DEEP WELL OIL & GAS INC - Quarter Report: 2016 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

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 number 0-24012

DEEP WELL OIL & GAS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (780) 409-8144

Former name, former address and former fiscal year, if changed since last report: not applicable.

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 þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company þ

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 þ

As of February 23, 2018, the Issuer had outstanding approximately 229,374,605 shares of common stock, $0.001 par value per share.

TABLE OF CONTENTS

DEEP WELL OIL & GAS, INC. (AND SUBSIDIARIES)

Condensed Consolidated Balance Sheets

March 31, 2016 and September 30, 2015

See accompanying notes to the condensed consolidated financial statements

DEEP WELL OIL & GAS, INC. (AND SUBSIDIARIES)

(Unaudited)

Condensed Consolidated Statements of Operations and Comprehensive Loss

For the Three and Six Months Ended March 31, 2016 and 2015

See accompanying notes to the condensed consolidated financial statements

DEEP WELL OIL & GAS, INC. (AND SUBSIDIARIES)

(Unaudited)

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended March 31, 2016 and 2015

See accompanying notes to the condensed consolidated financial statements

DEEP WELL OIL & GAS, INC. (AND SUBSIDIARIES)

(Unaudited)

Notes to the Condensed Consolidated Financial Statements

March 31, 2016

Nature of Business

Deep Well Oil & Gas, Inc. was originally incorporated on July 18, 1988 under the laws of the state of Nevada as Worldwide Stock Transfer, Inc. (Worldwide Stock Transfer, Inc. later changed its name to Allied Devices Corporation) and in connection with a plan of reorganization, effective on September 10, 2003, the company was reorganized and changed its name to Deep Well Oil & Gas, Inc. (“Deep Well”).

These condensed consolidated financial statements have been prepared showing the name “Deep Well Oil & Gas, Inc. (and Subsidiaries)” (“the Company”) and the post-split common stock, with $0.001 par value.

Basis of Presentation

The interim condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate so as to make the information presented not misleading.

These interim condensed consolidated financial statements follow the same significant accounting policies and methods of application as the Company’s annual consolidated financial statements for the year ended September 30, 2015.

These statements reflect all adjustments, consisting solely of normal recurring adjustments (unless otherwise disclosed) which, in the opinion of management, are necessary for a fair presentation of the information contained therein. However, the results of operations for the interim periods may not be indicative of results to be expected for the full fiscal year. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2015.

Basis of Consolidation

These condensed consolidated financial statements include the accounts of two wholly owned subsidiaries: (1) Northern Alberta Oil Ltd. (“Northern”) from the date of acquisition, being June 7, 2005, incorporated under the Business Corporations Act (Alberta), Canada; and (2) Deep Well Oil & Gas (Alberta) Ltd., incorporated under the Business Corporations Act (Alberta), Canada on September 15, 2005. All inter-company balances and transactions have been eliminated.

Change in Accounting Principle

During the fourth fiscal quarter of 2015, the Company voluntarily changed its method of accounting for its oil and gas properties from the successful efforts method to the full cost method. Accordingly, financial information for prior periods have been recast to reflect retrospective application of the full cost method. The Company believes that the full cost method is preferable as it reflects the results of the Company’s operations and the economics of exploring for and developing its non-traditional long life oil sands assets in the Peace River oil sands area in Alberta, Canada. The Company’s condensed consolidated financial statements have been recast to reflect these differences. There was no effect on the prior period financial statements as a result of the change in accounting policy.

Prepaid Assets

$453,180 was held in trust for a potential acquisition which was not concluded by the Company and was subsequently returned to the Company in May of 2016.

Crude oil and natural gas properties

The Company follows the full cost method of accounting for oil sands properties pursuant to SEC Regulation S-X Rule 4-10. The full cost method of accounting for oil and gas operations requires that all costs associated with the exploration for and development of oil and gas reserves be capitalized on a country by country basis. Such costs include lease acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells, production equipment and overhead charges directly related to acquisition, exploration and development activities.

Under the full cost method, oil and gas properties are subject to the ceiling test performed quarterly. A ceiling test write-down is recognized in net earnings if the carrying amount of a cost centre exceeds the “cost centre ceiling”. The carrying amount of the cost centre includes the capitalized costs of proved oil and natural gas properties, net of accumulated depletion and deferred income taxes. The cost centre ceiling is the sum of (A) present value of the estimated future net cash flows from proved oil and natural gas reserves using a 10 percent per year discount factor, (B) the costs of unproved properties not being amortized, and (C) the lower of cost or fair value of unproved properties included in the costs being amortized; less (D) related income tax effects. As of March 31, 2016, no ceiling test write-downs were recorded for the Company’s oil and gas properties.

Costs associated with unproved properties are excluded from the depletion calculation until it is determined that proved reserves are attributable or impairment has occurred. Unproved properties are assessed annually for impairment. Costs that have been impaired are included in the costs subject to depletion within the full cost pool.

Asset Retirement Obligations

The Company accounts for asset retirement obligations by recording the fair value of the estimated future cost of the Company’s plugging and abandonment obligations. The asset retirement obligation is recorded when there is a legal obligation associated with the retirement of a tangible long-lived asset and the fair value of the liability can reasonably be estimated. Upon initial recognition of an asset retirement obligation, the Company increases the carrying amount of the long-lived asset by the same amount as the liability. Over time, the liabilities are accreted for the change in their present value through charges to oil and gas production and well operations costs. The initial capitalized costs are depleted over the useful lives of the related assets through charges to depreciation, depletion, and amortization. If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and the asset retirement cost.

Revisions in estimated liabilities can result from revisions of estimated inflation rates, escalating retirement costs, and changes in the estimated timing of settling asset retirement obligations. As of March 31, 2016 and September 30, 2015, asset retirement obligations amount to $449,388 and $426,607, respectively. The Company has posted bonds, where required, with the Government of Alberta based on the amount the government estimates the cost of abandonment and reclamation to be.

Financial, Concentration and Credit Risk

The Company’s consideration or related financial credit risk related to cash and cash equivalents depends on if funds are fully insured by either The Canada Deposit Insurance Corporation (“CDIC”), or The Credit Union Deposit Guarantee Corporation (“CUDGC”) deposit insurance limit. As of March 31, 2016, the Company has approximately $224,621 funds that are in excess of deposit insurance limits, which may have financial credit risk. For the Company funds that are maintained in a financial institution which has its deposits fully guaranteed by CUDGC, there is no financial credit risk.

The Company is not directly subject to credit risk resulting from the concentration of its crude oil sales. For the period ending March 31, 2016 and for the year ended September 30, 2015, the Company has recorded oil sales received from the operator of the Company’s producing properties. The Company’s joint venture partner is the operator of the Company’s producing properties and it is the Company’s joint venture partner who sells all of the Company’s oil production to 11 purchasers in the oil and gas industry. The Company does not require collateral and management periodically evaluates the operator’s financial statements and the collectability of oil sales receivables from the operator and believes that the Company’s oil sales receivables are fully collectable and that the risk of loss is minimal.

Basic and Diluted Net Income (Loss) Per Share

Basic net income (loss) per share amounts are computed based on the weighted average number of shares actually outstanding. Diluted net income (loss) per share amounts are computed using the weighted average number of common shares and common equivalent shares outstanding as if shares had been issued on the exercise of the common share rights, unless the exercise becomes antidilutive and then the basic and diluted per share amounts are the same. There were 64,205,221 potentially dilutive securities excluded from the the diluted earnings per share calculation because their effect would be antidilutive.

Recently Adopted Accounting Standards

In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) — Deferral of the Effective Date.” ASU 2015-14 defers the effective date of ASU 2014-09 by one year to annual reporting periods beginning after December 15, 2017 with early adoption permitted for periods beginning after December 15, 2016. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” requiring lessees to recognize lease assets and lease liabilities for most leases classified as operating leases under previous U.S. GAAP. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company will be required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

The Company does not expect the adoption of any other recent accounting pronouncements to have a material impact on the Company’s financial statements.

The Company’s oil sands acreage as of March 31, 2016, covers 43,015 gross acres (34,096 net acres) on 68 sections of land under nine oil sands leases. Until the Company extends the leases “into perpetuity” based on the Alberta governmental regulations, the lease expiration dates of the Company’s nine oil sands leases are as follows:

Lease Rental Commitments

The Company has acquired interests in certain oil sands properties located in North Central Alberta, Canada. The terms include certain commitments related to oil sands properties that require the payments of rents as long as the leases are non-producing. As of March 31, 2016, the Company’s net payments due under this commitment are as follows:

The Company follows the full cost method of accounting for costs of oil properties. Under this method, oil and gas properties, for which no proved reserves have been assigned, must be assessed at least annually to ascertain whether or not a write down should occur. Unproven properties are assessed annually, or more frequently as economic events indicate, for potential write down.

This consists of comparing the carrying value of the asset with the asset’s expected future undiscounted cash flows without interest costs. Estimates of expected future cash flows represent management’s best estimate based on reasonable and supportable assumptions. Proven oil properties are reviewed for any write down on a field-by-field basis. No write downs were recognized for the period ended March 31, 2016.

Capitalized costs of proven oil properties will be depleted using the unit-of-production method when the property is placed in production.

Substantially all of the Company’s oil activities are conducted jointly with others. The accounts reflect only the Company’s proportionate interest in such activities.

The following table illustrates capitalized costs relating to oil producing activities for the six months ended March 31, 2016 and the fiscal year ended September 30, 2015:

Depreciation and depletion expense for the six months ended March 31, 2016 and 2015 were $5,703 and $6,878 respectively.

The following table presents information regarding the Company’s costs incurred in the oil property acquisition, exploration and development activities for the six months ended March 31, 2016 and the fiscal year ended September 30, 2015:

Accounts payable – related parties was $3,050 as of March 31, 2016 (September 30, 2015 - $4,833) for expenses to be reimbursed to directors. This amount is unsecured, non-interest bearing, and has no fixed terms of repayment.

As of March 31, 2016, officers, directors, their families, and their controlled entities have acquired 53.63% of the Company’s outstanding common capital stock. This percentage does not include unexercised warrants or stock options.

The Company incurred expenses $66,456 to one related party, Concorde Consulting, for professional fees and consulting services provided to the Company during the period ended March 31, 2016 (March 31, 2015 - $76,005). These amounts were fully paid as of March 31, 2016.

The total future asset retirement obligation is estimated by management based on the Company’s net working interests in all wells and facilities, estimated costs as determined by the Alberta Energy Regulator to reclaim and abandon wells and facilities and the estimated timing of the costs to be incurred in future periods. At March 31, 2016, the Company estimates the undiscounted cash flows related to asset retirement obligation to total approximately $623,142 (September 30, 2015 - $602,613). The fair value of the liability at March 31, 2016 is estimated to be $449,388 (September 30, 2015 - $426,607) using a risk free rate of 3.74% and an inflation rate of 2%. The actual costs to settle the obligation are expected to occur in approximately 27 years.

Changes to the asset retirement obligation were as follows:

Common Stock Issued and Outstanding

As of March 31, 2016, the Company had outstanding 229,374,605 shares of common stock.

Warrants

The following table summarizes the Company’s warrants outstanding as of March 31, 2016:

The following is a summary of warrant activity for the period ended March 31, 2016:

There were 52,675,221 warrants outstanding as of March 31, 2016 (September 30, 2015 – 52,675,221), which have a historical fair market value of $3,153,216 (September 30, 2015 - $3,153,216).

For the period ended March 31, 2016, the Company recorded share based compensation expense related to stock options in the amount of $127,279 (September 30, 2015 – $1,116,544) on the stock options that were previously granted. As of March 31, 2016, there was remaining unrecognized compensation cost of $113,006 related to the non-vested portion of these unit option awards. Compensation expense is based upon straight-line depreciation of the grant-date fair value over the vesting period of the underlying unit option.

The aggregate intrinsic value of exercisable options as of March 31, 2016, was $Nil (September 30, 2015 - $Nil).

The following is a summary of stock option activity as at March 31, 2016:

There were 1,660,000 unvested stock options outstanding as of March 31, 2016 (September 30, 2015 – 2,010,000).

Compensation to Executive Officers

Concorde Consulting, a company owned 100% by Mr. Curtis J. Sparrow, for providing services as Chief Financial Officer to the Company for $11,076 per month (Cdn $15,000 per month). As of March 31, 2016, the Company did not owe Concorde Consulting any of this amount.

Rental Agreement

On July 27, 2015, the Company renewed its Edmonton office lease commencing effective on July 1, 2015 and expiring on June 30, 2017. The quarterly payments due are as follows:

On June 20, 2016, warrants to acquire up to 520,000 common shares of the Company, expired unexercised.

On November 23, 2016, warrants to acquire up to 52,155,221 common shares of the Company, expired unexercised.

On June 19, 2017, the Company renewed its Edmonton office lease commencing effective on July 1, 2017 and expiring on June 30, 2019. As part of the lease renewal the Company received the first 3 months of basic rent free. The quarterly payments due are as follows:

First production from the Company’s joint Steam Assisted Gravity Drainage Demonstration Project (the “SAGD Project”) began on September 16, 2014. As a result of the low-price environment for bitumen in 2015 and early 2016, a majority of the Company’s Joint Venture partners voted to temporarily suspend operations of the SAGD Project at the end of February 2016. In early May of 2016, an amended application was submitted to the AER for an expansion of the existing SAGD Project facility site which would potentially increase the operation for up to a total of eight SAGD well pairs. The amended application sought approval to expand the existing SAGD Project facility site to 3,200 bopd (100% basis). It is anticipated that only five SAGD well pairs need to be operating to achieve this production level. The expanded facility will be designed to handle up to 3,200 bopd. The AER approval for the expansion of the existing SAGD Project was granted on December 14, 2017. While the joint venture has not yet approved to expand the SAGD Project, currently, the SAGD Project continues to move forward with engineering and identification of long lead time items towards potential expansion to 3,200 bopd and future development at Sawn Lake.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes. For the purpose of this discussion, unless the context indicates another meaning, the terms: “Deep Well,” “Company,” “we,” “us,” and “our” refer to Deep Well Oil & Gas, Inc. and its subsidiaries. This discussion includes forward-looking statements that reflect our current views with respect to future events and financial performance that involve risks and uncertainties. Our actual results, performance or achievements could differ materially from those anticipated in the forward-looking statements as a result of certain factors including risks discussed in “Cautionary Note Regarding – Forward-Looking Statements” below and elsewhere in this report, and under the heading “Risk Factors” and “Environmental Laws and Regulations” disclosed in our annual report on Form 10-K for the fiscal year ended September 30, 2015, filed with the U.S. Securities and Exchange Commission (“SEC”) on December 29, 2017.

Our consolidated financial statements and the supplemental information thereto are reported in United States dollars and are prepared based upon United States generally accepted accounting principles (“US GAAP”). References in this Form 10-Q to “$” are to United States dollars and references to “Cdn$” are to Canadian dollars. On February 20, 2018, the daily rate of exchange for Canadian dollars expressed in US$ was Cdn$1.00 = US$0.7923 as reported by the Bank of Canada. The following table sets forth the rates of exchange for the Cdn$, expressed in US dollars, in effect at the end of the following periods and the average rates of exchange during such periods, based on the rates of exchange for such periods as reported by the Bank of Canada.

General Overview

Deep Well Oil & Gas, Inc., along with its subsidiaries through which it conducts business, is an emerging independent junior oil sands exploration and development company headquartered in Edmonton, Alberta, Canada. Our immediate corporate focus is to develop the existing oil sands land base where we have working interests ranging from 25% to 100% in the Peace River oil sands area of Alberta, Canada. Our principal office is located at Suite 700, 10150 - 100 Street, Edmonton, Alberta, Canada T5J 0P6, our telephone number is (780) 409-8144, and our fax number is (780) 409-8146. Deep Well Oil & Gas, Inc. is a Nevada corporation and trades on the OTC Marketplace under the symbol DWOG. We maintain a website at www.deepwelloil.com or www.DWOG.com. The contents of our website are not part of the quarterly report on Form 10-Q.

Results of Operations

Since the inception of our current business plan, our operations have consisted of various exploration and start-up activities relating to our properties, including the acquisition of lease holdings, raising capital, locating joint venture partners, acquiring and analyzing seismic data, complying with environmental regulations, providing project management, drilling, testing and analyzing of wells to define our oil sands reservoir, and development planning of our Alberta Energy Regulatory (“AER”) approved thermal recovery projects, which includes our steam assisted gravity drainage project where we have a 25% working interest.

During the fourth quarter of our 2015 fiscal year, our Company voluntarily changed its method of accounting for our oil and gas properties from the successful efforts method to the full cost method of accounting. Accordingly, financial information for prior periods has been recast to reflect retrospective application of the full cost method. We believe that the full cost method is preferable as it better reflects the results of our Company’s operations and the economics of exploring for and developing our non-traditional long life oil sands assets in the Peace River oil sands area in Alberta. See Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements under Item 1 of this quarterly report on Form 10-Q. The following table sets forth summarized financial information:

First production from our present joint Steam Assisted Gravity Drainage Demonstration Project (the “SAGD Project”) began on September 16, 2014. For the three month period ending March 31, 2016, oil revenue totaled $27,190 before deduction of royalties. For the three month period ending March 31, 2016, the volume of oil delivered was 9,545 barrels net to our Company, before royalties, with an average oil sales price of $2.85 per barrel ($3.91 per barrel Cdn). As a result of the low-price environment for bitumen in 2015 and early 2016, a majority of our Company’s Joint Venture partners voted to temporarily suspend operations of the SAGD Project at the end of February 2016. For the six month period ending March 31, 2016, we

Existing SAGD Project Surface Facility located on Section 7-30-91-12W5.

recorded oil revenue in the amount of $148,181 before deduction of royalties. For the six month period ending March 31, 2016, the volume of oil delivered was 19,156 barrels net to our Company, before royalties, with an average oil sales price of $7.74 per barrel ($10.48 per barrel Cdn). For the three month period ending March 31, 2015, we recorded oil revenue in the amount of $83,401 before deduction of royalties. For the three month period ending March 31, 2015, the volume of oil delivered was 5,922 barrels net to our Company, before royalties, with an average oil sales price of $16.51 per barrel ($20.44 per barrel Cdn). For the six month period ending March 31, 2015, we recorded oil revenue in the amount of $229,801 before deduction of royalties. For the six month period ending March 31, 2015, the volume of oil delivered was 9,536 barrels net to our Company, before royalties, with an average oil sales price of $24.06 per barrel ($28.49 per barrel Cdn). The realized sales price of our oil is discounted for diluent, blending, trucking, pipeline access and additional treating costs compared to the West Texas Intermediate (“WTI”) benchmark price, but paid in Canadian dollars. While oil prices remained low in 2015 and early 2016, the Canadian dollar weakened and in 2015 and early 2016 offset some of the lower WTI price impact. Our net operating margin after operating expenses is zero since at this time any negative operating margins are reimbursed to us under the farmout agreement we entered into on July 31, 2013 (the “Farmout Agreement”) with an additional joint venture partner (the “Farmee”) to fund our share of the current SAGD Project. Transportation costs are included in these operating costs. Therefore, the total share of the capital costs and operating expenses of our Company’s joint SAGD Project, has been funded in accordance with the Farmout Agreement, at a net cost to our Company of $Nil. As required by the Farmout Agreement, the Farmee has since reimbursed our Company and/or paid the operator in total approximately $21.5_ million ($26.7 million Cdn) for the Farmee’s share and our share of the capital costs and operating expenses of the SAGD Project as of November 30, 2017. These costs included the drilling and completion of one SAGD well pair; the purchase and transportation of equipment of which included the once through steam generator (“OTSG”), production tanks, water treatment plant, and power generators; installation and construction of the steam plant facility; testing and commissioning; the purchase of the water source and disposal wells; construction of pipelines and expenditures to connect and tie-in the source and disposal water wells to the steam plant facility along with a fuel source tie-in pipeline; equipment for processing and treating the bitumen production at the SAGD facility site; replacement of the electrical submersible pump; front end costs for the expansion; and the operating expenses associated with the steaming and production of the one SAGD well pair.

For the three months ended March 31, 2016, our general and administrative expenses decreased by $434,399 compared to the three months ended March 31, 2015, which was primarily due to (i) a decrease of $214,453 in non-cash share based compensation charged to expense, which was mainly due to vested stock options we granted on December 4, 2013, September 19, 2014 and November 17, 2014 to our directors and contractors; and (ii) a decrease of foreign exchange loss of $152,134; and (iii) a decrease of engineering fees of $43,494 for the preparation of an independent evaluation of our Sawn Lake properties. We also received $90,000 during this quarter from one of our joint venture partners in accordance with a Farmout Agreement to offset some of our monthly operational expenses. After adjusting for the non-cash items listed above, our general and administrative expenses were $155,758 for the three months ended March 31, 2016 compared to $221,203 for the three months ended March 31, 2015.

For the six months ended March 31, 2016, our general and administrative expenses decreased by $803,723 compared to the six months ended March 31, 2015, which was primarily due to (i) a decrease of $462,758 in non-cash share based compensation charged to expense, which was mainly due to vested stock options we granted in 2013 and 2014 to our directors and contractors; and (ii) a decrease of $204,845 in foreign exchange loss; and (iii) a decrease of engineering fees of $86,865. We also received $180,000 during the last six months from one of our joint venture partners in accordance with the Farmout Agreement, to offset some of our monthly operational expenses. After adjusting for the non-cash items listed above, our general and administrative expenses were $355,160 for the six months ended March 31, 2016 compared to $492,017 for the six months ended March 31, 2015.

For the three months ended March 31, 2016, our depreciation, depletion, and accretion expense decreased by $4,412 compared to the three months ended March 31, 2015, which was primarily due to the depreciating value of our assets. Depreciation expense is computed using the declining balance method over the estimated useful life of the asset. In compliance with our accounting policy, only half of the depreciation is taken in the year of acquisition. No significant asset purchases were made in the quarter ended March 31, 2016.

For the six months ended March 31, 2016, our depreciation and accretion expense decreased by $8,293 compared to the six months ended March 31, 2015, which was primarily due to the depreciating value of our assets. Depreciation expense is computed using the declining balance method over the estimated useful life of the asset. In compliance with our accounting policy, only half of the depreciation is taken in the year of acquisition. No significant depreciable asset purchases were made in the quarter ended March 31, 2016.

For the three months ended March 31, 2016, there were no significant increases or decreases for rental and other income compared to the three months ended March 31, 2015.

For the six months ended March 31, 2016, rental and other income increased by $1,080 compared to the six months ended March 31, 2015.

For the three months ended March 31, 2016, interest income decreased by $317 compared to the three months ended March 31, 2015.

For the six months ended March 31, 2016, interest income decreased by $967 compared to the six months ended March 31, 2015.

As a result of the above transactions, we recorded a decrease of $438,241 in our net loss and comprehensive loss from operations for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. As discussed above, this increase was primarily due to decreases in non-cash share-based compensation expenses and foreign exchange loss.

As a result of the above transactions, we recorded a decrease of $812,129 in our net loss and loss from operations for the six months ended March 31, 2016 compared to the six months ended March 31, 2015. As discussed above, this increase was primarily due to decreases in non-cash share-based compensation expenses and foreign exchange loss.

Operations

In accordance with the Farmout Agreement the Farmee has agreed to provide up to $40,000,000 in funding for our portion of the costs for the SAGD Project in return for a net 25% working interest in 12 sections where we had a working interest of 50% before the execution of the Farmout Agreement. The Farmee is also required to provide funding to cover monthly operating expenses of our Company provided that such funding shall not exceed $30,000 per month.

The first SAGD well pair established that SAGD thermal technology is effective in producing oil from the Bluesky reservoir formation at Sawn Lake. Our SAGD Project also provided valuable productivity information about the Bluesky reservoir. The following graph sets out the production levels since the project started producing. In October of 2015, the operator began steam rate trials to optimize production while lowering the steam injection rate, thereby lowering the steam to oil ratio (“SOR”). The SOR is reflective of the amount of steam needed to produce one barrel of oil. The average SOR for January and February of 2016 was 2.1.

These production numbers along with the corresponding SORs compare favorably to analogous reservoirs in thermal recovery projects that we are monitoring and using as a basis of comparison. The capital costs of the existing SAGD Project steam plant facility, with pipelines and one SAGD well was approximately $26.5 million (Cdn $34.8 million) on a 100% working interest basis, of which our share is covered under the Farmout Agreement (these capital costs do not include the start-up operating expenses to initiate oil production from the SAGD well pair). As a result of the low-price environment for bitumen in 2015 and early 2016, a majority of our Company’s Joint Venture partners voted to temporarily suspend operations of the SAGD Project at the end of February 2016.

The current SAGD Project has:

We also recently participated in drilling one core well in August of 2017. The well was drilled to a total depth of 681 meters. The results of this well will be used for an application for continuation of the mineral rights on one of our oil sands leases.

In August 2013, we received approval from the AER for our horizontal cyclic steam stimulation project (“HCSS Project”) application. It is anticipated that we will develop a thermal demonstration project on our properties followed by a commercial expansion project on one half section of land located on section 10-92-13W5 of our Sawn Lake oil sands properties where we currently have a 90% working interest. We have since received the final performance results and revised reservoir modeling studies from our SAGD Project which will be used to fine-tune our HCSS Project facility design before we initiate start-up operations on the half of a section of land where we plan to drill two horizontal wells to test the use of HCSS technology. We performed an environmental field study and surveyed the proposed location of our planned HCSS Project site and recently received AER approval for the surface wellsite and access road for this project.

Currently, we have a 90% working interest in 51 sections on six oil sands leases and a 100% working interest in five sections on one oil sands lease in the Peace River oil sands area of Alberta, where we are the operator. In addition, we have a 25% working interest in another 12 sections on two oil sands leases in the Peace River oil sands area of Alberta. These nine oil sands leases are contiguous and cover 43,015 gross acres (17,408 gross hectares) with our Company having 34,096 net acres (13,798 net hectares) as shown in the map below. The development progress of our properties is governed by several factors such as federal and provincial governmental regulations. Long lead times in getting regulatory approval for thermal recovery projects are commonplace in our industry. Road bans, winter access only roads and environmental regulations can, and often, do delay development of similar projects. Because of these and other factors, our oil sands project could take significantly longer to complete than regular conventional drilling programs for lighter oil.

Liquidity and Capital Resources

As of March 31, 2016, our total assets were $23,625,168 compared to $23,684,393 as of September 30, 2015.

Our total liabilities as of March 31, 2016 were $835,005 compared to $703,531 as of September 30, 2015. This decrease of $131,474 in our total liabilities was primarily the result of our payment for outstanding accounts payable to the operator of the SAGD Project for operating expenses, which was subsequently reimbursed to us by the Farmee under the terms of the Farmout Agreement.

Our working capital (current liabilities subtracted from current assets) is as follows:

As of March 31, 2016, we had working capital of $1,610,792 compared to a working capital of $1,848,876 as of September 30, 2015. This decrease of $238,084 is mainly the result of (i) the net change of accounts receivable, offset by the increase of accounts payable as described above; (ii) cash used for general and administrative expenses; and (iii) $453,180 transferred and held in trust for a potential acquisition which was not concluded and was subsequently returned to us in May of 2016. As of March 31, 2016, we had no long-term third party debt other than our estimated asset retirement obligations on oil and gas properties.

On July 31, 2013, we entered into the Farmout Agreement to fund our share of the costs of our joint SAGD Project. As of March 31, 2016, we recorded $283,789 in accounts payable due to the operator for our working interest share of the outstanding monthly operating expenses of the SAGD Project, of which all is reimbursable by the Farmee in accordance with the Farmout Agreement. Therefore, this amount is also recorded in accounts receivable to be paid to us from the Farmee to cover our share of the costs of the SAGD Project.

As reported on our condensed Consolidated Statement of Cash Flows under “Operating Activities”, for the six months ended March 31, 2016, our net cash used in operating activities was $738,971 compared to $195,413 for the six months ended March 31, 2015. This increase of $543,558 on our operating activities was primarily the result of $453,180 transferred and held in trust for a potential acquisition which was not concluded and was subsequently returned to us in May of 2016.

As reported on our condensed Consolidated Statement of Cash Flows under “Investing Activities”, we had an increase of $54,234 on investment in our oil and gas properties for the six months ended March 31, 2016, compared to the six months ended March 31, 2015. There were no significant investing activities during these periods.

As reported on our condensed Consolidated Statement of Cash Flows under “Financing Activities”, for the six months ended March 31, 2016, there was no cash inflow or outflow in financing activities. For the for the six months ended March 31, 2015, we received $5,002 from one shareholder in exchange for 47,618 shares of our common stock upon the exercise by that shareholder of warrants at an exercise price of $0.105 per common share.

Our cash and cash equivalents as of March 31, 2016 was $965,387 compared to $2,107,058 as of March 31, 2015. This decrease of $1,141,671 in cash was primarily due to $453,180 transferred and held in trust for a potential acquisition as described above and general and administrative expenses. As of March 31, 2016, we had no long-term debt other than our estimated asset retirement obligations on oil and gas properties.

Our current SAGD Project operating costs are covered by the Farmout Agreement. For our long-term operations, we anticipate that, among other alternatives, we may raise funds during the next twenty-four months through sales of our equity securities or debt. We also note that if we issue more shares of our common stock, our stockholders will experience dilution in the percentage of their ownership of common stock. We may not be able to raise sufficient funding from stock sales for long-term operations and if so, we may be forced to delay our business plans until adequate funding is obtained.

Full Cost Method of Accounting

Our Company’s Board adopted the full cost method of accounting for its oil sands activities effective July 1, 2015. Our Company’s Management determined that it is preferable to change its accounting policy for its oil sands properties and adopt the full cost method under U.S. GAAP to better reflect our non-traditional oil sands resource assets in the Peace River oil sands area in Alberta, Canada.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Cautionary Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q, including all referenced Exhibits, contains “forward-looking statements” within the meaning of the United States federal securities laws. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, projected costs and plans and objectives of management for future operations, are forward-looking statements. The words “may,” “believe,” “intend,” “will,” “anticipate,” “expect,” “estimate,” “project,” “future,” “plan,” “strategy,” “probable,” “possible,” or “continue,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters, often identify forward-looking statements. For these statements, Deep Well claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this quarterly report include, among others, statements with respect to:

These forward-looking statements are based on the beliefs and expectations of our management and are subject to significant risks and uncertainties. If underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results may differ materially from current expectations and projections. Factors that could cause actual results to differ materially from those set forward in the forward-looking statements include, but are not limited to:

The preceding bullets outline some of the risks and uncertainties that may affect our forward-looking statements. For a full description of risks and uncertainties, see the sections entitled “Risk Factors” and “Environmental Laws and Regulations” of our annual report on Form 10-K for the fiscal year ended September 30, 2015 filed with the SEC on December 29, 2017. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. Any forward-looking statement speaks only as of the date on which it was made and, except as required by law, we disclaim any obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q, 8-K and any other SEC filing or amendments thereto should be consulted.

We are a smaller reporting company as defined by Rule 12b-2 under the Exchange Act and therefore we are not required to provide the information required under this item.

Disclosure Controls and Procedures

As of the end of our fiscal quarter ended March 31, 2016, an evaluation of the effectiveness of our “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) was carried out under the supervision and with the participation of our principal executive officer and principal financial officer. Based upon that evaluation and due to the fact that our Company was late in filing its quarterly report on Form 10-Q for the period ended March 31, 2016, our principal executive officer and principal financial officer have concluded that as of the end of that quarter, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

It should be noted that while our principal executive officer and principal financial officer believe that our disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Changes In Internal Control Over Financial Reporting

Effective July 1, 2015, as approved by our Company’s Board of Directors, our Company determined that it is preferable to change its accounting policy to full cost accounting under U.S. GAAP. In the year ended September 30, 2015, our Company modified certain policies, procedures, and related internal controls that were impacted by the change in accounting principle from successful efforts method of accounting to the full cost method of accounting. There was no change in our internal controls over financial reporting during the period covered by this Quarterly Report on Form 10-Q that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

None.

Although we are a smaller reporting company as defined by Rule 12b-2 under the Exchange Act and are therefore not required to provide the information required under this item, there have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K for the fiscal year ended September 30, 2015, filed with the SEC on December 29, 2016.

None.

None.

Not applicable.

Information to be Reported on Form 8-K

Deep Well reported all information that was required to be disclosed on Form 8-K during the period covered by this quarterly report on Form 10-Q for the period ended March 31, 2016.

Shareholder Nominations

Other than the recent adoption of our corporate governance and nominating committee charters as previously disclosed in our annual report on Form 10-K for the year ending September 30, 2015, there have been no changes to the procedures by which shareholders may recommend nominees to our Company’s Board of Directors during the time period covered by this quarterly report on Form 10-Q for the period ended March 31, 2016.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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