The accompanying notes
are an integral part to these condensed financial statements.
The accompanying notes are an integral
part to these condensed financial statements.
The accompanying notes are an integral part
to these financial statements.
The accompanying
notes are an integral part to these condensed financial statements.
Notes to Condensed Financial
Statements
June 30, 2018
(Unaudited)
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
GulfSlope Energy, Inc. (the “Company,”
“GulfSlope,” “our” and words of similar import), a Delaware corporation, is an independent crude oil and
natural gas exploration 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 twelve federal Outer Continental Shelf blocks (referred
to as “prospect,” “portfolio” or “leases” in this Report).
As of June 30, 2018, we have 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, 2017, which were included in the Company’s
Annual Report on Form 10-K for the fiscal year ended September 30, 2017 and filed with the Securities and Exchange Commission on
December 29, 2017.
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. Cash
equivalents consist primarily of interest-bearing bank accounts and money market funds.
Liquidity/Going Concern
The Company has incurred accumulated
losses as of June 30, 2018 of $41.3 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 June 30, 2018, we had $4.9 million of unrestricted cash
on hand, $3.2 million of this amount is for the payment of joint payables for drilling operations. The Company estimates that it
will need to raise a minimum of $7.5 million to meet its obligations and planned expenditures through August 2019. The Company
plans to finance its operations through the issuance of equity and debt offerings. Our policy has been to periodically raise funds
through the sale of equity on a limited basis, to avoid undue dilution while at the early stages of execution of our business plan.
Short term needs have been historically funded through loans from executive management and other related parties. There are no
assurances that financing will be available with acceptable terms, if at all. If the Company is not successful in obtaining adequate
financing, operations would need to be curtailed or ceased, including those associated with being a public reporting company. The
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Full Cost Method
The Company uses the full cost method
of accounting for its oil and gas exploration and development activities as defined by the Securities and Exchange Commission (“SEC”).
Under the full cost method of accounting, all costs associated with successful and unsuccessful exploration and development activities
are capitalized on a country-by-country basis into a single cost center (“full cost pool”). Such costs include property
acquisition costs, geological and geophysical (“G&G”) costs, carrying charges on non-producing properties, costs
of drilling both productive and non-productive wells and overhead charges directly related to acquisition, exploration and development
activities. Proceeds from property sales will generally be credited to the full cost pool, with no gain or loss recognized, unless
such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these
costs. A significant alteration would typically involve a sale of 25% or more of the proved reserves related to a single
full cost pool. Proved properties are amortized on a country-by-country basis using the units of production method (UOP). The UOP
calculation multiplies the percentage of estimated proved reserves produced each quarter by the cost of those reserves. The amortization
base in the UOP calculation includes the sum of proved property, net of accumulated depreciation, depletion and amortization (DD&A),
estimated future development costs (future costs to access and develop proved reserves), and asset retirement costs, less related
salvage value.
The costs of unproved properties and
related capitalized costs (such as G&G costs) are withheld from the amortization calculation until such time as they are either
developed or abandoned. Unproved properties and properties under development are reviewed for impairment at least quarterly
and are determined through an evaluation considering, among other factors, seismic data, requirements to relinquish acreage, drilling
results, remaining time in the commitment period, remaining capital plan, and political, economic, and market conditions. In countries
where proved reserves exist, exploratory drilling costs associated with dry holes are transferred to proved properties immediately
upon determination that a well is dry and amortized accordingly. In countries where a reserve base has not yet been established,
impairments are charged to earnings.
Companies that use the full cost method
of accounting for oil and natural gas exploration and development activities are required to perform a ceiling test calculation
each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is
performed quarterly, on a country-by-country basis, utilizing the average of prices in effect on the first day of the month for
the preceding twelve-month period. The ceiling limits such pooled costs to the aggregate of the present value of future net revenues
attributable to proved crude oil and natural gas reserves discounted at 10%, plus the lower of cost or market value of unproved
properties less any associated tax effects. If such capitalized costs exceed the ceiling, the Company will record a write-down
to the extent of such excess as a non-cash charge to earnings. Any such write-down will reduce earnings in the period of occurrence
and results in a lower depreciation, depletion and amortization rate in future periods. A write-down may not be reversed in future
periods even though higher oil and natural gas prices may subsequently increase the ceiling.
As of June 30, 2018, the Company’s
oil and gas properties consisted of wells in process, 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 nine months ended June 30, 2018 and 2017, the potentially dilutive shares are anti-dilutive and are thus not added into the
loss per share calculations. As of June 30, 2018 and 2017, there were 214,418,438 and 163,805,888 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. ASU 2014-09 will be effective for us in our first quarter of fiscal 2019. We have evaluated the impact of adoption
of this standard and determined that it will not have a material impact on our financial statements.
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 terms of the Company’s evaluation efforts, the Company has assigned internal resources and engaged third party service
providers to assist in its evaluation. We expect this evaluation to be completed by the end of our fiscal year, September 30,
2018.
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.
Recent Tax and Financial Legislation
The Tax Cuts and Jobs Act of 2017 was
signed into law on December 22, 2017 by
President Donald J. Trump. The law
includes significant changes to the U.S. corporate income tax system, including a Federal corporate rate reduction from 35% to
21%, limitations on the deductibility of interest expense and executive compensation, and the transition of U.S. international
taxation from a worldwide tax system to a territorial tax system. We are in the process of analyzing the final legislation and
determining an estimate of the financial impact.
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. 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 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 was spud in
early August 2018 and the second well will be drilled after the first well.
The Company paid $632,665 in gross annual
lease rental payments to the BOEM for the year ended September 30, 2017. The Company’s share of these amounts are 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 t
he
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 will acquire 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 will acquire 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, $195,125 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. These capitalized costs
when added to the amounts paid in 2017 for lease rental and lease acquisition payments of $402,766 and netted with the 2017
receipts from working interest portion of annual rentals of $118,679 and the amount received through September 30, 2017 for
sale of working interest of $26,400 as well as the relinquished leases impairment amount of $3,316,212 results in unproved
oil and gas properties of $1,887,879 reflected on the Company’s balance sheet at September 30, 2017.
For the nine months ended June 30, 2018,
the Company incurred $180,379 in consulting fees, salaries and benefits associated with geoscientists, $544,958 in stock option
costs associated with geoscientists and engineers, $35,125 associated with technological infrastructure and third party hosting
services and $90,716 of engineering costs. The Company capitalized these G&G costs to unproved properties. These amounts when
added to unproved properties at September 30, 2017 and netted with the receipts of $2,884,651 from the sale of working interests
and $140,591 the amount paid for the lease that was acquired in October 2017, the Company’s share of lease rentals of $75,274
paid in May and June of 2018 and the capitalized consulting services of $4,880,000 paid for with the issuance of stock and the
wells in process of $384,632 results in unproved properties of $5,334,903 at June 30, 2018.
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 June 30, 2018 the total amount owed to John Seitz, our CEO, is $8,675,500. There
was a total of $1,530,232 of unpaid interest associated with these loans included in accrued interest within our balance sheet
as of June 30, 2018.
During March 2016, the Company entered
into a promissory note for a total of $80,000 with the Morris Family Partnership, L.P., an affiliate of Mr. Paul Morris, a director
of the Company. The $80,000 promissory note was converted into the Bridge Financing (see Note 5). The Bridge note and accrued interest
was converted into 3.7 million shares of common stock in June 2018, under the same terms received by other investors. The note
was paid in full in June 2018 (see Note 5).
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 month period ended June 30, 2018, the services provided
were valued at $5,915. The Company has accrued these amounts, and they have been reflected in the June 30, 2018 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 5 – BRIDGE FINANCING –
CONVERTIBLE PROMISSORY NOTES WITH ASSOCIATED WARRANTS
Between June and November 2016, the Company
issued eleven convertible promissory notes with associated warrants in a private placement to accredited investors for total gross
proceeds of $837,000. Three of the notes were to related parties for proceeds totaling $222,000, including the extinguishment of
$70,000 worth of related party payables. The convertible notes have a maturity of one year, bear an annual interest rate of 8%
and can be converted at the option of the holder at a conversion price of $0.025 per share. In addition, the convertible notes
will automatically convert if a qualified equity financing of at least $3 million occurs before maturity and such mandatory conversion
price will equal the effective price per share paid in the qualified equity financing. In addition to the convertible notes, the
investors received 27.9 million warrants (7.4 million to the above mentioned related parties) with an exercise price of $0.03 and
a term of the earlier of three years or upon a change of control. The Company evaluated the various financial instruments under
ASC 480 and ASC 815 and determined no instruments or features required fair value accounting. Therefore, in accordance with ASC
470-20-25-2, the Company allocated the proceeds between the convertible notes and warrants based on their relative fair values.
This resulted in an allocation of $452,422 to the warrants and $384,368 to the convertible notes. After such allocation, the Company
evaluated the conversion option to discern whether a beneficial conversion feature existed based upon comparing the effective exercise
price of the convertible notes to the fair value of the shares they are convertible into. The Company concluded a beneficial conversion
feature existed and measured such beneficial conversion feature at $384,368. Accordingly, the debt discount associated with these
notes was $836,790. Such discount was amortized using the effective interest rate method over the term (one year) of the convertible
notes. For the quarter ended June 30, 2018 the amortization of this discount and the discount associated with the extension warrants
(see below) was zero, because it was fully amortized at March 31, 2018. Accrued interest expense for the quarter ended June 30,
2018 was $14,462. Cumulative accrued interest at June 30, 2018 was $56,996 after the conversion of three of the notes with
a principal balance of $480,000 plus accrued interest of $73,012. The remaining Bridge note balance at June 30, 2018 was $357,000.
Upon maturity of eight of the eleven
promissory notes in June 2017, the Company issued 3,225,000 extension warrants (equal to 25% of the original warrant amount) to
the holders of the notes to extend the terms to January 15, 2018. The Company evaluated this modification including considering
the fair value of the warrants issued and concluded that extinguishment accounting was required as the present value of future
cash flows from the new note, including the fair value of the warrants issued to extend, exceeded the present value of future cash
flows of the old note by more than 10%. The fair value of the warrants was deemed to be $50,701 and such amount was recognized
immediately as a loss on extinguishment of debt. The fair value of the warrants was determined using the Black-Scholes option pricing
model.
In July and August 2017, the three remaining
promissory notes issued in July, August and November 2016 were extended until January 15, 2018 and issued 3,750,000 extension warrants
(equal to 25% of the original warrant amount). The Company evaluated this transaction including considering the fair value
of the warrants issued and concluded that modification accounting was required as the present value of future cash flows from the
new note, including the fair value of the warrants issued to extend, are less than 10% of the present value of future cash flows
of the old note. When an instrument is modified, any incremental increase in value (in this case the warrants) should be added
to the discount of the notes and such discount should be amortized to interest expense using the effective interest rate method
over the new remaining life of the note. The fair value of the warrants, $38,946, was determined using the Black-Scholes option
pricing model.
Upon maturity on January 15,
2018 of the eleven promissory notes, the Company issued 2,790,000 extension warrants (equal to 10% of the original warrant
amount) to the holders of the notes to extend the term to April 16, 2018. Three of the notes were converted prior to
June 30
th
and three notes were converted after quarter end. The remaining bridge note holders are working with
the Company to extend or convert their notes. 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 $217,141 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.
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 required fair value accounting. Therefore, in accordance with ASC 470-20-25-2, the Company
allocated the proceeds between the convertible note, restricted common stock, and warrants based on their relative fair values.
This resulted in an allocation of $21,287 to the restricted stock, $20,175 to the warrants and $58,538 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 $58,538. Accordingly,
at October 16, 2017, the debt discount associated with these notes was $110,000. Such discount will be amortized using the effective
interest rate method over the term (seven months) of the convertible note. For the nine months ended June 30, 2018 amortization
of this discount totaled $110,000 and is included in interest expense in the statement of operations. Accrued interest expense
for the nine months ended June 30, 2018 is $6,600. On April 16, 2018 this note, and accrued interest was paid in full by the issuance
of 5.8 million shares of common stock.
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 required fair value accounting. Therefore, in accordance with ASC 470-20-25-2, the Company
allocated the proceeds between the convertible note, restricted common stock, and warrants based on their relative fair values.
This resulted in an allocation of $27,807 to the restricted stock, $27,212 to the warrants and $44,981 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 $44,981. Accordingly,
at December 15, 2017, the debt discount associated with these notes was $110,000. Such discount will be amortized using the effective
interest rate method over the term (seven months) of the convertible note. For the nine months ended June 30, 2018 amortization
of this discount totaled $110,000 and is included in interest expense in the statement of operations. Accrued interest expense
for the nine months June 30, 2018 is $6,600. On June 15, 2018 this note, and accrued interest was paid in full by the issuance
of 5.8 million shares of common stock.
NOTE 6 – 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 5, between June
and November 2016, the Company issued 27.9 million warrants in conjunction with convertible notes payable. The warrants have an
exercise price of $0.03 and a term of the earlier of 3 years or upon a change of control. Based upon the allocation of proceeds
between the convertible notes payable and the warrants, approximately $452,422 was allocated to the warrants. 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.
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 (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
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
2 years
|
|
|
|
2 years
|
|
|
|
2 years
|
|
|
|
1.5 years (2)
|
|
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.
During the period December 2016 through
December 2017 the Company issued 3,500,000 shares of restricted stock to an investor as part of financing transactions (see Note
5).
As discussed in Note 5, in December 2016,
the Company issued 550,000 warrants in conjunction with a convertible note payable. The warrants have an exercise price of $0.10
and a term of the earlier of 5 years or upon a change of control. Based upon the allocation of proceeds between the convertible
note payable and the warrants, approximately $13,188 was allocated to the warrants. In March 2017, the Company issued 1,100,000
warrants in conjunction with a convertible note payable. The warrants have an exercise price of $0.10 and a term of the earlier
of 5 years or upon a change of control. Based upon the allocation of proceeds between the convertible note payable and the warrants,
approximately $14,051 was allocated to the warrants. In October 2017, the Company issued 1,100,000 warrants in conjunction with
a convertible note payable. The warrants have an exercise price of $0.10 and a term of the earlier of 5 years or upon a change
of control. Based upon the allocation of proceeds between the convertible note payable and the warrants, approximately $20,175
was allocated to the warrants. In December 2017, the Company issued 1,100,000 warrants in conjunction with a convertible note payable.
The warrants have an exercise price of $0.10 and a term of the earlier of 5 years or upon a change of control. Based upon the allocation
of proceeds between the convertible note payable and the warrants, approximately $27,212 was allocated to the warrants.
The fair value of the warrants were determined
using the Black Scholes valuation model with the following key assumptions:
|
December 2016
|
March 2017
|
October 2017
|
December 2017
|
Number of Warrants Issued
|
|
550,000
|
|
1,100,000
|
|
1,100,000
|
|
1,100,000
|
Stock Price:
|
$
|
0.028
|
$
|
0.0279
|
$
|
0.04
|
$
|
0.068
|
Exercise Price:
|
$
|
0.10
|
$
|
0.10
|
$
|
0.10
|
$
|
0.10
|
Term:
|
|
5 years
|
|
5 years
|
|
5 years
|
|
5 years
|
Risk Free Rate:
|
|
2.02%
|
|
2.13%
|
|
1.95%
|
|
2.16%
|
Volatility:
|
|
155%
|
|
127%
|
|
150%
|
|
149%
|
NOTE 7 – STOCK-BASED COMPENSATION
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 May 1, 2018. 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
date of grant 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.
The fair value of the stock-options were determined using the Black
Scholes valuation model with the following key assumptions:
Date
of Grant
|
May
1, 2018
|
June
1, 2018
|
Number of Stock Options Granted
|
500,000
|
67,500,000
|
Stock Price
|
$0.065
|
$0.075
|
Exercise Price
|
$0.065
|
$0.075
|
Expected Life of Options
|
4.25 years
|
4.25 years
|
Risk Free Rate
|
2.74%
|
2.675%
|
Volatility
|
145.21%
|
145.21%
|
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.
On January 1, 2017, 33.5 million stock options
were granted to 6 employees and 2 directors of the Company. The CEO was not included in the award. The stock options vested 50%
on January 1, 2017 and the remaining 50% vested on January 1, 2018, provided that the option holder continues to serve as an employee
or director on the vesting date. The stock options are exercisable for seven years from the original grant date of January 1, 2017,
until January 1, 2024.
The following table summarizes the Company’s
stock option activity during the three months ended June 30, 2018:
|
|
Number
of Options
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
(In years)
|
|
Average Intrinsic
Value
|
Outstanding at September 30, 2017
|
|
|
35,500,000
|
|
|
|
0.033
|
|
|
|
|
|
|
|
Granted
|
|
|
68,000,000
|
|
|
|
0.075
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
103,500,000
|
|
|
$
|
0.0605
|
|
|
|
5.71
|
|
|
$5.1 million
|
Vested and expected to vest
|
|
|
103,500,000
|
|
|
$
|
0.0605
|
|
|
|
5.71
|
|
|
$5.1 million
|
Exercisable at June 30, 2018
|
|
|
54,500,000
|
|
|
$
|
0.0475
|
|
|
|
4.17
|
|
|
$3.4 million
|
The intrinsic value of the options outstanding
as of June 30, 2018 was $5.1 million. As of June 30, 2018 there was $3.1 million of unrecognized stock-based compensation.
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
$1,371,150 and $1,464,534 in stock based compensation during the three and nine months ended June 30, 2018 and $93,381 and $560,287
in stock-based compensation during the three and nine months ended June 30, 2017, respectively. A portion of these costs,
$585,858 and $613,733 were capitalized to unproved properties for the three and nine months ended June 30, 2018 and $27,875 and
$167,250 was capitalized to unproved properties for the three months and nine months ended June 30, 2017 and the remainder were
recorded as general and administrative expenses.
NOTE 8 – COMMITMENTS AND
CONTINGENCIES
In March 2013, the Company licensed certain
seismic data pursuant to an agreement for $4,012,260. As of June 30, 2018, the Company has paid $3,109,195 in cash and is
obligated to pay $903,065 during 2018.
In October 2017, the Company purchased
a directors and officers’ insurance policy for $171,360 and financed $156,718 of the premium by executing a note payable.
The balance of the note payable at June 30, 2018 is $43,526.
In June
2018, the Company entered into a thirty-nine month office lease agreement effective July 1, 2018. In addition, the Company
paid a $24,785 security deposit in June 2018.
The Company
signed a contract with Atlantic Maritime Services, LLC, a sub subsidiary of Rowan Companies plc, for the use of the Ralph Coffman
drilling rig for its joint operations in the Gulf of Mexico. The company’s share of the cost of the drilling rig is approximately
$1.1 million. As of June 30, 2018 $0.08 million of this amount has been paid.
NOTE 9 – SUBSEQUENT EVENTS
In the fourth quarter of fiscal 2018,
three investors converted their June 2016 bridge notes and accrued interest into approximately 3.7 million shares of common stock
in accordance with the terms of the loan documents. These three June 2016 notes and accrued interest have been paid in full.
In the fourth quarter of fiscal 2018,
416,666 warrants were exercised by a Bridge note investor.