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, 2019 of $55.6 million, has a lack of cash on-hand, 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, 2019 and 2018, 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, we assess the receivable and
the underlying asset for recovery. As of September 30, 2019 and 2018, no allowance was recorded. Accounts receivable from oil
and gas joint operations are $12.1 million at September 30, 2019, which includes $3.7 million classified as other non-current
assets. See note 13 Subsequent Events.
(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. Overhead costs, which includes employee compensation
and benefits including stock-based compensation, incurred that are directly related to acquisition, exploration
and development activities are capitalized. Interest expense is capitalized related to unevaluated properties and wells
in process during the period in which the Company is incurring costs and expending resources to get the properties
ready for their intended purpose. For significant investments in unproved properties and major development
projects that are not being currently depreciated, depleted, or amortized and on which exploration or development activities
are in progress, interest costs are capitalized. 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.
The
Company capitalizes exploratory well costs into oil and gas properties until a determination is made that the well has either
found proved reserves or is impaired. If proved reserves are found, the capitalized exploratory well costs are reclassified to
proved properties. The well costs are charged to expense if the exploratory well is determined to be impaired. The Company has
drilled two well bores and is currently evaluating such wells for proved reserves. Accordingly such costs are included as
suspended well costs at September 30, 2019 and it is expected that a final analysis will be completed
in the next twelve months at which time the costs will be transferred to the full cost pool.
As
of September 30, 2019, the Company’s oil and gas properties consisted of unproved properties, wells in process and no proved
reserves.
(g)
Asset Retirement Obligations
The
Company’s asset retirement obligations will represent the present value of the estimated future costs associated with
plugging and abandoning oil and natural gas wells, removing production equipment and facilities and restoring the seabed in
accordance with the terms of oil and gas leases and applicable state and federal laws. Determining asset retirement
obligations requires estimates of the costs of plugging and abandoning oil and natural gas wells, removing production
equipment and facilities and restoring the sea bed as well as estimates of the economic lives of the oil and gas wells and
future inflation rates. The resulting estimate of future cash outflows will be discounted using a credit-adjusted risk-free
interest rate that corresponds with the timing of the cash outflows. Cost estimates will consider historical experience,
third party estimates, the requirements of oil and natural gas leases and applicable local, state and federal laws, but do
not consider estimated salvage values. Asset retirement obligations will be recognized when the wells drilled reach total
depth or when the production equipment and facilities are installed or acquired with an associated increase in proved oil and
gas property costs. Asset retirement obligations will be accreted each period through depreciation, depletion and
amortization to their expected settlement values with any difference between the actual cost of settling the asset retirement
obligations and recorded amount being recognized as an adjustment to proved oil and gas property costs. Cash paid to settle
asset retirement obligations will be included in net cash provided by operating activities from continuing operations in the
statements of cash flows. On a quarterly basis, when indicators suggest there have been material changes in the estimates
underlying the obligation, the Company reassesses its asset retirement obligations to determine whether any revisions to the
obligations are necessary. At least annually, the Company will assess all of its asset retirement obligations to determine
whether any revisions to the obligations are necessary. Future revisions could occur due to changes in estimated costs or
well economic lives, or if federal or state regulators enact new requirements regarding plugging and abandoning oil and
natural gas wells. The Company has drilled two well bores and is currently evaluating these wells. The two wellbores
drilled in 2018 and 2019, were both plugged and therefore the costs related to the asset retirement obligation were
incurred. Such costs were recognized as capitalized oil and gas costs. The asset retirement obligation was
completely extinguished in that if the well proves not to be commercially viable, there is no further cost needed to
remediate the site.
(h)
Property and Equipment
Property
and equipment are carried at cost and include expenditures for new equipment and those expenditures that substantially increase
the productive lives of existing equipment and leasehold improvements. Maintenance and repair costs are expensed as incurred.
Property and equipment are depreciated on a straight-line basis over the assets’ estimated useful lives. Fully depreciated
property and equipment still in use are not eliminated from the accounts.
The
Company assesses the carrying value of its property and equipment for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing estimated undiscounted cash
flows, expected to be generated from such assets, to their net book value. If net book value exceeds estimated cash flows, the
asset is written down to its fair value, determined by the estimated discounted cash flows from such asset. When an asset is retired
or sold, its cost and related accumulated depreciation and amortization are removed from the accounts. The difference between
the net book value of the asset and proceeds on disposition is recorded as a gain or loss in our statements of operations in the
period in which they occur.
(i)
Income Taxes
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
as a component of income tax expense when incurred.
(j)
Stock-Based Compensation
The
Company records expenses associated with the fair value of stock-based compensation. For fully vested and restricted stock grants,
the Company calculates the stock based compensation expense based upon estimated fair value on the date of grant. For stock warrants
and options, the Company uses the Black-Scholes option valuation model to calculate stock based compensation at the date of grant.
Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in
these assumptions can materially affect the fair value estimate.
(k)
Stock Issuance
The
Company records 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.
(l)
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, 2019 and 2018, the potentially dilutive shares are anti-dilutive and thus not added into the EPS calculations.
As of September 30, 2019 and 2018, there were 354,818,379 and 213,089,281 potentially dilutive shares, respectively.
(m)
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.
(n)
Impact of New Accounting Standards
In
February 2016, the FASB issued ASU No. 2016-02, “Leases,” and in March 2019, the FASB issued ASU No. 2019-01, “Leases:
Codification Improvements”, which updated the accounting guidance related to leases to increase transparency and comparability
among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about
leasing arrangements. They also clarify implementation issues. These updates are effective for public companies for annual periods
beginning after December 15, 2018, including interim periods therein. Accordingly, the standard is effective for the Company
for its annual period beginning October 1, 2019, and interim periods therein. The standard is to be applied utilizing a modified
retrospective approach, with early adoption permitted. The Company is assessing the quantitative effect of adopting the new
standard on the Company’s 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 with no material impact to stock compensation issued to non-employees
during the year ended September 30, 2019.
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, 2019 of $55.6 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, 2019, the Company had $1.1 million of cash on hand, $0.6 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 million
to meet its obligations and planned expenditures through December 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.
NOTE
3 – OIL AND NATURAL GAS PROPERTIES
The
Company currently has under lease seven federal Outer Continental Shelf blocks and has licensed 2.2 million acres of three-dimensional
(3-D) seismic data in its area of concentration.
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 costs associated with
drilling each exploratory well. The Company will be required to fund 20% of well costs in excess of 115% of budget. 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.
At present, Delek’s commitment and rights extend only to the Initial 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, 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 during the first calendar quarter of 2020.
The
second well, Tau, 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 that depth, but hydrocarbon shows were
encountered. Complex geomechanical conditions required two by-pass wellbores, one sidetrack wellbore, and eight casing strings
to reach that depth. Equipment limitations prevented further drilling. In addition, the drilling rig had contractual obligations
related to another operator. The Company elected to abandon this well in a manner that would allow for re-entry at a later time.
The drilling, pressure, and reservoir information has confirmed geophysical and geological models, and reinforces the Company’s
confidence that there is resource potential. The Company is currently evaluating various options related to future operations
in this wellbore and testing of the deeper Tau prospect.
In
January 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 total amount of the claim was approximately $10.8 million for 100% working interest after
the insurance deductible amount, and at September 30, 2019 approximately $10.8 million had been received. GulfSlope received approximately
$2.5 million of this amount and credited wells in process for approximately $0.9 million, and accrued payable for approximately
$1.6 million, pending evaluation of distributions to the working interest owners.
As
of September 30, 2019, the Company’s oil and natural gas properties consisted of unproved properties, wells in process
and no proved reserves. During the years ended September 30, 2019 and 2018, the company capitalized approximately $1.1
million and $Nil of interest expense to oil and natural gas properties, respectively, and approximately $1,229,742 and
$1,242,807, of general and administrative expenses, respectively. The Company incurred approximately $6 million of impairment
of oil and natural gas properties for the year ended September 30, 2019 primarily resulting from the expiration of oil and
natural gas leases.
NOTE
4 – PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at September 30, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Office equipment and computers
|
|
$
|
133,089
|
|
|
$
|
133,089
|
|
Furniture and fixtures
|
|
|
16,280
|
|
|
|
16,280
|
|
Leasehold improvements
|
|
|
7,680
|
|
|
|
5,756
|
|
Total
|
|
|
157,049
|
|
|
|
155,125
|
|
Less: accumulated depreciation
|
|
|
(144,035
|
)
|
|
|
(140,339
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
13,014
|
|
|
$
|
14,786
|
|
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 $5,619 and $4,724 for the years ended September 30, 2019 and 2018, respectively.
NOTE
5 – INCOME TAXES
The
provision for income taxes consists of the following for the years ended September 30, 2019 and 2018:
|
|
|
2019
|
|
|
|
2018
|
|
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, 2019 and 2018, respectively:
|
|
2019
|
|
|
2018
|
|
Expected
provision (based on statutory rate of 21%)
|
|
$
|
(2,881,988)
|
|
|
$
|
(553,714)
|
|
Effect
of:
|
|
|
|
|
|
|
|
|
Increase
in valuation allowance
|
|
|
2,879,685
|
|
|
|
2,696,631
|
|
Non-deductible
expense
|
|
|
500,638
|
|
|
|
53,493
|
|
Rate
change
|
|
|
—
|
|
|
|
(2,305,270)
|
|
Other,
net
|
|
|
(498,335)
|
|
|
|
108,860
|
|
Total
actual provision
|
|
$
|
—
|
|
|
$
|
—
|
|
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,
2019 and 2018, the Company did not recognize any interest or penalties, nor did we have any interest or penalties accrued as of
September 30, 2019 and 2018 relating to unrecognized benefits. Deferred income tax assets and liabilities at September 30, 2019
and 2018, respectively, consist of the following:
|
|
2019
|
|
|
2018
|
|
DEFERRED TAX ASSETS (LIABILITIES)
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
10,295,547
|
|
|
$
|
7,131,636
|
|
Exploration costs
|
|
|
(1,110,135
|
)
|
|
|
(1,503,472
|
)
|
Oil and natural gas leases
|
|
|
2,336,776
|
|
|
|
2,192,654
|
|
IDC
|
|
|
(1,036,737
|
)
|
|
|
—
|
|
Partnership ordinary loss
|
|
|
(178,359
|
)
|
|
|
—
|
|
Stock based compensation
|
|
|
567,406
|
|
|
|
411,287
|
|
Accrued interest and expenses not paid
|
|
|
386,685
|
|
|
|
271,190
|
|
Derivative financial instrument
|
|
|
69,120
|
|
|
|
(57,059
|
)
|
Differences in book/tax depreciation
|
|
|
9,191
|
|
|
|
13,573
|
|
Net deferred tax asset
|
|
$
|
11,339,494
|
|
|
$
|
8,459,809
|
|
Valuation allowance
|
|
|
(11,339,494
|
)
|
|
|
(8,459,809
|
)
|
NET DEFERRED TAXES
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company’s valuation allowance increased $2,879,685 during the year ended September 30, 2019 and increased $2,696,633
during the year ended September 30, 2018.
At
September 30, 2019, the Company had approximately $49 million of NOLs, approximately 66% of which will expire from 2032 to 2038.
Approximately $33.4 million 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, 2016 through 2019 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 2013 through September 2017, the Company entered into promissory notes whereby it borrowed a total of $8,675,500 from John
Seitz, the chief executive officer (“CEO”). 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 September 30, 2019 and 2018, the total
amount owed to John Seitz is $8,675,500. This amount is included in loans from related parties within the balance sheet. There
was a total of $2,080,885 and $1,641,086 of unpaid interest associated with these loans included in accrued interest payable within
the balance sheets as of September 30, 2019 and 2018, 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. 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 entered into a $50,000 convertible promissory note with associated warrants (“Bridge
Financing”) under the same terms received by other investors (see Note 7).
Domenica
Seitz CPA, related to John Seitz, has provided accounting consulting services to the Company. During the years ended September
30, 2019 and 2018, the services provided were valued at $59,250 and $23,660, respectively. The Company has accrued these amounts,
and they have been reflected in related party payable in the September 30, 2019 and 2018 financial statements.
See
Note 7 for a description of the Delek term loan.
NOTE
7 – TERM LOAN AND CONVERTIBLE DEBENTURES
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), 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 per share 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 to common stock during the year ended September 30, 2018. The remaining note balance at September 30, 2019
is $277,000. Accrued interest for the year ended September 30, 2019, was approximately $5,500 and cumulative accrued interest
was approximately $72,000. During June 2019, the Company completed the extension of the remaining notes to April 30, 2020. In
consideration for the extension of the remaining notes, the Company extended the term of the warrants until April 30, 2020. As
a result, approximately $152,000 was recorded as a debt discount and to additional paid-in capital for the modification.
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 which is March 1, 2019. 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 may be 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. 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.
On
April 19, 2019, the Company borrowed $1.0 million under the Term Loan Facility and issued to Delek warrants to purchase 23,809,524
shares of stock with an exercise price of $0.042 per share. The Company allocated the proceeds between debt and warrants on a
relative fair value basis, recording a debt discount of approximately $0.5 million. The term loan facility expired as of September
4, 2019, and as of September 30, 2019, the warrants have not been exercised and the term loan is outstanding. See Note 13 Subsequent
Events.
On
June 21, 2019 the Company entered into a Securities Purchase Agreement (“SPA”)
under the terms of which the Company will issue and sell to buyers up to an aggregate of $3,000,000 of convertible debentures
(“Convertible Debentures”) and associated warrants. On June 21, 2019,
approximately $2,100,000 of Convertible Debentures were purchased upon the signing of the SPA (the “First Closing”),
and $400,000 and $500,000, respectively, shall be purchased by the holder upon: (1) the filing of a Registration Statement with
the U.S. Securities and Exchange Commission (the “SEC”) registering the
resale of the conversion shares by the buyers which occurred on August 5, 2019; and (2) the date a registration statement covering
the underlying common shares has first been declared effective by the SEC which occurred on November 4, 2019.
On
August 7, 2019, the Company purchased approximately $400,000 of convertible debentures under the June 21, 2019 Securities Purchase
Agreement.
The
Convertible Debentures accrue interest at 8.0% per annum, mature on June 21, 2020, and August 7, 2020, respectively and are convertible
at the option of the holder any time after issuance into common stock at a conversion rate of the lesser of: (1) $0.05 per share;
or (2) 80% of the lowest volume weighted adjusted price (as reported by Bloomberg, LP) for the ten consecutive trading days immediately
preceding conversion. In addition, the holder received warrants to purchase an aggregate of 50 million shares of common stock
at an exercise price of $0.04 per share. Such warrants expire on the fifth anniversary of issuance. The direct offering costs
related to the two note issuances were approximately $333,000 and has been recorded as a debt discount.
The
Company evaluated the conversion feature and concluded that it should be bifurcated and accounted for as a derivative liability
due to the variable conversion feature which does not contain an explicit limit on the number of shares that are required to be
issued. In addition, the Company concluded the warrants required treatment as derivative liabilities as the Company could not
assert in has sufficient authorized but unissued shares to settle the warrants upon exercise when taking into account other stock
based commitments including the Convertible Debentures. Accordingly, the embedded conversion feature and warrants were recorded
at fair value at issuance and are subsequently remeasured to fair value each reporting period. The fair value of the derivative
liabilities at issuance exceeded the remaining net proceeds received resulting in an approximately $1.8 million day one charge
to interest expense in the September 30, 2019 Statement of Operations.
The
fair value of the embedded conversion feature was determined utilizing a Geometric Brownian Motion Stock Path Based Monte Carlo
Simulation that utilized the following key assumptions:
|
|
June 21, 2019 Convertible Debenture
|
|
|
August 7, 2019 Convertible Debenture
|
|
|
|
June 21, 2019
|
|
|
June 30, 2019
|
|
|
September 30, 2019
|
|
August 7, 2019
|
|
|
September 30, 2019
|
Stock Price
|
|
$
|
0.041
|
|
|
$
|
0.041
|
|
|
$
|
0.034
|
|
|
$
|
0.037
|
|
|
$
|
0.034
|
|
Fixed Exercise Price
|
|
$
|
0.050
|
|
|
$
|
0.050
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
Volatility
|
|
|
148
|
%
|
|
|
150
|
%
|
|
|
135
|
%
|
|
|
144
|
%
|
|
|
135
|
%
|
Term (Years)
|
|
|
1.00
|
|
|
|
0.98
|
|
|
|
0.73
|
|
|
|
1.00
|
|
|
|
0.73
|
|
Risk Free Rate
|
|
|
1.95
|
%
|
|
|
1.92
|
%
|
|
|
1.75
|
%
|
|
|
1.75
|
%
|
|
|
1.75
|
%
|
In
addition to the fixed exercise price noted above, the model incorporates the variable conversion price which is simulated as 80%
of the lowest trading price within the ten consecutive days preceding presumed conversion.
The
Company’s Term Loan and Convertible Debentures consisted of the following as of September 30, 2019.
Promissory
Notes Payable at September 30, 2019
|
|
Notes
|
|
|
Discount
|
|
|
Notes, Net of Discount
|
|
Term Loan
|
|
$
|
1,000,000
|
|
|
$
|
—
|
|
|
$
|
1,000,000
|
|
Convertible
Debentures and Bridge Financing Notes
|
|
$
|
2,727,000
|
|
|
$
|
(2,529,034
|
)
|
|
$
|
197,966
|
|
Total
|
|
$
|
3,727,000
|
|
|
$
|
(2,529,034
|
)
|
|
$
|
1,197,966
|
|
At
September 30, 2018, Promissory Notes Payable totaled $135,000 and was comprised of three Bridge Financing Notes.
See
Note 9 for a summary of the warrants outstanding relating to the Bridge Financing Notes and Note 13 Subsequent Events related
to the term loan payoff.
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, 2019 and 2018:
|
|
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 September 30, 2018
|
|
|
—
|
|
|
|
(271,710
|
)
|
|
|
—
|
|
|
|
(271,710
|
)
|
Issuance of Derivative Financial Instruments
|
|
|
—
|
|
|
|
(3,863,599
|
)
|
|
|
—
|
|
|
|
(3,863,599
|
)
|
Change in fair value for year ended September 30, 2019
|
|
|
—
|
|
|
|
600,853
|
|
|
|
—
|
|
|
|
600,853
|
|
Total as of Total as of September 30, 2019
|
|
$
|
—
|
|
|
$
|
(3,534,456
|
)
|
|
$
|
—
|
|
|
$
|
(3,534,456
|
)
|
During
the years ended September 30, 2019 and 2018, 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
As
discussed in Note 7, between June and November 2016, the Company issued 27.9 million warrants in conjunction with Convertible
Debentures. The warrants have an exercise price of $0.03 and a term of the earlier of three years or upon a change of control.
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, or approximately 7 million extension 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,
or approximately 2.8 million extension warrants (see Note 7). 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 September 30, 2019, approximately 3.3
million warrants have been exercised, approximately 22.0 million have expired and approximately 12.5 million remain outstanding.
During June 2019, the Company completed the extension of the remaining notes to April 30, 2020. In consideration for the extension
of the remaining notes, the Company extended the term of the warrants until April 30, 2020.
The
fair value of the warrants were determined using the Black Scholes valuation model with the following key assumptions:
|
|
June
2016
|
|
|
November
2016
|
|
|
June
2017
|
|
|
|
January
2018
|
|
Remaining
Warrants
|
|
7.6
million
|
|
|
1.7
million
|
|
|
2.3
million
|
|
|
|
0.9
Million
|
|
Stock
Price:
|
|
$
|
0.054
|
(1)
|
|
$
|
0.029
|
(1)
|
|
$
|
0.025
|
(1)
|
|
$
|
0.11
|
(1)
|
Exercise
Price
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Term
|
|
|
3
years
|
|
|
|
3
years
|
|
|
|
2
years
|
|
|
|
1.5
years
|
|
Risk
Free Rate
|
|
|
.87
|
%
|
|
|
1.28
|
%
|
|
|
1.35
|
%
|
|
|
1.89%
|
|
Volatility
|
|
|
135
|
%
|
|
|
131
|
%
|
|
|
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, 2019:
|
|
|
|
|
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
|
|
|
|
7,566,667
|
|
|
|
.58
|
|
|
$
|
0.03
|
|
|
|
7,566,667
|
|
|
$
|
0.03
|
|
November
2016
|
|
$
|
0.03
|
|
|
|
1,666,667
|
|
|
|
.58
|
|
|
$
|
0.03
|
|
|
|
1,666,667
|
|
|
$
|
0.03
|
|
June
2017
|
|
$
|
0.03
|
|
|
|
1,891,667
|
|
|
|
.58
|
|
|
$
|
0.03
|
|
|
|
1,891,667
|
|
|
$
|
0.03
|
|
November
2017
|
|
$
|
0.03
|
|
|
|
416,667
|
|
|
|
.58
|
|
|
$
|
0.03
|
|
|
|
416,667
|
|
|
$
|
0.03
|
|
January
2018
|
|
$
|
0.10
|
|
|
|
923,333
|
|
|
|
.58
|
|
|
$
|
0.10
|
|
|
|
923,333
|
|
|
$
|
0.10
|
|
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. The warrants have a term of five years.
In
October 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. The warrants have a term of five years.
A
summary of the warrants, issued in conjunction with Bridge Financing Notes, Private Placements and Services Rendered and outstanding
at September 30, 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
|
|
|
|
2.25
|
|
|
$
|
0.10
|
|
|
|
550,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
2.46
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
3.04
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
3.21
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
$
|
0.09
|
|
|
|
9,662,500
|
|
|
|
1.90
|
|
|
$
|
0.09
|
|
|
|
9,662,500
|
|
|
$
|
0.09
|
|
$
|
0.15
|
|
|
|
2,027,780
|
|
|
|
1.99
|
|
|
$
|
0.15
|
|
|
|
2,027,780
|
|
|
$
|
0.15
|
|
$
|
0.042
|
|
|
|
23,809,523
|
|
|
|
0.55
|
|
|
$
|
0.042
|
|
|
|
23,809,523
|
|
|
$
|
0.042
|
|
$
|
0.04
|
|
|
|
50,000,000
|
|
|
|
4.73
|
|
|
$
|
0.04
|
|
|
|
50,000,000
|
|
|
$
|
0.04
|
|
During
December 2018, 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 included as a liability because
the transaction did not close until the current fiscal year and it was 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 was determined using the Black Scholes valuation model with the following key assumptions:
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
|
%
|
In
September 2018, the Company issued approximately 4 million shares of common stock valued at approximately $231,000 on the date
of grant and approximately 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 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.
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 vested 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. Forty-nine 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. Fifty percent of the stock options
vested on the issue date and the remainder vested 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.
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 $1,629,333 and $1,857,531 in stock-based compensation expense for the years ended September 30,
2019 and 2018, respectively. A portion of these costs allocable to the Company’s exploration activities, $884,839 and $820,877
were capitalized to unproved properties and the remainder was recorded as general and administrative expenses, for the years ended
September 30, 2019 and 2018, respectively.
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, 2019 and 2018 were based on the following assumptions at the date of
grant as follows:
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
following table summarizes the Company’s stock option activity during the year ended September 30, 2019:
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Term
(In years)
|
|
Outstanding at September 30, 2018
|
|
|
103,500,000
|
|
|
$
|
0.0605
|
|
|
|
|
|
Granted
|
|
|
1,000,000
|
|
|
|
0.0450
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
104,500,000
|
|
|
$
|
0.0604
|
|
|
|
5.13
|
|
Vested and expected to vest
|
|
|
104,500,000
|
|
|
$
|
0.0604
|
|
|
|
5.13
|
|
Exercisable at September 30, 2019
|
|
|
79,500,000
|
|
|
$
|
0.0552
|
|
|
|
5.13
|
|
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, 2019, there was $1.1 million of unrecognized stock-based compensation cost related to the stock option grants
expected to be amortized over a weighted average period of nine months.
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, 2019 there is a fair value liability of approximately $554,000.
NOTE
12 – CORRECTION OF IMMATERIAL ERROR IN PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Prior
to the filing of the Company’s September 30, 2019 Form 10-K, the management of
the Company determined that capitalized interest should be computed for the Company’s oil and gas properties that were being
actively developed. As a result, the Company is revising certain of its condensed financial statements as of and for the quarters
ended December 31, 2018, March 31, 2019, and June 30, 2019 to correct this error. After
considering Staff Accounting Bulletin No. 99, Assessing Materiality, management does not deem this revision to be material
to its financial statements due to its consideration of the amount and direction of the error and its impact on the quality of
key oil and natural gas industry financial metrics.
As
a result of the correction, the originally reported net loss for the three months ended December 31, 2018, March 31,
2019, and June 30, 2019 was decreased by approximately $78,000, $106,000, and $371,000, respectively, and the originally
reported net loss for the six months ended March 31, 2019, and nine months ended June 30, 2019 was decreased by approximately
$183,000 and $554,000, respectively. Originally reported basic and diluted loss per share for these periods was
not changed.
The
following tables reflect the amounts within the balance sheet, statement of operations and statement of cash flows as originally
reported to amounts as now reflected as of and for the quarters ended December 31, 2018, March 31, 2019, and June
30, 2019.
|
|
December 31, 2018
|
|
|
|
As Originally
reported
|
|
|
Adjustment
|
|
|
Corrected
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and Natural Gas Properties
|
|
$
|
11,203,790
|
|
|
$
|
77,542
|
|
|
$
|
11,281,332
|
|
Total Assets
|
|
$
|
28,172,736
|
|
|
$
|
77,542
|
|
|
$
|
28,250,278
|
|
Accumulated Deficit
|
|
$
|
(42,282,117
|
)
|
|
$
|
77,542
|
|
|
$
|
(42,204,575
|
)
|
Total Liabilities and Stockholders’ Deficit
|
|
$
|
28,172,736
|
|
|
$
|
77,542
|
|
|
$
|
28,250,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
|
As Originally
reported
|
|
|
|
Adjustment
|
|
|
|
Corrected
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and Natural Gas Properties
|
|
$
|
16,892,281
|
|
|
$
|
183,299
|
|
|
$
|
17,075,580
|
|
Total Assets
|
|
$
|
32,438,825
|
|
|
$
|
183,299
|
|
|
$
|
32,622,124
|
|
Accumulated Deficit
|
|
$
|
(47,695,556
|
)
|
|
$
|
183,299
|
|
|
$
|
(47,512,257
|
)
|
Total Liabilities and Stockholders’ Deficit
|
|
$
|
32,438,825
|
|
|
$
|
183,299
|
|
|
$
|
32,622,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
|
|
As Originally
reported
|
|
|
|
Adjustment
|
|
|
|
Corrected
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and Natural Gas Properties
|
|
$
|
17,318,916
|
|
|
$
|
554,086
|
|
|
$
|
17,873,002
|
|
Total Assets
|
|
$
|
37,551,079
|
|
|
$
|
554,086
|
|
|
$
|
38,105,165
|
|
Accumulated Deficit
|
|
$
|
(54,574,356
|
)
|
|
$
|
554,086
|
|
|
$
|
(54,020,270
|
)
|
Total Liabilities and Stockholders’ Deficit
|
|
$
|
37,551,079
|
|
|
$
|
554,086
|
|
|
$
|
38,105,165
|
|
|
|
Three
Months Ended December 31, 2018
|
|
|
|
As
Originally reported
|
|
|
Adjustment
|
|
|
Corrected
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense, net
|
|
$
|
(98,157
|
)
|
|
$
|
77,542
|
|
|
$
|
(20,615
|
)
|
Net
Loss
|
|
$
|
(423,861
|
)
|
|
$
|
77,542
|
|
|
$
|
(346,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(423,861
|
)
|
|
$
|
77,542
|
|
|
$
|
(346,319
|
)
|
Capitalized
Interest Expense
|
|
$
|
—
|
|
|
$
|
(77,542
|
)
|
|
$
|
(77,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, 2019
|
|
|
Six
Months Ended March 31, 2019
|
|
|
|
As
Originally reported
|
|
|
Adjustment
|
|
|
Corrected
|
|
|
As
Originally reported
|
|
|
Adjustment
|
|
|
Corrected
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense, net
|
|
$
|
(106,152
|
)
|
|
$
|
105,757
|
|
|
$
|
(395
|
)
|
|
$
|
(204,309
|
)
|
|
$
|
183,299
|
|
|
$
|
(21,010
|
)
|
Net
Loss
|
|
$
|
(5,413,439
|
)
|
|
$
|
105,757
|
|
|
$
|
(5,307,682
|
)
|
|
$
|
(5,837,299
|
)
|
|
$
|
183,299
|
|
|
$
|
(5,654,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,837,299
|
)
|
|
$
|
183,299
|
|
|
$
|
(5,654,000
|
)
|
Capitalized
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
(183,299
|
)
|
|
$
|
(183,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2019
|
|
|
Nine
Months Ended June 30, 2019
|
|
|
|
As
Originally reported
|
|
|
Adjustment
|
|
|
Corrected
|
|
|
As
Originally reported
|
|
|
Adjustment
|
|
|
Corrected
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense, net
|
|
$
|
(2,080,620
|
)
|
|
$
|
370,787
|
|
|
$
|
(1,709,833
|
)
|
|
$
|
(2,284,928
|
)
|
|
$
|
554,086
|
|
|
$
|
(1,730,842
|
)
|
Net
Loss
|
|
$
|
(6,878,800
|
)
|
|
$
|
370,787
|
|
|
$
|
(6,508,013
|
)
|
|
$
|
(12,716,099
|
)
|
|
$
|
554,086
|
|
|
$
|
(12,162,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(12,716,099
|
)
|
|
$
|
554,086
|
|
|
$
|
(12,162,013
|
)
|
Capitalized
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
(554,086
|
)
|
|
$
|
(554,086
|
)
|
NOTE
13 – SUBSEQUENT EVENTS
In
November 2019, the Company purchased an insurance policy for approximately $241,000 and financed approximately $221,000 of the
premium by executing a note payable.
In
October 2019, the Company signed a Post-Drilling Agreement with Delek GOM Investments, LLC. The Agreement provides, among other
things, that the Company (i) issue to Delek 38,423,221 shares of common stock of the Company (the “Insurance Proceeds
Shares”) as compensation with respect to certain insurance proceeds received in connection with drilling of the Tau
well prospect, (ii) that as payoff for the Company’s outstanding obligations of $1,220,548 (“Term Loan Payoff”)
to Delek under the Term Loan Agreement entered into between the Company and Delek on March 1, 2019, the Company issue a convertible
debenture (the “Convertible Debenture”) to Delek in a principal amount equal to the Term Loan Payoff, as a
consequence of which the Term Loan Agreement has been terminated, (iii) that the Security Agreement entered into between the Company
and Delek on March 1, 2019, be amended to release all liens and security interests Delek may hold in properties of the Company
other than those attributable to the Tau well, and (iv) that the Registration Rights Agreement entered into between the Company
and Delek on March 25, 2019, be amended to extend Delek’s rights thereunder to the shares underlying the Convertible Debenture,
discussed below. The Convertible Debenture is convertible at the option of Delek at any time in whole or in part for up to 24,410,960
shares of Common Stock at a conversion price of $0.05 per share. Interest on the Convertible Debenture is accruable at 12%
per annum and the maturity of the Convertible Debenture is October 22, 2020 (which interest rate will increase to 15% per annum
upon any Event of Default as defined in the Convertible Debenture). The Company has a right to prepay the Convertible Debenture
prior to maturity for an amount equal to the outstanding principal balance plus accrued and unpaid interest. Absent any
restrictions under the federal securities laws, Delek’s ability to sell shares of common stock of the Company issued upon
conversion of the Convertible Debenture will be limited, in any one-month period, to 10% (ten percent) of the total volume of
such converted shares.
Underwriters
(the "Underwriters") associated with the Company's Energy Package insurance policy (the "Policy") have acknowledged
confirmation of coverage, subject to the Policy terms and conditions, related to a subsurface well occurrence that happened during
the drilling of the Company's Tau well earlier this year. This occurrence transpired on May 5, 2019 during drilling operations
at a measured depth of 15,254 feet. The Company subsequently controlled the occurrence and ceased drilling operations. Plugs were
placed in the well to meet regulatory requirements prior to rig release. Pursuant to the Policy terms and conditions, the Underwriters
will reimburse GulfSlope for qualified actual costs and expenses incurred to (i) regain control of the well, and (ii) restore
or re-drill the well to 15,254 feet. GulfSlope is working with the Underwriters to finalize details associated with the claim.
In
November 2019, an agreement was reached with
Texas South whereby Texas South re-conveyed to GulfSlope all of Texas South’s interest in Tau and Canoe in exchange for
the release of claims and foregoing collections for Texas South’s failure to pay JIBs for the Tau and Canoe wells.
Convertible
debentures in the amount of $300,000 plus accrued interest of $86,636 have been converted into 17,919,455 shares of common stock
at a weighted average price of $0.0214.