in 2020, 2022 and 2023. BOEM’s
regulatory framework provides multiple options for leaseholders to apply to receive extensions of lease terms under specified
conditions and we are exploring all options contained in BOEM’s regulatory framework. As of the date of this prospectus,
we have drilled oil and gas wells on two of our lease blocks.
Historical
Background
The
Company was incorporated under the laws of the State of Utah on December 12, 2003, as “Lostwood Professional Services, Inc.”
On July 21, 2004, the Company changed its name to “Plan A Promotions, Inc.” The Company became an SEC reporting company
in 2006, when a registration statement for its common stock was declared effective under the Exchange Act. At that time, the Company
was engaged in the business of selling promotional and marketing merchandise and apparel. Those operations were discontinued later
that year, and the Company was not engaged in any active business in the following years. In June 2011, the Company and certain
of its shareholders sold an aggregate of 9,700,000 shares of the Company’s common stock at a price of $0.01 per share to
certain accredited investors, which resulted in a change of control and management. Following the change of control, in April
2012 the Company changed its state of incorporation from the State of Utah to the State of Delaware, and changed its name to GulfSlope
Energy, Inc. Prior to March 2013, the Company had not been engaged in any substantive business activity since 2006.
General
Our
address is 1331 Lamar St., Suite 1665, Houston, Texas 77010, and our telephone number is (281) 918-4100. Our web site is www.gulfslope.com.
The information contained on our website is not incorporated by reference into this prospectus, and you should not consider any
information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase
our common stock. You may access and read our SEC filings through the SEC’s web site (http:www.sec.gov). This site contains
reports, proxy and information statements and other information regarding registrants, including us, that file electronically
with the SEC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion highlights the principal factors that have affected our financial condition and results of operations as
well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements. Please
see “Forward-Looking Statements” above for a discussion of the uncertainties, risks and assumptions associated with
these forward-looking statements. The following discussion and analysis of our financial condition and results of operations is
based on our consolidated financial statements, which have been prepared on the accrual basis of accounting, whereby revenues
are recognized when earned, and expenses are recognized when incurred. You should read this management’s discussion and
analysis of our financial condition and results of operations in conjunction with our historical financial statements included
elsewhere in this prospectus. In addition to the impact of the matters discussed in “Risk Factors,” our future results
could differ materially from our historical results due to a variety of factors, many of which are out of our control.
Overview
GulfSlope
Energy, Inc. is an independent oil and natural gas exploration and production company whose interests are concentrated in the
United States, Gulf of Mexico federal waters offshore Louisiana in 450 feet or less of water depth. The Company has under lease
seven federal Outer Continental Shelf blocks (referred to as “leases” in this report) and licensed 2.2 million acres
of three-dimensional (3-D) seismic data in its area of concentration. Approximately half this data has been reprocessed utilizing
Reverse Time Migration (RTM) to more accurately define the imaging below salt. Since March 2013, we have been singularly focused
on identifying high-potential oil and natural gas prospects located on the shelf in the U.S. GOM. 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 multiple 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. We have given preference to areas with water depths of 450 feet or less where production infrastructure
already exists, which will allow for any discoveries to be developed rapidly and cost effectively with the goal to reduce economic
risk while increasing returns. Recent actions of the Bureau of Ocean Energy Management (“BOEM”) have reduced the royalty
rate for leases acquired in future lease sales in water depths of less than 200 meters (approximately 656 feet) from 18.75% to
12.5%, which further enhances the economics for the drilling of any leases acquired after August 2017 in these water depths. This
reduced royalty applies to three of the Company’s leases.
The
Company has invested significant technical person hours in the reprocessing and interpretation of seismic data. We believe the
proprietary reprocessing and interpretation and the contiguous nature of our licensed 3-D seismic data gives us an advantage over
other exploration and production (“E&P”) companies operating in our core area.
We
have historically operated our business with working capital deficits and these deficits have been funded by equity investments
and loans from management. As of March 31, 2019, we had $5.0 million of cash on hand, $4.9 million of this amount is for the payment
of joint payables from drilling operations. The Company estimates that it will need to raise a minimum of $10.0 million to meet
its obligations and planned expenditures through June 2020. The Company plans to finance its operations through the issuance of
equity and/or debt financings. There are no assurances that financing will be available with acceptable terms, if at all.
Current
Operations
The
Company is currently conducting pre-drill operations on two prospects and we anticipate spudding one well in late 2019. The Company
continues to be active in the evaluation of potential mergers and acquisitions that it deems to be attractive opportunities. Any
such merger or acquisition is likely to be financed through a combination of debt and equity.
On
January 8, 2018, the Company signed comprehensive documents related to partnering with Delek and Texas South to participate in
the drilling of nine currently leased prospects. The initial phase (Phase I) consists of a commitment to drill the Canoe Prospect
(VR378) and the Tau Prospect (SS336 and SS351). The Company commenced drilling operations at the Canoe prospect in August 2018.
The well completed drilling in August 2018 and based on Logging-While-Drilling (LWD) and Isotube analysis of hydrocarbon samples,
oil sands were encountered in the northwest center of the block. The well was drilled to a total of 5,765 feet measured depth
(5,700 feet true vertical depth) and encountered no problems while drilling. A full integration of the well information and seismic
data is being performed for further evaluation of the shallow potential of the wellbore and the block, and to define commerciality
of these oil pays. The well was temporarily abandoned, and multiple open hole plugs were set across several intervals. The well
is equipped with a mud-line suspension system for possible future re-entry. A deeper subsalt prospect on the Canoe lease block,
for which the block was originally leased, is drill-ready, due to further seismic enhancement.
The Tau Prospect
is located approximately six miles northeast of the Mahogany Field, discovered in 1993. The Mahogany Field is recognized as the
first commercial discovery below allocthonous salt in the Gulf of Mexico. The Tau Prospect is defined by mapping of 3D seismic
reprocessed by RTM methods. Drilling operations on the Tau subsalt prospect commenced in September 2018. The wellbore is designed
to test multiple Miocene horizons trapped against a well-defined salt flank, including equivalent reservoir sands discovered and
developed at the nearby Mahogany Field. The surface location for Tau is located in 305 feet of water. Drilling was completed in
May 2019. In January 2019, the Tau well experienced an underground control of well event and as a result, we filed an insurance
claim with its insurance underwriters for a net amount of approximately $10.8 million for 100% working interest. The insurance
claim was subsequently approved. On May 13, 2019, GulfSlope announced the Tau well was drilled to a measured depth of 15,254 feet,
as compared to the originally permitted 29,857 foot measured depth. Producible hydrocarbon zones were not established to the current
depth, but hydrocarbon shows were encountered. Complex geomechanical conditions required two by-pass wellbores, one sidetrack wellbore,
and eight casing strings to reach the current depth. Equipment limitations prevent further drilling at this time. In addition,
the drilling rig has contractual obligations related to another operator. Due to these factors, the Company has elected to temporarily
abandon this well in a manner that would allow for re-entry at a later time. The Company is currently evaluating various options
related to future operations in this wellbore and testing of the deeper Tau prospect.
The
Company has completed the shallow hazard seismic survey for a third planned well and the detailed engineering and permitting process
for the drilling of that well. The exploration plan for this well was approved by BOEM in July 2019.
The Company has
incurred accumulated losses for the period from inception to March 31, 2019, of approximately $48.4 million, and has a net capital
deficiency. Further losses are anticipated in developing its business. As a result, there exists substantial doubt about the Company’s
ability to continue as a going concern. As of March 31, 2019, the Company had approximately $5.0 million of unrestricted cash on
hand, $4.9 million of this amount is for the payment of joint payables from drilling operations. Our current capital on hand is
insufficient to enable us to execute our business strategy beyond September 2019. The Company estimates that it will need to raise
a minimum of $10.0 million to meet its obligations and planned expenditures through June 2020. These expenditures include the Company’s
drilling costs, lease rentals to the BOEM, general and administrative expenses, and costs associated with seismic acquisition and
processing. The Company plans to finance the Company through best-efforts equity and/or debt financings and farm-out agreements.
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. 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 or cease operations or the Company would need to sell assets or consider alternative plans up to and
including restructuring.
Significant
Accounting Policies
The
Company uses the full cost method of accounting for its oil and natural 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”), whereby capitalized
costs are amortized over total proved 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 cost center ceiling is defined as the sum of (a) estimated future
net revenues, discounted at 10% per annum, from proved reserves, (b) the cost of properties not being amortized, if any, and (c)
the lower of cost or market value of unproved properties included in the cost being amortized. 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, 2019, the Company’s oil and gas properties consisted of wells in process, capitalized exploration and acquisition
costs for unproved properties and no proved reserves.
Property
and equipment are carried at cost. We assess the carrying value of our property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
A
more complete discussion of our critical accounting policies is included in our annual report on Form 10-K as of September 30,
2018, which was filed with the Securities and Exchange Commission on December 31, 2018.
Factors
Affecting Comparability of Future Results
Success
in Acquiring Oil and Gas Leases or Prospects
. As a result of our 3-D seismic imaging and reprocessing, we currently hold seven
lease blocks in the U.S. Gulf of Mexico, which we believe may potentially contain economically recoverable reserves.
We
have No Proved Reserves
. We have identified prospects based on available seismic and geological information that indicate
the potential presence of oil or gas, and we own the drilling and production rights for these prospects. Some of our current prospects
may require additional seismic data reprocessing and interpretation. Even when properly used and interpreted, seismic data and
visualization techniques are only tools used to assist geoscientists in identifying structures and hydrocarbon indicators and
do not enable the interpreter to have certainty as to whether hydrocarbons are, in fact, present in those structures. We do not
know if any prospect will contain oil or gas in sufficient quantities or quality to recover drilling and completion costs or to
be economically viable.
Success
in the Discovery and Development of Reserves
. Because we have no operating history in the production of oil and gas, our future
results of operations and financial condition will be directly affected by our ability to discover and develop reserves through
our drilling activities.
Oil
and Gas Revenue
. We have not yet commenced oil and gas production. If and when we do commence production, we expect to generate
revenue from such production. No oil and gas revenue is reflected in our historical financial statements.
General
and Administrative Expenses
. We expect that our general and administrative expenses will increase in future periods when we
commence drilling operations.
Demand
and Price
. The demand for oil and gas is susceptible to volatility related to, among other factors, the level of global economic
activity and may also fluctuate depending on the performance of specific industries. We expect that a decrease in economic activity,
in the United States and elsewhere, would adversely affect demand for any oil and gas we may produce. Since we have not generated
revenues, these key factors will only affect us if and when we produce and sell hydrocarbons.
For
a more complete discussion of the factors affecting comparability of our future results, see the “Risk Factors” above.
Three
Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
There
was no revenue during the three months ended March 31, 2019 and March 31, 2018. General and administrative expenses were approximately
$1.0 million for the three months ended March 31, 2019, compared to approximately $0.1 million for the three months ended March
31, 2018. This increase is primarily due to an increase in bad debt expense for March 31, 2019. Interest expense was $0.1 million
for the three months ended March 31, 2019 compared to $0.2 million for the three months ended March 31, 2018, primarily due to
differences in debt discount amortization. Loss on debt extinguishment was approximately $5.1 million for the three months ended
March 31, 2019, and approximately $0.2 million for the three months ended March 31, 2018. This increase is due to a loan and subsequent
warrant exercise resulting in loan extinguishment. For the three months ended March 31, 2019 there was a gain of $0.2 million
on a derivative financial instrument, compared to zero for the three months ended March 31, 2018.
Six
Months Ended March 31, 2019 Compared to Six Months Ended March 31, 2018
There
was no revenue during the six months ended March 31, 2019 and March 31, 2018. General and administrative expenses were approximately
$1.2 million for the six months ended March 31, 2018, compared to approximately $0.4 million for the six months ended March 31,
2018. This increase was primarily due to an increase in bad debt expense. Interest expense was $0.2 million for the six months
ended March 31, 2019 compared to $0.5 million for the six months ended March 31, 2018. This decrease was due to a decrease in
debt discount amortization for the six months ended March 31, 2019 compared to March 31, 2018. Loss on debt extinguishment was
approximately $5.1 million for the six months ended March 31, 2019 and approximately $0.2 million for the six months ended March
31, 2018. This increase is due to a loan and subsequent warrant exercise resulting in loan extinguishment. Loss on derivative
financial instrument was $0.02 million and zero for March 31, 2019 and 2018 respectively.
Liquidity
and Capital Resources
As
of March 31, 2019, we had $5.0 million of cash on hand, $4.9 million of this amount is for joint payables from drilling
operations. We have a working capital deficit of $11.5 million, $8.7 million of this amount is loans from related parties.
Our current capital on hand is insufficient to enable us to execute our business strategy beyond September 2019. The Company
estimates that it will need to raise a minimum of $10 million to meet its obligations and planned expenditures through July
2020. The $10 million is comprised primarily of capital project expenditures as well as general and administrative expenses.
It does not include any amounts due under outstanding debt obligations, which amounted to $10.9 million of current principal
and interest as of March 31, 2019. The Company plans to finance its operations through the issuance of equity and debt
financings. 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. 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.
For
the six months ended March 31, 2019, the Company used approximately $4.9 million of net cash in operating activities, compared
with approximately $1.0 million of net cash received in operating activities for the six months ended March 31, 2018, due to approximately
$4.1 million decrease in deposits. For the six months ended March 31, 2019 we used approximately $5.7 million of cash from investing
activities compared with approximately $1.2 million of cash received in investing activities for the six months ended March 31,
2018, primarily due to a $5.7 million investment in oil and gas properties for the six months ended in March 31, 2019. For the
six months ended March 31, 2019 we received approximately $10.0 million of net cash from financing activities, compared with approximately
$0.1 million received in financing activities for the three months ended March 31, 2018. This increase is due to loan proceeds
received during the six months ended March 31, 2019.
We
will need to raise additional funds to cover expenditures planned after July 2019, as well as any additional, unexpected expenditures
that we may encounter. Future equity financings may be dilutive to our stockholders. Alternative forms of future financings may
include preferences or rights superior to our common stock. Debt financings may involve a pledge of assets and will rank senior
to our common stock. We have historically financed our operations through private equity and debt financings. We do not have any
credit or equity facilities available with financial institutions, stockholders or third-party investors, and will continue to
rely on best efforts financings. The failure to raise sufficient capital could cause us to cease operations.
Off-Balance
Sheet Arrangements
None.
MARKET
PRICE INFORMATION AND DIVIDEND POLICY
Our
common stock is quoted on the OTCBB and the OTCQB under the symbol “GSPE.” Shares of our common stock have historically
been thinly traded, and currently there is no active trading market for our common stock. As a result, our stock price as quoted
by the OTCBB or OTCQB may not reflect an actual or perceived value. The following table sets forth the approximate high and low
bid prices for our common stock for the last two fiscal years and interim periods. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual transactions.
|
|
High
|
|
|
Low
|
|
YEAR
2019
|
|
|
|
|
|
|
|
|
|
Quarter
ended March 31, 2019
|
$
|
0.073
|
|
|
$
|
0.055
|
|
|
|
|
|
|
|
|
|
|
YEAR
2018
|
|
|
|
|
|
|
|
|
|
Quarter
ended September 30, 2018
|
$
|
0.072
|
|
|
$
|
0.057
|
|
|
Quarter
ended June 30, 2018
|
$
|
0.120
|
|
|
$
|
0.100
|
|
|
Quarter
ended March 31, 2018
|
$
|
0.078
|
|
|
$
|
0.060
|
|
|
Quarter
ended December 31, 2018
|
$
|
0.045
|
|
|
$
|
0.039
|
|
|
|
|
|
|
|
|
|
|
YEAR
2017
|
|
|
|
|
|
|
|
|
|
Quarter
ended September 30, 2017
|
$
|
0.039
|
|
|
$
|
0.030
|
|
|
Quarter
ended June 30, 2017
|
$
|
0.018
|
|
|
$
|
0.018
|
|
|
Quarter
ended March 31, 2017
|
$
|
0.030
|
|
|
$
|
0.027
|
|
|
Quarter
ended December 31, 2017
|
$
|
0.065
|
|
|
$
|
0.058
|
|
As
of July 19, 2019, the closing price of our Common Stock was $0.04 per share.
Holders
The
number of record holders of the Company’s common stock, as of July 19, 2019, is approximately 188.
Dividends
The
Company has not declared any dividends with respect to its common stock and does not intend to declare any dividends in the foreseeable
future. The future dividend policy of the Company cannot be ascertained with any certainty. There are no material restrictions
limiting the Company’s ability to pay cash dividends on its common stock.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table sets forth information with respect to the equity compensation plans available to directors, officers, certain
employees and certain consultants of the Company at December 31, 2018.
|
|
(a)
|
|
(b)
|
|
(c)
|
Plan category
|
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights (1)
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
Number of securities
remaining available for
future issuance under
equity compensation
plans, excluding securities
reflected in column (2)
|
Equity compensation plans approved by security holders
|
|
|
103,500,000
|
|
|
$
|
0.0605
|
|
|
|
42,500,000
|
|
Equity compensation plans not approved by security holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
103,500,000
|
|
|
|
|
|
|
|
42,500,000
|
|
(1)
|
This column reflects the maximum number of shares of our common stock subject to stock option awards granted under the 2014 and 2018 Omnibus Incentive Plans outstanding and unvested.
|
(2)
|
This column reflects the total number of shares of our common stock remaining available for issuance under the 2018 Omnibus Incentive Plan.
|
MANAGEMENT,
DIRECTORS AND SIGNIFICANT EMPLOYEES
Directors
of the corporation are elected by the stockholders and serve until a successor is elected and qualified. Officers of the corporation
are appointed by the Board and serves until a successor is duly appointed and qualified, or until he or he is removed from office.
The Board also appointed our officers in accordance with our bylaws and employment agreements negotiated between the Board and
the respective officer. Currently, there are no such employment agreements. Officers listed herein are employed at the discretion
of the Board and state employment law, where applicable.
Our
executive officers and directors and their respective ages, positions and biographical information are set forth below.
Name
|
Position
|
Age
|
John N. Seitz
|
Chairman, Chief Executive Officer
|
67
|
John H. Malanga
|
Chief Financial Officer
|
51
|
Dwight M. Moore
|
Vice President, Secretary
|
62
|
Charles G. Hughes
|
Vice President, Land
|
62
|
Richard S. Langdon
|
Director
|
68
|
Paul L. Morris
|
Director
|
77
|
John
N. Seitz.
Mr. Seitz has served as the Company’s chief executive officer and chairman of the board and director since
May 31, 2013, and served as a consultant to the Company from March 2013 through May 2013. Prior to joining the Company, Mr. Seitz
held positions of increasing responsibility at Anadarko Petroleum Corporation (NYSE: APC), serving most recently as a director
and as president and chief executive officer until 2003. Mr. Seitz also serves on the board of directors of ION Geophysical Corporation
(NYSE: IO), a leading technology focused seismic solutions company. Mr. Seitz is a Certified Professional Geological Scientist
from the American Institute of Professional Geologists and a licensed professional geoscientist with the State of Texas. Mr. Seitz
also serves as a trustee for the American Geological Institute Foundation. In 2000, the Houston Geological Society honored Mr.
Seitz as a “Legend in Wildcatting,” and he is a member of the All American Wildcatters. Mr. Seitz holds a Bachelor
of Science degree in Geology from the University of Pittsburgh, a Master of Science degree in Geology from Rensselaer Polytechnic
Institute, and has completed the Advanced Management Program at the Wharton School.
John
H. Malanga.
Mr. Malanga has served as chief financial officer since July 2014 and is responsible for leading the financial
function of the organization, overseeing strategic planning and analysis, accounting and reporting, treasury, tax, audit and risk
management. From 2005 to 2014, Mr. Malanga worked as a senior investment banker with the energy firms of Weisser, Johnson &
Co. and Sanders Morris Harris Inc. Mr. Malanga began his investment banking career with Jefferies & Co. Over his career, he
has participated in capital markets, mergers and acquisitions, and financial advisory transactions with particular emphasis on
providing strategic and financial advice to emerging growth companies. Mr. Malanga holds a Bachelor of Science in Economics from
Texas A&M University and a Master in Business Administration with a concentration in finance from Rice University.
Dwight
M. Moore.
Mr. Moore has served as vice president and secretary of the Company since May 2013, and most recently served as
vice president- corporate development for ION Geophysical Corporation (NYSE: IO) from 2008 to 2013. From 2006-07, Mr. Moore was
manager of offshore business development at Murphy Oil Corporation (NYSE: MUR). From 1987 to 2003, Mr. Moore held positions at
Anadarko Petroleum (NYSE: APC) and from 1978 to 1987, at Diamond Shamrock/Maxus Energy (NYSE: YPF). Mr. Moore has served as president
of the Houston Geological Society, as treasurer of the American Association of Petroleum Geologists (AAPG), and recently served
as the chairman of the AAPG Investment Committee. Mr. Moore is also a licensed professional geoscientist with the State of Texas,
an AAPG Certified Petroleum Geologist, and holds two bachelor degrees with Honors, in Geology and Business Administration-Finance
and Economics from Southern Methodist University and its Cox School of Business.
Charles
G. Hughes.
Mr. Hughes has served as vice president land since April 2014. Mr. Hughes’ executive responsibilities include
all land and industry partner related matters. He formerly served as general manager – land and business development for
Marubeni Oil & Gas (USA), Inc. from 2007 to 2014. From 1980 to 2007, Mr. Hughes served in roles of increasing responsibility
both onshore and offshore in the Gulf of Mexico at Anadarko Petroleum Corporation. Mr. Hughes is a member and former Chairman
of the OCS Advisory Board, a member of the Association of Professional Landmen, the Houston Association of Professional Landmen
and the Professional Landmen’s Association of New Orleans. Mr. Hughes received his Bachelor of Business Administration in
Petroleum Land Management from the University of Texas.
Richard
S. Langdon.
Richard S. Langdon has served as a director of the Company since March 2014. Mr. Langdon is currently the executive
vice president and chief financial officer of Altamont Energy, Inc., a newly formed privately held exploration and production
company. Mr. Langdon served as the president, chief executive officer and outside director of Badlands Energy, Inc. and its predecessor
entity, Gasco Energy, Inc. since May 2013 and Debtor-in Possession since August 2017. Prior to assuming the President and CEO
role, Mr. Langdon had served as a Gasco Energy Inc. outside board member since 2003. Mr. Langdon serves as a member of the board
of managers of Sanchez Midstream Partners, LP, and is a member of its Audit, Nominating and Corporate Governance and Conflicts
Committees. Mr. Langdon was the president and chief executive officer of KMD Operating Company, LLC (“KMD Operating”),
and its predecessor entity, Matris Exploration Company LP (“Matris Exploration”), both privately held exploration
and production companies, from July 2004 through December 2015. Mr. Langdon was executive vice president and chief operating officer
of KMD Operating, from August 2009, until the merger of Matris Exploration into KMD Operating in November 2011. From 1997 until
2002, Mr. Langdon served as executive vice president and chief financial officer of EEX Corporation, a publicly traded exploration
and production company that merged with Newfield Exploration Company in 2002. Prior to that, he held various positions with the
Pennzoil Companies from 1991 to 1996, including executive vice president - International Marketing - Pennzoil Products Company;
senior vice president - Business Development - Pennzoil Company and senior vice president - Commercial & Control - Pennzoil
Exploration & Production Company. Mr. Langdon graduated from the University of Texas at Austin with a Bachelor of Science
degree in Mechanical Engineering in 1972 and a Masters of Business Administration in 1974.
Paul
L. Morris.
Mr. Morris has served as a director of the Company since March 2014. Mr. Morris founded Elk River Resources, LLC
in August 2013 to explore and develop oil and gas potential in the oil-producing regions of the southwest United States. Mr. Morris
has served as chairman and chief executive officer of Elk River Resources since inception. Prior to Elk River Resources, Mr. Morris
served as president and chief executive officer from 1988 to September 2013 of Wagner & Brown, Ltd., an independent oil and
gas company headquartered in Midland, Texas. With Wagner & Brown, Mr. Morris oversaw all company operations, including exploration
and production activities, in eight states as well as in France, England and Australia. Mr. Morris also oversaw affiliates involved
in natural gas gathering and marketing, crude oil purchasing and reselling, pipeline development, construction and operation,
and compressed natural gas (CNG) design, fabrication and operations. Mr. Morris served as president of Banner Energy from 1981
until 1988. Mr. Morris graduated from the University of Cincinnati with a Bachelor of Science degree in Mechanical Engineering
in 1964. Mr. Morris has also completed the Executive Management Program in the College of Business Administration of Penn State
University.
Board
Committees and Meetings
The
Board currently consists of three directors. Vacancies on the Board may be filled by a vote of a majority of the remaining directors,
although less than a quorum is present. A director elected by the Board to fill a vacancy shall serve for the remainder of the
term of that director until the director’s successor is elected and qualified. This includes vacancies created by an increase
in the number of directors. The Board has three standing committees: the Audit and Compliance Committee, the Compensation Committee,
and the Corporate Governance and Nominating Committee.
The
Company has no formal policy with regard to Board members’ attendance at annual meetings of security holders. The Company
held an annual shareholder meeting in May of 2018. During the fiscal year ended September 30, 2018, the Board held 4 meetings.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of the Exchange Act requires our directors and executive officers, and persons who beneficially own more than 10% of our
common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Directors,
executive officers and more than 10% stockholders are required by SEC regulations to provide us with copies of all Section 16(a)
forms they file. To our knowledge, based solely on a review of the copies of the reports furnished to us, all Section 16(a) filing
requirements applicable to our directors, officers and more than 10% beneficial owners were complied with during the year ended
September 30, 2018.
Code
of Ethics
We
have adopted a written code of ethics and whistleblower policy (the “Code of Ethics”) that applies to our principal
executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions.
We believe that the Code of Ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide
full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal
reporting of code violations; and provide accountability for adherence to the code. A copy of our Code of Ethics was previously
filed as an exhibit to our Annual Report on Form 10-K for the fiscal year ended 2012, and can be found at
www.sec.gov
.
Our Code of Ethics can also be found on our website at
www.gulfslope.com
. A copy of the Code of Ethics will be provided
to any person, without charge, upon request to the Secretary at 1331 Lamar St., Suite 1665, Houston, Texas 77010.
Involvement
in Certain Legal Proceedings
There
are currently no material pending legal proceedings to which the Company is a party or of which any of its property is the subject,
in which any of the above referenced directors or officers is a party adverse to the Company or has a material interest adverse
to the Company. Furthermore, during the past ten years, none of the Company’s officers or directors described above were
involved in any legal proceedings that are material to an evaluation of the ability or integrity of such directors and officers.
COMPENSATION
OF DIRECTORS AND EXECUTIVE OFFICERS
The
following tables contain compensation data for our named executive officers for the fiscal years ended September 30, 2018 and
2017:
Summary Compensation Table
|
Name and
Principal Position
|
|
|
Year
|
|
|
|
Salary
|
|
|
|
Bonus
|
|
|
|
Stock
Awards
|
|
|
|
Stock
Option Awards
|
|
|
|
All
Other
Compensation
|
|
|
|
Total
|
|
John N. Seitz
|
|
|
2018
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
CEO
|
|
|
2017
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
John H. Malanga
|
|
|
2018
|
|
|
|
36,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
560,250
|
|
|
|
—
|
|
|
|
596,250
|
|
CFO
|
|
|
2017
|
|
|
|
24,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
167,250
|
|
|
|
—
|
|
|
|
191,250
|
|
(1)
|
Mr. Seitz is not currently
receiving or accruing any compensation as of the date of this prospectus.
|
Employment
and Consulting Arrangements
Mr.
Seitz is not currently receiving or accruing any compensation as of the date of this prospectus.
On
January 1, 2016 all officers and all employees’ salaries were reduced due to budgetary constraints. A reduced annual salary
of approximately $24,000 plus benefits has been paid through May 2018. Beginning in May 2018 a monthly salary of approximately
$5,000 plus benefits was paid to all employees and officers. In January 2017, Mr. Malanga was awarded fifteen million stock options,
50% vested immediately the remainder vested in January of 2018. In June of 2018 Mr. Malanga was awarded eighteen million stock
options, 6 million vested immediately, 6 million will vest in June of 2019 and 6 million in June of 2020. The Company has seven
current employees and officers.
In
January 2017, 33,500,000 stock options were issued to employees, officers and board members. The options have an exercise price
of $0.0278 and 50% vested upon grant and 50% vested in January 2018, The options will expire in January 2024.
In
May 2018, 500,000 stock options with an exercise price of $0.065 were issued and in June 2018, 67,500,000 stock options with an
exercise price of $0.075 were issued to employees, officers and board members. 19 million stock options vested upon grant and
24 million will vest in June 2019, and 25 million will vest in June 2020. The options will expire on December 31, 2025.
Compensation
Policies and Practices as they Relate to the Company’s Risk Management
We
conducted a review of our compensation policies and procedures as they relate to an overall risk management policy. We do not
believe that any of our compensation policies and practices create risks that are reasonably likely to have a material adverse
effect on the Company.
Director
Compensation
During
2018, the directors of the Company were not compensated for their services as directors. In January of 2017 the Company’s
nonemployee directors were each awarded 2,500,000 stock options for the Company’s stock at an exercise price of $0.0278
per share, 50% vested in January 2017 and 50% vested in January of 2018. The stock options will expire in January 2024. In June
of 2018 the Company’s nonemployee directors were each awarded 4,500,000 stock options for the Company’s stock at an
exercise price of $0.075 per share, 1.5 million vested in June 2018, and 1.5 million will vest in June 2019 and June 2020, respectively.
The stock options will expire in December 2025.
Grants
of Plan-Based Awards
The
Company’s shareholders approved the 2018 Omnibus Incentive Plan in May of 2018. Restricted stock and stock option awards
made after this date, to executives, employees, and directors were made pursuant to the plan.
Outstanding
Equity Awards at Fiscal Year End
In October
2013, two million stock options were awarded with an exercise price of $0.12 and an expiration of October 2023. Fifty percent
vested upon grant and fifty percent vested one year later. In January 2017, 22 million stock options were awarded to
GulfSlope Energy executives, 5 million to directors, and 28.5 million to employees. The exercise price of the stock options
is $0.0278 and they expire in January 2024. Fifty percent of these options vested upon grant in January 2017 and fifty
percent vested in January 2018. In May 2018, 0.5 million stock options were awarded and in June 2018, 67.5 million stock
options were awarded to GulfSlope Energy executives, employees and directors. The exercise price of the stock options is
$0.075 and they expire in December 2025. 19 million of these options vested upon grant in June 2018, 24 million vested in
June 2019, and 25 million will vest in June 2020, provided the recipient remains employed at the Company.
Certain
Relationships and 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, 2018 and September 30, 2017 the total amount owed to John Seitz, our CEO, is $8,675,500. There
was a total of $1,641,086 and $1,201,286 of unpaid interest associated with these loans included in accrued interest within our
balance sheet as of September 30, 2018 and 2017, 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 former 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, 2018, the total amount owed to Dr. Bain and his
affiliate was $267,000. There was a total of $42,706 and $27,171 of accrued interest associated with these loans included within
our balance sheet as of September 30, 2018 and 2017, respectively. In June of 2016, Dr. Ronald Bain also entered into a $92,000
convertible promissory note with associated warrants under the same terms received by other investors (see Note 7 to the financial
statement as of and for the years ended September 30, 2018 and 2017).
On
November 15, 2016, a family member of the CEO, a related party, entered into a $50,000 convertible promissory note with associated
warrants under the same terms received by other investors (see Note 7 to the financial statement as of and for the years ended
September 30, 2018 and 2017).
Domenica
Seitz CPA, related to John Seitz, has provided accounting consulting services to the Company. During the years ended September
30, 2018 and 2017, the services provided were valued at $23,660 and $32,625, respectively. The Company has accrued these amounts
within accrued expenses and other payables, and they have been reflected in the September 30, 2018 and 2017 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.
PRINCIPAL
STOCKHOLDERS
The
following table sets forth the number and percentage of outstanding shares of common stock owned by: (a) each of our directors;
(b) each person who is known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; (c) the
named executive officers as defined in Item 402 of Regulation S-K; and (d) all current directors and executive officers, as a
group. As of July 19, 2019, there were 1,092,266,844 shares of common stock deemed issued and outstanding.
Unless
otherwise stated, beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Under this rule,
certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote
or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has
the right to acquire shares (for example, upon exercise of an option or warrant) within 60 days of the date as of which the information
is provided. In computing the percentage ownership of any person or group of persons, the number of shares beneficially owned
by such person or group of persons is deemed to include the number of shares beneficially owned by such person or the members
of such group by reason of such acquisition rights, and the total number of shares outstanding is also deemed to include such
shares (but not shares subject to similar acquisition rights held by any other person or group) for purposes of that calculation.
As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the
person’s actual voting power at any particular date. To our knowledge, except as indicated in the footnotes to this table
and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them. The address for each of the beneficial owners is the
Company’s address.
Name of Beneficial Owner
|
|
Number of Shares of Common Stock Beneficially Owned as of July 19, 2019
|
|
|
Percentage of Class
Beneficially Owned
|
|
Named Executive Officers and Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John N. Seitz (1)
|
|
|
254,668,176
|
|
|
|
23.3
|
%
|
John H. Malanga (3)
|
|
|
35,666,667
|
|
|
|
3.3
|
%
|
Dwight M. Moore (4)
|
|
|
21,045,555
|
|
|
|
1.9
|
%
|
Richard S. Langdon (5)
|
|
|
7,916,667
|
|
|
|
0.7
|
%
|
Paul L. Morris (2)
|
|
|
9,228,038
|
|
|
|
0.8
|
%
|
All directors & executive officers as a group (5 persons)
|
|
|
328,525,103
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
Shareholders of Greater Than 5%:
|
|
|
|
|
|
|
|
|
Delek GOM Investments, LLC
|
|
|
238,095,238
|
|
|
|
21.8
|
%
|
(1)
|
Includes 44,166,667
shares of common stock underlying the convertible demand note in the principal amount of $5.3 million and 9,241,300 shares
underlying the convertible accrued interest in the amount of $1,108,956.
|
(2)
|
Includes 4,167 shares
of common stock held by the Morris Family Limited Partnership LP, a partnership of which an entity controlled by Mr. Morris
is the general partner and 2,500,000 stock options awarded in January 2017, one-half vested in January of 2017 and one-half
vested in January 2018. Includes 4,500,000 stock options awarded in June 2018, one-third vested in June of 2018, one-third
will vest in June 2019 and one-third will vest in June 2020.
|
(3)
|
Includes 15,000,000
stock options awarded in January 2017, one-half vested in January of 2017 and one-half vested in January 2018. Includes 18,000,000
stock options awarded in June 2018, one-third vested in June of 2018, one-third will vest in June 2019 and one-third will
vest in June 2020.
|
(4)
|
Includes 3,000,000
stock options awarded in January 2017, one-half vested in January of 2017 and one-half vested in January 2018. Includes 8,000,000
stock options awarded in June 2018, 2 million vested in June of 2018, 3 million will vest in June 2019 and 3 million will
vest in June 2020.
|
(5)
|
Includes 2,500,000
stock options awarded in January 2017, one-half vested in January of 2017 and one-half vested in January 2018. Includes 4,500,000
stock options awarded in June 2018, one-third vested in June of 2018, one-third will vest in June 2019 and one-third will
vest in June 2020.
|
DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our
directors and officers are indemnified to the fullest extent permitted under Delaware law. We have also purchased and maintain
directors and officers insurance which protects our officers and directors against any liabilities incurred in connection with
their service in such a capacity.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the foregoing, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person
of ours in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
EXPERTS
The
financial statements as of September 30, 2018 and 2017 and for the years then ended included in this Prospectus and in the Registration
Statement have been so included in reliance on the report of BDO USA, LLP, an independent registered public accounting firm (the
report on the financial statements contains an explanatory paragraph regarding the Company’s ability to continue as a going
concern) appearing elsewhere herein and in the Registration Statement, given on the authority of said firm as experts in auditing
and accounting.
LEGAL
MATTERS
The
validity of the shares of common stock registered for resale hereby will be passed upon by Mayer Brown LLP, Houston, Texas.
WHERE
YOU CAN FIND MORE INFORMATION
We
have filed with the SEC under the Securities Act, a registration statement on Form S-1 relating to the securities offered hereby.
This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules
thereto. For further information with respect to our company and the securities we are offering by this prospectus you should
refer to the registration statement, including the exhibits and schedules thereto. You may inspect a copy of the registration
statement without charge at the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet
site that contains reports, proxy and information statements and other information regarding registrants that file electronically
with the SEC. The SEC’s internet address is http://www.sec.gov. We maintain a website at http://www.gulfslope.com. You may
access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC free of charge at our website as soon as
reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information contained in,
or that can be accessed through, our website is not part of this prospectus.
ITEM
11(e). FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
|
Page
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
Balance Sheets as of September 30, 2018 and 2017
|
F-
4
|
Statements of Operations for the Years Ended September 30, 2018 and 2017
|
F-
5
|
Statement of Stockholders’ Deficit for the Years Ended September 30, 2018 and 2017
|
F-
6
|
Statements of Cash Flows for the Years Ended September 30, 2018 and 2017
|
F-
7
|
Notes to Financial Statements for the Years Ended September 30, 2018 and 2017
|
F-
8
|
|
|
Condensed Balance Sheets as of March 31, 2019 and September 30, 2018 (Unaudited)
|
F-23
|
Condensed Statements of Operations for the Three and Six Months Ended March 31, 2019 and 2018 (Unaudited)
|
F-24
|
Condensed Statements of Stockholders’ Deficit for the Three Months Ended March 31, 2019 and 2018 (Unaudited)
|
F-25
|
Condensed Statements of Stockholders’ Deficit for the Six Months Ended March 31, 2019 and 2018 (Unaudited)
|
F-26
|
Condensed Statements of Cash Flows for the Six Months Ended March 31, 2019 and 2018 (Unaudited)
|
F-27
|
Notes to Condensed Unaudited Financial Statements
|
F-28
|
GulfSlope
Energy, Inc.
Report
of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
GulfSlope Energy, Inc.
Houston, Texas
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of GulfSlope Energy, Inc. (the “Company”) as of September 30, 2018 and
2017, the related statements of operations, stockholders’ deficit, and cash flows for the years then ended, and the related
notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly,
in all material respects, the financial position of the Company at September 30, 2018 and 2017, and the results of its operations
and its cash flows for the years then ended
,
in conformity with accounting principles generally accepted in the United
States of America.
Going
Concern Uncertainty
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described
in Note 2 to the financial statements, the Company has a net capital deficiency, and further losses are anticipated in developing
the Company’s business, which raise substantial doubt about its ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/
BDO USA, LLP
We
have served as the Company’s auditor since 2016.
Salt Lake City, Utah
December 31, 2018
GulfSlope
Energy, Inc.
BALANCE SHEETS
|
|
As of September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Assets
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,621,814
|
|
|
$
|
6,426
|
|
Accounts Receivable, Net
|
|
|
6,286,796
|
|
|
|
—
|
|
Prepaid Expenses and Other Current Assets
|
|
|
32,042
|
|
|
|
40,573
|
|
Total Current Assets
|
|
|
11,940,652
|
|
|
|
46,999
|
|
Property and Equipment, net of depreciation
|
|
|
14,786
|
|
|
|
3,484
|
|
Oil and Natural Gas Properties, Full Cost Method of Accounting, Unproved Properties
|
|
|
8,112,784
|
|
|
|
1,887,879
|
|
Other Non-Current Assets
|
|
|
24,785
|
|
|
|
—
|
|
Total Non-Current Assets
|
|
|
8,152,355
|
|
|
|
1,891,363
|
|
Total Assets
|
|
$
|
20,093,007
|
|
|
$
|
1,938,362
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
7,591,236
|
|
|
$
|
476,244
|
|
Deposits from Joint Interest Owners
|
|
|
4,078,786
|
|
|
|
—
|
|
Related Party Payable
|
|
|
306,386
|
|
|
|
298,458
|
|
Accrued Interest Payable
|
|
|
1,732,239
|
|
|
|
1,318,188
|
|
Accrued Expenses and Other Payables
|
|
|
268,862
|
|
|
|
1,321,927
|
|
Loans from Related Parties
|
|
|
9,084,500
|
|
|
|
9,155,581
|
|
Notes Payable
|
|
|
—
|
|
|
|
3,690
|
|
Convertible Promissory Notes Payable
|
|
|
135,000
|
|
|
|
669,419
|
|
Derivative Financial Instrument
|
|
|
271,710
|
|
|
|
—
|
|
Funds Received from Capital Raise
|
|
|
965,800
|
|
|
|
—
|
|
Other
|
|
|
44,723
|
|
|
|
11,605
|
|
Total Current Liabilities
|
|
|
24,479,242
|
|
|
|
13,255,112
|
|
Total Liabilities
|
|
|
24,479,242
|
|
|
|
13,255,112
|
|
Commitments and Contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Preferred Stock; par value ($0.001); Authorized 50,000,000 shares, none issued or outstanding
|
|
|
—
|
|
|
|
—
|
|
Common Stock; par value ($0.001); Authorized 1,500,000,000 as of September 30, 2018 and 975,000,000 as of September 30, 2017; issued and outstanding 832,013,272 and 692,196,625, as of September 30, 2018 and 2017, respectively
|
|
|
832,013
|
|
|
|
692,196
|
|
Additional Paid-in Capital
|
|
|
36,640,009
|
|
|
|
27,212,577
|
|
Accumulated Deficit
|
|
|
(41,858,257
|
)
|
|
|
(39,221,523
|
)
|
Total Stockholders’ Deficit
|
|
|
(4,386,235
|
)
|
|
|
(11,316,750
|
)
|
Total Liabilities and Stockholders’ Deficit
|
|
$
|
20,093,007
|
|
|
$
|
1,938,362
|
|
The
accompanying notes are an integral part to these financial statements.
GulfSlope
Energy, Inc.
STATEMENTS
OF OPERATIONS
|
|
For
the years ended
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
Impairment of Oil and Natural Gas Properties
|
|
|
—
|
|
|
|
3,316,212
|
|
General & Administrative Expenses
|
|
|
1,220,247
|
|
|
|
964,309
|
|
Net Loss from Operations
|
|
|
(1,220,247
|
)
|
|
|
(4,280,521
|
)
|
Other Income/(Expenses):
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(780,513
|
)
|
|
|
(1,324,127
|
)
|
Interest Income
|
|
|
27,312
|
|
|
|
—
|
|
Loss on Derivative Financial Instrument
|
|
|
(136,827
|
)
|
|
|
—
|
|
Loss on Debt Extinguishment
|
|
|
(526,459
|
)
|
|
|
(89,701
|
)
|
Net Loss Before Income Taxes
|
|
|
(2,636,734
|
)
|
|
|
(5,694,349
|
)
|
Provision for Income Taxes
|
|
|
—
|
|
|
|
—
|
|
Net Loss
|
|
$
|
(2,636,734
|
)
|
|
$
|
(5,694,349
|
)
|
Loss Per Share – Basic and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
Weighted Average Shares Outstanding – Basic and Diluted
|
|
|
768,365,759
|
|
|
|
684,935,344
|
|
The
accompanying notes are an integral part to these financial statements.
GulfSlope
Energy, Inc.
STATEMENTS
OF STOCKHOLDERS’ DEFICIT
|
|
Common
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Net
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance September 30, 2016
|
|
|
682,402,225
|
|
|
$
|
682,402
|
|
|
$
|
26,151,376
|
|
|
$
|
(33,527,174
|
)
|
|
$
|
(6,693,396
|
)
|
Common stock issued for services
|
|
|
1,250,000
|
|
|
|
1,250
|
|
|
|
(1,250
|
)
|
|
|
—
|
|
|
|
—
|
|
Common stock issued for cash received in prior period
|
|
|
—
|
|
|
|
—
|
|
|
|
653,670
|
|
|
|
—
|
|
|
|
653,670
|
|
Common stock issued resulting from anti-dilution provision
|
|
|
—
|
|
|
|
—
|
|
|
|
131,165
|
|
|
|
—
|
|
|
|
131,165
|
|
Restricted common stock issued to employees
|
|
|
—
|
|
|
|
—
|
|
|
|
81,861
|
|
|
|
—
|
|
|
|
81,861
|
|
Value of warrants in conjunction with convertible promissory notes
|
|
|
1,500,000
|
|
|
|
1,500
|
|
|
|
24,210
|
|
|
|
—
|
|
|
|
25,710
|
|
Value of beneficial conversion feature in conjunction with convertible promissory notes
|
|
|
7,044,400
|
|
|
|
7,044
|
|
|
|
120,844
|
|
|
|
—
|
|
|
|
127,888
|
|
Loss from extension of due date and issuance of Bridge Note extensions
|
|
|
—
|
|
|
|
—
|
|
|
|
50,701
|
|
|
|
—
|
|
|
|
(50,701
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,694,349
|
)
|
|
|
(5,694,349
|
)
|
Balance at September 30, 2017
|
|
|
692,196,625
|
|
|
|
692,196
|
|
|
|
27,212,577
|
|
|
|
(39,221,523
|
)
|
|
|
(11,316,750
|
)
|
Common stock issued for services
|
|
|
84,348,985
|
|
|
|
84,349
|
|
|
|
5,122,404
|
|
|
|
—
|
|
|
|
5,206,753
|
|
Amortization of employee stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
1,857,531
|
|
|
|
—
|
|
|
|
1,857,531
|
|
Value of beneficial conversion feature in conjunction with convertible promissory notes
|
|
|
—
|
|
|
|
—
|
|
|
|
103,519
|
|
|
|
—
|
|
|
|
103,519
|
|
Value of warrants in conjunction with convertible promissory notes
|
|
|
—
|
|
|
|
—
|
|
|
|
47,387
|
|
|
|
—
|
|
|
|
47,387
|
|
Common stock issued for convertible promissory notes
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
47,093
|
|
|
|
—
|
|
|
|
49,093
|
|
Common stock issued for conversion of convertible promissory notes plus accrued interest
|
|
|
41,850,996
|
|
|
|
41,851
|
|
|
|
924,474
|
|
|
|
—
|
|
|
|
966,325
|
|
Common stock issued for warrants exercised
|
|
|
416,666
|
|
|
|
417
|
|
|
|
12,083
|
|
|
|
—
|
|
|
|
12,500
|
|
Common stock issued to settle debt
|
|
|
11,200,000
|
|
|
|
11,200
|
|
|
|
1,095,800
|
|
|
|
—
|
|
|
|
1,107,000
|
|
Value of warrants issued in conjunction with Bridge Note extensions
|
|
|
—
|
|
|
|
—
|
|
|
|
217,141
|
|
|
|
—
|
|
|
|
217,141
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,636,734
|
)
|
|
|
(2,636,734)
|
|
Balance at September 30, 2018
|
|
|
832,013,272
|
|
|
$
|
832,013
|
|
|
$
|
36,640,009
|
|
|
$
|
(41,858,257
|
)
|
|
$
|
(4,386,235)
|
|
The
accompanying notes are an integral part to these financial statements.
GulfSlope
Energy, Inc.
STATEMENTS OF CASH FLOWS
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,636,734
|
)
|
|
$
|
(5,694,349
|
)
|
Adjustments to Reconcile Net Loss to Cash Provided
by (Used in) Operating Activities:
|
|
|
|
|
|
|
|
|
Impairment of Oil and Natural Gas Properties
|
|
|
—
|
|
|
|
3,316,212
|
|
Change in Allowance For Doubtful Accounts Receivable
|
|
|
—
|
|
|
|
(128,024
|
)
|
Depreciation
|
|
|
4,724
|
|
|
|
20,804
|
|
Debt Discount Amortization
|
|
|
254,501
|
|
|
|
810,540
|
|
Loss on Debt Extinguishment
|
|
|
526,459
|
|
|
|
89,701
|
|
Stock Based Compensation
|
|
|
1,036,654
|
|
|
|
458,543
|
|
Stock Issued for Services
|
|
|
503,076
|
|
|
|
—
|
|
Change in fair value of Derivatives
|
|
|
136,827
|
|
|
|
—
|
|
Changes in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
(Increase) Decrease in Accounts Receivable
|
|
|
(6,286,796
|
)
|
|
|
191,171
|
|
(Increase) Decrease in Prepaid Expenses and Other Current Assets
|
|
|
146,488
|
|
|
|
156,927
|
|
Increase (Decrease) in Deposits from Joint Interest Owners
|
|
|
4,078,786
|
|
|
|
—
|
|
Increase (Decrease) in Accounts Payable
|
|
|
5,914,705
|
|
|
|
(30,205
|
)
|
Increase (Decrease) in Related Party Payable
|
|
|
7,928
|
|
|
|
32,626
|
|
Increase (Decrease) in Accrued Interest Payable
|
|
|
520,375
|
|
|
|
509,139
|
|
Increase (Decrease) in Accrued Liabilities and Other Payables
|
|
|
633,865
|
|
|
|
—
|
|
Increase (Decrease) in Other
|
|
|
44,723
|
|
|
|
—
|
|
Net Cash Provided by (Used in) Operating Activities
|
|
|
4,885,581
|
|
|
|
(266,915
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Leases Purchased / Lease Rentals Paid
|
|
|
(280,268
|
)
|
|
|
(284,089
|
)
|
Proceeds From Sale of Working Interest
|
|
|
2,884,651
|
|
|
|
26,400
|
|
Capitalized Exploration and Wells In Process Costs
|
|
|
(1,904,618
|
)
|
|
|
(175,931
|
)
|
Deposits and Equipment Purchases
|
|
|
(22,050
|
)
|
|
|
—
|
|
Net Cash Provided by (Used in) Investing Activities
|
|
|
677,715
|
|
|
|
(433,620
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from Related Party Loans
|
|
|
—
|
|
|
|
652,500
|
|
Payments on Note Payable
|
|
|
(160,408
|
)
|
|
|
(159,653
|
)
|
Proceeds from Convertible Promissory Notes and Warrants
|
|
|
212,500
|
|
|
|
150,000
|
|
Net Cash Provided by (Used in) Financing Activities
|
|
|
52,092
|
|
|
|
642,847
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash
|
|
|
5,615,388
|
|
|
|
(57,688
|
)
|
Beginning Cash Balance
|
|
|
6,426
|
|
|
|
64,114
|
|
|
|
|
|
|
|
|
|
|
Ending Cash Balance
|
|
$
|
5,621,814
|
|
|
$
|
6,426
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Cash Flow Activities
|
|
|
|
|
|
|
|
|
Cash Paid for Interest
|
|
$
|
5,636
|
|
|
$
|
4,448
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
Prepaid Asset Financed Through Notes Payable
|
|
$
|
156,718
|
|
|
$
|
159,188
|
|
Accrued Liabilities, Convertible Notes and Accrued Interest Settled Through Issuance of Common Stock
|
|
|
1,896,999
|
|
|
|
—
|
|
Purchase of Capital Expenditures
|
|
|
|
|
|
|
|
|
Included in Accounts Payable
|
|
|
1,223,792
|
|
|
|
49,177
|
|
Through Stock Based Compensation to Employees
|
|
|
820,877
|
|
|
|
195,127
|
|
Through Issuance of Common Stock
|
|
|
4,880,000
|
|
|
|
—
|
|
GulfSlope
Energy, Inc.
Notes
to the Financial Statements
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Organization
GulfSlope
Energy, Inc. (the “Company” or “GulfSlope”) 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
14 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, 2018 of $41.9 million, has a lack of cash on-hand not from joint interest owners, and a working capital deficit. These factors
raise substantial 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. Management 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. 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 or cease operations or the Company would
need to sell assets or consider alternative plans up to and including restructuring.
(d)
Cash
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, 2018 and 2017, respectively.
(e)
Accounts Receivable
The
Company records an accounts receivable for operations expense reimbursements due from joint interest partners. 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. As of September 30, 2018
and 2017, no allowance was recorded. Accounts receivable from joint operations are $6.7 million at September 30, 2018.
(f)
Full Cost Method
The
Company uses the full cost method of accounting for its oil and gas exploration and development activities. 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”), whereby capitalized
costs are amortized over total proved 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 cost center ceiling is defined as the sum of (a) estimated future
net revenues, discounted at 10% per annum, from proved reserves, (b) the cost of properties not being amortized, if any, and (c)
the lower of cost or market value of unproved properties included in the cost being amortized. 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, 2018, the Company’s oil and gas properties consisted of unproved properties, wells in process and no proved
reserves.
(g)
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.
(h)
Income Taxes
Deferred
tax assets and liabilities are recognized 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.
(i)
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.
(j)
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.
(k)
Earnings per Share
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,
convertible notes and restricted stock. The number of potential common shares outstanding relating to stock options, warrants,
and restricted stock is computed using the treasury stock or if-converted method. As the Company has incurred losses for the years
ended September 30, 2018 and 2017, the potentially dilutive shares are anti-dilutive and thus not added into the EPS calculations.
As of September 30, 2018 and 2017, there were 213,089,281 and 164,345,443 potentially dilutive shares, respectively.
(l)
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.
(m)
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 replaces most existing revenue recognition guidance. ASU 2014-09 will be effective for us October 1, 2018. Once implemented,
the Company can use one of two retrospective application methods for prior periods. The Company has completed its evaluation of
the provisions of this standard and concluded that the adoption will not result in any adjustment to beginning accumulated deficit
as the Company does not have any revenues. The Company will adopt this new standard effective October 1, 2018 using the modified
retrospective method of adoption as permitted by the standard. The adoption of Topic 606 will have no material impact on our financial
position, results of operations, stockholders’ equity, or cash flows, but will impact disclosures when the Company has revenue.
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.
The
Jumpstart Our Business Startups Act, or JOBS Act, provides that an emerging growth company can take advantage of the extended
transition period for complying with new or revised accounting standards. An emerging growth company can therefore delay the adoption
of certain accounting standards until those standards would otherwise apply to private companies. However, the Company has elected
not to take advantage of such extended transition period, and as a result, will comply with new or revised accounting standards
on the relevant dates on which adoption of such standards is required for non-emerging growth companies.
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, 2018 of $41.9 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, 2018, the Company had $5.6 million of unrestricted cash on hand, $4.5 million of this amount
is for the payment of joint payables from drilling operations. The Company estimates that it will need to raise a minimum of $8
million to meet its obligations and planned expenditures through December 2019. The Company plans to finance operations and planned
expenditures through equity and/or debt financings and/or farm-out agreements. The Company also plans to extend the agreements
associated with all loans, the accrued interest payable on these loans, as well as the Company’s accrued liabilities. 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 or the Company would need to sell assets or consider alternative plans
up to and including restructuring. 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
January 2018, the Company entered into a strategic partnership with Delek Group Ltd. (“Delek”), and Texas South Energy,
Inc. (“Texas South”) (collectively, the “Parties”) and executed a participation agreement for a multi-phase
exploration program. Under the terms of the Agreement, the Parties have committed to drill the Company’s “Canoe”
and “Tau” prospects (the “Initial Phase”) with Delek having the option to participate in two additional
two-well drilling phases and a final, three-well drilling phase (collectively, the “Phases”). In each Phase, Delek
will earn a 75% working interest upon paying 90% of the exploratory costs associated with drilling each exploratory well. The
Company will retain a 20% working interest while paying 8% of the exploratory costs associated with drilling each well. The Company
will be required to fund 20% of any well costs in excess of 115% of budget. In addition, Delek will pay the Company approximately
$1.1 million in cash for each Prospect when the respective exploration plan is filed with BOEM. Also, each Party will be responsible
for their pro rata share (based on working interest) of delay rentals associated with the Prospects. The Company will be the Operator
during exploratory drilling of the Prospect, however, subsequent to a commercial discovery, Delek will have the right to become
the Operator. Delek will have the right to terminate this Agreement at the conclusion of any drilling Phase. Delek will also have
the option to purchase up to 5% of the Company’s common stock, par value $0.001 per share (the “Common Stock”),
upon fulfilling its obligation for each Phase (maximum of 20% in the aggregate) at a price per share equal to a 10% discount to
the 30-day weighted average closing price for the Common Stock preceding the acquisition. This option will expire January 8, 2020.
The
Company will assign an eight-tenths of one percent of eight/eights net profits interest in certain of the Company’s oil
and gas leases to include Vermilion Area, South Addition 378, Ship Shoal Area, South Addition 336, and Ship Shoal Area, South
Addition 351, to Hi-View Investment Partners, LLC (“Hi-View”) in consideration for oil and gas consulting services
provided pursuant to a non-exclusive consulting engagement dated October 25, 2017, by and between Hi-View, the Company, and Texas
South (the “Advisory Agreement”). Hi-View will be entitled to additional assignments on the same terms and conditions
as described above related to any of the Leases whereby Delek elects to participate in drilling of an exploratory well. In addition,
the Company issued an aggregate of eighty million shares of Common Stock to Hi-View in consideration for oil and gas consulting
services provided in facilitating the Delek farm out agreement. The value of the shares of $4.8 million determined using the share
price on March 29, 2018, the date the shares were owed to Hi-View per the agreement which was the date of the funding obligation
of the first well, was capitalized to unproved properties.
The
Company, as the operator of two wells being drilled in the Gulf of Mexico, has incurred tangible and intangible drilling costs
for the wells in process and has billed its working interest partners for their respective shares of the drilling costs to date.
The first of the two wells has been drilled and is being evaluated. The second well was spud in September 2018 and is currently
being drilled.
The
Company paid $376,368 in gross annual lease rental payments to the BOEM for the year ended September 30, 2017. The Company’s
share of these amounts is included in unproved properties. 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 block and paid $26,398, which represents
20% of the total lease bonus amount. On September 29, 2017 the Company’s bid was accepted. After payment in October 2017
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 an agreement for the Company’s
Tau prospect. In exchange for $166,989, Texas South acquired an undivided 20% interest in the prospect. In accordance with full
cost requirements, the Company recorded the proceeds from the transaction as an adjustment to the capitalized costs of its oil
and gas properties with no gain or loss recognition.
In
October 2017, the Company executed the second amendment to the March 2014 farm-out agreement with Texas South under which Texas
South acquired 20% of Gulfslope’s interest in two prospects for $329,062.
On
January 1, 2018, the Company executed the third amendment to the March 2014 farm-out agreement with Texas South under which Texas
South acquired 20% of GulfSlope’s interest in two prospects for $225,000.
For
the year ended September 30, 2017, the Company incurred $172,094 in consulting fees, salaries and benefits, $195,127 in stock
option costs associated with geoscientists, and $53,014 associated with technological infrastructure and third party hosting services.
As these G&G costs relate to specific company-owned unevaluated properties, the Company capitalized these G&G costs to
unproved properties.
For
the year ended September 30, 2018, the Company incurred $229,267 in consulting fees, salaries and benefits associated with geoscientists,
$820,877 in stock option costs associated with geoscientists and engineers, $53,934 associated with technological infrastructure
and third party hosting, and $138,729 in capitalized acquisition costs. The Company capitalized these G&G costs to unproved
properties.
NOTE
4 – PROPERTY AND EQUIPMENT
Property
and equipment consist of the following as of September 30, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Office equipment and computers
|
|
$
|
133,089
|
|
|
$
|
143,897
|
|
Furniture and fixtures
|
|
|
16,280
|
|
|
|
16,280
|
|
Leasehold improvements
|
|
|
5,756
|
|
|
|
4,054
|
|
Total
|
|
|
155,125
|
|
|
|
164,231
|
|
Less: accumulated depreciation
|
|
|
(140,339
|
)
|
|
|
(160,747
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
14,786
|
|
|
$
|
3,484
|
|
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 $4,724 and $20,804 for the years ended September 30, 2018 and 2017, respectively.
NOTE
5 – INCOME TAXES
The
provision for income taxes consists of the following as of September 30, 2018 and 2017:
|
|
9/30/2018
|
|
|
9/30/2017
|
|
FEDERAL
|
|
$
|
|
|
|
$
|
|
|
Current
|
|
|
—
|
|
|
|
—
|
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
STATE
|
|
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
|
—
|
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
TOTAL
PROVISION
|
|
$
|
—
|
|
|
$
|
—
|
|
The difference between the actual income tax provision versus tax computed at the statutory rate is as follows for the years ended September 30, 2018 and 2017, respectively:
|
|
9/30/2018
|
|
|
9/30/2017
|
|
Expected provision (based on statutory rate of 21% in 2018 and 15% in 2017)
|
|
$
|
(553,714
|
)
|
|
$
|
(854,152
|
)
|
Effect of:
|
|
|
|
|
|
|
|
|
Increase in valuation allowance
|
|
|
2,696,631
|
|
|
|
732,562
|
|
Non-deductible expense
|
|
|
53,493
|
|
|
|
121,590
|
|
Rate change
|
|
|
(2,305,270
|
)
|
|
|
—
|
|
Other, net
|
|
|
108,860
|
|
|
|
—
|
|
Total actual provision
|
|
$
|
—
|
|
|
$
|
—
|
|
On
December 22, 2017, the President of the United States (“the President”) signed into law the tax bill commonly referred
to as the “Tax Cuts and Job Act” (“TCJA”), significantly changing federal income tax laws. According to
ASC section 740, “Income Taxes,” a company is required to record the effects of an enacted tax law or rate change
in the period of enactment, which is the date the bill is signed by the President and becomes law. The TCJA did not have a significant
impact on the financial statements as the change in the deferred income tax assets and liabilities was fully offset by a change
in the valuation allowance. The Company does not have any material uncertain tax positions. The Company’s policy is to recognize
interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense (benefit). For the years
ended September 30, 2018 and 2017, the Company did not recognize any interest or penalties, nor did we have any interest or penalties
accrued as of September 30, 2018 and 2017 relating to unrecognized benefits. Deferred income tax assets and liabilities at September
30, 2018 and 2017 consist of the following:
|
|
9/30/2018
|
|
|
9/30/2017
|
|
DEFERRED TAX ASSETS (LIABILITIES)
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
7,131,636
|
|
|
$
|
5,611,276
|
|
Exploration costs
|
|
|
(1,503,472
|
)
|
|
|
(931,289
|
)
|
Oil and natural gas leases
|
|
|
2,192,654
|
|
|
|
691,336
|
|
Stock based compensation
|
|
|
411,287
|
|
|
|
138,278
|
|
Accrued interest and expenses not paid
|
|
|
271,190
|
|
|
|
246,360
|
|
Derivative financial instrument
|
|
|
(57,059
|
)
|
|
|
—
|
|
Differences in book/tax depreciation
|
|
|
13,573
|
|
|
|
7,215
|
|
Net deferred tax asset
|
|
$
|
8,459,809
|
|
|
$
|
5,763,176
|
|
Valuation allowance
|
|
|
(8,459,809
|
)
|
|
|
(5,763,176
|
)
|
NET DEFERRED TAXES
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company’s valuation allowance increased $2,696,633 during the year ended September 30, 2018 and $732,562 during the year
ended September 30, 2017.
At
September 30, 2018, the Company had approximately $34.0 million of NOLs, 95% of which will expire from 2032 to 2037. All of the
Company’s NOLs are allowable as a deduction against 100 percent of future taxable income since they were generated prior
to the effective date of limitations imposed by the TCJA.
The
tax years ended September 30, 2015 through 2018 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, 2018 and September 30, 2017 the total amount owed to John Seitz, our CEO, is $8,675,500. There
was a total of $1,641,086 and $1,201,286 of unpaid interest associated with these loans included in accrued interest within our
balance sheet as of September 30, 2018 and 2017, 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 former 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, 2018, the total amount owed to Dr. Bain and his
affiliate was $267,000. There was a total of $42,706 and $27,171 of accrued interest associated with these loans included within
our balance sheet as of September 30, 2018 and 2017, respectively. In June of 2016, Dr. Ronald Bain also entered into a $92,000
convertible promissory note with associated warrants under the same terms received by other investors (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 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 years ended September
30, 2018 and 2017, the services provided were valued at $23,660 and $32,625, respectively. The Company has accrued these amounts
within accrued expenses and other payables, and they have been reflected in the September 30, 2018 and 2017 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.
NOTE
7 – NOTES PAYABLE
Between
June and November 2016, the Company issued eleven convertible promissory notes (“Bridge Financing 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 had a maturity of one year (prior to extension), 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 represented embedded derivatives. 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
approximately $452,000 to the warrants and approximately $385,000 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 approximately $385,000. Accordingly, the debt discount
associated with these notes was approximately $837,000. Such discount was amortized using the effective interest rate method over
the term (one year) of the convertible notes.
Upon
maturity of eight of the eleven promissory notes in June 2017, the Company issued 3,225,000 extension warrants with an exercise
price of $0.03 per share (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 approximately $51,000 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, was 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, approximately $39,000, was determined using
the Black-Scholes option pricing model.
Upon
revised maturity of the eleven promissory notes on January 15, 2018, the Company issued 2,790,000 extension warrants with an exercise
price of $0.10 per share (equal to 10% of the original warrant amount) to the holders of the notes to extend the term to April
16, 2018. The Company evaluated this transaction 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 approximately $217,000 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 June 2018, the maturity
date of all of the notes was extended to January 15, 2019.
For
the year ended September 30, 2018, the amortization of the discounts associated with the Bridge Financing Notes was approximately
$30,000. Six of the Bridge Financing Notes with a principal balance of $560,000 plus accrued interest of $86,525 were converted
during the year ended September 30, 2018. The remaining note balance at September 30, 2018 is $277,000. See Note 9 for a summary
of the warrants outstanding relating to the Bridge Financing Notes.
On
December 28, 2016, the Company issued a convertible promissory note (together with the convertible promissory notes issued below,
the “Financing Notes”) 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 approximately $56,000, 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 represented embedded derivatives. 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 approximately $8,000 to the restricted stock, approximately $8,000 to the warrants
and approximately $34,000 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 approximately $34,000. Accordingly, at December 28, 2016, the debt discount associated with these
notes was approximately $56,000. 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 $56,000 and is included in
interest expense in the statement of operations. 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 approximately $111,000, 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 represented embedded derivatives. 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 approximately $17,000 to the restricted stock, approximately
$14,000 to the warrants and approximately $69,000 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 approximately $69,000. Accordingly, at March 14, 2017, the debt discount associated
with these notes was approximately $111,000. 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 approximately
$106,000 and is included in interest expense in the statement of operations. 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. The remaining balance and accrued interest were
converted in October 2017 at which time all was paid in full.
On
October 16, 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, 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 $250,000 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 represented embedded derivatives. 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 approximately $21,000 to the restricted stock, approximately
$20,000 to the warrants and approximately $59,000 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 approximately $59,000. Accordingly, at October 16, 2017, the debt discount associated
with these notes was $110,000. Such discount was amortized using the effective interest rate method over the term (seven months)
of the convertible note. In April 2018 the note and accrued interest was converted into 5.8 million shares of common stock and
paid in full.
On
December 15, 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, 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 $150,000 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 represented embedded derivatives. 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 approximately $28,000 to the restricted stock, approximately
$27,000 to the warrants and approximately $45,000 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 approximately $45,000. Accordingly, at December 15, 2017, the debt discount associated
with these notes was $110,000. Such discount was amortized using the effective interest rate method over the term (seven months)
of the convertible note. In June 2018 the note and accrued interest was converted into 5.8 million shares of common stock and
paid in full.
See
Note 9 for a summary of the warrants outstanding relating to the Financing Notes.
NOTE
8 – Fair Value Measurement
Fair
value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Fair value measurements are classified and disclosed in one of the following
categories:
Level
1:
|
Unadjusted
quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
GulfSlope considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency
and volume to provide pricing information on an ongoing basis.
|
Level
2:
|
Quoted
prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the
full term of the asset or liability. This category includes those derivative instruments that GulfSlope values using observable
market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instrument,
can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.
Instruments in this category include non-exchange traded derivative financial instruments as well as long-term incentive plan
liabilities calculated using the Black-Scholes model to estimate the fair value as of the measurement date.
|
Level
3:
|
Measured
based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable
from objective sources (i.e. supported by little or no market activity).
|
Financial
assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The
Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may
affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
Fair
Value on a Recurring Basis
The
following table sets forth by level within the fair value hierarchy GulfSlope Energy, Inc.’s liabilities that were accounted
for at fair value on a recurring basis as of September 30, 2018 (no financial assets or liabilities were accounted for at fair
value on a recurring basis as of September 30, 2017):
|
|
|
Fair Value Measurements Using
|
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
Total Carrying
|
|
Description
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value as of
|
|
|
|
|
(In thousands)
|
Derivative Financial Instrument
|
|
|
$
|
—
|
|
|
$
|
(271,710
|
)
|
|
$
|
—
|
|
|
$
|
(271,710
|
)
|
Total as of Total as of September 30, 2018
|
|
|
$
|
—
|
|
|
$
|
(271,710
|
)
|
|
$
|
—
|
|
|
$
|
(271,710
|
)
|
During
the years ended September 30, 2018 and 2017, the Company did not have any assets or liabilities measured at fair value on a non-recurring
basis.
NOTE
9 - COMMON STOCK/PAID IN CAPITAL
At
our annual shareholder meeting in May of 2018 our shareholders approved increasing the number of authorized shares of common stock
from 975,000,000 to 1,500,000,000. The number of authorized shares of preferred stock was not changed and is 50,000,000.
As
discussed in Note 7, during the year ended September 30, 2016, the Company issued 26.2 million warrants in conjunction with the
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. In November 2016, the Company issued 1.7 million warrants in conjunction with the 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. 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. In January 2018, the maturity date of all of the Bridge Financing Notes was extended to April 16, 2018
in exchange for the issuance of 10% additional warrants. The warrants have an exercise price of $0.10 and the same expiration
date (three years from original transaction) as the original warrants. In June 2018, a majority of the Bridge Note holders extended
their notes to January 15, 2019, thus extending all the remaining Bridge Notes to this date. The fair value of the warrants was
determined using the Black Scholes valuation model with the following key assumptions:
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
|
|
|
January
2018
|
|
Warrants Issued
|
|
12.9 million
|
|
|
10.0 million
|
|
|
3.3 million
|
|
|
1.7 million
|
|
|
3.2 million
|
|
|
2.5 million
|
|
|
1.25 million
|
|
|
2.8 Million
|
|
Stock Price:
|
|
0.054
|
(1)
|
|
0.040
|
(1)
|
|
0.032
|
(1)
|
|
0.029
|
(1)
|
|
0.025
|
(1)
|
|
0.019
|
(1)
|
|
0.016
|
(1)
|
|
0.11
|
(1)
|
Exercise Price
|
|
0.03
|
|
|
0.03
|
|
|
0.03
|
|
|
0.03
|
|
|
0.03
|
|
|
0.03
|
|
|
0.03
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
3 years
|
|
|
3 years
|
|
|
3 years
|
|
|
3 years
|
|
|
2 years
|
|
|
2 years
|
|
|
2 years
|
|
|
1.5 years
|
|
Risk Free Rate
|
|
.87
|
%
|
|
.80
|
%
|
|
.88
|
%
|
|
1.28
|
%
|
|
1.35
|
%
|
|
1.35
|
%
|
|
1.33
|
%
|
|
1.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
135
|
%
|
|
138
|
%
|
|
137
|
%
|
|
131
|
%
|
|
135
|
%
|
|
136
|
%
|
|
135
|
%
|
|
163
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Fair market value on the date of agreement.
|
A summary of warrants, issued in conjunction
with the Bridge Financing Notes and outstanding at September 30, 2018:
|
|
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
|
|
|
|
12,566,667
|
|
|
|
.69
|
|
|
|
$
|
0.03
|
|
|
|
12,566,667
|
|
|
|
$
|
0.03
|
|
|
July 2016
|
|
$
|
0.03
|
|
|
|
10,000,000
|
|
|
|
.79
|
|
|
|
$
|
0.03
|
|
|
|
10,000,000
|
|
|
|
$
|
0.03
|
|
|
August 2016
|
|
$
|
0.03
|
|
|
|
3,333,333
|
|
|
|
.88
|
|
|
|
$
|
0.03
|
|
|
|
3,333,333
|
|
|
|
$
|
0.03
|
|
|
November 2016
|
|
$
|
0.03
|
|
|
|
1,666,667
|
|
|
|
1.13
|
|
|
|
$
|
0.03
|
|
|
|
1,666,667
|
|
|
|
$
|
0.03
|
|
|
June 2017
|
|
$
|
0.03
|
|
|
|
3,141,667
|
|
|
|
.69
|
|
|
|
$
|
0.03
|
|
|
|
3,141,667
|
|
|
|
$
|
0.03
|
|
|
July 2017
|
|
$
|
0.03
|
|
|
|
2,500,000
|
|
|
|
.79
|
|
|
|
$
|
0.03
|
|
|
|
2,500,000
|
|
|
|
$
|
0.03
|
|
|
August 2017
|
|
$
|
0.03
|
|
|
|
833,333
|
|
|
|
.88
|
|
|
|
$
|
0.03
|
|
|
|
833,333
|
|
|
|
$
|
0.03
|
|
|
August 2017
|
|
$
|
0.03
|
|
|
|
416,667
|
|
|
|
1.13
|
|
|
|
$
|
0.03
|
|
|
|
416,667
|
|
|
|
$
|
0.03
|
|
|
January 2018
|
|
$
|
0.10
|
|
|
|
2,790,000
|
|
|
|
.78
|
|
|
|
$
|
0.10
|
|
|
|
2,790,000
|
|
|
|
$
|
0.10
|
|
|
In December 2016 and March 2017 the Company
issued 500,000 and 1,000,000 shares of GulfSlope Energy stock, respectively to an investor as part of a financing transaction (see
Financing Notes in 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 an investor as part of a financing transaction (see Financing Notes in Note 7). The warrants have a term
of 5 years.
In October 2017 and December 2017 the Company
issued 1,000,000 and 1,000,000 shares of GulfSlope Energy stock, respectively to an investor as part of a financing transaction
(see Financing Notes in Note 7). In October 2017 and December 2017 the Company issued 1,100,000 and 1,100,000 warrants to purchase
stock at $0.10 per share to an investor as part of a financing transaction (see Financing Notes in Note 7). The warrants have a
term of 5 years.
A summary of the Financing Note warrants,
issued in conjunction with the Financing Notes and outstanding at September 30, 2018:
|
|
|
|
|
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
|
|
|
|
3.25
|
|
|
$
|
0.10
|
|
|
|
550,000
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
3.46
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
4.04
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
4.21
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
|
Beginning in August 2018, the Company began
negotiating a capital raise which is expected to consist of the issuance of common shares and warrants. The specific terms of the
capital raise have not been finalized including the number of shares and warrants to be received by each investor. Through September
30, 2018, approximately $970,000 has been received from investors related to this capital raise; however, the agreements have not
been finalized, and no shares or equity have been issued. As such, the funds received have been recorded as a liability on the
balance sheet as of September 30, 2018.
In September 2018, the Company issued approximately
4 million shares of common stock valued at approximately $231,000 on the date of grant and 2 million warrants valued at $80,000
utilizing the Black Scholes model with an exercise price of $0.15 per share in settlement of a liability for services rendered.
NOTE 10 – 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 50% on January 1, 2018. The stock options are exercisable for seven years from the original grant
date of January 1, 2017, until January 1, 2024.
In May 2018, 500,000 stock options were
granted to an employee. In June 2018, 33.5 million stock options were granted to employees, officers and directors of the Company.
The CEO was not included in the award. Approximately 33% of the stock options vested on June 1, 2018 and approximately 33% will
vest on June 1, 2019 and 2020, respectively, provided that the option holder continues to serve as an employee or director on the
vesting date. The stock options are exercisable from the original grant date until December 31, 2025.
Stock-based compensation cost is measured
at the grant date, based on the estimated fair value of the award, and is recognized over the vesting period. The Company recognized
$1,857,531 and $653,669 in stock-based compensation expense for the years ended September 30, 2018 and 2017, respectively. A portion
of these costs allocable to the Company’s exploration activities, $820,877 and $195,125 were capitalized to unproved properties
and the remainder was recorded as general and administrative expenses, for the years ended September 30, 2018 and 2017, respectively.
The following table summarizes the Company’s
stock option activity during the year ended September 30, 2018:
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Average
Intrinsic
Value
|
|
Outstanding at beginning of period
|
|
|
35,500,000
|
|
|
$
|
0.033
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
68,000,000
|
|
|
|
0.075
|
|
|
|
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Outstanding at end of period
|
|
|
103,500,000
|
|
|
$
|
0.0605
|
|
|
|
3.32
|
|
|
$
|
1.2 million
|
|
Vested and expected to vest
|
|
|
103,500,000
|
|
|
$
|
0.0605
|
|
|
|
3.32
|
|
|
$
|
1.2 million
|
|
Exercisable at end of period
|
|
|
54,500,000
|
|
|
$
|
0.0475
|
|
|
|
—
|
|
|
$
|
1.3 million
|
|
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 years ended
September 30, 2018 and 2017 were based on the following assumptions at the date of grant as follows:
|
|
2018
|
|
|
2017
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected stock price volatility
|
|
|
145.2
|
%
|
|
|
127.2
|
%
|
Risk-free interest rate
|
|
|
2.7
|
%
|
|
|
1.71
|
%
|
Expected life of options
|
|
|
7 years
|
|
|
|
4 years
|
|
Weighted-average grant date fair value
|
|
$
|
0.065
|
|
|
$
|
0.022
|
|
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, 2018 there was $2.7
million of unrecognized stock-based compensation cost related to the stock option grants expected to be amortized over a weighted
average period of three years.
NOTE 11 – 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 July 2018 the Company entered into a
39 month lease for approximately 5,000 square feet of office space in 4 Houston Center in downtown Houston. Annual base rent is
approximately $94 thousand for the first 18 months, increasing to approximately $97 thousand and $99 thousand, respectively during
the remaining term of the lease.
The Company reached an agreement with a
vendor in August 2018 for the settlement of approximately $1 million in debt. The vendor was paid $150,000 in cash, future cash
payments of $7,500 and 10 million shares of GulfSlope common stock. The agreement contains a provision that upon the sale of the
common stock if the original debt is not fully satisfied, full payment will be made, under a mutually agreed payment plan. If the
stock is sold for a gain any surplus in excess of $1.3 million shall be a credit against future purchases from the vendor. The
agreement was determined to meet the definition of a derivative in accordance with ASC 815. At September 30, 2018 there is a fair
value liability of $271,710.
NOTE 12 – SUBSEQUENT EVENTS
In October 2018, the Company purchased
an insurance policy for $159,995 and financed $146,310 of the premium by executing a note payable.
In October 2018, the Company paid the 80%
lease bonus payment and the first year rentals in the amount of $139,809 and was awarded Gulf of Mexico lease block Eugene Island,
South Addition 371.
In November 2018, the Company paid the
80% lease bonus payment and the first year rentals in the amount of $187,809 and was awarded Gulf of Mexico lease block Vermillion,
South Addition 376.
GulfSlope
Energy, Inc.
Condensed
Balance Sheets
As of
March 31, 2019 and September 30, 2018
(Unaudited)
|
|
March 31,
2019
|
|
|
September 30,
2018
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,001,143
|
|
|
$
|
5,621,814
|
|
Prepaid Expenses and Other Current Assets
|
|
|
113,611
|
|
|
|
32,042
|
|
Accounts Receivable, net
|
|
|
9,722,309
|
|
|
|
6,286,796
|
|
Total Current Assets
|
|
|
14,837,063
|
|
|
|
11,940,652
|
|
Property and Equipment, Net of Depreciation
|
|
|
12,196
|
|
|
|
14,786
|
|
Oil and Natural Gas Properties, Full Cost Method of
Accounting Unproved Properties
|
|
|
16,892,281
|
|
|
|
8,112,784
|
|
Other Non-Current Assets
|
|
|
24,785
|
|
|
|
24,785
|
|
Total Non-Current Assets
|
|
|
16,929,262
|
|
|
|
8,152,355
|
|
Total Assets
|
|
$
|
31,766,325
|
|
|
$
|
20,093,007
|
|
Liabilities and
Stockholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
14,022,521
|
|
|
$
|
7,591,236
|
|
Deposits from Joint Interest Owners
|
|
|
|
|
|
|
4,078,786
|
|
Related Party Payable
|
|
|
336,145
|
|
|
|
306,386
|
|
Accrued Interest Payable
|
|
|
1,970,160
|
|
|
|
1,732,239
|
|
Accrued Expenses and Other Payables
|
|
|
268,862
|
|
|
|
268,862
|
|
Loans from Related Parties
|
|
|
8,725,500
|
|
|
|
9,084,500
|
|
Notes Payable
|
|
|
347,755
|
|
|
|
—
|
|
Convertible Promissory Notes Payable
|
|
|
227,000
|
|
|
|
135,000
|
|
Funds Received from Capital Raise
|
|
|
—
|
|
|
|
965,800
|
|
Derivative Financial Instrument
|
|
|
288,702
|
|
|
|
271,710
|
|
Other
|
|
|
64,275
|
|
|
|
44,723
|
|
Total Current Liabilities
|
|
|
26,250,920
|
|
|
|
24,479,242
|
|
Total Liabilities
|
|
|
26,250,920
|
|
|
|
24,479,242
|
|
Commitments and Contingencies
(Note 9)
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred Stock; par value ($0.001); Authorized 50,000,000 shares none issued or outstanding
|
|
|
—
|
|
|
|
—
|
|
Common Stock; par value ($0.001); Authorized 1,500,000 shares; issued and outstanding 1,089,433,510 and 832,013,272, respectively
|
|
|
1,089,433
|
|
|
|
832,013
|
|
Additional Paid-in-Capital
|
|
|
52,794,029
|
|
|
|
36,640,009
|
|
Accumulated Deficit
|
|
|
(48,368,056
|
)
|
|
|
(41,858,257
|
)
|
Total Stockholders’
Equity (Deficit)
|
|
|
5,515,405
|
|
|
|
(4,386,235
|
)
|
Total Liabilities and
Stockholders’ Equity (Deficit)
|
|
$
|
31,766,325
|
|
|
$
|
20,093,007
|
|
The
accompanying notes are an integral part to these condensed financial statements.
GulfSlope
Energy, Inc.
Condensed
Statements of Operations
For the
Three and Six Months Ended March 31, 2019 and 2018
(Unaudited)
|
|
For the Three
Months
Ended
March 31, 2019
|
|
|
For the Three
Months
Ended
March 31, 2018
|
|
|
For the Six
Months
Ended
March 31, 2019
|
|
|
For the Six
Months
Ended
March 31, 2018
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
General & Administrative Expenses
|
|
|
1,059,721
|
|
|
|
101,139
|
|
|
|
1,189,158
|
|
|
|
390,465
|
|
Net Loss from Operations
|
|
|
(1,059,721
|
)
|
|
|
(101,139
|
)
|
|
|
(1,189,158
|
)
|
|
|
(390,465
|
)
|
Other Income/(Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense, net
|
|
|
(106,152
|
)
|
|
|
(227,489
|
)
|
|
|
(204,309
|
)
|
|
|
(452,566
|
)
|
Loss on Debt Extinguishment
|
|
|
(5,099,340
|
)
|
|
|
(217,141
|
)
|
|
|
(5,099,340
|
)
|
|
|
(217,141
|
)
|
Gain (Loss) on Derivative Financial Instrument
|
|
|
179,274
|
|
|
|
—
|
|
|
|
(16,992
|
)
|
|
|
—
|
|
Net Loss Before Income Taxes
|
|
|
(6,085,939
|
)
|
|
|
(545,769
|
)
|
|
|
(6,509,799
|
)
|
|
|
(1,060,172
|
)
|
Provision for Income Taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net Loss
|
|
$
|
(6,085,939
|
)
|
|
$
|
(545,769
|
)
|
|
$
|
(6,509,799
|
)
|
|
$
|
(1,060,172
|
)
|
Loss Per Share - Basic and Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
Weighted Average Shares Outstanding – Basic and Diluted
|
|
|
919,010,230
|
|
|
|
770,552,707
|
|
|
|
875,033,746
|
|
|
|
733,243,895
|
|
The accompanying
notes are an integral part to these condensed financial statements.
GulfSlope
Energy, Inc.
Condensed
Statements of Stockholders’ Equity (Deficit)
For the
Three Months Ended March 31, 2019 and 2018
(unaudited)
For the
Three Months Ended March 31, 2019
|
|
Common Stock
|
|
|
Additional Paid-
|
|
|
Accumulated
|
|
|
Net Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
In Capital
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
Balance at December 31, 2018
|
|
|
851,338,272
|
|
|
$
|
851,338
|
|
|
$
|
37,979,934
|
|
|
$
|
(42,282,117
|
)
|
|
$
|
(3,450,846
|
)
|
Stock Based Compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
409,103
|
|
|
|
—
|
|
|
|
409,103
|
|
Warrants Issued in Debt Transaction
|
|
|
—
|
|
|
|
—
|
|
|
|
4,643,087
|
|
|
|
—
|
|
|
|
4,643,087
|
|
Stock Issued for Warrant Exercise
|
|
|
238,095,238
|
|
|
|
238,095
|
|
|
|
9,761,905
|
|
|
|
—
|
|
|
|
10,000,000
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,085,939
|
)
|
|
|
(6,085,939
|
)
|
Balance at March 31, 2019
|
|
|
1,089,433,510
|
|
|
$
|
1,089,433
|
|
|
$
|
52,794,029
|
|
|
$
|
(48,368,056
|
)
|
|
$
|
5,515,405
|
|
For the
Three Months Ended March 31, 2018
|
|
Common Stock
|
|
|
Additional Paid-
|
|
|
Accumulated
|
|
|
Net Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
In Capital
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
Balance at December 31, 2017
|
|
|
698,526,625
|
|
|
$
|
698,526
|
|
|
$
|
27,586,227
|
|
|
$
|
(39,735,926
|
)
|
|
$
|
(11,451,173
|
)
|
Common Stock Issued for Services
|
|
|
80,293,425
|
|
|
|
80,294
|
|
|
|
4,814,961
|
|
|
|
—
|
|
|
|
4,895,255
|
|
Value of Warrants issued with Bridge Note Extensions
|
|
|
—
|
|
|
|
—
|
|
|
|
217,141
|
|
|
|
—
|
|
|
|
217,141
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(545,769
|
)
|
|
|
(545,769
|
)
|
Balance at March 31, 2018
|
|
|
778,820,050
|
|
|
$
|
778,820
|
|
|
$
|
32,618,329
|
|
|
$
|
(40,281,695
|
)
|
|
$
|
(6,884,546
|
)
|
The accompanying
notes are an integral part to these condensed financial statements.
GulfSlope
Energy, Inc.
Condensed
Statements of Stockholders’ Equity (Deficit)
For the
Six Months Ended March 31, 2019 and 2018
(unaudited)
For the
Six Months Ended March 31, 2019
|
|
Common Stock
|
|
|
Additional Paid-
|
|
|
Accumulated
|
|
|
Net Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
In Capital
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
Balance at September 30, 2018
|
|
|
832,013,272
|
|
|
$
|
832,013
|
|
|
$
|
36,640,009
|
|
|
$
|
(41,858,257
|
)
|
|
$
|
(4,386,235
|
)
|
Stock Based Compensation
|
|
|
|
|
|
|
|
|
|
|
802,103
|
|
|
|
|
|
|
|
802,103
|
|
Warrants Issued in Debt Transaction
|
|
|
|
|
|
|
|
|
|
|
4,643,087
|
|
|
|
|
|
|
|
4,643,087
|
|
Stock Issued in Capital Raise
|
|
|
19,325,000
|
|
|
|
19,325
|
|
|
|
946,925
|
|
|
|
|
|
|
|
966,250
|
|
Stock Issued for Warrant Exercise
|
|
|
238,095,238
|
|
|
|
238,095
|
|
|
|
9,761,905
|
|
|
|
|
|
|
|
10,000,000
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,509,799
|
)
|
|
|
(6,509,799
|
)
|
Balance at March 31, 2019
|
|
|
1,089,433,510
|
|
|
$
|
1,089,433
|
|
|
$
|
52,794,029
|
|
|
$
|
(48,368,056
|
)
|
|
$
|
5,515,405
|
|
For the
Six Months Ended March 31, 2018
|
|
Common Stock
|
|
|
Additional Paid-
|
|
|
Accumulated
|
|
|
Net Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
In Capital
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
Balance at September 30, 2017
|
|
|
692,196,625
|
|
|
$
|
692,196
|
|
|
$
|
27,212,577
|
|
|
$
|
(39,221,523
|
)
|
|
$
|
(11,316,750
|
)
|
Stock Based Compensation
|
|
|
|
|
|
|
|
|
|
|
93,381
|
|
|
|
|
|
|
|
93,381
|
|
Common Stock Issued for Services
|
|
|
80,293,425
|
|
|
|
80,294
|
|
|
|
4,814,961
|
|
|
|
|
|
|
|
4,895,255
|
|
Common Stock Issued for Convertible Promissory Note
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
47,094
|
|
|
|
|
|
|
|
49,094
|
|
Value of Beneficial Conversion Feature in Conjunction with Convertible Promissory Notes
|
|
|
|
|
|
|
|
|
|
|
103,519
|
|
|
|
|
|
|
|
103,519
|
|
Value of Warrants in Conjunction with Convertible Promissory Notes
|
|
|
|
|
|
|
|
|
|
|
47,386
|
|
|
|
|
|
|
|
47,386
|
|
Common Stock Issued for Conversion of Convertible Promissory Note and Accrued Interest
|
|
|
4,330,000
|
|
|
|
4,330
|
|
|
|
82,270
|
|
|
|
|
|
|
|
86,600
|
|
Value of Warrants issued with Bridge Note Extensions
|
|
|
|
|
|
|
|
|
|
|
217,141
|
|
|
|
|
|
|
|
217,141
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,060,172
|
)
|
|
|
(1,060,172
|
)
|
Balance at March 31, 2018
|
|
|
778,820,050
|
|
|
$
|
778,820
|
|
|
$
|
32,618,329
|
|
|
$
|
(40,281,695
|
)
|
|
$
|
(6,884,546
|
)
|
The accompanying
notes are an integral part to these condensed financial statements.
GulfSlope
Energy, Inc.
Condensed
Statements of Cash Flows
For the
Six Months Ended March 31, 2019 and 2018
(Unaudited)
|
|
For the Six
Months Ended
March 31, 2019
|
|
|
For the Six
Months Ended
March 31, 2018
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(6,509,799
|
)
|
|
$
|
(1,060,172
|
)
|
Adjustments to reconcile net loss to net cash From Operating Activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,590
|
|
|
|
2,976
|
|
Stock Based Compensation
|
|
|
260,648
|
|
|
|
65,506
|
|
Bad Debt Expense
|
|
|
672,500
|
|
|
|
—
|
|
Loss on Derivative Financial Instrument
|
|
|
16,992
|
|
|
|
—
|
|
Stock Issued for Services
|
|
|
—
|
|
|
|
3,650
|
|
Debt Discount Amortization
|
|
|
11,449
|
|
|
|
175,634
|
|
Loss on Debt Extinguishment
|
|
|
5,099,340
|
|
|
|
217,141
|
|
Changes in Operating Assets and Liabilities
|
|
|
|
|
|
|
|
|
(Increase)/Decrease in Accounts Receivable
|
|
|
(4,108,013
|
)
|
|
|
(218,664
|
)
|
(Increase)/Decrease in Prepaid Expenses
|
|
|
64,741
|
|
|
|
65,968
|
|
Increase/(Decrease) in Deposits from Joint Interest Owners
|
|
|
(4,078,786
|
)
|
|
|
—
|
|
Increase/(Decrease) in Accounts Payable
|
|
|
3,384,095
|
|
|
|
1,496,334
|
|
Increase/(Decrease) in Related Party Payable
|
|
|
29,758
|
|
|
|
11,830
|
|
Increase/(Decrease) in Other
|
|
|
19,553
|
|
|
|
—
|
|
Increase/(Decrease) in Accrued Interest
|
|
|
237,921
|
|
|
|
272,727
|
|
Net Cash (Used In) Provided By Operating Activities
|
|
|
(4,897,011
|
)
|
|
|
1,032,930
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Investments in Oil and Gas Properties
|
|
|
(5,658,105
|
)
|
|
|
(281,584
|
)
|
Proceeds From Sale of Working Interest
|
|
|
—
|
|
|
|
1,485,589
|
|
Net Cash (Used In) Provided By Investing Activities
|
|
|
(5,658,105
|
)
|
|
|
1,204,005
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from Term Loan
|
|
|
10,000,000
|
|
|
|
—
|
|
Proceeds from Convertible Promissory Notes and Warrants
|
|
|
—
|
|
|
|
200,000
|
|
Payments on Note Payable
|
|
|
(65,555
|
)
|
|
|
(73,413
|
)
|
Net Cash Provided By Financing Activities
|
|
|
9,934,445
|
|
|
|
126,587
|
|
|
|
|
|
|
|
|
|
|
Net Increase/(Decrease) in Cash
|
|
|
(620,670
|
)
|
|
|
2,363,522
|
|
Beginning Cash Balance
|
|
|
5,621,814
|
|
|
|
6,426
|
|
Ending Cash Balance
|
|
$
|
5,001,143
|
|
|
$
|
2,369,948
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Cash Flow Activities:
|
|
|
|
|
|
|
|
|
Cash Paid for Interest
|
|
$
|
2,870
|
|
|
$
|
3,036
|
|
Non-Cash Financing and Investing Activities:
|
|
|
|
|
|
|
|
|
Prepaid Asset Financed by Note Payable
|
|
$
|
146,310
|
|
|
$
|
156,718
|
|
Debt Issuance Costs in Accounts Payable
|
|
$
|
467,704
|
|
|
$
|
—
|
|
Capital Expenditures Included in Accounts Payable
|
|
$
|
—
|
|
|
$
|
16,260
|
|
Stock-Based Compensation Capitalized to Unproved Properties
|
|
$
|
541,905
|
|
|
$
|
27,875
|
|
Stock Issued for Consulting Services Capitalized to Unproved Properties
|
|
$
|
—
|
|
|
$
|
4,880,000
|
|
Loans Extinguished through Exercise of Warrants
|
|
$
|
10,000,000
|
|
|
$
|
—
|
|
Receivable from Sale of Working Interest
|
|
$
|
—
|
|
|
$
|
304,052
|
|
Wells In Process Included in Accounts Payable
|
|
$
|
2,579,486
|
|
|
$
|
127,415
|
|
Funds Received from Capital Raise Transferred to Equity
|
|
$
|
965,800
|
|
|
$
|
—
|
|
The
accompanying notes are an integral part to these condensed financial statements.
GulfSlope Energy, Inc.
Notes to Condensed Financial Statements
March 31, 2019
(Unaudited)
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
GulfSlope Energy, Inc. (the
“Company,” “GulfSlope,” and words of similar import), a Delaware corporation, is an independent crude
oil and natural gas exploration and production company whose interests are concentrated in the United States Gulf of Mexico
(“GOM”) federal waters offshore Louisiana. The Company currently has under lease fourteen federal Outer
Continental Shelf blocks (referred to as “prospect,” “portfolio” or “leases” in this
Report).
As of March 31, 2019, GulfSlope has
no production or 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, 2018, which were included in the Company’s
Annual Report on Form 10-K for the fiscal year ended September 30, 2018, and filed with the Securities and Exchange Commission on
December 31, 2018.
Cash
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. There
were no cash equivalents at March 31, 2019 and September 30, 2018.
Liquidity/Going Concern
The Company has incurred accumulated losses
as of March 31, 2019, of $48.4 million. Further losses are anticipated in developing our business. As a result, there exists substantial
doubt about our ability to continue as a going concern. As of March 31, 2019, we had $5.0 million of unrestricted cash on hand,
$4.9 million of this amount is for the payment of joint payables from drilling operations. The Company estimates that it will need
to raise a minimum of $5.0 million to meet its obligations and planned expenditures through May 2020. The Company plans to finance
operations and planned expenditures through equity and/or debt financings and/or farm-out agreements. The Company also plans to
extend the agreements associated with all loans, the accrued interest payable on these loans, as well as the Company’s accrued
liabilities. 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 or the Company would need to sell assets or consider alternative
plans up to and including restructuring. 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 natural gas exploration and development activities as defined by the 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”), whereby capitalized costs are amortized over total proved 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 cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted
at 10% per annum, from proved reserves, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market
value of unproved properties included in the cost being amortized. 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, 2019, the Company’s
oil and gas properties consisted of wells in process, and capitalized exploration and acquisition costs for unproved properties
and no proved reserves.
Basic and Dilutive Earnings Per Share
Basic (loss) per share (“EPS”)
is computed by dividing net income (loss) (the numerator) by the weighted average number of common shares outstanding for the period
(denominator). Diluted EPS is computed by dividing net income (loss) by the weighted average number of common shares and potential
common shares outstanding (if dilutive) during each period. Potential common shares include stock options, warrants, and restricted
stock. The number of potential common shares outstanding relating to stock options, warrants, and restricted stock is computed
using the treasury stock method.
As the Company has incurred losses for
the three and six months ended March 31, 2019 and 2018, the potentially dilutive shares are anti-dilutive and are thus not added
into the loss per share calculations. As of March 31, 2019 and 2018, there were 225,311,416 and 179,062,176 potentially dilutive
shares, respectively.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue
from Contracts with Customers (Topic 606).
ASU 2014-09 is amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-11,
ASU 2016-12, ASU 2016-20, ASU 2017-10, ASU 2017-13 and ASU 2017-14, which FASB issued in
August 2015, March 2016, April
2016, May 2016, May 2016, December 2016, May 2017, September 2017 and November 2017, respectively (collectively, the amended ASU
2014-09). The amended ASU 2014-09 provides a single comprehensive model for the recognition of revenue arising from contracts with
customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It requires an entity
to recognize revenue when the entity transfers promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The amended ASU 2014-09 creates a five-step
model that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the
contract(s) with the customer, (2) identifying the separate performance obligations in the contract, (3) determining the transaction
price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance
obligation is satisfied. The amended ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts, including qualitative and quantitative information about contracts with
customers, significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
The effective date for the amended ASU 2014-09 for the Company is fiscal year 2019, including interim reporting periods within
that reporting period. Early adoption is permitted for fiscal year 2018, including interim reporting periods within that reporting
period. The Company adopted this new standard effective October 1, 2018, using the modified retrospective method of adoption as
permitted by the standard. The adoption of Topic 606 had no material impact on the financial position, results of operations, stockholders’
equity, or cash flows, but will impact disclosures when the Company has revenue.
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 June 2018, the FASB issued ASU 2018-07,
Compensation-Stock Compensation (Topic 718)
, Improvements to Nonemployee Share-based Payments (“ASU 2018-07”).
This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.
The amendments in this ASU are effective for public companies for fiscal
years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted and
the Company adopted this new standard effective January 1, 2019.
In August 2018, the FASB issued ASU 2018-13,
Fair
Value Measurement (Topic 820)
. Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which
removes, modifies, and adds disclosure requirements on fair value measurements. ASU 2018-13 is effective for the Company for fiscal
years beginning after December 15, 2019 and the Company is permitted to early adopt any removed or modified disclosures upon issuance
of this ASU and delay adoption of the additional disclosures until their effective date. The Company is currently evaluating the
impact of the adoption of this guidance on its disclosures.
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
The Company currently has under lease fourteen
federal Outer Continental Shelf blocks and has licensed 2.2 million acres of three-dimensional (3-D) seismic data in its area of
concentration. The Company submitted the high bid in the Bureau of Ocean Energy Management (“BOEM”) Lease Sale
252 in March 2019, and is awaiting BOEM’s award of the lease.
In January 2018, the Company
entered into a strategic partnership with Delek GOM Investments, LLC. (“Delek”), and Texas South Energy,
Inc. (“Texas South”) (collectively, the “Parties”) and executed a participation agreement (the
“Agreement”) for a multi-phase exploration program. Under the terms of the Agreement, the Parties have committed
to drill the Company’s “Canoe” and “Tau” prospects (the “Initial Phase”) with Delek
having the option to participate in two additional two-well drilling phases and a final, three-well drilling phase
(collectively, the “Phases”). In each Phase, Delek will earn a 75% working interest upon paying 90% of the
exploratory costs associated with drilling each exploratory well. The Company will retain a 20% working interest while paying
8% of the exploratory costs associated with drilling each well. The Company will be required to fund 20% of well costs in
excess of 115% of budget. In addition, Delek will pay the Company approximately $1.1 million in cash for each Prospect when
the respective exploration plan is filed with BOEM for each phase. Also, each Party will be responsible for their pro rata share
(based on working interest) of delay rentals associated with the Prospects. The Company will be the Operator during
exploratory drilling of the Prospect, however, subsequent to a commercial discovery, Delek will have the right to become the
Operator. Delek will have the right to terminate this Agreement at the conclusion of any drilling Phase. Delek will also have
the option to purchase up to 5% of the Company’s common stock, par value $0.001 per share (the “Common
Stock”), upon fulfilling its obligation for each Phase (maximum of 20% in the aggregate) at a price per share equal to
a 10% discount to the 30-day weighted average closing price for the Common Stock preceding the acquisition. This option will
expire January 8, 2020. On March 11, 2019, Delek notified the Issuer that it is exercising its right under the Agreement
to enter into a stock purchase agreement for the purchase of up to 5% of the Issuer’s Common Stock, upon the
fulfillment of certain milestones and obligations.
The Company, as the operator of
two wells drilled in the Gulf of Mexico, has incurred tangible and intangible drilling costs for the wells in process and
has billed its working interest partners for their respective shares of the drilling costs to date. GulfSlope drilled the
first well, Canoe, to a total depth of 5,765 feet (5,670 feet TVD). Multiple open hole plugs were set across several
intervals and the well is equipped with a mud-line suspension system for possible future re-entry. Calibration of seismic
amplitudes, petrophysical analysis, reservoir engineering and scoping of development is currently underway to determine the
commerciality of these sands and that work is expected to be completed in the second calendar quarter of 2019. The second
well, Tau, was spud in September 2018 and is expected to be completed in May 2019. In February 2019, the Tau well experienced
an underground control of well event and as a result, the Company filed an insurance claim with its insurance underwriters.
The Company estimates the total amount of the claim to be approximately $10 million for 100% working interest.
As of March 31, 2019, the Company’s
oil and natural gas properties consisted of unproved properties, wells in process and no proved reserves.
NOTE 4 – RELATED PARTY TRANSACTIONS
During April 2013 through September
2017, the Company entered into convertible promissory notes whereby it borrowed a total of $8,675,500 from John Seitz, its
current chief executive officer. The notes are due on demand, bear interest at the rate of 5% per annum, and $5,300,000 of
the notes 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). As of March 31, 2019, the total amount owed to John
Seitz, our CEO, is $8,675,500. There was a total of $1,860,383 of unpaid interest associated with these loans included in
accrued interest within the balance sheet as of March 31, 2019.
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).
Domenica Seitz CPA, related to John Seitz,
has provided accounting consulting services to the Company. During the three and six month period ended March 31, 2019, the services
provided were valued at $14,880 and $29,760, respectively. The Company has accrued these amounts, and they have been reflected
in related party payable in the March 31, 2019 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 in the accompanying condensed
financial statements.
NOTE 5 – NOTES PAYABLE
Between June and November 2016, the
Company issued eleven convertible promissory notes (“Bridge Financing 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 had a maturity of one year (prior to extension), 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 approximately 27.9 million warrants, with an exercise price of $0.03 and a term of the earlier of three years or
upon a change of control. Upon maturity of the eleven promissory notes during 2017, the Company issued approximately 7
million extension warrants with an exercise price of $0.03 per share (equal to 25% of the original warrant amount) to the
holders of the notes to extend the terms to January 15, 2018. Upon revised maturity of the eleven promissory notes on January
15, 2018, the Company issued approximately 2.8 million extension warrants with an exercise price of $0.10 per share
(equal to 10% of the original warrant amount) to the holders of the notes to extend the term to April 16, 2018. In June 2018,
the maturity date of all of the notes was extended to January 15, 2019. Six of the Bridge Financing Notes with a principal
balance of $560,000 plus accrued interest of approximately $87,000 were converted during the year ended September 30, 2018.
The remaining note balance at March 31, 2019 is $277,000. Accrued interest for the quarter ended March 31, 2019, was
approximately $6,000 and cumulative accrued interest was approximately $60,000. The Company is working on the extension of
the remaining notes.
On March 1, 2019, the Company entered into
a Term Loan Agreement by and among the Company, as borrower, and Delek, as lender. In the Term Loan Agreement,
Delek agreed to provide the Company with multiple draw term loans in an aggregate stated principal amount of up to $11.0 million
(the “Term Loan Facility” and the loans thereunder, the “Loans”). The maturity date of the Term Loan Facility
is six months following the closing date of the Term Loan Agreement. Until such maturity date, the Loans under the Term Loan Agreement
shall bear interest at a rate per annum equal to 5.0%, payable in arrears on the maturity date. If an event of default occurs,
all Loans under the Term Loan Agreement shall bear interest at a rate equal to 7.0%, payable on demand. In connection with the
Term Loan Agreement, the Company entered into: (i) a Subordination Agreement (the “Subordination Agreement”) by and
among the Company, as borrower, John N. Seitz, as subordinated lender (the “Subordinated Lender”), and Delek, as
senior lender; (ii) a Security Agreement (the “Security Agreement”) among the Company, as debtor, and Delek, as
lender; and (iii) warrants to purchase 238,095,238 shares of Common Stock, at an exercise price of $0.042 per share issued to Delek GOM (the “Warrants”). The Company
may elect, at its option, to prepay borrowings outstanding under the Term Loan Agreement in multiples of $100,000 and not less
than $500,000 without premium or penalty. The Company is required to prepay the Loans with any net cash proceeds resulting from
an asset sale, receipt of insurance proceeds from certain casualty events, proceeds from equity issuances or incurrence of indebtedness
other than the Loans (subject to a $500,000 carve-out to be applied toward the Company’s general corporate purposes) or receipt
of any cash proceeds from any payments, refunds, rebates or other similar payments and amounts under the Company’s operative
documents. Amounts outstanding under the Term Loan Agreement are secured by a security interest in substantially all of the properties
and assets of the Company.
As of March 6, 2019, the Company had
borrowed a total of $10.0 million under the Term Loan Facility and issued to Delek GOM warrants to purchase 238,095,238
shares of Common Stock; and Delek GOM fully exercised the warrants through a Loan Reduction Exercise, thereby extinguishing
the Company’s outstanding obligations to Delek GOM as of that date. Upon receiving the proceeds in two tranches, the
Company allocated the proceeds between debt and warrants on a relative fair value basis, recording a debt discount of
approximately $5.1 million. The exercise of the warrants through the extinguishment of the loan was accounted for as a
standard warrant exercise and an extinguishment of debt including a recognition of a loss in the amount of the debt discount
of approximately $5.1 million.
NOTE 6 – FAIR VALUE MEASUREMENT
Fair value is defined as the price that
would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. Fair value measurements are classified and disclosed in one of the following categories:
Level 1:
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. GulfSlope considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
|
Level 2:
|
Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that GulfSlope values using observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include non-exchange traded derivative financial instruments as well as warrants to purchase common stock and long-term incentive plan liabilities calculated using the Black-Scholes model to estimate the fair value as of the measurement date.
|
Level 3:
|
Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity).
|
As required by ASC 820-10, financial
assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The
Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may
affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
Fair Value on a Recurring Basis
The following table sets forth by level
within the fair value hierarchy the Company’s derivative financial instruments that were accounted for at fair value on a
recurring basis as of March 31, 2019:
Description
|
|
Quoted
Prices in
ActiveMarkets for
Identical Assets
(Level
1)
|
|
Significant
Other
Observable Inputs
(Level 2)
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
Total Carrying
Value as of
|
Derivative Financial Instrument at September 30, 2018
|
|
|
—
|
|
|
|
(271,710
|
)
|
|
|
—
|
|
|
|
(271,710
|
)
|
Changes in Fair Value at December 31, 2018
|
|
|
—
|
|
|
|
(196,266
|
)
|
|
|
—
|
|
|
|
(196,266
|
)
|
Changes in Fair Value at March 31, 2019
|
|
|
|
|
|
|
179,274
|
|
|
|
|
|
|
|
179,274
|
|
Derivative Financial Instrument at March 31, 2019
|
|
|
—
|
|
|
|
(288,702
|
)
|
|
|
—
|
|
|
|
(288,702
|
)
|
During the quarter ended March 31, 2019,
the Company issued warrants and stock options measured at fair value on a non-recurring basis.
NOTE 7 – COMMON STOCK/PAID IN
CAPITAL
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 three 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. During 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. On January 15, 2018, the maturity date of
the Bridge Financing Notes was extended to April 16, 2018, in exchange for the issuance of 10% additional warrants (see Note 5
for status of notes). The warrants have an exercise price of $0.10 per share and the same expiration date (three years from
original transaction) as the original warrants. Through March 31, 2019, approximately 471,000 warrants have been
exercised.
The fair value of the warrants were determined using the Black
Scholes valuation model with the following key assumptions:
Warrants Issue Date
|
|
June 2016
|
|
|
July 2016
|
|
|
August 2016
|
|
|
November 2016
|
|
|
June 2017
|
|
|
July 2017
|
|
|
August 2017
|
|
|
January 2018
|
|
Warrants Outstanding
|
|
12.6
million
|
|
|
10.0
million
|
|
|
3.3
million
|
|
|
1.7
million
|
|
|
3.1
million
|
|
|
2.5
million
|
|
|
1.25
million
|
|
|
2.8
million
|
|
Stock Price (1)
|
|
$
|
0.054
|
|
|
$
|
0.040
|
|
|
$
|
0.032
|
|
|
$
|
0.029
|
|
|
$
|
0.025
|
|
|
$
|
0.019
|
|
|
$
|
0.016
|
|
|
$
|
0.11
|
|
Exercise Price
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Term (2)
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
2 years
|
|
|
|
2 years
|
|
|
|
2 years
|
|
|
|
1.5 years
|
|
Risk Free Rate
|
|
|
.87
|
%
|
|
|
.80
|
%
|
|
|
.88
|
%
|
|
|
1.28
|
%
|
|
|
1.35
|
%
|
|
|
1.35
|
%
|
|
|
1.33
|
%
|
|
|
1.89
|
%
|
Volatility
|
|
|
135
|
%
|
|
|
138
|
%
|
|
|
137
|
%
|
|
|
131
|
%
|
|
|
135
|
%
|
|
|
136
|
%
|
|
|
135
|
%
|
|
|
163
|
%
|
(1) Fair market value on the date of agreement.
(2) Average term.
Below is a summary of warrants issued in conjunction with convertible
notes which were paid in full as of September 30, 2018. The warrants are outstanding at March 31, 2019.
|
|
|
|
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
|
|
|
|
2.75
|
|
|
$
|
0.10
|
|
|
|
550,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
2.96
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
3.55
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
3.71
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
During the six months ended March 31, 2019,
the Company issued approximately 19.3 million shares of common stock and approximately 9.7 million warrants to accredited investors
in a private placement. The funds were received in the prior fiscal year and moved to equity during the quarter ended December
31, 2018. Based upon the allocation of proceeds between the common stock and the warrants, approximately $259,000 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 2018
|
Number of Warrants Issued
|
|
9,662,500
|
|
Stock Price
|
$
|
0.044
|
|
Exercise Price
|
$
|
0.09
|
|
Term
|
|
3 years
|
|
Risk Free Rate
|
|
2.46
|
%
|
Volatility
|
|
149
|
%
|
As discussed in Note 5, as of March
6, 2019, the Company had borrowed a total of $10.0 million under a Term Loan Facility and issued to Delek GOM warrants to
purchase approximately 238 million shares of common Stock; and Delek GOM fully exercised the warrants through a Loan
Reduction Exercise and was issued approximately 238 million shares of common stock. Upon receiving the proceeds in two
tranches, the Company allocated the proceeds between debt and warrants on a relative fair value basis, recording a debt
discount of approximately $5.1 million. The exercise of the warrants through the extinguishment of the loan was accounted for
as a standard warrant exercise and an extinguishment of debt including a recognition of a loss in the amount of the debt
discount of approximately $5.1 million.
NOTE 8 – STOCK-BASED COMPENSATION
On January 1, 2017, 33.5
million stock options, with an exercise price of $0.0278 per share, 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 50% on January 1, 2018.
The stock options are exercisable for seven years from the original grant date of January 1, 2017, until January 1, 2024.
On May 1, 2018, 500,000 stock options,
with an exercise price of $0.065 per share were granted to an employee. The stock options vested on the issue date. The stock options
are exercisable for approximately 7.5 years from the date of grant of May 1, 2018 to December 31, 2025. These stock options were
awarded from the Company’s 2014 Omnibus Incentive Plan.
On June 1, 2018, 67.5 million stock options,
with an exercise price of $0.075 per share were granted to employees, directors and contractors. 18.5 million of the stock options
vested on June 1, 2018, 24 million will vest on June 1, 2019 and 25 million will vest on June 1, 2020 provided the holder continues
to serve as an employee or a director on the vesting date. The stock options are exercisable for approximately 7.5 years from the
grant date of June 1, 2018, to December 31, 2025. 49 million of these stock options were awarded from the Company’s 2018 Omnibus
Incentive Plan and 18.5 million stock options were inducement awards.
On
January 2, 2019 the Company issued 1 million stock options to a former employee and contractor. 50% of the stock options
vested on the issue date and the remainder will vest in July 2019. The stock options were valued at approximately $35,000
to be recognized over the service period of seven months. The stock options are exercisable until December 31, 2025.
The fair value of the stock-options granted during 2018 and
2019 were determined using the Black Scholes valuation model with the following key assumptions:
Date of Grant
|
|
May 1, 2018
|
|
|
June 1, 2018
|
|
|
January 2, 2019
|
|
Number of Stock Options Granted
|
|
|
500,000
|
|
|
|
67,500,000
|
|
|
|
1,000,000
|
|
Stock Price
|
|
$
|
0.065
|
|
|
$
|
0.075
|
|
|
$
|
0.045
|
|
Exercise Price
|
|
$
|
0.065
|
|
|
$
|
0.075
|
|
|
$
|
0.045
|
|
Expected Life of Options
|
|
|
4.25 years
|
|
|
|
4.25 years
|
|
|
|
3.75 years
|
|
Risk Free Rate
|
|
|
2.74
|
%
|
|
|
2.675
|
%
|
|
|
2.51
|
%
|
Volatility
|
|
|
145.21
|
%
|
|
|
145.21
|
%
|
|
|
126.37
|
%
|
The
Company used the historical volatility of its stock for the period June 2014, through June 1, 2018, 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.
The
Company used the historical volatility of its stock for the prior year to value the stock options granted in 2019. 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.
The following table summarizes the Company’s
stock option activity during the six months ended March 31, 2019:
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Term
(In years)
|
|
|
Average Intrinsic
Value
|
|
Outstanding at September 30, 2018
|
|
|
103,500,000
|
|
|
|
0.0605
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,000,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
104,500,000
|
|
|
$
|
0.0604
|
|
|
|
2.82
|
|
|
|
$1.5 million
|
|
Vested and expected to vest
|
|
|
104,500,000
|
|
|
$
|
0.0604
|
|
|
|
2.82
|
|
|
|
$1.5 million
|
|
Exercisable at March 31, 2019
|
|
|
55,000,000
|
|
|
$
|
0.0475
|
|
|
|
2.82
|
|
|
|
$1.5 million
|
|
There was approximately $1.5 million of
intrinsic value for the options outstanding as of March 31, 2019. As of March 31, 2019, there was $1.9 million of unrecognized
stock-based compensation to be recognized over a weighted average period of 2.82 years.
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 $409,103 and zero in stock based compensation during the three months ended March 31, 2019 and March 31, 2018,
respectively. A portion of these costs, $223,247 and zero were capitalized to unproved properties for the three months ended March
31, 2019 and March 31, 2018, respectively, with the remainder recorded as general and administrative expenses for each respective
period. The Company recognized $802,553 and
$93,381 in stock based compensation for six months ended March 31, 2019 and 2018, respectively. A portion of these costs
$541,905, and $27,875 were capitalized to unproved properties for the six months ended March 31, 2019 and 2018, respectively.
NOTE 9 – COMMITMENTS AND
CONTINGENCIES
In July 2018, the Company entered
into a thirty-nine month lease for approximately 5,000 square feet of office space in 4 Houston Center in downtown Houston.
Annual base rent is approximately $94 thousand for the first 18 months, increasing to approximately $97 thousand and $99
thousand, respectively during the remaining term of the lease.
The Company reached an agreement with a
vendor in August 2018 for the settlement of approximately $1 million in debt. The vendor was paid approximately $0.16 million in
cash and 10 million shares of GulfSlope common stock. The agreement contains a provision that upon the sale of the common stock
if the original debt is not fully satisfied, full payment will be made under a mutually agreed payment plan. If the stock is sold
for a gain any surplus in excess of $1.3 million shall be a credit against future purchases from the vendor. The agreement was
determined to meet the definition of a derivative in accordance with ASC 815. At March 31, 2019 there is a derivative financial
instrument liability of approximately $0.3 million.
In October 2018, the Company purchased
a directors and officers’ insurance policy for approximately $160,000 and financed $146,000 of the premium by executing a
note payable. The balance of the note payable at March 31, 2019, is approximately $81,000.
NOTE 10 – SUBSEQUENT EVENTS
Insurance proceeds for an underground
control of well event were received in April and May 2019. Several partial payments totaling approximately $8 million were
received for 100% working interest.
Loan proceeds of $1 million were received
under the $11 million Term Loan Facility described in Note 5 in April 2019.
BACK COVER PAGE
Part II
Information not required in prospectus
Item 13. Other Expenses of Issuance and Distribution
The following table
sets forth the estimated expenses to be incurred in connection with the distribution of the securities being registered. The expenses
shall be paid by the Company.
SEC registration fees*
|
$
|
1,000
|
Legal fees*
|
$
|
30,000
|
Accounting fees*
|
$
|
25,000
|
EDGAR/financial printing*
|
$
|
5,000
|
Misc.*
|
$
|
10,000
|
Total
|
$
|
71,000
|
*Estimated
Item 14. Indemnification of directors and officers
Section 145 of the
DGCL permits a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by
him in connection with such action.
In an action brought
to obtain a judgment in the corporation’s favor, whether by the corporation itself or derivatively by a stockholder, the
corporation may only indemnify for expenses, including attorneys’ fees, actually and reasonably incurred in connection with
the defense or settlement of such action, and the corporation may not indemnify for amounts paid in satisfaction of a judgment
or in settlement of the claim. In any such action, no indemnification may be paid in respect of any claim, issue or matter as to
which such person shall have been adjudged liable to the corporation except as otherwise approved by the Delaware Court of Chancery
or the court in which the claim was brought. In any other type of proceeding, the indemnification may extend to judgments, fines
and amounts paid in settlement, actually and reasonably incurred in connection with such other proceeding, as well as to expenses
(including attorneys’ fees).
The statute does not
permit indemnification unless the person seeking indemnification has acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the corporation and, in the case of criminal actions or proceedings, the person
had no reasonable cause to believe his conduct was unlawful. There are additional limitations applicable to criminal actions and
to actions brought by or in the name of the corporation. The determination as to whether a person seeking indemnification has met
the required standard of conduct is to be made (i) by a majority vote of a quorum of disinterested members of the board of directors,
(ii) by independent legal counsel in a written opinion, if such a quorum does not exist or if the disinterested directors so direct,
or (iii) by the stockholders.
As permitted by the
DGCL, In accordance with Section 102(b)(7) of the DGCL, our Certificate of Incorporation eliminates the personal liability of directors
to us and to our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director’s duty of loyalty to us or our stockholders, (ii) for acts or omissions which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. Our Certificate of Incorporation further provides that, if the DGCL is amended after the
effective date of our Certificate of Incorporation to authorize corporate action further eliminating or limiting the personal liability
of directors, then the liability of our directors will be eliminated or limited to the fullest extent permitted by the DGCL, as
so amended.
Our Certificate of
Incorporation and Bylaws contains provisions that provide for indemnification of officers and directors to the full extent permitted
by, and in the manner permissible under Delaware law. Delaware law empowers a Delaware corporation to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in the right of such corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of such corporation, or is or was serving at the request
of such corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other
enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that such person acted
in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation
and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful.
A Delaware corporation may indemnify directors, officers, employees and other agents of such corporation in an action by or in
the right of a corporation under the same conditions against expenses (including attorneys’ fees) actually and reasonably
incurred by the person in connection with the defense and settlement of such action or suit, except that no indemnification is
permitted without judicial approval if the person to be indemnified has been adjudged to be liable to the corporation.
The Company has entered
into Indemnification Agreements with Mr. Seitz, a director and executive officer, Mr. Langdon, a director, Mr. Morris, a director
and Mr. Malanga, an executive officer. Pursuant to the Indemnification Agreements, the Company agrees to indemnify each director
or officer against any and all expenses to the fullest extent permitted by the law and the Company’s Certificate of Incorporation
if such director or officer was, is, becomes or is threatened to be made a party to or witness or other participant in a claim
by reason of (or arising in part out of) the director or officer’s service as a director, officer, partner, employee, trustee,
agent or fiduciary of the Company or any of its subsidiaries or the director or officer’s service at the request of the Company
in any such capacity with any other enterprise. The Indemnification Agreement also provides for, among other things, the advancement
of expenses relating to the indemnification obligations, subject to reimbursement in the event the individual is not entitled to
indemnification under applicable law and the Company’s Certificate of Incorporation.
Item 15. Recent Sales of Unregistered Securities
As previously reported
in the Company’s Report on Form 8-K, on June 21, 2019 the Company entered into a SPA with one or more buyers identified on
the signature pages thereto (“Buyers”). Under the terms of the SPA, the Company will issue and sell to Buyers up to
an aggregate of $3,000,000 of convertible debentures (“Convertible Debentures”), which shall be convertible (as converted,
the “Conversion Shares”) into shares of the Company’s common stock, of which $2,100,000 shall be purchased upon
the signing of the SPA (the “First Closing”), $400,000 shall be purchased upon the filing of a Registration Statement
with the SEC registering the resale of the Conversion Shares by the Buyers, and $500,000 shall be purchased on or about the date
the Registration Statement has first been declared effective by the SEC. In addition, at the First Closing, the Company issued
to Buyer Warrants to purchase an aggregate of 50,000,000 million Warrant Shares of the Company’s common stock at an exercise
price of $0.04 per share. Such Warrants will expire on the fifth (5
th
) anniversary after issuance.
The offer and sale
of the securities described above were made without registration under the Securities Act, and the applicable securities laws of
certain states, in reliance upon exemptions provided by Section 4(a)(2) and Regulation D under the Securities Act and in reliance
upon similar exemptions under applicable state laws with regard to the offer and sale of securities that are made solely to “accredited
investors,” as that term is defined under Rule 501(a) of Regulation D, and do not involve any general solicitation.
As previously reported
in the Corporation’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2017, the Company issued two convertible
promissory notes, each with 1 million shares of restricted stock and 1.1 million 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 notes have
a face value of $110,000 and incur 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.
The offer and sale
of the securities described above were made without registration under the Securities Act, and the applicable securities laws of
certain states, in reliance upon exemptions provided by Section 4(a)(2) and Regulation D under the Securities Act and in reliance
upon similar exemptions under applicable state laws with regard to the offer and sale of securities that are made solely to “accredited
investors,” as that term is defined under Rule 501(a) of Regulation D, and do not involve any general solicitation
Item 16. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements (included under Item 11):
|
Page
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
Balance Sheets as of September 30, 2018 and 2017
|
F-
4
|
Statements of Operations for the Years Ended September 30, 2018 and 2017
|
F-
5
|
Statement of Stockholders’ Deficit for the Years Ended September 30, 2018 and 2017
|
F-
6
|
Statements of Cash Flows for the Years Ended September 30, 2018 and 2017
|
F-
7
|
Notes to Financial Statements for the Years Ended September 30, 2018 and 2017
|
F-
8
|
|
|
Condensed Balance Sheets as of March 31, 2019 and September 30, 2018 (Unaudited)
|
F-23
|
Condensed Statements of Operations for the Three and Six Months Ended March 31, 2019 and 2018 (Unaudited)
|
F-24
|
Condensed Statements of Stockholders’ Deficit for the Three Months Ended March 31, 2019 and 2018 (Unaudited)
|
F-25
|
Condensed Statements of Stockholders’ Deficit for the Six Months Ended March 31, 2019 and 2018 (Unaudited)
|
F-26
|
Condensed Statements of Cash Flows for the Six Months Ended March 31, 2019 and 2018 (Unaudited)
|
F-27
|
Notes to Condensed Unaudited Financial Statements
|
F-28
|
(3) Exhibits. The following exhibits are
filed as part of this Annual Report:
Exhibit No.
|
|
|
Description
|
|
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation of GulfSlope Energy, Inc., incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed May 30, 2014
|
3.2
|
|
Bylaws of GulfSlope Energy, Inc., incorporated by reference to Exhibit 3.2 of the Company’s Form 10-Q for the quarter ended June 30, 2014
|
4.1
|
|
Common Stock Specimen, incorporated by reference to Exhibit 4.1 of the Company’s Form 10-K for the fiscal year ended September 30, 2012
|
5.1
|
|
Opinion of Mayer Brown LLP
|
10.1(1)
|
|
Form of Restricted Stock Agreement, incorporated by reference to Exhibit 10.1 of the Company’s Form 10-K for the fiscal year ended September 30, 2014,
|
10.2(1)
|
|
Form of Indemnification Agreement, incorporated by reference to Exhibit 10.1 of Form 8-K filed October 31, 2013
|
10.3
|
|
Form of Convertible Promissory Note between the Company and John N. Seitz, incorporated by reference to Exhibit 10.4 of Form 8-K filed October 31, 2013
|
10.4
|
|
Form of Promissory Note between the Company and John N. Seitz; Dr. Ronald Bain and an affiliate incorporated by reference to Exhibit 10.4 of the Company’s Form 10-K for the fiscal year ended September 30, 2018
|
10.5(1)
|
|
GulfSlope Energy, Inc. 2014 Omnibus Incentive Plan dated effective May 24, 2014, incorporated by reference to Exhibit 10.1 of Form 8-K filed May 30, 2014
|
10.6
|
|
Securities Purchase Agreement dated June 21, 2019, between the Company and the Buyers identified therein, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed June 27, 2019
|
10.7
|
|
Convertible Debenture dated June 21, 2019, between the Company and the Buyers identified therein, incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed June 27, 2019
|
10.8
|
|
Registration Rights Agreement dated June 21, 2019, between the Company and the Buyers identified therein, incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed June 27, 2019
|
10.9
|
|
Company Warrant dated June 21, 2019, between the Company and the Buyers identified therein, incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed June 27, 2019
|
14.1
|
|
Code of Ethics, incorporated by reference to Exhibit 14.1 of the Company’s Form 10-K for the fiscal year ended September 30, 2012
|
23.1
(1)
|
|
Consent of Independent Registered Public Accounting Firm
|
31.1
(1)
|
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
31.2
(1)
|
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
32.1
(1)
|
|
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
32.2
(1)
|
|
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
101.INS
|
|
XBRL Instance Document Documents
|
101.SCH
|
|
XBRL Schema Document
|
101.CAL
|
|
XBRL Calculation Linkbase Document
|
101.DEF
|
|
XBRL Definition Linkbase Document
|
101.LAB
|
|
XBRL Label Linkbase Document
|
101.PRE
|
|
XBRL Presentation Linkbase Document
|
(1)
|
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
|
ITEM 17. UNDERTAKINGS
The undersigned registrant
hereby undertakes:
1. To file, during any period in which
offers or sales are being made, a post-effective amendment to this registration statement:
|
(i)
|
To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
|
|
(ii)
|
To reflect in the prospectus any facts or events arising after the effective date of the registration
statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
and
|
|
(iii)
|
To include any material information with respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such information in the registration statement;
|
2. That, for the purpose of determining
any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial
bona fide
offering thereof.
3. To remove from registration by means
of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
4. For determining liability of the undersigned
registrant under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned undertakes
that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the
underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
|
(i)
|
Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering
required to be filed pursuant to Rule 424;
|
|
(ii)
|
Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned
registrant or used or referred to by the undersigned registrant;
|
|
(iii)
|
The portion of any other free writing prospectus relating to the offering containing material information
about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
|
|
(iv)
|
Any other communication that is an offer in the offering made by the undersigned registrant to
the purchaser.
|
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a
claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
Each prospectus filed
pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying
on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement
or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document immediately prior to such date of first use.
SIGNATURES
In accordance with
the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-1 and authorized this registration statement to be signed on its behalf by the undersigned,
in the City of Houston, State of Texas, on August 5, 2019.
|
GULFSLOPE ENERGY, INC.
|
|
|
|
|
By:
|
/S/ John N. Seitz
|
|
John N. Seitz
|
|
Chief Executive Officer
|
Pursuant to the requirements
of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities
indicated below on August 5, 2019.
Signature
|
Title
|
Date
|
|
|
|
/s/ John N. Seitz
|
|
Chief Executive Officer and Chairman
|
August 5, 2019
|
John N. Seitz
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ John H. Malanga
|
|
Chief Financial Officer
|
August 5, 2019
|
John H. Malanga
|
(Principal Financial Officer)
(Principal Accounting Officer)
|
|
|
|
|
/s/ Richard S. Langdon
|
|
Director
|
August 5, 2019
|
Richard S. Langdon
|
|
|
|
|
|
/s/ Paul L. Morris
|
|
Director
|
August 5, 2019
|
Paul Morris
|
|
|
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