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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended
December 31, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from _______________ to
________________
Commission
File No.
000-51638
GULFSLOPE ENERGY, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware |
|
16-1689008 |
(State
or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
| |
|
|
1000 Main St.,
Suite 2300,
Houston,
Texas
(Address of principal executive offices) |
|
77002
(zip code) |
| |
|
|
(281)
918-4100
(Registrant’s telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: None
|
Title
of each class |
Trading
Symbol |
Name
of each
exchange on
which registered |
|
Common stock, par value $0.001 per share |
GSPE |
OTCPK |
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See definitions of “large
accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large
accelerated filer ☐ |
Accelerated
filer ☐ |
Non-accelerated
filer ☐ |
Smaller
reporting company
☒ |
Emerging
growth company
☐ |
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒
The
number of outstanding shares of the registrant’s common stock,
$0.001 par value, on February 10, 2023, was
1,268,240,346.
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q (“Report”) contains forward-looking
statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act
of 1934. All statements, other than statements of historical fact
included in this communication, regarding our strategy, future
operations, financial position, estimated revenues and losses,
projected costs, prospects, plans and objectives of management are
forward-looking statements. When used in this communication, the
words “could,” “believe,” “anticipate,” “intend,” “estimate,”
“expect,” “project,” “forecast, “may,” “objective,” “plan,” and
similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain
such identifying words. These forward-looking statements are based
on our current expectations and assumptions about future events and
are based on currently available information as to the outcome and
timing of future events.
We
caution you that these forward-looking statements are subject to
numerous risks and uncertainties, most of which are difficult to
predict and many of which are beyond our control. These risks
include, but are not limited to, commodity price volatility,
inflation, lack of availability of drilling and production
equipment and services, environmental risks, drilling and other
operating risks, regulatory changes, the uncertainty inherent in
estimating reserves and in projecting future rates of production,
cash flow and access to capital, the timing of development
expenditures, and other factors that may affect our future results
and business, generally, including those discussed in the Company’s
periodic reports that are filed with the SEC and available on the
SEC’s website (http://www.sec.gov).
Should
one or more of these risks occur, or should underlying assumptions
prove incorrect, our actual results and plans could differ
materially from those expressed in any forward-looking statements.
All forward-looking statements, expressed or implied, are expressly
qualified in their entirety by this cautionary statement. This
cautionary statement should also be considered in connection with
any subsequent written or oral forward-looking statements that we
or persons acting on our behalf may issue. Except as otherwise
required by applicable law, we disclaim any duty to update any
forward-looking statements, to reflect events or circumstances
after the date of this communication.
PART
I – FINANCIAL STATEMENTS (Unaudited)
December
31, 2022
CONTENTS
PART I – FINANCIAL STATEMENTS
Item 1. Financial Statements
GulfSlope Energy, Inc.
Condensed
Balance Sheets
(Unaudited)
| |
|
December 31,
2022 |
|
|
September 30,
2022 |
|
|
Assets |
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
| Cash |
|
$ |
63,638 |
|
|
$ |
135,381 |
|
|
Accounts Receivable, Net |
|
|
— |
|
|
|
12,925 |
|
|
Prepaid Expenses and Other Current Assets |
|
|
31,726 |
|
|
|
33,004 |
|
|
Total Current Assets |
|
|
95,364 |
|
|
|
181,310 |
|
|
Property and Equipment, net |
|
|
667 |
|
|
|
848 |
|
|
Oil and Natural Gas Properties, Full Cost Method of Accounting,
Unproved Properties |
|
|
5,306,415 |
|
|
|
5,288,915 |
|
|
Total Non-Current Assets |
|
|
5,307,082 |
|
|
|
5,289,763 |
|
|
Total Assets |
|
$ |
5,402,446 |
|
|
$ |
5,471,073 |
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
Accounts Payable |
|
$ |
229,968 |
|
|
$ |
135,391 |
|
|
Related Party Payable |
|
|
404,469 |
|
|
|
404,469 |
|
|
Related Party Accrued Interest Payable |
|
|
3,512,343 |
|
|
|
3,401,489 |
|
|
Loans from Related Parties |
|
|
8,725,500 |
|
|
|
8,725,500 |
|
|
Accrued Interest Payable |
|
|
144,769 |
|
|
|
138,020 |
|
|
Convertible Notes Payable, net of Debt Discount |
|
|
251,258 |
|
|
|
227,000 |
|
|
Derivative Financial Instruments |
|
|
1,018,523 |
|
|
|
959,222 |
|
|
Total Current Liabilities |
|
|
14,286,830 |
|
|
|
13,991,091 |
|
|
Total Liabilities |
|
|
14,286,830 |
|
|
|
13,991,091 |
|
|
Commitments and Contingencies (Note 9) |
|
|
|
|
|
|
|
|
|
Stockholders’ (Deficit) Equity |
|
|
|
|
|
|
|
|
|
Preferred Stock; par value ($0.001);
Authorized 50,000,000 shares
none issued or outstanding |
|
|
— |
|
|
|
— |
|
|
Common Stock; par value ($0.001);
Authorized 1,500,000,000
shares; issued and outstanding 1,268,240,346 and
1,268,240,346 as of
December 31, 2022 and September 30, 2022, respectively |
|
|
1,268,240 |
|
|
|
1,268,240 |
|
|
Additional Paid-in-Capital |
|
|
59,116,487 |
|
|
|
59,116,487 |
|
|
Accumulated Deficit |
|
|
(69,269,111 |
) |
|
|
(68,904,745 |
) |
|
Total Stockholders’ (Deficit) Equity |
|
|
(8,884,384 |
) |
|
|
(8,520,018 |
) |
|
Total Liabilities and Stockholders’ (Deficit) Equity |
|
$ |
5,402,446 |
|
|
$ |
5,471,073 |
|
The
accompanying notes are an integral part to these condensed
financial statements.
GulfSlope
Energy, Inc.
Condensed Statements of Operations
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
For the Three Months Ended
December 31, |
|
| |
|
2022 |
|
|
2021 |
|
| Revenues |
|
$ |
— |
|
|
$ |
— |
|
|
General and Administrative Expenses |
|
|
254,705 |
|
|
|
446,960 |
|
| Net
Loss from Operations |
|
|
(254,705 |
) |
|
|
(446,960 |
) |
|
Other Income/(Expenses): |
|
|
|
|
|
|
|
|
|
Interest Expense, net |
|
|
(131,040 |
) |
|
|
(138,238 |
) |
|
Gain on Derivative Financial Instruments |
|
|
21,379 |
|
|
|
80,314 |
|
|
Provision for Income Taxes |
|
|
— |
|
|
|
— |
|
|
Net Loss |
|
$ |
(364,366 |
) |
|
$ |
(504,884 |
) |
| Loss
Per Share - Basic and Diluted |
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
| Weighted
Average Shares Outstanding – Basic and Diluted |
|
|
1,268,240,346 |
|
|
|
1,268,240,346 |
|
The
accompanying notes are an integral part to these condensed
financial statements.
GulfSlope
Energy, Inc.
Statements of Stockholders’ Equity
(unaudited)
For
the Three Months Ended December 31, 2022
| |
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Net |
|
| |
|
Common |
|
|
Paid-in |
|
|
Accumulated |
|
|
Stockholders’ |
|
| |
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Equity |
|
|
Balance at September 30, 2022 |
|
|
1,268,240,346 |
|
|
$ |
1,268,240 |
|
|
$ |
59,116,487 |
|
|
$ |
(68,904,745 |
) |
|
$ |
(8,520,018 |
) |
|
Net Loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(364,366 |
) |
|
|
(364,366 |
) |
|
Balance at December 31, 2022 |
|
|
1,268,240,346 |
|
|
$ |
1,268,240 |
|
|
$ |
59,116,487 |
|
|
$ |
(69,269,111 |
) |
|
$ |
(8,884,384 |
) |
For
the Three Months Ended December 31, 2021
| |
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
| |
|
Common |
|
|
Paid-in |
|
|
Accumulated |
|
|
Stockholders’ |
|
| |
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Equity |
|
|
Balance at September 30, 2021 |
|
|
1,268,240,346 |
|
|
$ |
1,268,240 |
|
|
$ |
58,999,585 |
|
|
$ |
(60,207,991 |
) |
|
$ |
59,834 |
|
|
Stock based compensation |
|
|
— |
|
|
|
— |
|
|
|
31,775 |
|
|
|
— |
|
|
|
31,775 |
|
|
Net Loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(504,884 |
) |
|
|
(504,884 |
) |
|
Balance at December 31, 2021 |
|
|
1,268,240,346 |
|
|
$ |
1,268,240 |
|
|
$ |
59,031,360 |
|
|
$ |
(60,712,875 |
) |
|
$ |
(413,275 |
) |
The
accompanying notes are an integral part to these condensed
financial statements.
GulfSlope
Energy, Inc.
Condensed Statements of Cash Flows
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
For the Three Months Ended
December 31, |
|
| |
|
2022 |
|
|
2021 |
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(364,366 |
) |
|
$ |
(504,884 |
) |
|
Adjustments to Reconcile Net Loss to Net Cash Used In Operating
Activities: |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
182 |
|
|
|
456 |
|
|
Stock Based Compensation |
|
|
— |
|
|
|
31,775 |
|
| Gain
on Derivative Financial Instruments |
|
|
(21,379 |
) |
|
|
(80,314 |
) |
| Debt
Discount Amortization |
|
|
13,437 |
|
|
|
21,844 |
|
|
Changes in Operating Assets and Liabilities: |
|
|
|
|
|
|
|
|
|
Accounts Receivable |
|
|
12,925 |
|
|
|
— |
|
|
Prepaid Expenses and Other Current Assets |
|
|
1,278 |
|
|
|
(218,473 |
) |
|
Accounts Payable |
|
|
94,577 |
|
|
|
59,092 |
|
|
Accrued Interest Payable |
|
|
117,603 |
|
|
|
116,394 |
|
|
Net Cash Used In Operating Activities |
|
|
(145,743 |
) |
|
|
(574,110 |
) |
| |
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
| Investments in
Oil and Gas Properties |
|
|
(17,500 |
) |
|
|
(19,317 |
) |
|
Net Cash Used In Investing Activities |
|
|
(17,500 |
) |
|
|
(19,317 |
) |
| |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Proceeds From Convertible Promissory Notes |
|
|
91,500 |
|
|
|
— |
|
|
Net Cash Provided By Financing Activities |
|
|
91,500 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| Net
Decrease in Cash |
|
|
(71,743 |
) |
|
|
(593,427 |
) |
|
Beginning Cash Balance |
|
|
135,381 |
|
|
|
1,517,522 |
|
|
Ending Cash Balance |
|
$ |
63,638 |
|
|
$ |
924,095 |
|
| |
|
|
|
|
|
|
|
|
|
Non-Cash Financing and Investing Activities: |
|
|
|
|
|
|
|
|
|
Capital Expenditures in Accounts Payable |
|
$ |
— |
|
|
|
26,253 |
|
|
Debt Discount Related to Issuance of Convertible Promissory
Notes |
|
|
89,179 |
|
|
|
— |
|
The
accompanying notes are an integral part to these condensed
financial statements.
GulfSlope
Energy, Inc.
Notes to Condensed Financial Statements
December
31, 2022
(Unaudited)
NOTE
1 – ORGANIZATION AND NATURE
OF BUSINESS
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 currently has under lease one
federal Outer Continental Shelf block (referred to as “prospect,”
“portfolio” or “leases”) and licensed three-dimensional (3-D)
seismic data across its area of concentration.
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 generally accepted accounting principles (“GAAP”) in the
United States of America 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
generally accepted accounting principles in the United States of
America have been omitted 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, 2022, which
were included in the Company’s Annual Report on Form 10-K for the
fiscal year ended September 30, 2022 and filed with the Securities
and Exchange Commission on December 29, 2022.
Cash
GulfSlope
considers highly liquid investments with original maturities to the
Company of three months or less to be cash equivalents. There were
no cash equivalents at December 31, 2022 and September 30,
2022.
Liquidity /
Going Concern
The
Company has incurred accumulated losses as of December 31, 2022 of
$69.3 million, has
negative working capital of $14.2 million and
for the three months ended December 31, 2022 generated losses of
$0.4 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 December 31, 2022, we had $0.06 million of
unrestricted cash on hand. The Company estimates that it will need
to raise a minimum of $10.0
million to meet its obligations and planned expenditures. The
$10.0
million is comprised primarily of capital project expenditures as
well as general and administrative expenses. It does not include
any amounts due under outstanding debt obligations, which amounted
to $12.6 million of current
principal and accrued interest as of December 31, 2022. The Company
plans to finance operations and planned expenditures through the
issuance of equity securities, debt financings and farm-out
agreements, asset sales or mergers. 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, or that obligations can
be extended. If the Company is not successful in obtaining
financing or extending obligations, 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.
Accounts
Receivable
The
Company records an accounts receivable for operations expense
reimbursements due from joint interest partners and also from
normal operations. 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, the receivable
and the underlying asset are assessed for recovery. As of December
31, 2022 and September 30, 2022, there was no allowance for
doubtful accounts receivable. Gross accounts receivable was
nil at December 31,
2022 and approximately $13,000
at September 30, 2022, respectively.
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 that considers, 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.
As of
December 31, 2022, the Company’s oil and gas properties consisted
of unproved properties, capitalized costs and no proved
reserves.
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.
Derivative
Financial Instruments
The
accounting treatment of derivative financial instruments requires
that the Company record certain
embedded conversion options and warrants as liabilities at their
fair value as of the inception date of the agreement and at fair
value as of each subsequent balance sheet date with any change in
fair value recorded as income or expense. As a result of entering
into certain note agreements, for which such instruments contained
a variable conversion feature with no floor, the Company has adopted a sequencing policy
in accordance with ASC 815-40-35-12 whereby all future instruments
issued after such variable conversion feature instruments may be
classified as a derivative liability with the exception of
instruments related to share-based compensation issued to employees
or directors, as long as the certain variable convertible
instruments exist.
Basic and
Dilutive Earnings Per Share
Basic
income (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 convertible notes payable. The number of
potential common shares outstanding relating to stock options and
warrants, is computed using the treasury stock method. The number
of potential common shares related to convertible notes payable is
determined using the if-converted method.
As
the Company has incurred losses for the three months ended December
31, 2022, and 2021, the potentially dilutive shares are
anti-dilutive and are not added into the loss per share
calculations. As of December 31, 2022, and 2021, there were
353,099,289
and
288,396,467 potentially dilutive shares,
respectively.
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.
Recent
Accounting Pronouncements Not Yet
Adopted
In August 2020, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2020-06, Accounting
for Convertible Instruments and Contracts in an Entity’s Own
Equity, which simplifies the accounting for certain financial
instruments with characteristics of liabilities and equity,
including convertible instruments and contracts in an entity’s own
equity. Additionally, ASU 2020-06 requires the application of the
if-converted method to calculate the impact of convertible
instruments on diluted earnings per share (EPS), which is
consistent with the Company’s accounting treatment under the
current standard. This standard is effective for small reporting
companies who adopt the private Company rules for fiscal years
beginning after December 15, 2023. The adoption of ASU 2020-06 is
not expected to have a material impact on the Company’s financial
statements or disclosures.
The
Company has evaluated all other recent accounting pronouncements
and believes either they are not applicable or 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 one federal
Outer Continental Shelf block and has licensed 2.2 million
acres of three-dimensional (3-D) seismic data in its area of
concentration. Our lease expires on October 31, 2025.
As of
December 31, 2022, the Company’s oil and natural gas properties
consisted of unproved properties, capitalized exploration costs and
no proved reserves. During the three months ended December 31,
2022, and 2021, the Company capitalized $0.018
and approximately $0.05 million
to oil and gas properties, respectively. During the three months
ended December 31, 2022, and 2021, the Company capitalized nil of
interest expense to oil and natural gas properties,
respectively.
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, 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 $
per share of common stock (the then offering price of shares of
common stock to unaffiliated investors). As of December 31, 2022,
the total amount owed to John Seitz is $8,675,500. This amount
is included in loans from related parties within the condensed
balance sheets. There was approximately $3.5 million and $3.07
million of unpaid interest associated with these loans included in
accrued interest payable within the balance sheet as of December
31, 2022 and 2021, respectively.
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 5). This amount is included in loans from related parties
within the condensed balance sheets.
Domenica
Seitz, CPA, related to John Seitz, has provided accounting services
to the Company through September 2020 as a consultant and beginning
October 2020 as an employee. The total amount payable to Domenica
Seitz is approximately $346,000
for unpaid past services as of December 31, 2022 and September 30,
2022, respectively. During the three months ended December 31, 2022
and 2021, salary of approximately $8,900 and $19,000,
respectively, was paid.
NOTE
5 – CONVERTIBLE
NOTES PAYABLE
The
Company’s convertible promissory notes consisted of the following
as of September 30, 2022 and December 31, 2022.
|
|
|
September
30, 2022 |
|
|
|
December
31, 2022 |
|
|
|
|
Notes |
|
|
Discount |
|
|
Notes,
Net
of Discount |
|
|
|
Notes |
|
|
Discount |
|
|
Notes,
Net
of Discount |
|
|
Bridge
Financing Notes |
|
$ |
227,000 |
|
|
$ |
— |
|
|
$ |
227,000 |
|
|
|
$ |
227,000 |
|
|
$ |
— |
|
|
$ |
227,000 |
|
|
2022
Convertible Debenture |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
100,000 |
|
|
|
(75,742 |
) |
|
|
24,258 |
|
|
Total |
|
$ |
227,000 |
|
|
$ |
— |
|
|
$ |
227,000 |
|
|
|
$ |
327,000 |
|
|
$ |
(75,742 |
) |
|
$ |
251,258 |
|
Bridge Financing Notes
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,
including $222,000
from related parties. These notes and associated warrants had a
maturity of one year (which has been extended at
maturity to April 30, 2024), 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.
The note balances as of December 31, 2022 and September 30, 2022
were $277,000, with unamortized debt
discounts of nil, respectively. As noted above, on April 30, 2022,
the maturity date related to these notes and associated warrants
was extended to April 30, 2024. In consideration
for the extension of the notes in April 2022, the Company extended
the term of the related warrants until April 30, 2024 and recognized
approximately $85,000 of loss on
extinguishment of debt when the incremental fair value pre
modification was compared to post modification and the incremental
value of the modified warrants was over
10% of the old note and as such the warrants were expensed
immediately.
2022 Convertible Debenture
In
October 2022, 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 $650,000 of convertible debentures
(“Convertible Debentures”). On October 13, 2022, approximately
$50,000 of Convertible
Debentures were purchased upon the signing of the SPA (the
“First Closing”).
The Convertible Debentures accrue interest at eight percent per annum, and no
earlier than six months after the issue date, are convertible at
the option of the holder into common stock at a conversion rate of
65% of the
lowest volume weighted adjusted price (as reported by
OTCQB,
OTCQX, Pink Sheets electronic quotation system or applicable
trading market (the “OTC”) as reported by a reliable reporting
service (“Reporting Service”) designated by the Holder (i.e.
Bloomberg, LP) for the ten
consecutive trading days immediately preceding
conversion.
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. Accordingly, the embedded conversion feature was recorded
at fair value at issuance and will be subsequently remeasured to
fair value at each reporting period.
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:
|
|
Tranche
1
October 13,
2022
|
Tranche
2
December 5,
2022
|
|
Tranche
1
December 31,
2022
|
|
|
Tranche
1
December 31,
2022
|
|
|
Stock
Price |
$ |
0.0052 |
|
|
$ |
0.0041 |
|
|
$ |
0.0045 |
|
|
$ |
0.0045 |
|
|
Volatility |
|
158.12 |
% |
|
|
156.37 |
% |
|
|
168.03 |
% |
|
|
159.49 |
% |
|
Remaining
Term |
|
0.98 |
|
|
|
0.98 |
|
|
|
0.77 |
|
|
|
0.91 |
|
|
Risk
Free Rate |
|
4.46 |
% |
|
|
4.77 |
% |
|
|
4.73 |
% |
|
|
4.73 |
% |
In addition to the fixed exercise price noted above, the model
incorporates the variable conversion price which is simulated as
65% of the
lowest trading price within the ten consecutive days preceding
presumed conversion.
The Company’s convertible promissory notes consisted of the
following as of December 31, 2022. Debt discount
amortization for the quarter ended December 31, 2022 was
approximately 13,000.
|
Notes Payable at December 31, 2022 |
|
Notes |
|
Discount |
|
Notes, Net of Discount |
|
Bridge Financing Notes |
|
$ |
227,000 |
|
|
$ |
— |
|
|
$ |
227,000 |
|
|
2022 Convertible Debenture |
|
|
100,000 |
|
|
|
(75,742 |
) |
|
|
24,258 |
|
|
Total |
|
$ |
327,000 |
|
|
$ |
(75,742 |
) |
|
$ |
251,258 |
|
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.
The Company 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 the Company 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 September
30, 2022 and December 31, 2022, respectively:
|
Description |
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level
3)
|
|
|
Total Fair
Value as of |
|
|
Derivative Financial Instrument at September 30, 2022 |
|
$ |
— |
|
|
$ |
(959,222 |
) |
|
$ |
— |
|
|
$ |
(959,222 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instrument at December 31, 2022 |
|
$ |
— |
|
|
$ |
(1,018,523 |
) |
|
$ |
— |
|
|
$ |
(1,018,523 |
) |
The change in derivative financial instruments for the three months
ended December 31, 2022 is as follows:
|
September
30, 2022 balance |
|
$ |
(959,222 |
) |
|
New
derivative instruments issued |
|
|
(80,679 |
) |
|
Derivative
instruments extinguished |
|
|
— |
|
|
Change
in fair value |
|
|
21,378 |
|
|
December
31, 2022 balance |
|
$ |
(1,018,523 |
) |
Non-recurring
fair value assessments include impaired oil and natural gas
property assessments and stock-based compensation. There was no
impairment charge recorded for the quarters ended December 31, 2022
and 2021, respectively. The Company recorded stock-based
compensation of nil and approximately
$32,000
for the three months ended December 31, 2022 and 2021,
respectively.
NOTE
7 – COMMON
STOCK/PAID IN CAPITAL
The
following table summarizes the Company’s outstanding warrants at
September 30, 2022 and December 31, 2022, respectively:
|
Warrants |
|
|
Number of Options |
|
|
Weighted Average
Exercise Price |
|
|
Weighted Average
Remaining
Contractual Term
(In years) |
|
| Outstanding
at September 30, 2022 |
|
|
|
64,665,000 |
|
|
$ |
0.040 |
|
|
|
2.75 |
|
| Granted |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Exercised |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Expired |
|
|
|
2,200,000 |
|
|
$ |
0.100 |
|
|
|
— |
|
| Outstanding
at December 31, 2022 |
|
|
|
62,465,000 |
|
|
$ |
0.023 |
|
|
|
1.45 |
|
NOTE
8 – STOCK-BASED
COMPENSATION
Stock-based
compensation cost is measured at the grant date, based on the
estimated fair value of the award using the Black Scholes option
pricing model, and is recognized over the vesting period. The
Company recognized stock-based compensation of nil and approximately
$32,000 for the
three months ended December 31, 2022 and 2021, respectively. Of the
$32,000 of
stock-based compensation recognized for the three months ended
December 31, 2021, all was recorded as compensation expense within
general and administrative expense.
The following table summarizes the Company’s stock option activity
at September 30, 2022 and for the three months ended December 31,
2022:
| |
|
Number of Options |
|
|
Weighted Average
Exercise Price |
|
|
Weighted Average
Remaining
Contractual Term
(In years) |
|
| Outstanding at September 30, 2022 |
|
|
146,000,000 |
|
|
$ |
0.0444 |
|
|
|
2.8 |
|
| Granted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Cancelled |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Outstanding at December 31,
2022 |
|
|
146,000,000 |
|
|
$ |
0.0444 |
|
|
|
2.51 |
|
| Exercisable at December 31, 2022 |
|
|
146,000,000 |
|
|
$ |
0.0444 |
|
|
|
2.51 |
|
As of
December 31, 2022, there was no unrecognized stock-based
compensation expense.
NOTE
9 – 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 was
approximately $94,000 for
the first 18 months, increasing to approximately $97,000 and
$99,000 respectively
during the remaining term of the lease. The lease term ended on
September 30, 2021, and the Company
entered into a twelve-month lease
that could be terminated with at least
30 days prior written notice. The lease was terminated in
August 2022 and the company
made alternative arrangements and entered into a new month to month
lease.
The
Company reached an agreement in August 2018 for the settlement of
approximately $1 million in debt owed to a
third party. 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. On December 31, 2022 and
September 30, 2022, there is a fair value liability of
approximately $781,000 and $784,000, respectively, which is
included within Derivative Financial Instruments on the condensed
balance sheet.
NOTE
10 – SUBSEQUENT
EVENTS
A
convertible promissory note facility for up to $125,000 was transacted with a
related party in February 2023. Through the date of this filing
$65,000 has been
borrowed.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Forward-looking
Statements
The
following discussion and analysis should be read in conjunction
with our accompanying unaudited condensed consolidated financial
statements and the notes to those financial statements included in
Item 1 of this Quarterly Report on Form 10-Q. The following
discussion contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, Section
27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 (the “Exchange Act”). These forward-looking
statements involve risks, uncertainties and assumptions. If the
risks or uncertainties materialize or the assumptions prove
incorrect, our results may differ materially from those expressed
or implied by such forward-looking statements and assumptions. All
statements other than statements of historical fact are statements
that could be deemed forward-looking statements, such as those
statements that address activities, events or developments that we
expect, believe or anticipate will or may occur in the future.
These statements are based on certain assumptions and analyses made
by us in light of our experience and perception of historical
trends, current conditions, expected future developments and other
factors we believe are appropriate in the circumstances. Known
material risks that may affect our financial condition and results
of operations are discussed in Item 1A, Risk Factors of our Annual
Report on Form 10-K for the year ended September 30, 2022 and this
Quarterly Report on Form 10-Q, Part II, Item 1A, Risk Factors, and
may be discussed or updated from time to time in subsequent reports
filed with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date hereof. We assume no
obligation, nor do we intend to update these forward-looking
statements. Unless the context requires otherwise, references in
this Quarterly Report on Form 10-Q to “GulfSlope” “we,” “us,” “our”
and the “Company” refer to GulfSlope Energy, Inc.
Overview
GulfSlope
Energy, Inc. is an independent crude oil and natural gas
exploration and production company whose interests are concentrated
in the United States Gulf of Mexico federal waters. We are a
technically driven company, and we use our licensed 2.2 million
acres of advanced three-dimensional (3-D) seismic data to identify,
evaluate, and acquire assets with attractive economic profiles.
GulfSlope Energy commenced commercial operations in March 2013.
GulfSlope Energy was originally organized as a Utah corporation in
2004 and became a Delaware corporation in 2012.
We
have focused our operations in the Gulf of Mexico because we
believe this area provides us with favorable geologic and economic
conditions, including multiple reservoir formations, comprehensive
geologic databases, extensive infrastructure, relatively favorable
royalty regime, and an attractive acquisition market and because
our management and technical teams have significant experience and
technical expertise in this geologic province. Additionally, we
licensed 2.2 million acres of advanced 3-D seismic data, a
significant portion of which has been enhanced by new,
state-of-the-art reprocessing and noise attenuation techniques
including reverse time migration depth imaging. We have used our
broad regional seismic database and our reprocessing efforts to
generate and high-grade oil and natural gas prospects. The use of
our extensive seismic database, coupled with our ability,
knowledge, and expertise to effectively reprocess this seismic
data, allows us to further optimize our operations and to
effectively evaluate acquisition and joint venture opportunities.
We consistently assess opportunities for drilling and producing
property acquisitions in order to deploy capital as efficiently as
possible. We have given preference to areas with water depths of
450 feet or less where production infrastructure already exists,
which will allow for any discoveries to be developed rapidly and
cost effectively with the goal to reduce economic risk while
increasing returns.
We
have historically operated our business with working capital
deficits and these deficits have been funded by equity and debt
investments and loans from management. As of December 31, 2022, we
had $0.06 million of cash on hand. The Company estimates that it
will need to raise a minimum of $10.0 million to meet its
obligations and planned expenditures through February 2024 assuming
execution of our prospect drilling and acquisition strategy. The
Company plans to finance operations and planned expenditures
through equity and/or debt financings, farm-out agreements, and/or
other transactions. There are no assurances that financing will be
available with acceptable terms, if at all.
Competitive
Advantages
Experienced management. Our management team has a track
record of finding, developing and producing oil and natural gas in
various hydrocarbon producing basins including the US Gulf of
Mexico. Our team has significant experience in acquiring and
operating oil and natural gas producing assets worldwide with
particular emphasis on conventional reservoirs. We deployed a
technical team with over 150 years of combined industry experience
finding and developing oil and natural gas in the development and
execution of our technical strategy. We believe the application of
advanced geophysical techniques on a specific geographic area with
unique geologic features such as conventional reservoirs whose
trapping configurations have been obscured by overlying salt layers
provides us with a competitive advantage.
Advanced seismic image processing. Commercial improvements
in 3-D seismic data imaging and the development of advanced
processing algorithms, including pre-stack depth, beam, and reverse
time migration have allowed the industry to better distinguish
hydrocarbon traps and identify previously unknown prospects.
Specifically, advanced processing techniques improve the definition
of the seismic data from a scale of time to a scale of depth, thus
locating the images in three dimensions. The Company has invested
significant technical person hours in the reprocessing and
interpretation of seismic data. We believe the proprietary
reprocessing and interpretation and the contiguous nature of our
licensed 3-D seismic data gives us an advantage over other
exploration and production companies operating in our core
area.
Industry leading position in our core area. We have
licensed 2.2 million acres of 3-D seismic data which covers over
440 Outer Continental Shelf (“OCS”) Federal lease blocks on the
highly prolific Louisiana outer shelf, offshore US Gulf of Mexico.
We believe the proprietary and state-of-the-art reprocessing of our
licensed 3-D seismic data, along with our proprietary and
leading-edge geologic depositional and petroleum trapping models,
gives us an advantage in identifying and high grading drilling and
acquisition opportunities in our core area.
Technical
Strategy
We
believe that a major obstacle to identifying potential hydrocarbon
accumulations globally has been the inability of seismic technology
to accurately image deeper geologic formations because of overlying
massive, extensive, and complex salt bodies. Large and thick
laterally extensive subsurface salt layers highly distort the
seismic ray paths traveling through them, which often has led to
misinterpretation of the underlying geology and the potential major
accumulations of oil and gas. We believe the opportunity exists for
a technology-driven company to extensively apply advanced seismic
acquisition and processing technologies, with the goal of achieving
attractive commercial discovery rates for exploratory wells, and
their subsequent appraisal and development, potentially having a
very positive impact on returns on invested capital. These tools
and techniques have been proven to be effective in deep water
exploration and production worldwide, and we are using them to
identify and drill targets below the salt bodies in an area of the
shallower waters of the Gulf of Mexico where industry activity has
largely been absent for over 20 years. GulfSlope management led the
early industry teams in their successful efforts to discover and
develop five new fields below the extensive salt bodies in our core
area during the 1990’s, which have produced over 125 million
barrels of oil equivalent.
Our
technical approach to exploration and development is to deploy a
team of highly experienced geo-scientists who have current and
extensive understanding of the geology and geophysics of the
petroleum system within our core area, thereby decreasing the
traditional timing and execution risks of advancing up a learning
curve. For data licensing, re-processing and interpretation, our
technical staff has prioritized specific geographic areas within
our 2.2 million acres of seismic coverage, with the goal to
optimize capital outlays.
Modern
3-D seismic datasets with acquisition parameters that are optimal
for improved imaging at multiple depths are readily available in
many of these sub-basins across our core area and can be licensed
on commercially reasonable terms. The application of
state-of-the-art seismic imaging technology is necessary to
optimize delineation of prospective structures and to detect the
presence of hydrocarbon-charged reservoirs below many complex salt
bodies. An example of such a seismic technology is reverse time
migration, which we believe to be the most accurate, fastest, and
yet affordable, seismic imaging technology for critical depth
imaging available today.
Lease
and Partner Strategy
Our
prospect identification and analytical strategy is based on a
thorough understanding of the geologic trends within our core area.
Exploration efforts have been focused in areas where lease
acquisition opportunities are readily available. We entered into
two master 3-D license agreements, together covering approximately
2.2 million acres and we have completed advanced processing on
select areas within this licensed seismic area exceeding one
million acres. We can expand this coverage and perform further
advanced processing, both with currently licensed seismic data and
seismic data to be acquired. We have sought to acquire and
reprocess the highest resolution data available in the potential
prospect’s direct vicinity. This includes advanced imaging
information to further our understanding of a particular
reservoir’s characteristics, including both trapping mechanics and
fluid migration patterns. Reprocessing is accomplished through a
series of model building steps that incorporate the geometry of the
geology to optimize the final image. Our integration of existing
geologic understanding and enhanced seismic processing and
interpretation provides us with unique insights and perspectives on
existing producing areas and especially underexplored formations
below and adjacent to salt bodies that are highly prospective for
hydrocarbon production.
We
currently hold one lease, and we are evaluating the acquisition of
additional leases in our core area. Our lease has a five-year
primary term, plus a three year extension and the lease expires on
October 31, 2025. The Bureau of Ocean Energy Management’s (“BOEM”)
regulatory framework provides multiple options for leaseholders to
apply to receive extensions of lease terms under specified
conditions. GulfSlope is exploring all options contained in BOEM’s
regulatory framework to extend the terms of the leases. Additional
prospective acreage can be obtained through lease sales, farm-in,
or purchase. As is consistent with a prudent and successful
exploration approach, we believe that additional seismic licensing,
acquisition, processing, and/or interpretation may become highly
advantageous, to more precisely define the most optimal drillable
location(s), particularly for development of
discoveries.
Our plan has been to partner with other entities which could
include oil and gas companies and/or financial investors. Our goal
is to diversify risk and minimize capital exposure to drilling
costs. We expect a portion of our drilling costs to be paid by our
partners through these transactions, in return for our previous
investment in prospect generation and delivery of an identified
prospect on acreage we control. Such arrangements are a commonly
accepted industry method of proportionately recouping pre-drill
cost outlays for seismic, lease costs, and associated
interpretation expenses. We cannot assure you, however, that we
will be able to enter into any such arrangements on satisfactory
terms.
Merger
and Acquisition Strategy
We
believe there is an opportunity to consolidate oil and gas assets
located in the offshore Gulf of Mexico. Multiple oil and gas
companies have explicitly stated their intentions to exit the Gulf
of Mexico and we believe that GulfSlope is well positioned to take
advantage of these opportunities due to our highly specialized
subsurface and engineering capabilities, relevant operational
experience, and regional knowledge and expertise. We have developed
a significant pipeline of potential acquisition opportunities with
the following characteristics: (i) strong cash flow, (ii) inventory
of low-risk capital projects, and (iii) manageable plugging and
abandonment liabilities. In addition to asset acquisitions, we are
also evaluating the combination of GulfSlope with other GOM oil and
gas companies. Any merger or acquisition is likely to be financed
through the issuance of debt and equity securities.
Recent
Developments
During the past fiscal year, the Company has conducted engineering,
geotechnical and economic evaluations on a total of 10 producing
property acquisitions, all located in the Gulf of Mexico. The
Company submitted bids on four of those opportunities, one of which
was deemed non-competitive by the seller. The Company is currently
engaged in seeking debt and equity financing for the remaining
opportunities.
Significant
Accounting Policies
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 by management and third-party consultants 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.
As of
December 31, 2022, the Company’s oil and gas properties consisted
of unproved properties, capitalized costs and no proved
reserves.
Property
and equipment are carried at cost. We assess the carrying value of
our property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.
There
has been no change to our critical accounting policies as included
in our annual report on Form 10-K as of September 30, 2022, which
was filed with the Securities and Exchange Commission on December
29, 2022.
Three
Months Ended December 31, 2022, Compared to Three Months Ended
December 31, 2021
There
was no revenue during the three months ended December 31, 2022 and
2021. General and administrative expenses were approximately $0.3
million for the three months ended December 31, 2022, compared to
approximately $0.4 million for the three months ended December 31,
2021. Net interest expense was approximately $131,000 for the three
months ended December 31, 2022 as compared to approximately
$138,000 for the three months ended December 31, 2021. Gain on
derivative financial instruments was approximately $21,000 and
$80,000 for the three months ended December 31, 2022 and 2021,
respectively, which was caused by the change in fair value of the
underlying derivative financial instruments.
Liquidity
and Capital Resources
The
Company has incurred accumulated losses for the period from
inception to December 31, 2022, of approximately $69.3 million, and
has a negative working capital of $14.2 million. For the three
months ended December 31, 2022, the Company has generated losses of
approximately $0.4 million and net cash used in operations of
approximately $0.1 million. As of December 31, 2022, there was
$0.06 million of cash on hand. The Company estimates that it will
need to raise a minimum of $10 million to meet its obligations and
planned expenditures through February 2024. The $10 million is
comprised primarily of capital project expenditures as well as
general and administrative expenses. It does not include any
amounts due under outstanding debt obligations and accrued
interest, which amounted to approximately $12.6 million as of
December 31, 2022. The Company plans to finance operations and
planned expenditures through the issuance of equity securities,
debt financings, farm-out agreements, mergers or other
transactions. Our policy has been to periodically raise funds
through the sale of equity on a limited basis, to avoid undue
dilution while at the early stages of execution of our business
plan. Short term needs have been historically funded through loans
from executive management. There are no assurances that financing
will be available with acceptable terms, if at all. If the Company
is not successful in obtaining financing, operations would need to
be curtailed or ceased. The accompanying financial statements do
not include any adjustments that might result from the outcome of
this uncertainty.
For
the three months ended December 31, 2022, the Company used
approximately $0.1 million of net cash in operating activities,
compared with approximately $0.6 million of net cash used in
operating activities for the three months ended December 31, 2021.
For the three months ended December 31, 2022 and 2021,
approximately $0.02 million of cash was used in investing,
respectively. For the three months ended December 31, 2022, the
Company received approximately $0.09 million of net cash from
financing activities compared with nil for the three months ended
December 31, 2021.
The
Company will need to raise additional funds to cover planned
expenditures, as well as any additional, unexpected expenditures
that we may encounter. Future equity financings may be dilutive to
our stockholders. Alternative forms of future financings may
include preferences or rights superior to our common stock. Debt
financings may involve a pledge of assets and will rank senior to
our common stock. We have historically financed our operations
through private equity and debt financings. We do not have any
credit or equity facilities available with financial institutions,
stockholders or third-party investors, and will continue to rely on
best efforts financings. The failure to raise sufficient capital
could cause us to cease operations, or the Company would need to
sell assets or consider alternative plans up to and including
restructuring.
Off-Balance
Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Not
required for smaller reporting companies.
Item 4. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) are designed to ensure that information required to
be disclosed in reports filed or submitted under the Exchange Act
is recorded, processed, summarized, and reported within the time
periods specified in rules and forms adopted by the SEC’s rules and
forms, and that such information is accumulated and communicated to
management, including the principal executive and principal
financial officers, to allow timely decisions regarding required
disclosures.
Under
the supervision and with the participation of our principal
executive and principal financial officers, our management
evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation, our
principal executive and principal financial officers concluded
that, as of the end of the period covered by this Quarterly Report
on Form 10-Q, our disclosure controls and procedures were effective
at a reasonable assurance level to ensure that information required
to be disclosed by the Company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the SEC’s rules
and forms.
As
noted in the Company’s Annual Report on Form 10-K for the year
ended September 30, 2022, the design and operating effectiveness of
our controls were adequate to ensure that certain account analysis
and accounting judgments related to certain estimates throughout
the year were properly accounted for and reviewed in a timely
manner.
Limitations
on the Effectiveness of Controls
The
Company’s management is responsible for establishing and
maintaining adequate internal control over financial reporting. The
Company’s internal control over financial reporting is designed to
provide reasonable assurance as to the reliability of the Company’s
financial reporting and the preparation of financial statements in
accordance with generally accepted accounting principles. All
internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Changes
in Internal Control Over Financial Reporting
During
the fiscal quarter covered by this Report, there has been no change
in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II – OTHER INFORMATION
Item
1. Legal Proceedings
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.
Item
1A. Risk Factors
In
addition to the other information set forth in this Quarterly
Report, you should carefully consider the risk factors and other
cautionary statements described under the heading Part I, Item 1A.
“Risk Factors” included in our September 30, 2022 Annual Report,
and the risk factors and other cautionary statements contained in
our other SEC filings, which could materially affect our business,
financial condition or future results. Additional risks and
uncertainties not currently known to us or that we currently deem
to be immaterial also may materially adversely affect our business,
financial condition or future results. The risks and uncertainties
described below should be read together with those disclosed in our
2022 Form 10-K, Annual Report filed with the SEC on December 29,
2022 and our other SEC filings.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Mine Safety Disclosures
Not
applicable.
Item
5. Other Information
None.
Item
6. Exhibits
The
following exhibits are attached hereto or are incorporated by
reference:
| (1) |
Filed
herewith. |
| (2) |
Furnished
herewith. |
| (3) |
Pursuant
to Rule 406T of Regulation S-T, the Interactive Data Files on
Exhibit 101 hereto are deemed not filed or part of a registration
statement or prospectus for purposes of Sections 11 or 12 of the
Securities Act of 1933, as amended, are deemed not filed for
purposes of Section 18 of the Securities and Exchange Act of 1934,
as amended, and otherwise are not subject to liability under those
sections. |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Issuer has duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
| |
|
GULFSLOPE
ENERGY, INC. |
| |
|
(Issuer) |
| |
|
|
|
| Date: |
February
14 ,2023 |
By: |
/s/
John N. Seitz |
| |
|
|
John
N. Seitz, Chief Executive Officer, and Chairman |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Issuer has duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
| |
|
GULFSLOPE
ENERGY, INC. |
| |
|
(Issuer) |
| |
|
|
|
| Date: |
February
14, 2023 |
By: |
/s/
John H. Malanga |
| |
|
|
John
H. Malanga, Chief Financial Officer, |
| |
|
|
and
Chief Accounting Officer |