The accompanying notes
are an integral part to these condensed financial statements.
The accompanying notes are an integral
part to these condensed financial statements.
The accompanying notes
are an integral part to these condensed financial statements.
Notes to Condensed Financial Statements
December 31, 2018
(Unaudited)
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
GulfSlope Energy, Inc. (the “Company”
or “GulfSlope”), 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 December 31, 2018, we have no production
or proved reserves.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
The condensed financial statements included
herein are unaudited. However, these condensed financial statements include all adjustments (consisting of normal recurring adjustments),
which, in the opinion of management are necessary for a fair presentation of financial position, results of operations and cash
flows for the interim periods. The results of operations for interim periods are not necessarily indicative of the results to be
expected for an entire year. The preparation of financial statements in accordance with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed financial
statements and accompanying notes. Actual results could differ materially from those estimates.
Certain information, accounting policies,
and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) have been omitted in this Form 10-Q pursuant to certain rules and
regulations of the Securities and Exchange Commission (“SEC”). The condensed financial statements should be read in
conjunction with the audited financial statements for the year ended September 30, 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 December 31, 2018 and September 30, 2018.
Liquidity/Going Concern
The Company has incurred accumulated
losses as of December 31, 2018 of $42.3 million, and has a net capital deficiency. Further losses are anticipated in developing
its business, and there exists substantial doubt about the Company’s ability to continue as a going concern. As of December
31, 2018, the Company had $3.8 million of unrestricted cash on hand, $3.4 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 $15 million to meet its obligations and
planned expenditures through February 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 December 31, 2018, the Company’s
oil and natural gas properties consisted of wells in process, capitalized exploration and acquisition costs for unproved properties
and no proved reserves.
Basic and Dilutive Earnings Per Share
Basic 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, convertible
notes and restricted stock. The number of potential common shares outstanding relating to stock options, warrants, convertible
notes and restricted stock is computed using the treasury stock or if-converted method.
As the Company has incurred losses for
the three months ended December 31, 2018 and 2017, the potentially dilutive shares are anti-dilutive and are thus not added into
the loss per share calculations. As of December 31, 2018 and 2017, there were 223,537,733 and 163,805,888 potentially dilutive
shares, respectively.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“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. 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. 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 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. Two of the fourteen lease blocks were awarded in the quarter ended December 31, 2018.
In January 2018, the Company entered into a
strategic partnership with Delek Group Ltd. (“Delek”), and Texas South Energy, Inc. (“Texas South”) (collectively,
the “Parties”) and executed a participation agreement for a multi-phase exploration program. Under the terms of the
Agreement, the Parties have committed to drill the Company’s “Canoe” and “Tau” prospects (the “Initial
Phase”) with Delek having the option to participate in two additional two-well drilling phases and a final, three-well drilling
phase (collectively, the “Phases”). In each Phase, Delek will earn a 75% working interest upon paying 90% of the exploratory
costs associated with drilling each exploratory well. The Company will retain a 20% working interest while paying 8% of the exploratory
costs associated with drilling each well. In addition, Delek will pay the Company approximately $1.1 million in cash for each Prospect
when the respective exploration plan is filed with BOEM. Also, each Party will be responsible for their pro rata share (based on
working interest) of delay rentals associated with the Prospects. The Company will be the Operator during exploratory drilling
of the Prospect, however, subsequent to a commercial discovery, Delek will have the right to become the Operator. Delek will have
the right to terminate this Agreement at the conclusion of any drilling Phase. Delek will also have the option to purchase up to
5% of the Company’s common stock, par value $0.001 per share (the “Common Stock”), upon fulfilling its obligation
for each Phase (maximum of 20% in the aggregate) at a price per share equal to a 10% discount to the 30-day weighted average closing
price for the Common Stock preceding the acquisition. Phase One of the Agreement has not yet been reached; thus, the option to
purchase the Common Stock is not yet available. This option will expire January 8, 2020.
The Company, as the operator of two wells
being drilled in the Gulf of Mexico, has incurred tangible and intangible drilling costs for the wells in process and has billed
its working interest partners for their respective shares of the drilling costs to date. 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 first calendar quarter of 2019. The second well, Tau, was spud in September 2018 and is currently being
drilled. The well is expected to be drilling in the targeted prospective section in February 2019.
As of December 31, 2018, 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 December 31, 2018, the total amount owed to John Seitz, our CEO, is $8,675,500.
There is a total of $1,751,939 of unpaid interest associated with these loans included in accrued interest within our balance sheet
as of December 31, 2018.
On November 15, 2016, a family member
of the CEO, a related party, entered into a $50,000 convertible promissory note with associated warrants under the same terms received
by other investors (see Note 5).
Domenica Seitz CPA, related to
John Seitz, has provided accounting consulting services to the Company. During the three month periods ended December 31, 2018
and 2017, the services provided were valued at $14,880 and $5,915, respectively. The Company has accrued these amounts, and they
have been reflected in the December 31, 2018 financial statements.
John Seitz has not received a salary
since May 31, 2013, the date he commenced serving as CEO and accordingly, no amount has been accrued on the 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 27.9 million warrants (7.4 million to
the above mentioned related parties) with an exercise price of $0.03 and a term of the earlier of three years or upon a change
of control. The Company evaluated the various financial instruments under ASC 480 and ASC 815 and determined no instruments or
features represented embedded derivatives. Therefore, in accordance with ASC 470-20-25-2, the Company allocated the proceeds between
the convertible notes and warrants based on their relative fair values. This resulted in an allocation of approximately $452,000
to the warrants and approximately $385,000 to the convertible notes. After such allocation, the Company evaluated the conversion
option to discern whether a beneficial conversion feature existed based upon comparing the effective exercise price of the convertible
notes to the fair value of the shares they are convertible into. The Company concluded a beneficial conversion feature existed
and measured such beneficial conversion feature at approximately $385,000. Accordingly, the debt discount associated with these
notes was approximately $837,000. Such discount was amortized using the effective interest rate method over the term (one year)
of the convertible notes.
Upon maturity of eight of the eleven promissory
notes in June 2017, the Company issued 3,225,000 extension warrants with an exercise price of $0.03 per share (equal to 25% of
the original warrant amount) to the holders of the notes to extend the terms to January 15, 2018. The Company evaluated this modification
including considering the fair value of the warrants issued and concluded that extinguishment accounting was required as the present
value of future cash flows from the new note, including the fair value of the warrants issued to extend, exceeded the present value
of future cash flows of the old note by more than 10%. The fair value of the warrants was deemed to be approximately $51,000 and
such amount was recognized immediately as a loss on extinguishment of debt. The fair value of the warrants was determined using
the Black-Scholes option pricing model. In July and August 2017, the three remaining promissory notes issued in July, August and
November 2016 were extended until January 15, 2018 and issued 3,750,000 extension warrants (equal to 25% of the original warrant
amount). The Company evaluated this transaction including considering the fair value of the warrants issued and concluded that
modification accounting was required as the present value of future cash flows from the new note, including the fair value of the
warrants issued to extend, was less than 10% of the present value of future cash flows of the old note. When an instrument is modified,
any incremental increase in value (in this case the warrants) should be added to the discount of the notes and such discount should
be amortized to interest expense using the effective interest rate method over the new remaining life of the note. The fair value
of the warrants, approximately $39,000, was determined using the Black-Scholes option pricing model.
Upon revised maturity of the eleven promissory
notes on January 15, 2018, the Company issued 2,790,000 extension warrants with an exercise price of $0.10 per share (equal to
10% of the original warrant amount) to the holders of the notes to extend the term to April 16, 2018. The Company evaluated this
transaction including considering the fair value of the warrants issued and concluded that extinguishment accounting was required
as the present value of future cash flows from the new note, including the fair value of the warrants issued to extend, exceeded
the present value of future cash flows of the old note by more than 10%. The fair value of the warrants was deemed to be approximately
$217,000 and such amount was recognized immediately as a loss on extinguishment of debt. The fair value of the warrants was determined
using the Black-Scholes option pricing model. In June 2018, the maturity date of all of the notes was extended to January 15, 2019.
The Company is working on the extension of the remaining notes.
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 December 31, 2018 is $277,000. Accrued interest for the quarter ended December 31, 2018 was approximately
$6,000 and cumulative accrued interest was approximately $55,000.
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 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 December 31, 2018:
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
|
|
|
—
|
|
|
|
(196,266
|
)
|
|
|
—
|
|
|
|
(196,266
|
)
|
Derivative Financial Instrument at December 31, 2018
|
|
|
—
|
|
|
|
(467,976
|
)
|
|
|
—
|
|
|
|
(467,976
|
)
|
During the year ended September 30, 2018, the
Company did not have any assets or liabilities measured at fair value on a non-recurring basis.
NOTE 7 – COMMON STOCK/PAID IN
CAPITAL
At
the annual shareholder meeting in May of 2018, our shareholders approved increasing the number of authorized shares of common stock
from 975,000,000 to 1,500,000,000. The number of authorized shares of preferred stock was not changed and is 50,000,000.
As discussed in Note 5, between June
and November 2016, the Company issued 27.9 million warrants in conjunction with convertible notes payable. The warrants have an
exercise price of $0.03 and a term of the earlier of 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.
The fair value of the warrants were determined
using the Black Scholes valuation model with the following key assumptions:
|
|
June 2016
|
|
|
July 2016
|
|
|
August 2016
|
|
|
November 2016
|
|
|
June 2017
|
|
|
July 2017
|
|
|
August 2017
|
|
|
January 2018
|
|
Warrants Issued
|
|
12.9 million
|
|
|
10.0 million
|
|
|
3.3 million
|
|
|
1.7 million
|
|
|
3.2 million
|
|
|
2.5 million
|
|
|
1.25 million
|
|
|
2.8 million
|
|
Stock Price (1)
|
|
$
|
0.054
|
|
|
$
|
0.040
|
|
|
$
|
0.032
|
|
|
$
|
0.029
|
|
|
$
|
0.025
|
|
|
$
|
0.019
|
|
|
$
|
0.016
|
|
|
$
|
0.11
|
|
Exercise Price
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Term (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 December 31, 2018.
|
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Exercise Price
|
|
|
Number Outstanding
|
|
|
Remaining Contractual Life (Yrs)
|
|
|
Weighted Average Exercise Price
|
|
|
Number Exercisable
|
|
|
Weighted Average Exercise Price
|
|
$
|
0.10
|
|
|
|
550,000
|
|
|
|
3.00
|
|
|
$
|
0.10
|
|
|
|
550,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
3.21
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
3.79
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
3.96
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
During the three months ended December
31, 2018, the Company issued approximately 19.3 million shares of common stock and approximately 9.7 million warrants to accredited
investors in a private placement. The funds were received in the prior quarter and moved to equity during the current quarter.
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:
|
|
Effective Date 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%
|
|
|
|
|
NOTE 8 – STOCK-BASED COMPENSATION
On January 1, 2017, 33.5 million stock
options were granted to 6 employees and 2 directors of the Company. The CEO was not included in the award. The stock options vested
50% on January 1, 2017 and 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 May 1, 2018. The stock options
are exercisable for approximately 7.5 years from the date of grant of May 1, 2018 to December 31, 2025. These stock options were
awarded from the Company’s 2014 Omnibus Incentive Plan.
On June 1, 2018, 67.5 million stock options,
with an exercise price of $0.075 per share were granted to employees, directors and contractors. 18.5 million of the stock options
vested on June 1, 2018, 24 million will vest on June 1, 2019 and 25 million will vest on June 1, 2020 provided the holder continues
to serve as an employee or a director on the vesting date. The stock options are exercisable for approximately 7.5 years from the
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.
The fair value of the stock-options granted during 2018 were determined
using the Black Scholes valuation model with the following key assumptions:
Date of Grant
|
|
May 1, 2018
|
|
|
June 1, 2018
|
|
Number of Stock Options Granted
|
|
|
500,000
|
|
|
|
67,500,000
|
|
Stock Price
|
|
$
|
0.065
|
|
|
$
|
0.075
|
|
Exercise Price
|
|
$
|
0.065
|
|
|
$
|
0.075
|
|
Expected Life of Options
|
|
|
4.25 years
|
|
|
|
4.25 years
|
|
Risk Free Rate
|
|
|
2.74
|
%
|
|
|
2.675
|
%
|
Volatility
|
|
|
145.21
|
%
|
|
|
145.21
|
%
|
The
Company used the historical volatility of its stock for the period June 2014 through June 1, 2018 for the Black Scholes computation.
The Company has no historical data regarding the expected life of the options and therefore used the simplified method of calculating
the expected life. The risk free rate was calculated using the U.S. Treasury constant maturity rates similar to the expected
life of the options, as published by the Federal Reserve. The Company has no plans to declare any future dividends.
The following table summarizes the Company’s
stock option activity during the three months ended December 31, 2018:
|
|
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
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
103,500,000
|
|
|
$
|
0.0605
|
|
|
|
3.07
|
|
|
|
$0.5 million
|
|
Vested and expected to vest
|
|
|
103,500,000
|
|
|
$
|
0.0605
|
|
|
|
3.07
|
|
|
|
$0.5 million
|
|
Exercisable at December 31, 2018
|
|
|
54,500,000
|
|
|
$
|
0.0475
|
|
|
|
3.07
|
|
|
|
$0.5 million
|
|
There was approximately $0.5 million
of intrinsic value for the options outstanding as of December 31, 2018. As of December 31, 2018, there was $2.3 million of
unrecognized stock-based compensation to be recognized over a weighted average period of 3.07 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
$393,000 and $93,381 in stock based compensation during the three months ended December 31, 2018 and December 31, 2017, respectively.
A portion of these costs, $318,658 and $27,875 were capitalized to unproved properties for the three months ended December 31,
2018 and December 31, 2017, respectively, with the remainder recorded as general and administrative expenses for each respective
period.
NOTE 9
– COMMITMENTS AND CONTINGENCIES
In July 2018 the Company entered into a 39
month lease for approximately 5,000 square feet of office space in 4 Houston Center in downtown Houston. Annual base rent is approximately
$94 thousand for the first 18 months, increasing to approximately $97 thousand and $99 thousand, respectively during the remaining
term of the lease.
The Company reached an agreement with a vendor
in August 2018 for the settlement of approximately $1 million in debt. The vendor was paid 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 December 31, 2018 there is a derivative financial instrument
liability of approximately $0.5 million.
In October 2018, the Company purchased a directors
and officers’ insurance policy for $159,995 and financed $146,310 of the premium by executing a note payable. The balance
of the note payable at December 31, 2018 is $120,275.
NOTE 10 – SUBSEQUENT
EVENTS
On
February 11, 2019, the Company executed a letter agreement (the “Agreement”) whereby the Company agreed to a
new term loan facility (the “Term Loan Facility”) to be provided by Delek GOM Investments LLC
(“Delek GOM"), a wholly owned subsidiary of Delek Group Ltd. Delek GOM is a working interest partner in the
Company’s Canoe and Tau prospects. The Term Loan Facility provides the Company with up to $11 million to be drawn in
amounts at the Company’s discretion with proceeds to be used for capital expenditures associated with the
Company’s drilling program. Borrowings under the Term Loan Facility mature in six months and bear interest at the rate
of 5.0% and are secured by the assets of the Company. The Agreement requires the Company to pay down the Term Loan with
proceeds from the sale of any equity securities and any refunds related to joint drilling operations. For a period of twelve
months, Delek GOM will have the right, but not the obligation, to purchase shares of the Company up to the outstanding Term
Loan Amount at a price per share of $4.2 cents a share (the “Option”). Any purchase of shares pursuant to the
Option will be in a transaction exempt under 4(a)(2) of the Securities Act of 1933, as amended. The Company anticipates
executing detailed agreements associated with the Term Loan Facility and the Option in February 2019.