Notes to Condensed Financial Statements
March 31, 2019
(Unaudited)
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
GulfSlope Energy, Inc. (the
“Company,” “GulfSlope,” and words of similar import), a Delaware corporation, is an independent crude
oil and natural gas exploration and production company whose interests are concentrated in the United States Gulf of Mexico
(“GOM”) federal waters offshore Louisiana. The Company currently has under lease fourteen federal Outer
Continental Shelf blocks (referred to as “prospect,” “portfolio” or “leases” in this
Report).
As of March 31, 2019, GulfSlope has
no production or proved reserves.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
The condensed financial statements included
herein are unaudited. However, these condensed financial statements include all adjustments (consisting of normal recurring adjustments),
which, in the opinion of management are necessary for a fair presentation of financial position, results of operations and cash
flows for the interim periods. The results of operations for interim periods are not necessarily indicative of the results to be
expected for an entire year. The preparation of financial statements in accordance with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed financial
statements and accompanying notes. Actual results could differ materially from those estimates.
Certain information, accounting policies,
and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) have been omitted in this Form 10-Q pursuant to certain rules and
regulations of the Securities and Exchange Commission (“SEC”). The condensed financial statements should be read in
conjunction with the audited financial statements for the year ended September 30, 2018, which were included in the Company’s
Annual Report on Form 10-K for the fiscal year ended September 30, 2018, and filed with the Securities and Exchange Commission on
December 31, 2018.
Cash
GulfSlope considers highly liquid investments
with insignificant interest rate risk and original maturities to the Company of three months or less to be cash equivalents. There
were no cash equivalents at March 31, 2019 and September 30, 2018.
Liquidity/Going Concern
The Company has incurred accumulated losses
as of March 31, 2019, of $48.4 million. Further losses are anticipated in developing our business. As a result, there exists substantial
doubt about our ability to continue as a going concern. As of March 31, 2019, we had $5.0 million of unrestricted cash on hand,
$4.9 million of this amount is for the payment of joint payables from drilling operations. The Company estimates that it will need
to raise a minimum of $5.0 million to meet its obligations and planned expenditures through May 2020. The Company plans to finance
operations and planned expenditures through equity and/or debt financings and/or farm-out agreements. The Company also plans to
extend the agreements associated with all loans, the accrued interest payable on these loans, as well as the Company’s accrued
liabilities. There are no assurances that financing will be available with acceptable terms, if at all. If the Company is not successful
in obtaining financing, operations would need to be curtailed or ceased or the Company would need to sell assets or consider alternative
plans up to and including restructuring. The financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
Full Cost Method
The Company uses the full cost
method of accounting for its oil and natural gas exploration and development activities as defined by the SEC. Under the full
cost method of accounting, all costs associated with successful and unsuccessful exploration and development activities are
capitalized on a country-by-country basis into a single cost center (“full cost pool”). Such costs include
property acquisition costs, geological and geophysical (“G&G”) costs, carrying charges on non-producing
properties, costs of drilling both productive and non-productive wells and overhead charges directly related to acquisition,
exploration and development activities. Proceeds from property sales will generally be credited to the full cost pool, with
no gain or loss recognized, unless such a sale would significantly alter the relationship between capitalized costs and the
proved reserves attributable to these costs. A significant alteration would typically involve a sale of 25% or
more of the proved reserves related to a single full cost pool. Proved properties are amortized on a country-by-country basis
using the units of production method (“UOP”), whereby capitalized costs are amortized over total proved reserves.
The amortization base in the UOP calculation includes the sum of proved property, net of accumulated depreciation, depletion
and amortization (“DD&A”), estimated future development costs (future costs to access and develop proved
reserves), and asset retirement costs, less related salvage value.
The costs of unproved properties and related
capitalized costs (such as G&G costs) are withheld from the amortization calculation until such time as they are either developed
or abandoned. Unproved properties and properties under development are reviewed for impairment at least quarterly and are
determined through an evaluation considering, among other factors, seismic data, requirements to relinquish acreage, drilling results,
remaining time in the commitment period, remaining capital plan, and political, economic, and market conditions. In countries where
proved reserves exist, exploratory drilling costs associated with dry holes are transferred to proved properties immediately upon
determination that a well is dry and amortized accordingly. In countries where a reserve base has not yet been established, impairments
are charged to earnings.
Companies that use the full cost method
of accounting for oil and natural gas exploration and development activities are required to perform a ceiling test calculation
each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is
performed quarterly, on a country-by-country basis, utilizing the average of prices in effect on the first day of the month for
the preceding twelve-month period. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted
at 10% per annum, from proved reserves, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market
value of unproved properties included in the cost being amortized. If such capitalized costs exceed the ceiling, the Company will
record a write-down to the extent of such excess as a non-cash charge to earnings. Any such write-down will reduce earnings in
the period of occurrence and results in a lower depreciation, depletion and amortization rate in future periods. A write-down may
not be reversed in future periods even though higher oil and natural gas prices may subsequently increase the ceiling.
As of March 31, 2019, the Company’s
oil and gas properties consisted of wells in process, and capitalized exploration and acquisition costs for unproved properties
and no proved reserves.
Basic and Dilutive Earnings Per Share
Basic (loss) per share (“EPS”)
is computed by dividing net income (loss) (the numerator) by the weighted average number of common shares outstanding for the period
(denominator). Diluted EPS is computed by dividing net income (loss) by the weighted average number of common shares and potential
common shares outstanding (if dilutive) during each period. Potential common shares include stock options, warrants, and restricted
stock. The number of potential common shares outstanding relating to stock options, warrants, and restricted stock is computed
using the treasury stock method.
As the Company has incurred losses for
the three and six months ended March 31, 2019 and 2018, the potentially dilutive shares are anti-dilutive and are thus not added
into the loss per share calculations. As of March 31, 2019 and 2018, there were 225,311,416 and 179,062,176 potentially dilutive
shares, respectively.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue
from Contracts with Customers (Topic 606).
ASU 2014-09 is amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-11,
ASU 2016-12, ASU 2016-20, ASU 2017-10, ASU 2017-13 and ASU 2017-14, which FASB issued in
August 2015, March 2016, April
2016, May 2016, May 2016, December 2016, May 2017, September 2017 and November 2017, respectively (collectively, the amended ASU
2014-09). The amended ASU 2014-09 provides a single comprehensive model for the recognition of revenue arising from contracts with
customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It requires an entity
to recognize revenue when the entity transfers promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The amended ASU 2014-09 creates a five-step
model that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the
contract(s) with the customer, (2) identifying the separate performance obligations in the contract, (3) determining the transaction
price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance
obligation is satisfied. The amended ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts, including qualitative and quantitative information about contracts with
customers, significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
The effective date for the amended ASU 2014-09 for the Company is fiscal year 2019, including interim reporting periods within
that reporting period. Early adoption is permitted for fiscal year 2018, including interim reporting periods within that reporting
period. The Company adopted this new standard effective October 1, 2018, using the modified retrospective method of adoption as
permitted by the standard. The adoption of Topic 606 had no material impact on the financial position, results of operations, stockholders’
equity, or cash flows, but will impact disclosures when the Company has revenue.
On February 25, 2016, the FASB issued ASU
No. 2016-02,
Leases (Topic 842)
. The new guidance establishes the principles to report transparent and economically
neutral information about the assets and liabilities that arise from leases. The new guidance is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years, and early application is permitted for all organizations.
The Company has not yet selected the period during which it will implement this pronouncement, and it is currently evaluating the
impact the adoption of ASU 2016-02 will have on its financial statements.
In June 2018, the FASB issued ASU 2018-07,
Compensation-Stock Compensation (Topic 718)
, Improvements to Nonemployee Share-based Payments (“ASU 2018-07”).
This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.
The amendments in this ASU are effective for public companies for fiscal
years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted and
the Company adopted this new standard effective January 1, 2019.
In August 2018, the FASB issued ASU 2018-13,
Fair
Value Measurement (Topic 820)
. Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which
removes, modifies, and adds disclosure requirements on fair value measurements. ASU 2018-13 is effective for the Company for fiscal
years beginning after December 15, 2019 and the Company is permitted to early adopt any removed or modified disclosures upon issuance
of this ASU and delay adoption of the additional disclosures until their effective date. The Company is currently evaluating the
impact of the adoption of this guidance on its disclosures.
The Company has evaluated all other recent
accounting pronouncements and believes that none of them will have a significant effect on the Company’s financial statements.
NOTE 3 – OIL AND NATURAL GAS PROPERTIES
The Company currently has under lease fourteen
federal Outer Continental Shelf blocks and has licensed 2.2 million acres of three-dimensional (3-D) seismic data in its area of
concentration. The Company submitted the high bid in the Bureau of Ocean Energy Management (“BOEM”) Lease Sale
252 in March 2019, and is awaiting BOEM’s award of the lease.
In January 2018, the Company
entered into a strategic partnership with Delek GOM Investments, LLC. (“Delek”), and Texas South Energy,
Inc. (“Texas South”) (collectively, the “Parties”) and executed a participation agreement (the
“Agreement”) for a multi-phase exploration program. Under the terms of the Agreement, the Parties have committed
to drill the Company’s “Canoe” and “Tau” prospects (the “Initial Phase”) with Delek
having the option to participate in two additional two-well drilling phases and a final, three-well drilling phase
(collectively, the “Phases”). In each Phase, Delek will earn a 75% working interest upon paying 90% of the
exploratory costs associated with drilling each exploratory well. The Company will retain a 20% working interest while paying
8% of the exploratory costs associated with drilling each well. The Company will be required to fund 20% of well costs in
excess of 115% of budget. In addition, Delek will pay the Company approximately $1.1 million in cash for each Prospect when
the respective exploration plan is filed with BOEM for each phase. Also, each Party will be responsible for their pro rata share
(based on working interest) of delay rentals associated with the Prospects. The Company will be the Operator during
exploratory drilling of the Prospect, however, subsequent to a commercial discovery, Delek will have the right to become the
Operator. Delek will have the right to terminate this Agreement at the conclusion of any drilling Phase. Delek will also have
the option to purchase up to 5% of the Company’s common stock, par value $0.001 per share (the “Common
Stock”), upon fulfilling its obligation for each Phase (maximum of 20% in the aggregate) at a price per share equal to
a 10% discount to the 30-day weighted average closing price for the Common Stock preceding the acquisition. This option will
expire January 8, 2020. On March 11, 2019, Delek notified the Issuer that it is exercising its right under the Agreement
to enter into a stock purchase agreement for the purchase of up to 5% of the Issuer’s Common Stock, upon the
fulfillment of certain milestones and obligations.
The Company, as the operator of
two wells drilled in the Gulf of Mexico, has incurred tangible and intangible drilling costs for the wells in process and
has billed its working interest partners for their respective shares of the drilling costs to date. GulfSlope drilled the
first well, Canoe, to a total depth of 5,765 feet (5,670 feet TVD). Multiple open hole plugs were set across several
intervals and the well is equipped with a mud-line suspension system for possible future re-entry. Calibration of seismic
amplitudes, petrophysical analysis, reservoir engineering and scoping of development is currently underway to determine the
commerciality of these sands and that work is expected to be completed in the second calendar quarter of 2019. The second
well, Tau, was spud in September 2018 and is expected to be completed in May 2019. In February 2019, the Tau well experienced
an underground control of well event and as a result, the Company filed an insurance claim with its insurance underwriters.
The Company estimates the total amount of the claim to be approximately $10 million for 100% working interest.
As of March 31, 2019, the Company’s
oil and natural gas properties consisted of unproved properties, wells in process and no proved reserves.
NOTE 4 – RELATED PARTY TRANSACTIONS
During April 2013 through September
2017, the Company entered into convertible promissory notes whereby it borrowed a total of $8,675,500 from John Seitz, its
current chief executive officer. The notes are due on demand, bear interest at the rate of 5% per annum, and $5,300,000 of
the notes are convertible into shares of common stock at a conversion price equal to $0.12 per share of common stock (the
then offering price of shares of common stock to unaffiliated investors). As of March 31, 2019, the total amount owed to John
Seitz, our CEO, is $8,675,500. There was a total of $1,860,383 of unpaid interest associated with these loans included in
accrued interest within the balance sheet as of March 31, 2019.
On November 15, 2016, a family member of
the CEO, a related party, entered into a $50,000 convertible promissory note with associated warrants (“Bridge Financing”)
under the same terms received by other investors (see Note 5).
Domenica Seitz CPA, related to John Seitz,
has provided accounting consulting services to the Company. During the three and six month period ended March 31, 2019, the services
provided were valued at $14,880 and $29,760, respectively. The Company has accrued these amounts, and they have been reflected
in related party payable in the March 31, 2019 financial statements.
John Seitz has not received a salary since
May 31, 2013, the date he commenced serving as our CEO and accordingly, no amount has been accrued in the accompanying condensed
financial statements.
NOTE 5 – NOTES PAYABLE
Between June and November 2016, the
Company issued eleven convertible promissory notes (“Bridge Financing Notes”) with associated warrants in a
private placement to accredited investors for total gross proceeds of $837,000. Three of the notes were to related parties
for proceeds totaling $222,000, including the extinguishment of $70,000 worth of related party payables. The convertible
notes had a maturity of one year (prior to extension), bear an annual interest rate of 8% and can be converted at the option
of the holder at a conversion price of $0.025 per share. In addition, the convertible notes will automatically convert if a
qualified equity financing of at least $3 million occurs before maturity and such mandatory conversion price will equal the
effective price per share paid in the qualified equity financing. In addition to the convertible notes, the investors
received approximately 27.9 million warrants, with an exercise price of $0.03 and a term of the earlier of three years or
upon a change of control. Upon maturity of the eleven promissory notes during 2017, the Company issued approximately 7
million extension warrants with an exercise price of $0.03 per share (equal to 25% of the original warrant amount) to the
holders of the notes to extend the terms to January 15, 2018. Upon revised maturity of the eleven promissory notes on January
15, 2018, the Company issued approximately 2.8 million extension warrants with an exercise price of $0.10 per share
(equal to 10% of the original warrant amount) to the holders of the notes to extend the term to April 16, 2018. In June 2018,
the maturity date of all of the notes was extended to January 15, 2019. Six of the Bridge Financing Notes with a principal
balance of $560,000 plus accrued interest of approximately $87,000 were converted during the year ended September 30, 2018.
The remaining note balance at March 31, 2019 is $277,000. Accrued interest for the quarter ended March 31, 2019, was
approximately $6,000 and cumulative accrued interest was approximately $60,000. The Company is working on the extension of
the remaining notes.
On March 1, 2019, the Company entered into
a Term Loan Agreement by and among the Company, as borrower, and Delek, as lender. In the Term Loan Agreement,
Delek agreed to provide the Company with multiple draw term loans in an aggregate stated principal amount of up to $11.0 million
(the “Term Loan Facility” and the loans thereunder, the “Loans”). The maturity date of the Term Loan Facility
is six months following the closing date of the Term Loan Agreement. Until such maturity date, the Loans under the Term Loan Agreement
shall bear interest at a rate per annum equal to 5.0%, payable in arrears on the maturity date. If an event of default occurs,
all Loans under the Term Loan Agreement shall bear interest at a rate equal to 7.0%, payable on demand. In connection with the
Term Loan Agreement, the Company entered into: (i) a Subordination Agreement (the “Subordination Agreement”) by and
among the Company, as borrower, John N. Seitz, as subordinated lender (the “Subordinated Lender”), and Delek, as
senior lender; (ii) a Security Agreement (the “Security Agreement”) among the Company, as debtor, and Delek, as
lender; and (iii) warrants to purchase 238,095,238 shares of Common Stock, at an exercise price of $0.042 per share issued to Delek GOM (the “Warrants”). The Company
may elect, at its option, to prepay borrowings outstanding under the Term Loan Agreement in multiples of $100,000 and not less
than $500,000 without premium or penalty. The Company is required to prepay the Loans with any net cash proceeds resulting from
an asset sale, receipt of insurance proceeds from certain casualty events, proceeds from equity issuances or incurrence of indebtedness
other than the Loans (subject to a $500,000 carve-out to be applied toward the Company’s general corporate purposes) or receipt
of any cash proceeds from any payments, refunds, rebates or other similar payments and amounts under the Company’s operative
documents. Amounts outstanding under the Term Loan Agreement are secured by a security interest in substantially all of the properties
and assets of the Company.
As of March 6, 2019, the Company had
borrowed a total of $10.0 million under the Term Loan Facility and issued to Delek GOM warrants to purchase 238,095,238
shares of Common Stock; and Delek GOM fully exercised the warrants through a Loan Reduction Exercise, thereby extinguishing
the Company’s outstanding obligations to Delek GOM as of that date. Upon receiving the proceeds in two tranches, the
Company allocated the proceeds between debt and warrants on a relative fair value basis, recording a debt discount of
approximately $5.1 million. The exercise of the warrants through the extinguishment of the loan was accounted for as a
standard warrant exercise and an extinguishment of debt including a recognition of a loss in the amount of the debt discount
of approximately $5.1 million.
NOTE 6 – FAIR VALUE MEASUREMENT
Fair value is defined as the price that
would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. Fair value measurements are classified and disclosed in one of the following categories:
Level 1:
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. GulfSlope considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
|
Level 2:
|
Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that GulfSlope values using observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include non-exchange traded derivative financial instruments as well as warrants to purchase common stock and long-term incentive plan liabilities calculated using the Black-Scholes model to estimate the fair value as of the measurement date.
|
Level 3:
|
Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity).
|
As required by ASC 820-10, financial
assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The
Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may
affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
Fair Value on a Recurring Basis
The following table sets forth by level
within the fair value hierarchy the Company’s derivative financial instruments that were accounted for at fair value on a
recurring basis as of March 31, 2019:
Description
|
|
Quoted
Prices in
ActiveMarkets for
Identical Assets
(Level
1)
|
|
Significant
Other
Observable Inputs
(Level 2)
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
Total Carrying
Value as of
|
Derivative Financial Instrument at September 30, 2018
|
|
|
—
|
|
|
|
(271,710
|
)
|
|
|
—
|
|
|
|
(271,710
|
)
|
Changes in Fair Value at December 31, 2018
|
|
|
—
|
|
|
|
(196,266
|
)
|
|
|
—
|
|
|
|
(196,266
|
)
|
Changes in Fair Value at March 31, 2019
|
|
|
|
|
|
|
179,274
|
|
|
|
|
|
|
|
179,274
|
|
Derivative Financial Instrument at March 31, 2019
|
|
|
—
|
|
|
|
(288,702
|
)
|
|
|
—
|
|
|
|
(288,702
|
)
|
During the quarter ended March 31, 2019,
the Company issued warrants and stock options measured at fair value on a non-recurring basis.
NOTE 7 – COMMON STOCK/PAID IN
CAPITAL
As discussed in Note 5, between
June and November 2016, the Company issued 27.9 million warrants in conjunction with convertible notes payable. The warrants
have an exercise price of $0.03 and a term of the earlier of three years or upon a change of control. Based upon the
allocation of proceeds between the convertible notes payable and the warrants, approximately $452,422 was allocated to the
warrants. During June through August 2017, the maturity date of all of the Bridge Financing Notes was extended to January 15,
2018, in exchange for the issuance of 25% additional warrants. The warrants have an exercise price of $0.03 and the same
expiration date (three years from original transaction) as the original warrants. On January 15, 2018, the maturity date of
the Bridge Financing Notes was extended to April 16, 2018, in exchange for the issuance of 10% additional warrants (see Note 5
for status of notes). The warrants have an exercise price of $0.10 per share and the same expiration date (three years from
original transaction) as the original warrants. Through March 31, 2019, approximately 471,000 warrants have been
exercised.
The fair value of the warrants were determined using the Black
Scholes valuation model with the following key assumptions:
Warrants Issue Date
|
|
June 2016
|
|
|
July 2016
|
|
|
August 2016
|
|
|
November 2016
|
|
|
June 2017
|
|
|
July 2017
|
|
|
August 2017
|
|
|
January 2018
|
|
Warrants Outstanding
|
|
12.6
million
|
|
|
10.0
million
|
|
|
3.3
million
|
|
|
1.7
million
|
|
|
3.1
million
|
|
|
2.5
million
|
|
|
1.25
million
|
|
|
2.8
million
|
|
Stock Price (1)
|
|
$
|
0.054
|
|
|
$
|
0.040
|
|
|
$
|
0.032
|
|
|
$
|
0.029
|
|
|
$
|
0.025
|
|
|
$
|
0.019
|
|
|
$
|
0.016
|
|
|
$
|
0.11
|
|
Exercise Price
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Term (2)
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
2 years
|
|
|
|
2 years
|
|
|
|
2 years
|
|
|
|
1.5 years
|
|
Risk Free Rate
|
|
|
.87
|
%
|
|
|
.80
|
%
|
|
|
.88
|
%
|
|
|
1.28
|
%
|
|
|
1.35
|
%
|
|
|
1.35
|
%
|
|
|
1.33
|
%
|
|
|
1.89
|
%
|
Volatility
|
|
|
135
|
%
|
|
|
138
|
%
|
|
|
137
|
%
|
|
|
131
|
%
|
|
|
135
|
%
|
|
|
136
|
%
|
|
|
135
|
%
|
|
|
163
|
%
|
(1) Fair market value on the date of agreement.
(2) Average term.
Below is a summary of warrants issued in conjunction with convertible
notes which were paid in full as of September 30, 2018. The warrants are outstanding at March 31, 2019.
|
|
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
Exercise Price
|
|
|
|
Number Outstanding
|
|
Remaining Contractual
Life (Yrs)
|
|
|
Weighted Average
Exercise Price
|
|
|
|
Number
Exercisable
|
|
|
|
Weighted Average
Exercise Price
|
|
$
|
0.10
|
|
|
|
550,000
|
|
|
|
2.75
|
|
|
$
|
0.10
|
|
|
|
550,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
2.96
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
3.55
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
3.71
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
During the six months ended March 31, 2019,
the Company issued approximately 19.3 million shares of common stock and approximately 9.7 million warrants to accredited investors
in a private placement. The funds were received in the prior fiscal year and moved to equity during the quarter ended December
31, 2018. Based upon the allocation of proceeds between the common stock and the warrants, approximately $259,000 was allocated
to the warrants.
The fair value of the warrants were determined
using the Black Scholes valuation model with the following key assumptions:
|
December 2018
|
Number of Warrants Issued
|
|
9,662,500
|
|
Stock Price
|
$
|
0.044
|
|
Exercise Price
|
$
|
0.09
|
|
Term
|
|
3 years
|
|
Risk Free Rate
|
|
2.46
|
%
|
Volatility
|
|
149
|
%
|
As discussed in Note 5, as of March
6, 2019, the Company had borrowed a total of $10.0 million under a Term Loan Facility and issued to Delek GOM warrants to
purchase approximately 238 million shares of common Stock; and Delek GOM fully exercised the warrants through a Loan
Reduction Exercise and was issued approximately 238 million shares of common stock. Upon receiving the proceeds in two
tranches, the Company allocated the proceeds between debt and warrants on a relative fair value basis, recording a debt
discount of approximately $5.1 million. The exercise of the warrants through the extinguishment of the loan was accounted for
as a standard warrant exercise and an extinguishment of debt including a recognition of a loss in the amount of the debt
discount of approximately $5.1 million.
NOTE 8 – STOCK-BASED COMPENSATION
On January 1, 2017, 33.5
million stock options, with an exercise price of $0.0278 per share, were granted to 6 employees and 2 directors of the
Company. The CEO was not included in the award. The stock options vested 50% on January 1, 2017, and 50% on January 1, 2018.
The stock options are exercisable for seven years from the original grant date of January 1, 2017, until January 1, 2024.
On May 1, 2018, 500,000 stock options,
with an exercise price of $0.065 per share were granted to an employee. The stock options vested on the issue date. The stock options
are exercisable for approximately 7.5 years from the date of grant of May 1, 2018 to December 31, 2025. These stock options were
awarded from the Company’s 2014 Omnibus Incentive Plan.
On June 1, 2018, 67.5 million stock options,
with an exercise price of $0.075 per share were granted to employees, directors and contractors. 18.5 million of the stock options
vested on June 1, 2018, 24 million will vest on June 1, 2019 and 25 million will vest on June 1, 2020 provided the holder continues
to serve as an employee or a director on the vesting date. The stock options are exercisable for approximately 7.5 years from the
grant date of June 1, 2018, to December 31, 2025. 49 million of these stock options were awarded from the Company’s 2018 Omnibus
Incentive Plan and 18.5 million stock options were inducement awards.
On
January 2, 2019 the Company issued 1 million stock options to a former employee and contractor. 50% of the stock options
vested on the issue date and the remainder will vest in July 2019. The stock options were valued at approximately $35,000
to be recognized over the service period of seven months. The stock options are exercisable until December 31, 2025.
The fair value of the stock-options granted during 2018 and
2019 were determined using the Black Scholes valuation model with the following key assumptions:
Date of Grant
|
|
May 1, 2018
|
|
|
June 1, 2018
|
|
|
January 2, 2019
|
|
Number of Stock Options Granted
|
|
|
500,000
|
|
|
|
67,500,000
|
|
|
|
1,000,000
|
|
Stock Price
|
|
$
|
0.065
|
|
|
$
|
0.075
|
|
|
$
|
0.045
|
|
Exercise Price
|
|
$
|
0.065
|
|
|
$
|
0.075
|
|
|
$
|
0.045
|
|
Expected Life of Options
|
|
|
4.25 years
|
|
|
|
4.25 years
|
|
|
|
3.75 years
|
|
Risk Free Rate
|
|
|
2.74
|
%
|
|
|
2.675
|
%
|
|
|
2.51
|
%
|
Volatility
|
|
|
145.21
|
%
|
|
|
145.21
|
%
|
|
|
126.37
|
%
|
The
Company used the historical volatility of its stock for the period June 2014, through June 1, 2018, for the Black Scholes computation.
The Company has no historical data regarding the expected life of the options and therefore used the simplified method of calculating
the expected life. The risk-free rate was calculated using the U.S. Treasury constant maturity rates similar to the expected
life of the options, as published by the Federal Reserve. The Company has no plans to declare any future dividends.
The
Company used the historical volatility of its stock for the prior year to value the stock options granted in 2019. The Company
has no historical data regarding the expected life of the options and therefore used the simplified method of calculating the expected
life. The risk-free rate was calculated using the U.S. Treasury constant maturity rates similar to the expected life of the
options, as published by the Federal Reserve. The Company has no plans to declare any future dividends.
The following table summarizes the Company’s
stock option activity during the six months ended March 31, 2019:
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Term
(In years)
|
|
|
Average Intrinsic
Value
|
|
Outstanding at September 30, 2018
|
|
|
103,500,000
|
|
|
|
0.0605
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,000,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
104,500,000
|
|
|
$
|
0.0604
|
|
|
|
2.82
|
|
|
|
$1.5 million
|
|
Vested and expected to vest
|
|
|
104,500,000
|
|
|
$
|
0.0604
|
|
|
|
2.82
|
|
|
|
$1.5 million
|
|
Exercisable at March 31, 2019
|
|
|
55,000,000
|
|
|
$
|
0.0475
|
|
|
|
2.82
|
|
|
|
$1.5 million
|
|
There was approximately $1.5 million of
intrinsic value for the options outstanding as of March 31, 2019. As of March 31, 2019, there was $1.9 million of unrecognized
stock-based compensation to be recognized over a weighted average period of 2.82 years.
Stock-based compensation cost is measured
at the grant date, using the estimated fair value of the award, and is recognized over the required vesting period. The Company
recognized $409,103 and zero in stock based compensation during the three months ended March 31, 2019 and March 31, 2018,
respectively. A portion of these costs, $223,247 and zero were capitalized to unproved properties for the three months ended March
31, 2019 and March 31, 2018, respectively, with the remainder recorded as general and administrative expenses for each respective
period. The Company recognized $802,553 and
$93,381 in stock based compensation for six months ended March 31, 2019 and 2018, respectively. A portion of these costs
$541,905, and $27,875 were capitalized to unproved properties for the six months ended March 31, 2019 and 2018, respectively.
NOTE 9 – COMMITMENTS AND
CONTINGENCIES
In July 2018, the Company entered
into a thirty-nine month lease for approximately 5,000 square feet of office space in 4 Houston Center in downtown Houston.
Annual base rent is approximately $94 thousand for the first 18 months, increasing to approximately $97 thousand and $99
thousand, respectively during the remaining term of the lease.
The Company reached an agreement with a
vendor in August 2018 for the settlement of approximately $1 million in debt. The vendor was paid approximately $0.16 million in
cash and 10 million shares of GulfSlope common stock. The agreement contains a provision that upon the sale of the common stock
if the original debt is not fully satisfied, full payment will be made under a mutually agreed payment plan. If the stock is sold
for a gain any surplus in excess of $1.3 million shall be a credit against future purchases from the vendor. The agreement was
determined to meet the definition of a derivative in accordance with ASC 815. At March 31, 2019 there is a derivative financial
instrument liability of approximately $0.3 million.
In October 2018, the Company purchased
a directors and officers’ insurance policy for approximately $160,000 and financed $146,000 of the premium by executing a
note payable. The balance of the note payable at March 31, 2019, is approximately $81,000.
NOTE 10 – SUBSEQUENT EVENTS
Insurance proceeds for an underground
control of well event were received in April and May 2019. Several partial payments totaling approximately $8 million were
received for 100% working interest.
Loan proceeds of $1 million were received
under the $11 million Term Loan Facility described in Note 5 in April 2019.