GULFSLOPE ENERGY, INC. - Annual Report: 2022 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 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 the issuer as specified in its charter)
| Delaware | 16-1689008 |
| (State or Other Jurisdiction of | (I.R.S. Employer I.D. No.) |
| incorporation or organization) |
1000 Main St., Suite 2300
Houston, Texas 77002
(Address of Principal Executive Offices)
(281) 918-4100
(Registrant’s Telephone Number)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| Common Stock, par value $0.001 | GSPE | OTCPK |
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates was $10,763,549 based on shares held by non-affiliates. These computations are based upon the closing sales price of $ for the common stock of the Company on the OTCPK of the Financial Industry Regulatory Authority, Inc. (“FINRA”) on March 31, 2022.
Indicate the number of shares outstanding of each of the Registrant’s classes of common equity, as of the latest practicable date:
| Class | Outstanding as of December 27, 2022 | |
| Common Stock, $0.001 par value per share |
Documents incorporated by reference: None
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TABLE OF CONTENTS
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PART I
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
In this Annual Report, references to “GulfSlope Energy,” “GulfSlope,” the “Company,” “we,” “us,” and “our” refer to GulfSlope Energy, Inc., the Registrant.
This Annual Report on Form 10-K (this “Annual Report” or this “Report”) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical facts, included in this Annual Report are forward looking statements, including, without limitation, statements regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management. These forward-looking statements may be, but are not always, identified by their use of terms and phrases such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,” “plan,” “will,” “shall,” “should,” “could” and “potential,” and similar terms and phrases, including when used in the negative. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. All forward-looking statements are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Annual Report including in Part I, Item 1A, “Risk Factors.” Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.
ITEM 1. BUSINESS
General
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.
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 U. S. 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 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.
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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 deepwater 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 has utilized highly experienced geo-scientists who have 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, the Company has historically 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 have identified multiple prospects that require the acquisition of additional leases in our core area. Our lease has a five-year primary term and was granted a three-year additional term and expires on October 31, 2025. BOEM’s regulatory framework provides multiple options for leaseholders to apply to receive extensions of lease terms under specified conditions. 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, in order 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.
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Oil and Natural Gas Industry
The oil and natural gas industry is a complex, multi-disciplinary sector that varies greatly across geographies. As a heavily regulated industry, operating conditions are subject to political regimes and changing legislation. Governments can either induce or deter investment in exploration and production, depending on legal requirements, fiscal and royalty structures and regulation. Beyond political considerations, exploration and production for hydrocarbons is an extremely risky business with multiple failure modes. Exploration and production wells require substantial investment and are long-term projects, sometimes exceeding twenty years. Regardless of the effort spent on an exploration or production prospect, success is difficult to attain. Even though modern equipment, including seismic equipment and advanced software has helped geologists find producing structures and map reservoirs, they do not guarantee any outcome. Drilling is the only method to ultimately determine whether a prospect will be productive, and even then, many complications can arise during drilling (e.g., those relating to drilling depths, pressure, porosity, weather conditions, permeability of the formation and rock hardness, among others).
Typically, there is a significant chance that exploratory wells will result in non-producing dry holes, leaving investors with the cost of seismic data and a dry well, which can total millions of dollars. Even if oil or gas is produced from a particular well, there is always the possibility that treatment, at additional cost, may be required to make production commercially viable. Further, production profiles decline over time. In summary, oil and gas exploration and production is an industry with high risks and high entry barriers.
Oil and natural gas prices can have a significant impact on the commercial feasibility of a project. Certain projects may become feasible with higher prices or, conversely, may falter with lower prices. Volatility in the price of oil, natural gas and other commodities has increased and is likely to continue in the future. This volatility complicates the assessment of the commercial viability of many oil and gas projects. Most governments have enforced strict regulations to uphold high standards of environmental awareness; thus, holding companies to a high degree of responsibility vis-a-vis protecting the environment. At this time, the Company does not have any production or proved oil or natural gas reserves.
Competition
We operate in a highly competitive environment for generating, evaluating and drilling prospects and for acquiring properties. Many of our competitors are major or large independent oil and natural gas companies that possess and employ financial resources well in excess of the Company’s resources. We believe that we may have to compete with other companies when acquiring leases or oil and gas properties. These additional resources can be particularly important in reviewing prospects and purchasing properties. Competitors may be able to evaluate and purchase a greater number of properties and prospects than our financial or personnel resources permit. Competitors may also be able to pay more for properties and prospects than we are able or willing to pay. Further, our competitors may be able to expend greater resources on the existing and changing technologies that we believe will impact attaining success in the industry. If we are unable to compete successfully in these areas in the future, our future growth may be diminished or restricted. Furthermore, these companies may also be better able to withstand the financial pressures of unsuccessful drill attempts, delays, sustained periods of volatility in financial or commodity markets and generally adverse global and industry-wide economic conditions and may be better able to absorb the burdens resulting from changes in relevant laws and regulations, which would adversely affect our operations.
Governmental Regulation
Our oil and natural gas operations are subject to various federal, state, and local governmental regulations. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, pooling of properties, occupational health and safety, and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas wells below actual production capacity in order to conserve supplies of oil and natural gas. The production, handling, storage, transportation, and disposal of oil and gas, by-products thereof, and other substances and materials produced or used in connection with oil and gas operations are also subject to regulation under federal, state, and local laws and regulations relating primarily to the protection of human health and the environment. State and local laws and regulations may affect the prices at which royalty owners are paid for their leases by requiring more stringent disclosure and certification requirements, adjusting interest rates for late payments, raising legal and administrative costs and imposing more costly default contractual terms. The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations. Although the regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens generally do not affect us any differently or to any greater or lesser extent than they affect others in our industry with similar business models.
Our operations on federal oil and natural gas leases in the United States Gulf of Mexico are subject to regulation by the Bureau of Safety and Environmental Enforcement (“BSEE”), the Bureau of Ocean Energy Management (“BOEM”) and the Office of Natural Resources Revenue (“ONRR”), which are all agencies of the U.S. Department of the Interior (“DOI”). These leases contain relatively standardized terms and require compliance with detailed BSEE and BOEM regulations and orders issued pursuant to various federal laws, including the federal Outer Continental Shelf Lands Acts (“OCSLA”). These laws and regulations are subject to change, and many new requirements, including those related to safety, permitting and performance, have been imposed by BSEE and BOEM subsequent to the 2010 Deepwater Horizon incident. For offshore operations, lessees must obtain BOEM approval for exploration, development and production plans prior to the commencement of such operations. In addition to permits required from other agencies such as the U.S. Environmental Protection Agency (the “EPA”), lessees must obtain a permit from BSEE prior to the commencement of drilling and comply with regulations governing, among other things, engineering and construction specifications for production facilities, safety procedures, plugging and abandonment (“P&A”) of wells on the OCS, calculation of royalty payments and the valuation of production for this purpose, and removal of facilities.
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The trend in the United States over the past decade has been for these governmental agencies to continue to evaluate and as necessary develop and implement new, more restrictive requirements. President Biden has made tackling climate change, including the restriction or elimination of future greenhouse gases (“GHGs”), a priority in his administration. The Biden Administration has already adopted several executive orders and is expected to pursue additional orders and pursue legislation, regulations or other regulatory initiatives in support of this regulatory agenda. Notably, President Biden issued an executive order in January 2021 suspending new leasing activities for oil and gas exploration and production on federal lands and offshore waters pending review and reconsideration of federal oil and gas permitting and leasing practices. The suspension of these federal leasing activities prompted legal action by several states against the Biden Administration, resulting in issuance of a nationwide preliminary injunction by a federal district court in June 2021, effectively halting implementation of the leasing suspension. Subsequent federal litigation, however, has impeded the most recent federal oil and gas lease sale in the Gulf of Mexico requiring the DOI to conduct a new environmental analysis that takes into consideration such climate effects before holding another sale. In November 2021, the DOI released its report on federal oil and gas leasing and permitting practices. The report includes recommendations in respect to offshore sector, including adjusting royalty rates to ensure that the full value of the tracts being leased are captured, strengthening financial assurance coverage amounts that are required by operators, establishing a “fitness to operate” criteria that companies would need to meet in respect of safety, environmental and financial responsibilities in order to operate on the OCS. Several of the report recommendations require action by the Congress and cannot be implemented unilaterally by the Biden Administration. Uncertainty on future Biden Administration actions with regard to offshore oil and gas activities on the OCS together with the issuance of any future executive orders or adoption and implementation of laws, rules or initiatives that further restrict, delay or result in cancellation of existing oil and gas activities on the OCS could have a material adverse effect on our business and operations.
Compliance with these regulatory actions, or any new laws, regulations or other legal initiatives could result in significant costs, including increased capital expenditures and operating costs, and could adversely impact our business. In addition, under certain circumstances, BSEE may require our operations on federal leases to be suspended or terminated. Any such suspension or termination could adversely affect our financial condition and operations.
Hurricanes in the Gulf of Mexico can have a significant impact on oil and gas operations on the OCS. The effects from past hurricanes have included structural damage to fixed production facilities, semi-submersibles and jack-up drilling rigs. The BOEM and the BSEE continue to be concerned about the loss of these facilities and rigs as well as the potential for catastrophic damage to key infrastructure and the resultant pollution from future storms. In an effort to reduce the potential for future damage, the BOEM and the BSEE have periodically issued guidance aimed at improving platform survivability by taking into account environmental and oceanic conditions in the design of platforms and related structures.
Environmental Regulation
The operation of our future oil and natural gas properties will be subject to numerous federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Applicable U.S. federal environmental laws include, but are not limited to, the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), the Clean Water Act (“CWA”) and the Clean Air Act (“CAA”). These laws and regulations govern environmental cleanup standards, require permits for air, water, underground injection, waste disposal and set environmental compliance criteria. In addition, state and local laws and regulations set forth specific standards for drilling wells, the maintenance of bonding requirements in order to drill or operate wells, the spacing and location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells, and the prevention and cleanup of pollutants and other matters. Typically, operators maintain insurance against costs of clean-up operations, but are not fully insured against all such risks. Additionally, U.S. Congress and federal and state agencies frequently revise the environmental laws and regulations, and any changes that result in delay or more stringent and costly permitting, waste handling, disposal and clean-up requirements for the oil and gas industry could have a significant impact on our operating costs. There can be no assurance that future developments, such as increasingly stringent environmental laws or enforcement thereof, will not cause us to incur material environmental liabilities or costs.
Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal fines and penalties and the imposition of injunctive relief. Accidental releases or spills may occur in the course of the operations of our properties, and we cannot assure you that we will not incur significant costs and liabilities as a result of such releases or spills, including any third-party claims for damage to property, natural resources or persons.
Among the environmental laws and regulations that could have a material impact on the oil and natural gas exploration and production industry, and our business are the following:
Waste Discharges. The CWA and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances, into waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or an analogous state agency. The CWA and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by an appropriately issued permit. Spill prevention, control and countermeasure requirements of federal laws mandate preparation of detailed plans that address spill response, including appropriate containment berms and similar structures to help prevent the contamination of navigable waters by a petroleum hydrocarbon tank spill, rupture or leak. In addition, the CWA and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. Federal and state regulatory agencies can impose administrative, civil and criminal penalties as well as other enforcement mechanisms for noncompliance with discharge permits or other requirements of the CWA and analogous state laws and regulations.
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Air Emissions —The CAA and comparable state statutes restrict the emission of air pollutants and affect both onshore and offshore oil and natural gas operations. New facilities may be required to obtain separate construction and operating permits before construction work can begin or operations may start, and existing facilities may be required to incur capital costs in order to remain in compliance. Also, the EPA has developed, and continues to develop, more stringent regulations governing emissions of toxic air pollutants, and is considering the regulation of additional air pollutants and air pollutant parameters. For example, in 2015, the EPA lowered the National Ambient Air Quality Standard (“NAAQS”) for ozone from 75 to 70 parts per billion. State implementation of the revised NAAQS could result in stricter permitting requirements, delays or prohibit our ability to obtain such permits, and result in increased expenditures for pollution control equipment, the costs of which could be significant.
Climate Change — The threat of climate change continues to attract considerable public, governmental and scientific attention in the United States and in foreign countries. As a result, numerous proposals have been made at the international, national, regional and state levels of government to monitor and limit existing emissions of GHG as well as to restrict or eliminate such future emissions. These efforts have included consideration of cap-and-trade programs, carbon taxes, GHG reporting and tracking programs and regulations that directly limit GHG emissions from certain sources. In the United States, no comprehensive climate change legislation has been implemented at the federal level. Under the Biden Administration, however, the EPA has adopted regulations under the existing CAA that, among other things, impose preconstruction and operating permit requirements on certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources, and implement New Source Performance Standards directing the reduction of methane from certain new, modified or reconstructed facilities in the oil and natural gas sector. Compliance with these rules or other similar rules implemented in the future could result in increased compliance costs on our operations. In November 2021, the EPA also issued a proposed rule that would more stringently regulate methane emissions from crude oil and natural gas sources. The EPA plans to issue a supplemental proposal enhancing this proposed rulemaking in 2022 with the goal of issuing a final rule by the end of 2022. Additionally, state implementation of revised air emission standards could result in stricter permitting requirements, delaying, limiting or prohibiting our ability to obtain such permits and result in increased expenditures for pollution control equipment, the costs of which could be significant.
At the international level, there exists numerous conventions and non-binding commitments of participating nations with goals of limiting their GHG emissions and fossil fuel subsidies. These include the United Nations-sponsored “Paris Agreement,” to which President Biden recommitted the Unites States, thereby requiring the United States to determine its emissions reduction goals every five years after 2020. The international community also gathered in Glasgow in November 2021 at the 26th Conference of the Parties (“COP26”), at which the United States and European Union jointly announced the launch of a Global Methane Pledge, an initiative which over 100 counties joined, committing to a collective goal of reducing global methane emissions by at least 30 percent from 2020 levels by 2030, including “all feasible reductions” in the energy sector. The impacts of these orders, pledges, agreements and any legislation or regulation promulgated to fulfill the United States’ commitments under the Paris Agreement, COP26, or other international conventions cannot be predicted at this time.
Governmental, scientific and public concern over the threat of climate change arising from GHG emissions has resulted in increasing federal political risk regarding climate change. Litigation risks are also increasing, as a number of cities, local governments and other plaintiffs have sought to bring suit against oil and natural gas companies in state or federal court, alleging, among other things, that such companies created public nuisances by producing fuels that contributed to global warming effects, such as rising sea levels and therefore are responsible for roadway and infrastructure damages as a result, or alleging that the companies have been aware of the adverse effects of climate change for some time but defrauded their investors or customers by failing to adequately disclose those impacts. We are not currently a defendant in any of these lawsuits but could be named in actions making similar allegations.
Additionally, our access to capital may be impacted by climate change policies. Stockholders and bondholders currently invested in fossil fuel energy companies such as ours but concerned about the potential effects of climate change may elect in the future to shift some or all of their investments into non-fossil fuel energy related sectors. Institutional lenders who provide financing to fossil-fuel energy companies also have become more attentive to sustainable lending practices that favor “clean” power sources, such as wind and solar, making those sources more attractive, and some of them may elect not to provide funding for fossil fuel energy companies. Many of the largest U.S. banks have made “net zero” carbon emission commitments and have announced that they will be assessing financed emissions across their portfolios and are taking steps to quantify and reduce those emissions. These and other developments in the financial sector could lead to some lenders and investors restricting access to capital for or divesting from certain industries or companies, including the oil and natural gas sector, or requiring that borrowers take additional steps to reduce their GHG emissions. Additionally, there is the possibility that financial institutions will be pressured or required to adopt policies that limit funding for fossil fuel energy companies.
The OCSLA authorized the DOI to regulate activities authorized by the BOEM in the Central and Western Gulf of Mexico. The EPA has air quality jurisdiction over all other parts of the OCS. Under the OCSLA, DOI is limited to regulating offshore emissions of criteria and their precursor – pollutants to the extent they significantly affect the air quality of any state. BSEE conducts field inspections of emission sources installed on offshore platforms that have the potential to emit regulated air pollutants. The agency also reviews BOEM mandated monitoring and reporting of air emission sources for compliance with approved plan emission limits. BSEE may initiate measures to control and bring into compliance those operations determined to be in violation of applicable regulations or plan conditions by issuing Incidents of Noncompliance (“INC”) or recommending further enforcement action against potential violators.
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Oil Pollution Act. The Oil Pollution Act of 1990 (“OPA”) and regulations thereunder impose a variety of requirements on “responsible parties” related to the prevention of oil spills and liability for damages resulting from such spills in United States waters. A “responsible party” includes the owner or operator of an onshore facility, pipeline or vessel, or the lessee or permittee of the area in which an offshore facility is located. OPA assigns liability to each responsible party for oil cleanup costs and a variety of public and private damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction or operating regulation. If the party fails to report a spill or to cooperate fully in the cleanup, liability limits likewise do not apply. Few defenses exist to the liability imposed by OPA. OPA imposes ongoing requirements on a responsible party, including the preparation of oil spill response plans and proof of financial responsibility to cover environmental cleanup and restoration costs that could be incurred in connection with an oil spill.
National Environmental Policy Act. Oil and natural gas exploration and production activities on federal lands are subject to the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the U.S. Department of Interior, to evaluate major agency actions having the potential to significantly impact the environment. The process involves the preparation of either an environmental assessment or environmental impact statement depending on whether the specific circumstances surrounding the proposed federal action will have a significant impact on the human environment. The NEPA process involves public input through comments, which can alter the nature of a proposed project either by limiting the scope of the project or requiring resource-specific mitigation. NEPA decisions can be appealed through the court system, by process participants. This process may result in delaying the permitting and development of projects, increase the costs of permitting and developing some facilities and could result in certain instances in the cancellation of existing leases.
Worker Safety. The Occupational Safety and Health Act (“OSH Act”) and comparable state statutes regulate the protection of the health and safety of workers. The OSH Act’s hazard communication standard requires maintenance of information about hazardous materials used or produced in operations and provision of such information to employees. Other OSH Act standards regulate specific worker safety aspects of our operations. Failure to comply with OSH Act requirements can lead to the imposition of penalties.
Safe Drinking Water Act. The Safe Drinking Water Act and comparable state statutes may restrict the disposal, treatment or release of water produced or used during oil and gas development. Subsurface emplacement of fluids (including disposal wells or enhanced oil recovery) is governed by federal or state regulatory authorities that in some cases, includes the state oil and gas regulatory authority or the state’s environmental authority. These regulations may increase the costs of compliance.
Offshore Drilling. In 2011, the U.S. Department of Interior issued new rules designed to improve drilling and workplace safety in the U.S. Gulf of Mexico, and various congressional committees began pursuing legislation to regulate drilling activities and increase liability. The BOEM, BSEE and Office of National Resources Revenue are expected to continue to issue new safety and environmental guidelines or regulations for drilling in the U.S. Gulf of Mexico, and other regulatory agencies could potentially issue new safety and environmental guidelines or regulations in other geographic regions, and may take other steps that could increase the costs of exploration and production, reduce the area of operations and result in permitting delays. We are monitoring legislation and regulatory developments; however, it is difficult to predict the ultimate impact of any new guidelines, regulations or legislation. A prolonged suspension of drilling activity or permitting delays in the U.S. Gulf of Mexico and new regulations and increased liability for companies operating in this sector, whether or not caused by a new incident in the region, could adversely affect the business and planned operations of oil and gas companies.
Hazardous Substances and Wastes. CERCLA, also known as the “Superfund law,” imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that transported or disposed or arranged for the transport or disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file corresponding common law claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.
Protected and Endangered Species. The Endangered Species Act (“ESA”) restricts activities that may affect federally identified endangered and threatened species or their habitats. Additionally, the Migratory Bird Treaty Act (“MBTA”) implements various treaties and conventions between the United States and certain other nations for the protection of migratory birds. Under the MBTA, the taking, killing or possessing of migratory birds is unlawful without a permit. The Marine Mammal Protection Act (“MMPA”) similarly prohibits the taking of marine mammals without authorization. Additionally, the U.S. Fish and Wildlife Service (“FWS”) may make determinations on the listing of species as threatened or endangered under the ESA and litigation with respect to the listing or non-listing of certain species may result in more fulsome protections for non-protected or lesser-protected species. We conduct operations on oil and natural gas leases in areas where certain species that are protected by the ESA, MBTA and MMPA are known to exist and where other species that could potentially be protected under these statutes are known to exist. The FWS or the National Marine Fisheries Service may designate critical habitat that it believes is necessary for survival of a threatened or endangered species. A critical habitat designation could result in further material restrictions to federal land use and may materially delay or prohibit access to protected areas for oil and natural gas development. These statutes may result in operating restrictions or a temporary, seasonal or permanent ban in affected areas.
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Employees
We currently have six employees. We utilize consultants and contractors, as needed, to perform strategic, technical, operational and administrative functions, and as advisors.
Additional Information
We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, other reports and amendments to those reports with the U.S. Securities and Exchange Commission (“SEC”). Our reports filed with the SEC are available free of charge to the general public through our website at www.gulfslope.com. These reports are accessible on our website as soon as reasonably practicable after being filed with, or furnished to, the SEC. This Form 10-K and our other filings can also be obtained through the SEC’s web site at www.sec.gov. Information on our website is not a part of this Form 10-K.
ITEM 1A. RISK FACTORS
Certain factors may have a material adverse effect on our business, financial condition, and results of operations. You should consider carefully, the risks and uncertainties described below, in addition to other information contained in this Annual Report on Form 10-K, including our financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occur, our business, financial condition, results of operations and future prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or all, of your investment.
Risks Related to Our Business and Financial Condition
Our business plan requires substantial additional capital, which we may be unable to raise on acceptable terms, if at all, in the future, which may in turn limit our ability to execute our business strategy.
We expect our capital outlays and operating expenditures to increase substantially over at least the next several years as we expand our operations. Lease and property acquisition costs, as well as drilling operations, are very expensive, and we will need to raise substantial additional capital, through equity offerings, strategic transactions or debt financings in 2023, for capital expenditures and also for the acquisition of producing properties.
Our future capital requirements will depend on many factors, including:
| ● | the number, location, terms, and pricing of our anticipated lease acquisitions; | |
| ● | our financing of the lease acquisitions and associated bonding; | |
| ● | our ability to enter into partnerships, and farm-outs with other oil and gas exploration and production companies and/or financial investors on satisfactory terms; | |
| ● | location of any drilling activities, whether onshore or offshore, as well as the depth of any wells to be drilled; | |
| ● | cost of additional seismic data to license as well as the reprocessing cost; | |
| ● | the scope, rate of progress and cost of any exploration and production activities; | |
| ● | oil and natural gas prices; | |
| ● | our ability to locate and acquire oil and gas reserves; | |
| ● | our ability to produce those oil and natural gas reserves; | |
| ● | access to oil and gas services and existing pipeline infrastructure; | |
| ● | the terms and timing of any drilling and other production-related arrangements that we may enter into; | |
| ● | the cost and timing of governmental approvals and/or concessions; | |
| ● | the cost, number, and access to qualified industry professionals we employ; and | |
| ● | the effects of competition by larger companies operating in the oil and gas industry. |
We have planned operating and capital expenditures through December 2023 of approximately $10 million, which includes capital expenditures and general and administrative expenses. We will need to raise funds to cover these planned operating expenditures.
To the extent we are able to raise capital through equity financings, this may be dilutive to our stockholders. Alternative forms of future financings may include preferred stock with 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 best efforts private equity and debt financings. We do not have any credit or equity facilities available with financial institutions, stockholders, or third-d party investors, and will continue to rely on best efforts financings. There is no assurance that we can raise the capital necessary to fund our business plan. Failure to raise the required capital to fund operations, on favorable terms or at all, will have a material adverse effect on our operations, resulting in impairments of our oil and gas properties and could cause us to curtail or cease operations.
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Our fiscal 2022 financial statements express substantial doubt about our ability to continue as a going concern, raising questions as to our continued existence.
We have incurred losses since our inception resulting in an accumulated deficit of approximately $68.9 million and negative working capital totaling approximately $13.8 million at September 30, 2022. Further losses are anticipated as we continue to develop our business. To continue as a going concern, we estimate that we will need approximately $10 million to meet our obligations and planned operating expenditures through December 2023. These expenditures include prospect development and pursuit of acquisition costs, lease rentals to the BOEM, general and administrative expenses, and costs associated with IT and seismic acquisition and processing. In addition, we plan to extend the agreements associated with our loans from related parties, the accrued interest payable on these loans, as well as the Company’s accrued liabilities. We plan to finance our operations through equity and/or debt financings, and strategic transactions to include farm-outs, asset sales or mergers. There are no assurances that financing will be available with acceptable terms, if at all. If we are not successful in obtaining financing, our 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.
We have no proved reserves and areas that we decide to drill may not yield oil and natural gas in commercial quantities or quality, or at all.
We have no proved reserves. We have identified prospects based on available seismic and geological information that indicates the potential presence of oil and natural gas. However, the areas we decide to drill may not yield oil and natural gas in commercial quantities or quality, or at all. Most of our current prospects are in various stages of evaluation that will require substantial additional seismic data reprocessing and interpretation. Even when properly used and interpreted, 3-D seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not enable the interpreter to know whether hydrocarbons are, in fact, present in those structures. We do not know if our prospects will contain oil and natural gas in sufficient quantities or quality to recover drilling and completion costs or to be economically viable. Even if oil and natural gas is found on our prospects in commercial quantities, construction costs of pipelines and other transportation costs may prevent such prospects from being economically viable. If one or more of our prospects do not prove to be successful, our business, financial condition and results of operations will be materially adversely affected.
The seismic data we use are subject to non-exclusive license arrangements and may be licensed to our competitors, which could adversely affect the execution of our acquisition strategy and business plan.
Our 3-D seismic license agreements are non-exclusive, industry-standard agreements. Accordingly, the licensor of such seismic data has the right to license the same data that we acquired to our competitors, which could adversely affect our acquisition strategy and the execution of our business plan. We are not authorized to assign any of our rights under our license agreements, including a transaction with a potential joint venture partner or acquirer, without complying with the terms of the license agreements and a payment to the licensor (by us or the acquirer in the event of a change of control transaction or our partner in a joint venture transaction). However, our interpretation of this seismic data and importantly, reprocessing and the modeling of certain seismic data utilized to identify and technically support oil and gas prospects, is unique and proprietary to the Company.
3-D seismic interpretation does not guarantee that hydrocarbons are present or if present, produce in economic quantities.
We rely on 3-D seismic studies to assist us with assessing prospective drilling opportunities on our properties, as well as on properties that we may acquire. Such seismic studies are merely an interpretive tool and do not necessarily guarantee that hydrocarbons are present or, if present, produce in economic quantities, and seismic indications of hydrocarbon saturation are generally not reliable indicators of productive reservoir rock. These limitations of 3-D seismic data may impact our drilling and operational results, and consequently our financial condition.
Our lease may be terminated if we are unable to make future lease payments or if we do not drill in a timely manner.
The failure to timely affect all lease related payments could cause the lease to be terminated by the BOEM. Net lease rental obligations on our existing prospect are expected to be approximately $0.02 million in fiscal year 2023. Our lease has a five-year primary term and was granted a three-year additional term and expires on October 31, 2025. Our lease may be extended, by drilling a well capable of producing hydrocarbons and submitting a Plan of Production approved by the regulatory authorities. In addition, the terms of our lease may also be extended by the granting of a Subsalt Lease Term Extension, should we elect to apply and qualify for said extension on any lease(s). If we are not successful in raising additional capital, we may be unable to successfully exploit our properties, and we may lose the rights to develop these properties upon the expiration of our lease. If not successful in securing extensions, our lease will be subject to the competitive bid process in the semi-annual BOEM OCS Lease Sales.
We may not be able to develop oil and natural gas reserves on an economically viable basis.
To the extent that we succeed in discovering oil and/or natural gas reserves, we cannot assure that these reserves will be capable of production levels we project or in sufficient quantities to be commercially viable. On a long-term basis, our viability depends on our ability to find, develop and commercially produce oil and gas reserves, assuming we acquire leases or drilling rights. Our future reserves, if any, will depend not only on our ability to develop then-existing properties, but also on our ability to identify and acquire additional suitable producing properties or prospects, to find markets for the oil and natural gas we develop and to effectively distribute our production into markets.
Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion, and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, the shutdown of wells resulting from extreme weather conditions, problems in storage and distribution and adverse geological and mechanical conditions. While we will endeavor to effectively manage these conditions, we cannot be assured of doing so optimally, and we will not be able to eliminate them completely in any case. Therefore, these conditions could adversely impact our operations.
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We are substantially dependent on certain members of our management and technical team.
Investors in our common stock must rely upon the ability, expertise, judgment and discretion of our management and the success of our technical team in identifying and acquiring leases and producing properties, as well as discovering and developing any oil and gas reserves. Our performance and success are dependent, in part, upon key members of our management and technical team, and their loss or departure could be detrimental to our future success. In making a decision to invest in our common stock, you must be willing to rely to a significant extent on our management’s discretion and judgment. The loss of any of our management and technical team members could have a material adverse effect on our business prospects, results of operations and financial condition, as well as on the market price of our common stock. We may not be able to find replacement personnel with comparable skills. If we are unable to attract and retain key personnel, our business may be adversely affected. We do not currently maintain key-man insurance on any member of the management team.
We are an oil and natural gas exploration and production company with limited operating history, and there can be no assurance that we will be successful in executing our business plan. We may never attain profitability.
We commenced our business activity in March 2013, when we entered into 3-D license agreements covering approximately 2.2 million acres and have entered into additional 3-D license agreements with seismic companies to acquire additional data and reprocess seismic data. While we intend to engage in the acquisition, drilling, development, and production of oil and natural gas in the future, we currently have no reserves or production. As we are a relatively new business, we are subject to all the risks and uncertainties, which are characteristic of a new business enterprise, including the substantial problems, expenses and other difficulties typically encountered in the course of its business, in addition to normal business risks, as well as those risks that are specific to the oil and gas industry. Investors should evaluate us in light of the delays, expenses, problems and uncertainties frequently encountered by companies developing markets for new products, services and technologies. We may never overcome these obstacles.
We may be unable to access the capital markets to obtain additional capital that we will require to implement our business plan, which would restrict our ability to grow.
Our current capital on hand is insufficient to enable us to fully execute our business strategy in 2023. Because we are a company with limited resources, we may not be able to compete in the capital markets with much larger, established companies that have ready access to capital. Our ability to obtain needed financing may be impaired by conditions and instability in the capital markets (both generally and in the oil and gas industry in particular), our status as a early-stage enterprise without a demonstrated operating history, the location of our lease and prices of oil and natural gas on the commodities markets (which will impact the amount of financing available to us), and/or the loss of key consultants and management. Further, if oil and/or natural gas prices decrease, then potential revenues, if any, will decrease, which may increase our requirements for capital. Some of the future contractual arrangements governing our operations may require us to maintain minimum capital (both from a legal and practical perspective), and we may lose our contractual rights if we do not have the required minimum capital. If the amount of capital we can raise is not sufficient, we may be required to curtail or cease our operations.
We have a limited operating history with significant losses and expect losses to continue for the foreseeable future.
We have incurred annual operating losses since our inception. As a result, at September 30, 2022, we had an accumulated deficit of approximately $68.9 million. We had no revenues in 2022 and do not anticipate generating revenues in fiscal 2023, or in subsequent periods unless we are successful in discovering or acquiring economically recoverable oil or gas reserves. We expect continued losses in the foreseeable future until we are successful in discovering or acquiring economically recoverable oil or gas reserves.
The majority of our existing debt outstanding is payable on demand. If we are unable to repay our existing or future debt as it becomes due, we may be unable to continue as a going concern.
As of September 30, 2022, we owed John Seitz, our chief executive officer, a total of $8.7 million in notes, payable on demand and bearing interest at the rate of 5% per annum. Unpaid interest associated with these notes was $3.4 million as of September 30, 2022. In addition, approximately 16% of our outstanding common stock is controlled by Mr. Seitz. If demand for immediate payment of some or all notes were to occur, it will threaten our ability to continue as a going concern.
Our lack of diversification increases the risk of an investment in our common stock.
Our business will focus on the oil and gas industry in commercially advantageous offshore areas of the United States. Larger companies have the ability to manage their risk by diversification. However, we lack diversification, in terms of both the nature and geographic scope of our business. As a result, factors affecting our industry, or the regions in which we operate, will likely impact us more acutely than if our business were diversified.
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Strategic relationships upon which we rely are subject to change, which may diminish our ability to conduct our operations.
Our ability to successfully bid on and acquire properties, to discover resources, to participate in drilling opportunities and to identify and enter into commercial arrangements with customers and partners, depends on developing and maintaining close working relationships with industry participants and on our ability to select and evaluate suitable properties. Further, we must consummate transactions in a highly competitive environment. These realities are subject to change and may impair our ability to grow.
To develop our business, we will endeavor to use the relationships of our management and to enter into strategic relationships, which may take the form of joint ventures with other private parties or with local government bodies or contractual arrangements with other oil and gas companies, including those that supply equipment and other resources that we will use in our business. We may not be able to establish these strategic relationships, or if established, we may not be able to maintain them. In addition, the dynamics of our relationships with strategic partners may require that we incur expenses or undertake activities we would not otherwise incur or undertake in order to fulfill our obligations to these partners or maintain our relationships. If our strategic relationships are not established or maintained, our business prospects may be limited, which could diminish our ability to conduct our operations.
We may not be able to effectively manage our growth, which may harm our profitability.
Our strategy envisions building and expanding our business. If we fail to effectively manage our growth, our financial results will be adversely affected. Growth may place a strain on our management systems and resources. We must continue to refine and expand our business development capabilities, our systems, processes, and our access to financing sources. As we grow, we must continue to hire, train, supervise and manage new employees. We cannot assure you that we will be able to:
| ● | expand our systems effectively or efficiently or in a timely manner; | |
| ● | optimally allocate our human resources; or | |
| ● | identify and hire qualified employees or retain valued employees. |
If we are unable to manage our growth and our operations, our financial results could be adversely affected, which could prevent us from ever attaining profitability.
We may not realize all of the anticipated benefits from our future acquisitions, and we may be unable to successfully integrate future acquisitions.
Our growth strategy will, in part, rely on acquisitions. We have to plan and manage acquisitions effectively to achieve revenue growth and maintain profitability in our evolving market. We may not realize all of the anticipated benefits from our future acquisitions, such as increased earnings, cost savings and revenue enhancements, for various reasons, including difficulties integrating operations and personnel, higher than expected acquisition and operating costs or other difficulties, inexperience with operating in new geographic regions, unknown liabilities, inaccurate reserve estimates and fluctuations in market prices.
In addition, integrating acquired businesses and properties involves a number of special risks and unforeseen difficulties can arise in integrating operations and systems and in retaining and assimilating employees. These difficulties include, among other things:
| ● | operating a larger organization; | |
| ● | coordinating geographically disparate organizations, systems and facilities; | |
| ● | integrating corporate, technological and administrative functions; | |
| ● | diverting management’s attention from regular business concerns; | |
| ● | diverting financial resources away from existing operations; | |
| ● | increasing our indebtedness; and | |
| ● | incurring potential environmental or regulatory liabilities and title problems. |
Any of these or other similar risks could lead to potential adverse short-term or long-term effects on our operating results. The process of integrating our operations could cause an interruption of, or loss of momentum in, the activities of our business. Members of our management may be required to devote considerable amounts of time to this integration process, which decreases the time they have to manage our business. If our management is not able to effectively manage the integration process, or if any business activities are interrupted as a result of the integration process, our business could suffer.
Our future acquisitions could expose us to potentially significant liabilities, including P&A liabilities.
We expect that future acquisitions will contribute to our growth. In connection with potential future acquisitions, we may only be able to perform limited due diligence.
Successful acquisitions of oil and natural gas properties require an assessment of a number of factors, including estimates of recoverable reserves, the timing of recovering reserves, exploration potential, future oil and natural gas prices, operating costs and potential environmental, regulatory and other liabilities, including P&A liabilities. Such assessments are inexact and may not disclose all material issues or liabilities. In connection with our assessments, we perform a review of the acquired properties. However, such a review may not reveal all existing or potential problems. In addition, our review may not permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities.
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There may be threatened, contemplated, asserted or other claims against the acquired assets related to environmental, title, regulatory, tax, contract litigation or other matters of which we are unaware, which could materially and adversely affect our production, revenues and results of operations. We may be successful in obtaining contractual indemnification for preclosing liabilities, including environmental liabilities, but we expect that we will generally acquire interests in properties on an “as is” basis with limited remedies for breaches of representations and warranties. In addition, even if we are able to obtain such indemnification from the sellers, these indemnification obligations usually expire over time and could potentially expose us to liabilities that are not indemnified, which could materially adversely affect our production, revenues and results of operations.
We may be dependent upon third party operators of any oil and natural gas properties we may acquire.
Third parties may act as the operators of our oil and natural gas wells and control the drilling and operating activities to be conducted on our properties, if and when such assets are acquired. Therefore, we may have limited control over certain decisions related to activities on our properties relating to the timing, costs, procedure, and location of drilling or production activities, which could affect the Company’s results.
We may not be able to obtain drilling rigs and other equipment and geophysical service crews necessary to exploit any oil and natural gas resources we may acquire.
We may not be able to procure the necessary drilling rigs, and related services and equipment or the cost of such items may be prohibitive. Our ability to comply with future license obligations or otherwise generate revenues from the production of operating oil and natural gas wells could be hampered, as a result of this, and our business could suffer.
Risks Related to Our Industry in Which We Intend to Compete
An extended decline in oil prices and significant fluctuations in energy prices may continue indefinitely, affecting the commercial viability of our projects and negatively affecting our business prospects and viability.
The commercial viability of our projects is highly dependent on the price of oil and natural gas. Prices also affect our ability to borrow money or raise additional capital. We will need to obtain additional financing to fund our activities. Our ability to do so may be adversely affected by an extended decline in oil prices. If we are unable to obtain such financing when needed, on commercially reasonable terms, we may be required to cease our operations, which could have a materially adverse impact on the market price of our stock. An extended decline in oil prices may have a material adverse effect on our planned operations, financial condition, and level of expenditures that we may ultimately have to make for the development of any oil and natural gas reserves we may acquire.
The oil and gas markets are very volatile, and we cannot predict future oil and natural gas prices. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control. In addition, the prices we receive for any future production and the levels of any future production and reserves will depend on numerous factors beyond our control. These factors include, but are not limited to, the following:
| ● | changes in global supply and demand for oil and natural gas by both refineries and end users; | |
| ● | the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; | |
| ● | the price and volume of imports of foreign oil and natural gas; | |
| ● | political and economic conditions, including embargoes, in oil-producing countries or affecting other oil-producing activity; | |
| ● | the level of global oil and gas exploration and production activity; | |
| ● | the level of global oil and gas inventories; | |
| ● | weather conditions; | |
| ● | government policies to discourage use of fuels that emit GHGs and encourage use of alternative energy; | |
| ● | technological advances affecting energy consumption; | |
| ● | domestic and foreign governmental regulations and taxes; | |
| ● | proximity and capacity of oil and gas pipelines and other transportation facilities; | |
| ● | the price and availability of competitors’ supplies of oil and gas in captive market areas; | |
| ● | the introduction, price and availability of alternative forms of fuel to replace or compete with oil and natural gas; | |
| ● | import and export regulations for LNG (“liquified natural gas”) and/or refined products derived from oil and gas production from the US; | |
| ● | speculation in the price of commodities in the commodity futures market; | |
| ● | technological advances affecting energy consumption; | |
| ● | the availability of drilling rigs and completion equipment; and | |
| ● | the overall economic environment. |
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Further, oil and natural gas prices do not necessarily fluctuate in direct relationship to each other. The price of oil has been extremely volatile, and we expect this volatility to continue for the foreseeable future. The volatility of the energy markets makes it difficult to predict future oil and natural gas price movements with any certainty.
Exploration for oil and natural gas is risky and may not be commercially successful, impairing our ability to generate revenues.
Oil and natural gas exploration involves a high degree of risk. These risks are more acute in the early stages of exploration. We may not discover oil or natural gas in commercially viable quantities. It is difficult to project the costs of implementing an exploratory drilling program due to the inherent uncertainties of drilling in unknown formations, the costs associated with encountering various drilling conditions, such as over pressured zones (which may lead to blowouts, fires, and explosions) and tools lost in the hole, and changes in drilling plans, locations as a result of prior exploratory wells or additional seismic data and interpretations thereof, and final commercial terms negotiated with partners. Developing exploratory oil and gas properties requires significant capital expenditures and involves a high degree of financial risk. The budgeted costs of drilling, completing, and operating exploratory wells are often exceeded and can increase significantly when drilling costs rise. Drilling may be unsuccessful for many reasons, including title problems, adverse weather conditions (which may be more frequent as climate changes), cost overruns, equipment shortages, mechanical difficulties, and environmental hazards (including spills and toxic gas releases). There is no assurance that we will successfully complete any wells or if successful, that the wells would be economically successful. Moreover, the successful drilling or completion of any oil or gas well does not ensure a profit on investment. Exploratory wells bear a much greater risk of loss than development wells. We cannot assure you that our exploration activities will result in profitable operations, the result of which will materially adversely affect our business.
Competition within our industry may adversely affect our operations.
Competition within our industry is intense, particularly with respect to the acquisition of producing properties and undeveloped acreage. We compete with major oil and gas companies and other independent producers of varying sizes, all of which are engaged in the acquisition of properties and the exploration and development of such properties. Many of our competitors have financial resources and exploration and development budgets that are substantially greater than our budget, which may adversely affect our ability to compete. If other companies relocate to the Gulf of Mexico region, levels of competition may increase, and our business could be adversely affected. In the exploration and production business, some of the larger integrated companies may be better able than we are to respond to industry changes including price fluctuations, oil and gas demand, political change and government regulations.
We actively compete with other companies when acquiring new leases or oil and gas properties. For example, new leases acquired from BOEM are acquired through a “sealed bid” process and are generally awarded to the highest bidder. These additional resources can be particularly important in reviewing prospects and purchasing properties. The competitors may also have a greater ability to continue drilling activities during periods of low oil and gas prices, such as the current decline in oil prices, and to absorb the burden of current and future governmental regulations and taxation. Competitors may be able to evaluate, bid for and purchase a greater number of properties and prospects than our financial or personnel resources permit. Competitors may also be able to pay more for productive oil and gas properties and exploratory prospects than we are able or willing to pay. Further, our competitors may be able to expend greater resources on the existing and changing technologies that we believe impacts attaining success in the industry. If we are unable to compete successfully in these areas in the future, our future revenues and growth may be diminished or restricted.
The Biden Administration may pursue significant regulatory and political actions that could adversely af ect our results of operations, and our ability to implement our business strategy.
President Biden has made addressing the threat of climate change from GHG emissions a priority under his Administration. Regulatory agencies under the Biden Administration have issued proposed rulemakings and may issue new or amended rulemakings in support of President Biden’s regulatory and political agenda, which include reducing dependence on, and use of, fossil fuels and curtailment of hydraulic fracturing on federal lands. Our operations in the Gulf of Mexico require permits from federal and state governmental agencies for drilling and completion activities and to conduct other regulated activities and the Biden Administration may continue pursuing actions that delay or refuse approval of new leases for hydrocarbon exploration and development on federal lands and waters or delay or fail to grant approvals required for development of existing leases on such lands and waters. To the extent that our operations in federal waters are restricted, delayed for varying lengths of time or cancelled, such developments could have a material adverse effect on our results of operations, our ability to replace reserves and the ability to implement our business strategy.
Additional deepwater drilling laws, regulations and other restrictions, delays and other offshore-related developments in the Gulf of Mexico, may have a material adverse effect on our business, financial condition, or results of operations. In January 2021, President Biden suspended new oil and natural gas leases on federal lands and waters, including the OCS pending review and reconsideration of federal oil and gas leasing and permitting practices. While this suspension was challenged and enjoined in June 2021 by a federal district court, the Biden Administration is appealing the court decision. Additionally, regulatory agencies under the Biden Administration may issue new or amended rulemakings regarding deepwater leasing, permitting, or drilling that could result in more stringent or costly restrictions, delays or cancellations to our operations as well as those of similarly situated offshore energy companies on the OCS. The BSEE and the BOEM have over the past decade, primarily under the Obama Administration, imposed more stringent permitting procedures and regulatory safety and performance requirements with respect to new wells drilled in federal deepwater. While actions by BSEE or BOEM under the former Trump Administration sought to mitigate or delay certain of those more rigorous standards, the Biden Administration could reconsider rules and regulatory initiatives implemented under the Trump Administration and replace them with new, more stringent requirements and also provide more rigorous enforcement of existing regulatory requirements. Compliance with any added or more stringent Biden Administration regulatory requirements or enforcement initiatives and existing environmental and spill regulations, together with uncertainties or inconsistencies in decisions and rulings by governmental agencies and delays in the processing and approval of drilling permits and exploration, development, oil spill response and decommissioning plans and possible additional regulatory initiatives could result in difficult and more costly actions and adversely affect or delay new drilling and ongoing development efforts. Moreover, governmental agencies under the Biden Administration.
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The BOEM requires that lessees demonstrate financial strength and reliability according to its regulations and provide acceptable financial assurances to ensure satisfaction of lease obligations, including decommissioning activities on the OCS. As of the filing date of this Form 10-K, we are in compliance with our financial assurance obligations to the BOEM, and have no outstanding BOEM orders, requests or financial assurance obligations. The BOEM under the Obama and Trump Administrations had sought to implement varying levels of stringent and costly standards under the existing federal financial assurance requirements, either through issuance and implementation of NTL #2016-N01 as was the case under the Obama Administration or proposing rulemaking to revise the decommissioning and related financial assurance regulations as was the case under the Trump Administration. However, BOEM under the Biden Administration is expected to propose new financial assurance requirements that, if adopted as proposed, could increase our operating costs. Additionally, the BOEM could in the future make new demands for additional financial assurances covering our obligations under our properties, which could exceed the Company’s capabilities to provide. If we fail to comply with such future orders, the BOEM could commence enforcement proceedings or take other remedial action, including assessing civil penalties, suspending operations or production, or initiating procedures to cancel leases, which, if upheld, would have a material adverse effect on our business, properties, results of operations and financial condition.
Our operations may incur substantial liabilities to comply with environmental laws and regulations as well as legal requirements applicable to marine mammals and endangered and threatened species.
Our oil and natural gas operations are subject to stringent federal, state, local and foreign laws and regulations relating to the release or disposal of materials into the environment or otherwise relating to environmental protection.
These laws and regulations:
| ● | require the acquisition of a permit or other approval before drilling or other regulated activity commences; | |
| ● | restrict the types, quantities and concentration of substances that can be released into the environment in connection with drilling and production activities; | |
| ● | limit or prohibit exploration or drilling activities on certain lands lying within protected areas or that may affect certain marine species and endangered and threatened species; and | |
| ● | impose substantial liabilities for pollution resulting from our operations. |
Failure to comply with these laws and regulations may result in:
| ● | the assessment of administrative, civil and criminal penalties; | |
| ● | loss of our lease; | |
| ● | incurrence of investigatory, remedial or corrective obligations; and | |
| ● | the imposition of injunctive relief, which could prohibit, limit or restrict our operations in a particular area. |
Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse effect on our industry in general and on our own results of operations, competitive position or financial condition. Under these environmental laws and regulations, we could incur strict joint and several liability for the removal or remediation of previously released materials or contamination, regardless of whether we were responsible for the release or contamination and regardless of whether our operations met previous standards in the industry at the time they were conducted. Our permits require that we report any incidents that cause or could cause environmental damages.
New laws and regulations, amendment of existing laws and regulations, reinterpretation of legal requirements or increased governmental enforcement could significantly increase our capital expenditures and operating costs or could result in delays, limitations or cancelations to our exploration and production activities, which could have an adverse effect on our financial condition, results of operations, or cash flows.
Our operations are subject to numerous risks of oil and natural gas drilling and production activities.
Oil and gas drilling and production activities are subject to numerous risks, including the risk that no commercially productive oil or natural gas reserves are found. The cost of drilling and completing wells is often uncertain. To the extent we drill additional wells in the Gulf of Mexico, our drilling activities increase capital cost. In addition, the geological complexity of the areas in which we have oil and natural gas operations make it more difficult for us to sustain the historical rates of drilling success. Oil and natural gas drilling and production activities may be shortened, delayed or cancelled as a result of a variety of factors, many of which are beyond our control. These factors include:
| ● | unexpected drilling conditions; | |
| ● | pressure or irregularities in formations; | |
| ● | equipment failures or accidents; |
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| ● | hurricanes and other adverse weather conditions; | |
| ● | shortages in experienced labor; and | |
| ● | shortages or delays in the delivery of equipment. |
The prevailing prices of oil and natural gas also affect the cost of and the demand for drilling rigs, production equipment and related services. We cannot assure you that the wells we drill will be productive or that we will recover all or any portion of our investment. Drilling for oil and natural gas may be unprofitable. Drilling activities can result in dry holes and wells that are productive but do not produce sufficient cash flows to recoup drilling costs.
Any insurance that we may acquire will likely be inadequate to cover liabilities we may incur.
Our involvement in the exploration for, and development of, oil and natural gas properties may result in our becoming subject to liability for pollution, blow-outs, property damage, personal injury or other hazards. Although we intend to obtain insurance in accordance with industry standards to address such risks, such insurance has limitations and so will be unlikely to cover the full extent of such liabilities. In addition, such risks may not, in all circumstances be insurable or, in certain circumstances, we may choose not to obtain insurance to protect against specific risks due to the high premiums associated with such insurance or for other reasons. The payment of such uninsured liabilities would reduce the funds available to us. If we suffer a significant event that is not fully insured or if the insurer of such event is not solvent or denies coverage, we could be required to divert funds from capital investment or other uses towards covering our liability for such events.
Events outside of our control, including an epidemic or outbreak of an infectious disease, such as the COVID-19, may materially adversely affect our business.
We face risks related to epidemics, outbreaks or other public health events that are outside of our control, and could significantly disrupt our operations and adversely affect our financial condition. The global or national outbreak of an illness or other communicable disease, or any other public health crisis, such as COVID-19, may cause disruptions to our business and operational plans, which may include (i) shortages of employees, (ii) unavailability of contractors or subcontractors, (iii) interruption of supplies from third parties upon which we rely, (iv) recommendations of, or restrictions imposed by government and health authorities, including quarantines, to address an outbreak and (v) restrictions that we and our contractors, subcontractors and our customers impose, including facility shutdowns, to ensure the safety of employees. For example, in response to COVID-19, we have reduced third party expenses and reduced capital expenditures. In addition, the effects of COVID-19 and concerns regarding its global spread could negatively impact the domestic and international demand for crude oil and natural gas, which could contribute to price volatility, impact the price we receive for oil and natural gas and materially and adversely affect the demand for and marketability of our production. The potential impact from COVID-19, both now and in the future, is difficult to predict, and the extent to which it may negatively affect our operating results or the duration of any potential business disruption is uncertain. Any potential impact will depend on future developments and new information that may emerge regarding the COVID-19 infection rate or the efficacy and distribution of COVID-19 vaccines, and the actions taken by authorities to contain it or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our operating results.
Lower oil and natural gas prices and other factors in the future may result in ceiling test write-downs and other impairments of our asset carrying values.
We use the full cost method of accounting for our oil and gas operations. Accordingly, we capitalize the costs to acquire, explore for and develop oil and gas properties. Under the full cost method of accounting, we compare, at the end of each financial reporting period for each cost center, the present value of estimated future net cash flows from proved reserves, to the net capitalized costs of proved oil and gas properties, net of related deferred taxes. We refer to this comparison as a ceiling test. If the net capitalized costs of proved oil and gas properties exceed the estimated discounted future net cash flows from proved reserves, we are required to write down the value of our oil and gas properties to the value of the estimated discounted future net cash flows. A write-down of oil and gas properties does not impact cash flows from operating activities but does reduce net income. The risk that we are required to write-down the carrying value of oil and gas properties increases when oil and natural gas prices are low or volatile. In addition, write-downs may occur if we experience substantial downward adjustments to our estimated undeveloped property values, or if estimated future development costs increase. Volatility in commodity prices, poor conditions in the global economic markets and other factors could cause us to record additional write-downs of our oil and natural gas properties and other assets in the future and incur additional charges against future earnings. Any required write-downs or impairments could materially adversely affect our business, results of operations and financial condition.
New technologies may cause our current exploration and drilling methods to become obsolete, and we may not be able to keep pace with technological developments in our industry.
The oil and natural gas industry is subject to rapid and significant advancements in technology, including the introduction of new products and services using new technologies. As competitors use or develop new technologies, we may be placed at a competitive disadvantage, and competitive pressures may force us to implement new technologies at a substantial cost. In addition, competitors may have greater financial, technical, and personnel resources that allow them to enjoy technological advantages and that may in the future allow them to implement new technologies before we can. We rely heavily on the use of seismic technology to identify opportunities and to reduce our geological risk. Seismic technology or other technologies that we may implement in the future may become obsolete. We cannot be certain that we will be able to implement technologies on a timely basis or at a cost that is acceptable to us. If we are unable to maintain technological advancements consistent with industry standards, our business, results of operations and financial condition may be materially adversely affected.
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Our operations are subject to various risks that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduced demand for the crude oil and natural gas that we produce.
Climate change continues to attract considerable public, governmental and scientific attention. As a result, numerous proposals have been made and could continue to be made at the international, national, regional and state levels of government to monitor and limit emissions of GHG. These efforts have included consideration of cap-and-trade programs, carbon taxes, GHG reporting and tracking programs and regulations that directly limit GHG emissions from certain sources. At the federal level, the U.S. Congress has from time to time considered climate change legislation, but no comprehensive climate change legislation has been adopted. The EPA, however, has adopted regulations under the existing CAA to restrict emissions of GHG. For example, the EPA imposes preconstruction and operating permit requirements on certain large stationary sources that are already potential sources of certain other significant pollutant emissions. The EPA also adopted rules requiring the monitoring and reporting of GHG emissions on an annual basis from specified large GHG emission sources in the United States, including onshore and offshore oil and natural gas production facilities. Federal agencies have also begun directly regulating emissions of methane, a GHG, from oil and natural gas operations as described above. Compliance with these rules or other could result in increased compliance costs on our operations.
There are also increasing financial risks for fossil fuel producers as stockholders and bondholders currently invested in fossil fuel energy companies concerned about the potential effects of climate change may elect in the future to shift some or all of their investments into non-fossil fuel energy related sectors. Institutional lenders who provide financing to fossil-fuel energy companies also have become more attentive to sustainable lending practices, and some of them may elect not to provide funding for fossil fuel energy companies. Additionally, the lending practices of institutional lenders have been the subject of intensive lobbying efforts in recent years, oftentimes public in nature, by environmental activists, proponents of the international Paris Agreement and foreign citizenry concerned about climate change not to provide funding for fossil fuel producers. Limitation of investments in and financings for fossil fuel energy companies could result in the restriction, delay or cancellation of drilling programs or development or production activities.
The adoption of legislation or regulatory programs to reduce or eliminate future emissions of GHG could require us to incur increased operating costs, such as costs to purchase and operate emissions control systems, to acquire emissions allowances or comply with new regulatory or reporting requirements. Any such legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for, the oil and natural gas we produce. Consequently, legislation and regulatory programs to reduce or eliminate future emissions of GHG could have an adverse effect on our business, financial condition and results of operations. Also, political, financial and litigation risks may result in our restricting or canceling production activities, incurring liability for infrastructure damages as a result of climatic changes or impairing the ability to continue to operate in an economic manner.
Finally, some scientists have concluded that increasing concentrations of GHG in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, floods and other climatic events. Our offshore operations are particularly at risk from severe climatic events. If any such effects of climate changes were to occur, they could have an adverse effect on our financial condition and results of operations.
We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption or financial loss.
The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain exploration, development, production, processing, and distribution activities. For example, we depend on digital technologies to interpret seismic data, conduct reservoir modeling, and record financial and other data. Our industry faces various security threats, including cyber-security threats. Cyber-security attacks, in particular are increasing and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. Although to date we have not experienced any material losses related to cyber-security attacks, we may suffer such losses in the future. Moreover, the various procedures and controls we use to monitor and protect against these threats and to mitigate our exposure to such threats may not be sufficient in preventing security threats from materializing. If any of these events were to materialize, they could lead to losses of intellectual property and other sensitive information essential to our business and could have a material adverse effect on our business prospects, reputation, and financial position.
Negative publicity may adversely impact us.
Media coverage and public statements that insinuate improper actions by us, regardless of their factual accuracy or truthfulness, may result in negative publicity, litigation, or governmental investigations by regulators. Addressing negative publicity and any resulting litigation or investigations may distract management, increase costs, and divert resources. Negative publicity may have an adverse impact on our reputation and the morale of our employees, which could materially adversely affect our business, financial position, results of operations, cash flows, growth prospects and stock price.
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Risks Related to Investment in our Securities
There is a limited trading market for our shares. You may not be able to sell your shares if you need money.
Our common stock is traded on the OTC Markets (Pink Marketplace Tier), an inter-dealer automated quotation system for equity securities. During the three calendar months preceding filing of this report, the average daily trading volume of our common stock was approximately 0.2 million shares. As of December 27, 2022, we had approximately 190 record holders of our common stock (not including an indeterminate number of stockholders whose shares are held by brokers in “street name”). There has been limited trading activity in our stock, and when it has traded, the price has fluctuated widely. We consider our common stock to be “thinly traded” and any last reported sale prices may not be a true market-based valuation of the common stock. Stockholders may experience difficulty selling their shares if they choose to do so, because of the illiquid market and limited public float for our common stock. This situation is attributable to a number of factors including, but not limited to:
| ● | we are a small company that is relatively unknown to stock analysts, stockbrokers, institutional investors, and others in the investment community that generate or influence sales volume; and | |
| ● | stock analysts, stockbrokers and institutional investors may be risk-averse and reluctant to follow a company such as ours that faces substantial doubt about its ability to continue as a going concern or to purchase or recommend the purchase of our shares until such time as we become more viable. |
As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations of the price of our common stock. Accordingly, investors must assume they may have to bear the economic risk of an investment in our common stock for an indefinite period of time and may lose their entire investment. There can be no assurance that a more active market for our common stock will develop, or if one should develop, there is no assurance that it will be sustained. This severely limits the liquidity of our common stock and would likely have a material adverse effect on the market price of our common stock and on our ability to raise additional capital.
We may issue preferred stock.
Our Certificate of Incorporation authorizes the issuance of up to 50 million shares of “blank check” preferred stock with designations, rights and preferences determined from time to time by the Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting, or other rights, which could adversely affect the voting power or other rights of the holders of the common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying, or preventing a change in control of the Company. Although we have no present intention to issue any shares of its authorized preferred stock, there can be no assurance that we will not do so in the future.
Future sales of our common stock could lower our stock price.
We will likely sell additional shares of common stock to fund working capital obligations in future periods. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock, or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock. Moreover, sales of our common stock by existing shareholders could also depress the price of our common stock.
Our common stock is subject to the “penny stock” rules of the SEC and FINRA, which makes transactions in our common stock cumbersome and may reduce the value of an investment in the stock.
The SEC has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
| ● | that a broker or dealer approve a person’s account for transactions in penny stocks; and | |
| ● | the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. |
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
| ● | obtain financial information and investment experience and objectives of the person; and | |
| ● | make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. |
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form sets forth:
| ● | the basis on which the broker or dealer made the suitability determination; and | |
| ● | that the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of common stock and cause a decline in the market value of stock.
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Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
In addition to the “penny stock” rules promulgated by the SEC, FINRA has adopted rules that require a broker-dealer to have reasonable grounds for believing that an investment is suitable for a customer when recommending the investment to that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit investors’ ability to buy and sell our stock and have an adverse effect on the market for our shares.
The price of our common stock will remain volatile, which could lead to losses by investors and costly securities litigation.
The trading price of our common stock is likely to be highly volatile and could fluctuate in response to factors such as:
| ● | actual or anticipated variations in our operating results including but not limited to leasing, drilling, and discovery of oil and gas; |
| ● | the price of oil and gas; |
| ● | announcements of developments by us, our strategic partners or our competitors; |
| ● | announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; |
| ● | adoption of new accounting standards affecting our Company’s industry; |
| ● | additions or departures of key personnel; |
| ● | sales of our common stock or other securities in the open market; |
| ● | our ability to acquire seismic data and other intellectual property on commercially reasonable terms and to defend such intellectual property from third party claims; |
| ● | the effects of government regulation, permitting and other legal requirements, including new legislation or regulation; |
| ● | litigation; and |
| ● | other events or factors, many of which are beyond our control. |
The stock market is subject to significant price and volume fluctuations. In the past, following periods of volatility in the market price of companies’ securities, securities class action litigation has often been initiated against those companies. Litigation initiated against us, whether or not successful, could result in substantial costs and diversion of our management’s attention and resources, which could harm our business and financial condition.
We do not anticipate paying any dividends on our common stock.
Cash dividends have never been declared or paid on our common stock, and we do not anticipate such a declaration or payment for the foreseeable future. We cannot assure stockholders of a positive return on their investment when they sell their shares, nor can we assure that stockholders will not lose the entire amount of their investment in the Company.
Any of the risk factors discussed herein could have a significant material adverse effect on our business, results of operations, financial condition, or liquidity. Readers of this Report should not consider any descriptions of these risk factors to be a complete set of all potential risks that could affect GulfSlope. These factors should be carefully considered together with the other information contained in this Report and the other reports and materials filed by us with the SEC. Further, any of these risks are interrelated and could occur under similar business and economic conditions, and the occurrence of certain of them may in turn cause the emergence or exacerbate the effect of others. Such a combination could materially increase the severity of the impact of these risks on our business, results of operations, financial condition, or liquidity.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
For a discussion of our oil and gas properties, see Item 1. Business.
ITEM 3. 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.
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ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock, $0.001 par value per share, is quoted on the OTC Markets (Pink Marketplace Tier) under the symbol “GSPE.” Shares of our common stock have historically been thinly traded. As a result, our stock price as quoted by the OTC Markets may not reflect an actual or perceived value.
Holders
The number of record holders of the Company’s common stock, as of December 27, 2022, is approximately 190.
Dividends
The Company has not declared any dividends with respect to its common stock and does not intend to declare any dividends in the foreseeable future. The future dividend policy of the Company cannot be ascertained with any certainty. There are no material restrictions limiting the Company’s ability to pay cash dividends on its common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information with respect to the equity compensation plans available to directors, officers, certain employees and certain consultants of the Company at September 30, 2022.
| (a) | (b) | (c) | ||||||||||
| Plan category | Number of be issued upon of outstanding | Weighted average exercise price of outstanding | Number of remaining future issuance compensation | |||||||||
| Equity compensation plans approved by security holders | 146,000,000 | $ | 0.0444 | 19,970,000 | ||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | 146,000,000 | 19,970,000 | ||||||||||
(1) |
This column reflects the maximum number of shares of our common stock subject to stock option awards granted as Inducement Shares or under the 2014 and 2018 Omnibus Incentive Plans vested and unvested. |
(2) |
This column reflects the total number of shares of our common stock remaining available for issuance under the 2014 and 2018 Omnibus Incentive Plans. |
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
Not required for smaller reporting companies.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements. Please see “Forward-Looking Statements” above for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. The following discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared on the accrual basis of accounting, whereby revenues are recognized when earned, and expenses are recognized when incurred. You should read this management’s discussion and analysis of our financial condition and results of operations in conjunction with our historical financial statements included elsewhere in this Annual Report. Our future results could differ materially from our historical results due to a variety of factors, many of which are out of our control.
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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 United States 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 drilling 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 also continue to evaluate attractive opportunities in deeper water.
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.
Factors Affecting Comparability of Future Results
Success in Acquiring Oil and Gas Leases or Prospects. As a result of our 3-D seismic imaging and reprocessing, we currently hold one lease block in the U.S. Gulf of Mexico, which we believe may potentially contain economically recoverable reserves.
We have No Proved Reserves. We have identified prospects based on available seismic and geological information that indicate the potential presence of oil or gas. Some of our current prospects may require additional seismic data reprocessing and interpretation. Even when properly used and interpreted, seismic data and visualization techniques are only tools used to assist geoscientists in identifying structures and hydrocarbon indicators and do not enable the interpreter to have certainty as to whether hydrocarbons are, in fact, present in those structures. We do not know if any prospect will contain oil or gas in sufficient quantities or quality to recover drilling and completion costs or to be economically viable.
Success in the Discovery and Development of Reserves. Because we have no operating history in the production of oil and gas, our future results of operations and financial condition will be directly affected by our ability to discover and develop reserves through our drilling activities.
Oil and Gas Revenue. We have not yet commenced oil and gas production. If and when we do commence production, we expect to generate revenue from such production. No oil and gas revenue is reflected in our historical financial statements.
General and Administrative Expenses. We expect that our general and administrative expenses will increase in future periods when we commence drilling operations.
Demand and Price. The demand for oil and gas is susceptible to volatility related to, among other factors, the level of global economic activity and may also fluctuate depending on the performance of specific industries. We expect that a decrease in economic activity, in the United States and elsewhere, would adversely affect demand for any oil and gas we may produce. Since we have not generated revenues, these key factors will only affect us if and when we produce and sell hydrocarbons.
Results of Operations for the Year Ended September 30, 2022, compared to September 30, 2021
We had no sales during the year ended September 30, 2022, and 2021. Impairment of oil and gas properties and capitalized exploration costs for the year ended September 30, 2022, was approximately $6.9 million compared to approximately $0.4 million for the year ended September 30, 2021. The impairment of approximately $6.9 million for the year ended September 30, 2022, resulted from the expiration of a lease and the write off of Tau well costs, and the impairment of approximately $0.4 million for the year ended September 30, 2021 resulted from the relinquishment of a lease and the write-off of related capitalized costs. General and administrative expenses were approximately $1.5 million for both of these years ended September 30, 2022 and 2021, as we have remained disciplined with our expenditures while we pursue our development and acquisition strategy. Interest expense was approximately $512,000 for the year ended September 30, 2022, as compared to approximately $554,000 for the year ended September 30, 2021. Loss on extinguishment of debt was approximately $85,000 for the year ended September 30, 2022, compared to a gain on extinguishment of debt of approximately $406,000 for the year ended September 30, 2021. Gain on derivative financial instrument was approximately $242,000 for the year ended September 30, 2022, compared to a loss on derivative financial instrument of approximately $177,000 for the year ended September 30, 2021.
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We had a net loss of approximately $8.7 million for the year ended September 30, 2022, compared to a net loss of approximately $2.2 million for the year ended September 30, 2021.
The basic loss per share for the year ended September 30, 2022, was $0.01, compared to a net loss per share of $0.00 for the year ended September 30, 2021.
For the year ended September 30, 2022, cash used in operating activities totaled approximately $1.4 million compared to approximately $1.6 million used in operating activities in fiscal 2021.
For the year ended September 30, 2022, cash provided by investing activities was approximately $0.014 million compared to $0.2 million provided by investing activities in fiscal 2021.
For the year ended September 30, 2022, and 2021 cash used in financing activities was approximately nil and $0.3 million, respectively.
As of September 30, 2022, the Company’s cash balance was approximately $0.14 million compared to approximately $1.5 million cash balance as of September 30, 2021. The Company’s fiscal 2022 cash decrease of approximately $1.4 million was primarily due to its net cash used in operating activities of approximately $1.4 million, cash received in investing activities of approximately $0.014 million and no cash used in financing activities.
Liquidity and Capital Resources
The Company has incurred accumulated losses for the period from inception to September 30, 2022, of approximately $68.9 million and has negative working capital of approximately $13.8 million. For the year ended September 30, 2022, the Company has generated losses of approximately $8.7 million and negative cash flows from operations of approximately $1.4 million. As of September 30, 2022, we had $0.14 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 December 2023. The $10 million is comprised primarily of capital expenditures for prospect development and the pursuit of acquisition targets as well as general and administrative expenses. It does not include any amounts due under outstanding debt obligations, which amount to $12.5 million of current principal and interest as of September 30, 2022. The Company plans to finance its operations through equity and/or debt financings, and strategic transactions to include farm-outs, asset sales or mergers. Our policy has been to periodically raise funds through the sale of equity securities 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 year ended September 30, 2022, the Company used approximately $1.4 million of net cash in operating activities, compared with approximately $1.6 million of net cash used in operating activities for the year ended September 30, 2021. For the year ended September 30, 2022, cash provided by investing activities was approximately $0.014 million compared to approximately $0.21 million of cash provided by investing activities for the year ended September 30, 2021. For the year ended September 30, 2022, no cash was used in financing activities, compared with approximately $0.3 million used in financing activities for year ended September 30, 2021.
We will need to raise additional funds to cover expenditures planned for 2023, 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.
We do not have any material contractual obligations. Other immaterial obligations may be reflected in our accompanying consolidated financial statements.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2022 and 2021, respectively.
Critical Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“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. The critical accounting estimates include impairment considerations of long-lived assets including oil and natural gas properties and assumptions used in valuing our derivative financial instruments.
23
Recently Adopted Accounting Pronouncements
In May 2021, Financial Accounting Standards Board (“FASB”) issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. ASU 2021-04 provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. An issuer measures the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange. ASU 2021-04 introduces a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt ASU 2021-04 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The Company has elected to early adopt this standard and in accordance with this standard was accounted for prospectively as of the beginning of the year. The early adoption of this standard impacted the accounting for the modification of investor warrants discussed in Note 7 and resulted in the recording of a loss on debt extinguishment of approximately $85,000. Historically the cost associated with the warrant modification was capitalized to deferred loan cost and amortized over the debt extension period.
Recent Accounting Pronouncements Not Yet Adopted
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), 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. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020. ASU No. 2020-06 can be adopted on either a fully retrospective or modified retrospective basis. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GulfSlope Energy, Inc.
TABLE OF CONTENTS
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of GulfSlope Energy
Opinion on the Financial Statements
We have audited the accompanying balance sheets of GulfSlope Energy, Inc. (the “Company”) as of September 30, 2022 and 2021, and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended September 30, 2022 and 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the financial statements, the Company has a net capital deficiency, and further losses are anticipated in developing the Company’s business, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Critical Audit Matter Description
We identified the Company's impairment assessment of unproved properties and properties under development as a critical audit matter which is referred to in Notes 1 and 3. 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. We also determined that the estimates of fair value of derivatives referred to in Notes 1 and 8 is also a critical audit matter due to its computational complexity and contains several assumptions influenced by management’s judgement. The Company currently has two derivative instruments one of which relates to a warrant originally granted with a debt instrument which contains a variable conversion feature with no floor and the other relates to a clause within an agreement that contains a make whole provision in the event that common stock held by the contracting party is sold at a loss then such loss would be reimbursed up to a guaranteed amount. Both instruments meet the definition of a derivative therefore they are accounted for at fair value each reporting period with any changes in fair value being recorded as a charge to the statement of operations. Performing audit procedures and evaluating audit evidence obtained related to these considerations required a high degree of auditor judgment and effort.
How the Critical Audit Matters were Addressed in the Audit
Our audit procedures performed to address these critical audit matters included the following, among others:
| · | Impairment Assessment: |
- We gained an understanding of the design of the controls over management’s process to develop their estimates included in the impairment assessment of oil and natural gas properties. We also gained an understanding of the design of the controls used by management to develop their estimates.
- We confirmed our understanding of the timing of lease expirations and performed a detailed evaluation of all unevaluated capitalized costs by type and category and through inquiry and testing of current activity we assessed the level of development plans and timing and if such activities were supported and progressing.
- The lease that expired in June 2022 was written off when it became apparent that a lease extension was not available and an interim impairment was recorded totaling approximately $3.1 million.
- We gained an understanding of management’s plans and the status of financing to pursue development.
- In total an impairment of approximately $6.9 million was recorded by the Company during different intervals during the year ended September 30, 2022 which we concluded that the timing and amounts were appropriate.
| · | Derivatives: |
- We gained an understanding of the design of the controls over management’s process to develop their estimate of fair value of its derivatives. We also gained an understanding of the design of the controls used by management to develop their estimates.
- Management uses the services of a third party consultant to compute the estimates of fair value. We performed an investigation into the experience, background and credentials of the third party specialist and found that the consultant possessed the appropriate competencies and experience to provide fair value services.
- The Company uses the Monte Carlo simulation model which takes into consideration stock price volatility, the current common stock price as of the balance sheet date, discount rates as well as other relevant assumptions that would be appropriate to estimate fair value as determined by a third party market participant.
- We confirmed our understanding and tested each underlying assumption to ensure they are correct.
- We independently reperformed the computations of the fair value estimates taking into consideration the appropriateness of the fair value model and underlying assumptions used and concluded the estimates where appropriate.
/s/ Pannell Kerr Forster of Texas, P.C.
We served as the Company’s auditor since November 2019.
Houston, Texas
December 29, 2022
GulfSlope Energy, Inc.
BALANCE SHEETS
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | 135,381 | $ | 1,517,522 | ||||
| Accounts Receivable, Net | 12,925 | |||||||
| Prepaid Expenses and Other Current Assets | 33,004 | 54,398 | ||||||
| Total Current Assets | 181,310 | 1,571,920 | ||||||
| Property and Equipment, net | 848 | 1,845 | ||||||
| Oil and Natural Gas Properties, Full Cost Method of Accounting, Unproved Properties | 5,288,915 | 12,124,720 | ||||||
| Total Non-Current Assets | 5,289,763 | 12,126,565 | ||||||
| Total Assets | $ | 5,471,073 | $ | 13,698,485 | ||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
| Current Liabilities | ||||||||
| Accounts Payable | $ | 135,391 | $ | 52,814 | ||||
| Related Party Payable | 404,469 | 404,469 | ||||||
| Related Party Accrued Interest Payable | 3,401,489 | 2,961,689 | ||||||
| Accrued Interest Payable | 138,020 | 115,860 | ||||||
| Accrued Liabilities and Other Payables | ||||||||
| Loans from Related Parties | 8,725,500 | 8,725,500 | ||||||
| Notes Payable | ||||||||
| Convertible Notes Payable, net of discount | 227,000 | 176,663 | ||||||
| Derivative Financial Instruments | 959,222 | 1,201,656 | ||||||
| Current Portion of Operating Lease Liability | ||||||||
| Total Current Liabilities | 13,991,091 | 13,638,651 | ||||||
| Total Liabilities | 13,991,091 | 13,638,651 | ||||||
| Commitments and Contingencies (Note 11) | ||||||||
| Stockholders’ Equity (Deficit) | ||||||||
| Preferred Stock; par value ($); Authorized shares, issued or outstanding | ||||||||
| Common Stock; par value ($); Authorized as of September 30, 2022 and as of September 30, 2021; issued and outstanding , as of September 30, 2022 and 2021, respectively | 1,268,240 | 1,268,240 | ||||||
| Additional Paid-in Capital | 59,116,487 | 58,999,585 | ||||||
| Accumulated Deficit | (68,904,745 | ) | (60,207,991 | ) | ||||
| Total Stockholders’ Equity (Deficit) | (8,520,018 | ) | 59,834 | |||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | 5,471,073 | $ | 13,698,485 | ||||
The accompanying notes are an integral part to these financial statements.
GulfSlope Energy, Inc.
STATEMENTS OF OPERATIONS
For the Years ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Operating Expenses: | ||||||||
| Impairment of Oil and Natural Gas Properties | 6,893,226 | 396,273 | ||||||
| General and Administrative Expenses | 1,463,538 | 1,505,270 | ||||||
| Net Loss from Operations | (8,356,764 | ) | (1,901,543 | ) | ||||
| Other Income (Expense): | ||||||||
| Gain on Disposal of Property and Equipment | 15,000 | |||||||
| Interest Expense | (512,297 | ) | (553,997 | ) | ||||
| Interest Income | 1,085 | |||||||
| Gain/(Loss) on Debt Extinguishment | (85,127 | ) | 405,502 | |||||
| Gain/(Loss) on Derivative Financial Instrument | 242,434 | (177,366 | ) | |||||
| Net Loss Before Income Taxes | (8,696,754 | ) | (2,226,319 | ) | ||||
| Income Taxes | ||||||||
| Net Loss | $ | (8,696,754 | ) | $ | (2,226,319 | ) | ||
| Loss Per Share – Basic and Diluted | $ | ) | $ | ) | ||||
| Weighted Average Shares Outstanding – Basic and Diluted | ||||||||
The accompanying notes are an integral part to these financial statements.
GulfSlope Energy, Inc.
STATEMENTS OF STOCKHOLDERS’ EQUITY (Deficit)
For the Years Ended September 30, 2022 and 2021
| Common Shares | Common Amount | Additional Paid-In Capital Shares to Be Issued | Additional Paid-In Capital | Accumulated Deficit | Net Stockholders’ Equity (Deficit) | |||||||||||||||||||
| Balance at September 30, 2020 | 1,250,740,346 | $ | 1,250,740 | $ | 105,000 | $ | 58,728,308 | $ | (57,981,672 | ) | $ | 2,102,376 | ||||||||||||
| Stock based compensation | — | 96,875 | 96,875 | |||||||||||||||||||||
| Common stock issued to extinguish accrued interest | 17,500,000 | 17,500 | (105,000 | ) | 87,500 | |||||||||||||||||||
| Warrants issued for debt extension | — | 86,902 | 86,902 | |||||||||||||||||||||
| Net loss | — | (2,226,319 | ) | (2,226,319 | ) | |||||||||||||||||||
| 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 | |||||||||||||||||||||
| Extension of Warrants in Conjunction with Extension of Debt Maturity | — | 85,127 | 85,127 | |||||||||||||||||||||
| Net loss | — | (8,696,754 | ) | (8,696,754 | ) | |||||||||||||||||||
| Balance at September 30, 2022 | 1,268,240,346 | $ | 1,268,240 | $ | $ | 59,116,487 | $ | (68,904,745 | ) | $ | (8,520,018 | ) | ||||||||||||
The accompanying notes are an integral part to these financial statements.
GulfSlope Energy, Inc.
STATEMENTS OF CASH FLOWS
| For the Years Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net Loss | $ | (8,696,754 | ) | $ | (2,226,319 | ) | ||
| Adjustments to Reconcile Net Loss to Cash Used in Operating Activities: | ||||||||
| Impairment of Oil and Natural Gas Properties | 6,893,226 | 396,273 | ||||||
| Depreciation | 996 | 6,667 | ||||||
| Debt Discount Amortization | 50,337 | 91,369 | ||||||
| Loss on Warrant Extension to Extend Debt Maturity | 85,127 | |||||||
| Loss (Gain) on Debt Extinguishment | (405,502 | ) | ||||||
| Stock Based Compensation | 31,775 | 96,875 | ||||||
| (Gain) on Disposal of Property and Equipment | (15,000 | ) | ||||||
| (Gain) Loss on Derivative Financial Instruments | (242,434 | ) | 177,366 | |||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Increase (Decrease) in Accounts Receivable | (12,925 | ) | 37,233 | |||||
| Increase (Decrease) in Prepaid Expenses and Other Current Assets | (3,392 | ) | 29,732 | |||||
| Increase (Decrease) in Accounts Payable | 50,619 | (206,856 | ) | |||||
| Decrease in Related Party Payable | (13,516 | ) | ||||||
| Increase in Accrued Interest Payable | 461,960 | 462,203 | ||||||
| Decrease in Deferred Credit | (7,307 | ) | ||||||
| Net Cash Used in Operating Activities | (1,396,465 | ) | (1,561,782 | ) | ||||
| INVESTING ACTIVITIES | ||||||||
| Proceeds from Disposal of Property and Equipment | 15,000 | 133,108 | ||||||
| Refund of Security Deposit | 24,785 | |||||||
| Insurance Proceeds Received Related to Oil and Natural Gas Properties | 223,650 | |||||||
| Investments in Oil and Natural Gas Properties | (25,461 | ) | (145,180 | ) | ||||
| Purchases of Property and Equipment | (2,165 | ) | ||||||
| Net Cash Provided by Investing Activities | 14,324 | 209,413 | ||||||
| FINANCING ACTIVITIES | ||||||||
| Payments on Notes Payable | (320,527 | ) | ||||||
| Net Cash Used in Financing Activities | (320,527 | ) | ||||||
| Net Decrease in Cash | (1,382,141 | ) | (1,672,896 | ) | ||||
| Beginning Cash Balance | 1,517,522 | 3,190,418 | ||||||
| Ending Cash Balance | $ | 135,381 | $ | 1,517,522 | ||||
| Supplemental Schedule of Cash Flow Activities: | ||||||||
| Cash Paid for Interest, Net of Capitalized Amounts | $ | $ | 424 | |||||
| Non-Cash Investing and Financing Activities: | ||||||||
| Common Stock Issued to Extinguish Accrued Interest | 17,500 | |||||||
| Warrants Issued to extend maturity of debt instrument | 86,902 | |||||||
| Reduction in Derivative Liability due to Loan Payment in Full | 46,621 | |||||||
| Accrued PPP Loan Interest Forgiven | 662 | |||||||
| Purchase of Capital Expenditures | ||||||||
| Included in Accounts Payable | 31,960 | 2,960 | ||||||
The accompanying notes are an integral part to these financial statements.
GulfSlope Energy, Inc.
Notes to the Financial Statements
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
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 has leased one federal Outer Continental Shelf block (referred to as “prospect,” “portfolio” or “leases”) and licensed three-dimensional (3-D) seismic data in its area of concentration.
(b) Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and the instructions to Form 10-K and Regulation S-X published by the US Securities and Exchange Commission (the “SEC”). The accompanying financial statements include the accounts of the Company.
(c) Cash
The Company considers all short-term highly liquid investments with an original maturity at the date of purchase of three months or less to be cash equivalents. There were no cash equivalents at September 30, 2022 and 2021, respectively.
(d) Accounts Receivable
The Company records an accounts receivable for operations expense reimbursements due from joint interest partners. 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, we assess the receivable and the underlying asset for recovery. As of September 30, 2022, and 2021, no allowance was recorded. Accounts receivable were approximately $13,000 and nil on September 30, 2022, and 2021, respectively.
(e) 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 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 September 30, 2022, the Company’s oil and gas properties consisted of unproved properties, capitalized costs and no proved reserves.
(f) 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.
(g) Property and Equipment
Property and equipment are carried at cost and include expenditures for new equipment and those expenditures that substantially increase the productive lives of existing equipment and leasehold improvements. Maintenance and repair costs are expensed as incurred. Property and equipment are depreciated on a straight-line basis over the assets’ estimated useful lives. Fully depreciated property and equipment still in use are not eliminated from the accounts.
The Company assesses the carrying value of its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing estimated undiscounted cash flows, expected to be generated from such assets to their net book value. If net book value exceeds estimated cash flows, the asset is written down to its fair value, determined by the estimated discounted cash flows from such asset. When an asset is retired or sold, its cost and related accumulated depreciation and amortization are removed from the accounts. The difference between the net book value of the asset and proceeds on disposition is recorded as a gain or loss in our statements of operations in the period in which they occur.
(h) Income Taxes
Deferred tax assets and liabilities are recognized for the temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance is provided if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company’s policy is to recognize potential interest and penalties as a component of income tax expense when incurred.
The Company records expenses associated with the fair value of stock-based compensation. For fully vested and restricted stock grants, the Company calculates the stock-based compensation expense based upon estimated fair value on the date of grant. For stock warrants and options, the Company uses the Black-Scholes option valuation model to calculate stock-based compensation at the date of grant. Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in these assumptions can materially affect the fair value estimate.
(j) Stock Issuance
The Company records stock-based compensation awards issued to non-employees and other external entities for goods and services at either the fair market value of the goods received or services rendered or the instruments issued in exchange for such services, whichever is more readily determinable.
Basic earnings per share (“EPS”) is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. 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, and restricted stock is computed using the treasury stock or if-converted method.
As the Company has incurred losses for the years ended September 30, 2022 and 2021, the potentially dilutive shares are anti-dilutive and thus not added into the EPS calculations. As of September 30, 2022 and 2021, there were and potentially dilutive shares, respectively.
(l) 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 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.
(m) 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.
(n) Recently Adopted Accounting Pronouncements
In May 2021, Financial Accounting Standards Board (“FASB”) issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. ASU 2021-04 provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. An issuer measures the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange. ASU 2021-04 introduces a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt ASU 2021-04 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The Company has elected to early adopt this standard and in accordance with this standard was accounted for prospectively as of the beginning of the year. The early adoption of this standard impacted the accounting for the modification of investor warrants discussed in Note 7 and resulted in the recording of a loss on debt extinguishment of approximately $85,000. Historically the cost associated with the warrant modification was capitalized to deferred loan cost and amortized over the debt extension period.
(n) Recent Accounting Pronouncements Not Yet Adopted
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), 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. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020. ASU No. 2020-06 can be adopted on either a fully retrospective or modified retrospective basis. 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 2 – LIQUIDITY/GOING CONCERN
The Company has incurred accumulated losses as of September 30, 2022, of $ million. Further losses are anticipated in developing our business, and there exists substantial doubt about the Company’s ability to continue as a going concern. As of September 30, 2022, the Company had $0.14 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 December 2023. The Company plans to finance operations and planned expenditures through equity and/or debt financings, and strategic transactions to include farm-outs, 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. 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.
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 September 30, 2022, the Company’s oil and natural gas properties consisted of unproved properties, capitalized exploration costs and no proved reserves. During the years ended September 30, 2022, and 2021, the Company capitalized approximately $0.03 million and $0.15 million to oil and gas properties. Nil and approximately $0.01 million of general and administrative expenses, respectively, were capitalized to oil and natural gas properties for the years ended September 30, 2022, and 2021.
During the twelve months ended September 30, 2022, the Company incurred impairment charges of approximately $6.9 million, resulting from the relinquishment or expiration of oil and natural gas leases and the impairment of the Tau well costs. For the twelve months ended September 30, 2021, impairment charges were approximately $0.4 million resulting from the relinquishment or expiration of oil and natural gas leases.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30, 2022 and 2021:
| 2022 | 2021 | |||||||
| Office equipment and computers | $ | 68,565 | $ | 135,254 | ||||
| Furniture and fixtures | 16,280 | |||||||
| Leasehold improvements | 7,680 | |||||||
| Total | 68,565 | 159,214 | ||||||
| Less: accumulated depreciation | (67,716 | ) | (157,369 | ) | ||||
| Net property and equipment | $ | $ | 1,845 | |||||
Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, which were as follows:
| Life | |
| Office equipment and computers | 3 years |
| Furniture and fixtures | 5 years |
| Leasehold improvements | Shorter of 5 years or related lease term |
Depreciation expense was $996 and $6,667 for the years ended September 30, 2022, and 2021, respectively.
NOTE 5 – INCOME TAXES
The provision for income taxes consists of the following for the years ended September 30, 2022 and 2021:
| 2022 | 2021 | |||||||
| FEDERAL | ||||||||
| Current | $ | $ | ||||||
| Deferred | ||||||||
| STATE | ||||||||
| Current | ||||||||
| Deferred | ||||||||
| TOTAL PROVISION | $ | $ | ||||||
The difference between the actual income tax provision versus tax computed at the statutory rate is as follows for the years ended September 30, 2022, and 2021, respectively:
| 2022 | 2021 | |||||||
| Expected provision (based on statutory rate of 21%) | $ | (1,826,318 | ) | $ | (467,527 | ) | ||
| Effect of: | ||||||||
| Increase (decrease) in valuation allowance | 1,913,189 | (661,812 | ) | |||||
| Non-Allowable (income) expenses | ||||||||
| Prior year true-ups to return and other, net | (86,871 | ) | 1,129,339 | |||||
| Total actual provision | $ | $ | ||||||
The Company does not have any material uncertain tax positions. The Company’s policy is to recognize interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense (benefit). For the years ended September 30, 2022, and 2021, the Company did not recognize any interest or penalties, nor did we have any interest or penalties accrued as of September 30, 2022 and 2021 relating to unrecognized benefits. Deferred income tax assets and liabilities at September 30, 2022 and 2021, respectively, consist of the following:
| DEFERRED TAX ASSETS (LIABILITIES) | 2022 | 2021 | ||||||
| Net operating losses | $ | 14,224,953 | $ | 13,028,326 | ||||
| Exploration costs | (858,133 | ) | (1,299,327 | ) | ||||
| Oil and natural gas leases | 1,337,094 | |||||||
| IDC | (1,559,306 | ) | ||||||
| Stock based compensation | 693,218 | 686,545 | ||||||
| Accrued interest and expenses not paid | 729,098 | 632,087 | ||||||
| Derivative financial instrument | 201,432 | 252,348 | ||||||
| Differences in book/tax depreciation | (387 | ) | ||||||
| Net deferred tax asset | 14,990,568 | 13,077,380 | ||||||
| Valuation allowance | (14,990,568 | ) | (13,077,380 | ) | ||||
| NET DEFERRED TAXES | $ | $ | ||||||
The Company’s valuation allowance increased $1,913,189 during the year ended September 30, 2022 and decreased $ during the year ended September 30, 2021.
At September 30, 2022, the Company had approximately $67.7 million of net operating losses (“NOL”), approximately $0.1 million of which will expire from 2024 to 2031, approximately $33.2 million of which will expire from 2032 to 2038, and approximately $34.4 million of which can be carried forward indefinitely. $33.4 million of the Company’s NOLs are allowable as a deduction against 100 percent of future taxable income since they were generated prior to the effective date of limitations imposed by the Tax Cut and Jobs Act (TCJA) of 2017 and Coronavirus Aid, Relief, and Economic Security Act (CARES) of 2020. $34.4 million of the Company’s NOLs are allowable as a deduction against 80 percent of future taxable income.
The tax years ended September 30, 2019 through 2022 are open for examination for federal income tax purposes and by other major taxing jurisdictions to which we are subject.
NOTE 6 – 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 $0.12 per share of common stock (the then offering price of shares of common stock to unaffiliated investors). As of September 30, 2022, and 2021, 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 $3.4 million and $2.96 million, respectively, of unpaid interest associated with these loans included in accrued interest payable within the balance sheet as of September 30, 2022, and 2021.
On November 15, 2016, a family member of the CEO entered into a $50,000 convertible promissory note with associated warrants under the same terms received by other investors (see Note 7).
Domenica Seitz CPA, who is related to the CEO, has provided accounting services to the Company, as a consultant and beginning October 2020 as an employee. During the years ended September 30, 2022 and 2021, the services provided were valued at approximately $67,000 and $75,000, respectively. The amount owed to this related party totals approximately $346,000 as of September 30, 2022 and 2021, respectively. The Company has accrued these amounts, and they have been reflected in related party payable in the September 30, 2022, and 2021 financial statements.
NOTE 7 – CONVERTIBLE NOTES PAYABLE
The Company’s convertible promissory notes consisted of the following as of September 30, 2022 and 2021.
| September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||||||||
| Notes | Discount | Notes,
Net of Discount |
Notes | Discount | Notes
Net of Discount |
|||||||||||||||||||||||||
| Bridge Financing Notes | $ | 227,000 | $ | $ | 227,000 | $ | 227,000 | $ | (50,337 | ) | $ | 176,663 | ||||||||||||||||||
| Total | $ | 227,000 | $ | $ | 227,000 | $ | 227,000 | $ | (50,337 | ) | $ | 176,663 | ||||||||||||||||||
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 had a maturity of one year (which has been extended each year at maturity, with current maturity of 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 $3.0 million occurs before maturity and such mandatory conversion price will equal the effective price per share paid in the qualified equity financing. The remaining note balance as of September 30, 2022 and 2021 was $277,000, including $50,000 from related parties, with remaining unamortized debt discounts of and approximately $50,000, respectively. For the year ended September 30, 2022, the two-year loan and warrant extension resulted in loss on extinguishment of debt of approximately $. For the years ended September 30, 2022 and 2021, debt discount amortization was approximately $50,000 and $48,000, respectively. Accrued interest as of September 30, 2022, and 2021 related to these notes was approximately $138,000 and $116,000, respectively. As noted above, the maturity date related to these notes was extended to April 30, 2024. In consideration for the extension of the notes, the Company extended the term of the related warrants until April 30, 2024 and recognized approximately $ 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.
June 2019 Convertible Debenture
In November 2020, the Company made a $300,000 payment in full to satisfy the remaining balance of the convertible debenture and a gain on extinguishment of debt was recognized in the amount of $35,678. Debt discount amortization for the year ended September 30, 2021 was approximately $44,000.
NOTE 8 – 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 judgement 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 2021:
| Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | Total Carrying | |||||||||||||
| Description | (Level 1) | (Level 2) | (Level 3) | Value as of | ||||||||||||
| Derivative Financial Instrument at 9-30-21 | $ | $ | (1,201,656 | ) | $ | $ | (1,201,656 | ) | ||||||||
| Derivative Financial Instrument at 9-30-22 | $ | $ | (959,222 | ) | $ | $ | (959,222 | ) | ||||||||
The change in derivative financial instruments for the twelve months ended September 30, 2022 and 2021 is as follows:
| September 30, 2020 balance | $ | (1,070,551 | ) | |
| Derivative instruments converted/extinguished | 46,261 | |||
| Change in fair value | (177,366 | ) | ||
| September 30, 2021 balance | (1,201,656 | ) | ||
| Derivative instruments converted/extinguished | ||||
| Change in fair value | 242,434 | |||
| September 30, 2022 balance | $ | (959,222 | ) |
Non-recurring fair value assessments include impaired oil and natural gas property assessments and stock-based compensation. During the years ended September 30, 2022 and 2021, the Company recorded an impairment charge of approximately $6.9 million and $0.4 million, respectively and approximately $ and $ of stock-based compensation expense, respectively.
NOTE 9 – COMMON STOCK/PAID IN CAPITAL
Year Ended September 30, 2021
In October 2020, the Company issued approximately common shares with a fair value of approximately $0.1 million related to the extinguishment of the Delek Note. Such shares were reflected on the September 30, 2020 balance sheet as additional paid in capital – shares to be issued.
Warrants
The warrants related to Bridge Financing Notes totaling 12,465,001 were extended during the year ended September 30, 2021 to mature on April 30, 2022 and at maturity during the year ended September 30, 2022 were extended again to mature on April 2024.
The following table summarizes the Company’s warrant activity during the twelve months ended September 30, 2022 and 2021:
| Warrants | Number of Options | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (In years) |
|||||||||
| Outstanding at September 30, 2020 | 78,005,281 | $ | 0.04 | 2.75 | ||||||||
| Granted | — | — | — | |||||||||
| Exercised | — | — | — | |||||||||
| Expired | 2,027,780 | $ | 0.15 | |||||||||
| Outstanding at September 30, 2021 | 75,977,500 | $ | 0.04 | 1.96 | ||||||||
| Granted | — | — | — | |||||||||
| Exercised | — | — | — | |||||||||
| Expired | 11,312,500 | 0.09 | ||||||||||
| Outstanding at September 30, 2022 | 64,665,000 | $ | 0.03 | 1.64 | ||||||||
| Exercisable at September 30, 2022 | 64,665,000 | $ | 0.03 | 1.64 | ||||||||
A summary of all outstanding warrants at September 30, 2022:
| Date Issued | Exercise Price | Number Outstanding |
Remaining Contractual Life (Years) |
|||||||
| Various 2016 | $ | 0.03 | 11,541,667 | 1.56 | ||||||
| Various 2018 | $ | 0.10 | 923,333 | 1.56 | ||||||
| October 2017 | $ | 0.10 | 1,100,000 | 0.04 | ||||||
| December 2017 | $ | 0.10 | 1,100,000 | 0.21 | ||||||
| June 2019 | $ | 0.04 | 50,000,000 | 1.73 | ||||||
| TOTAL | 64,665,000 | |||||||||
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 approximately $ and $ in stock-based compensation expense for the years ended September 30, 2022, and 2021, respectively. None of these costs were capitalized to unproved properties for the years ended September 30, 2022 and 2021, respectively. During the years ended September 30, 2022, and 2021, nil and million options were granted at an exercise price of $ with a vesting schedule of six months and one year after grant. The fair value of the options computed using Black Scholes was approximately $.
| Number of Options | Weighted Average | Weighted Average Remaining | ||||||||||
| Outstanding at September 30, 2021 | 146,000,000 | $ | 0.0444 | 3.8 | ||||||||
| Vested and expected to vest | 146,000,000 | $ | 0.0444 | 3.8 | ||||||||
| Exercisable at September 30, 2022 | 146,000,000 | $ | 0.0444 | 2.8 | ||||||||
As of September 30, 2022, there was no unrecognized stock-based compensation expense.
NOTE 11 – 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 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 September 30, 2022 and 2021, there is a fair value liability of approximately $784,000 and $721,000, respectively, which is included within Derivative Financial Instruments on the condensed balance sheet.
NOTE 12 – SUBSEQUENT EVENTS
On October 10, 2022, GulfSlope Energy, Inc. entered into a Securities Purchase Agreement with one or more buyers. Under the terms of the Securities Purchase Agreement, the Company will issue and sell to Buyers up to an aggregate of $650,000 of convertible promissory notes which shall be convertible into shares of the Company’s common stock, par value $ per share (the “Common Stock”), of which $55,000 shall be purchased upon the signing of the SPA (the “First Closing”), with additional tranches of financing subject to further agreement by and between the Buyer and the Company. The SPA contains customary representations, warranties and agreements by the Company and customary conditions to closing.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are properly recorded, processed, summarized and reported within the time periods required by the Commission’s rules and forms.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of these disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e) and 15d-15(e), as of September 30, 2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2022, the end of the period covered by this Annual Report on Form 10-K.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. All control systems contain inherent limitations, no matter how well designed. As a result, our management acknowledges that its internal controls over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our internal control over financial reporting as of September 30, 2022. In making this assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (2013 Framework). Based on this evaluation, our management concluded that, as of September 30, 2022, our internal control over financial reporting was effective.
This Annual Report does not include an attestation report of our registered public accounting firm regarding our internal control over financial reporting due to an exemption established by the SEC for smaller reporting companies.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the fourth quarter of 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not Applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Identification of Directors and Executive Officers
Our executive officers and directors and their respective ages, positions and biographical information are set forth below.
| Name | Age | Title | ||
| John N. Seitz | 70 | Chairman, Chief Executive Officer | ||
| John H. Malanga | 55 | Chief Financial Officer | ||
| Charles G. Hughes | 65 | Vice President, Land | ||
| Richard S. Langdon | 72 | Director | ||
| Paul L. Morris | 80 | Director |
John N. Seitz. Mr. Seitz has served as the Company’s chief executive officer and chairman of the board and director since May 31, 2013 and served as a consultant to the Company from March 2013 through May 2013. Prior to joining the Company, Mr. Seitz held positions of increasing responsibility at Anadarko Petroleum Corporation (NYSE: APC), serving most recently as a director and as president and chief executive officer until 2003. Mr. Seitz serves on the board of directors of Sheridan Production Partners (private oil & gas producer, U.S. onshore). Mr. Seitz is a Certified Professional Geological Scientist from the American Institute of Professional Geologists and a licensed professional geoscientist with the State of Texas. Mr. Seitz has also served as a trustee for the American Geological Institute Foundation. In 2000, the Houston Geological Society honored Mr. Seitz as a “Legend in Wildcatting,” and he is a member of the All American Wildcatters. Mr. Seitz holds a Bachelor of Science degree in Geology from the University of Pittsburgh, a Master of Science degree in Geology from Rensselaer Polytechnic Institute and has completed the Advanced Management Program at the Wharton School.
John H. Malanga. Mr. Malanga has served as chief financial officer since July 2014 and is responsible for leading the financial function of the organization, overseeing strategic planning and analysis, accounting and reporting, treasury, tax, audit and risk management. From 2005 to 2014, Mr. Malanga worked as a senior investment banker with the energy firms of Weisser, Johnson & Co. and Sanders Morris Harris Inc. Mr. Malanga began his investment banking career with Jefferies & Co. Over his career, he has participated in capital markets, mergers and acquisitions, and financial advisory transactions with particular emphasis on providing strategic and financial advice to emerging growth companies. Mr. Malanga holds a Bachelor of Science in Economics from Texas A&M University and a Master in Business Administration with a concentration in finance from Rice University.
Charles G. Hughes. Mr. Hughes has served as vice president land since April 2014. Mr. Hughes’ executive responsibilities include all land and industry partner related matters. He formerly served as general manager – land and business development for Marubeni Oil & Gas (USA), Inc. from 2007 to 2014. From 1980 to 2007, Mr. Hughes served in roles of increasing responsibility both onshore and offshore in the Gulf of Mexico at Anadarko Petroleum Corporation. Mr. Hughes is a member and former Chairman of the OCS Advisory Board, a member of the Association of Professional Landmen, the Houston Association of Professional Landmen and the Professional Landmen’s Association of New Orleans. Mr. Hughes received his Bachelor of Business Administration in Petroleum Land Management from the University of Texas.
Richard S. Langdon. Mr. Langdon has served as an independent director of the Company since March 2014. Mr. Langdon is currently the chief executive officer, president and chief financial officer of Altamont Energy, Inc., a privately held exploration and production company formed in April 2018. Mr. Langdon also serves as an independent member of the board of managers of Evolve Transition Infrastructure LP and is a member of its Audit and Conflicts Committees. Mr. Langdon served as the president, chief executive officer and outside director of Badlands Energy, Inc. and its predecessor entity, Gasco Energy, Inc. from May 2013, and Debtor-in Possession from August 2017 to October 2018. Prior to assuming the President and CEO role, Mr. Langdon had served as a Gasco Energy Inc. independent board member from March 2003 to May 2013. Mr. Langdon was the president and chief executive officer of KMD Operating Company, LLC, and its predecessor entity, Matris Exploration Company LP, both privately held exploration and production companies, from July 2004 through December 2015. Mr. Langdon also served as president and chief executive officer of Sigma Energy Ventures, LLC, a privately held production company, from November 2007 until November 2013. From 1997 until 2002, Mr. Langdon served as executive vice president and chief financial officer of EEX Corporation, a publicly traded exploration and production company that merged with Newfield Exploration Company in 2002. Prior to that, he held various positions with the Pennzoil Companies from 1991 to 1996, including executive vice president - International Marketing - Pennzoil Products Company; senior vice president - Business Development - Pennzoil Company and senior vice president - Commercial & Control - Pennzoil Exploration & Production Company. Mr. Langdon graduated from the University of Texas at Austin with a Bachelor of Science degree in Mechanical Engineering in 1972 and a Master of Business Administration in 1974.
Paul L. Morris. Mr. Morris has served as a director of the Company since March 2014. Mr. Morris founded Elk River Resources, LLC in August 2013 to explore and develop oil and gas potential in the oil-producing regions of the southwest United States. Mr. Morris served as chairman and chief executive officer of Elk River Resources since inception to November 2020. Prior to Elk River Resources, Mr. Morris served as president and chief executive officer from 1988 to September 2013 of Wagner & Brown, Ltd., an independent oil and gas company headquartered in Midland, Texas. With Wagner & Brown, Mr. Morris oversaw all company operations, including exploration and production activities, in eight states as well as in France, England and Australia. Mr. Morris also oversaw affiliates involved in natural gas gathering and marketing, crude oil purchasing and reselling, pipeline development, construction and operation, and compressed natural gas (CNG) design, fabrication and operations. Mr. Morris served as president of Banner Energy from 1981 until 1988. Mr. Morris graduated from the University of Cincinnati with a Bachelor of Science degree in Mechanical Engineering in 1964. Mr. Morris has also completed the Executive Management Program in the College of Business Administration of Penn State University.
Board Committees and Meetings
The Board currently consists of three directors. Vacancies on the Board may be filled by a vote of a majority of the remaining directors, although less than a quorum is present. A director elected by the Board to fill a vacancy shall serve for the remainder of the term of that director until the director’s successor is elected and qualified. This includes vacancies created by an increase in the number of directors. The Board has three standing committees: the Audit and Compliance Committee, the Compensation Committee, and the Corporate Governance and Nominating Committee.
The Company has no formal policy with regard to Board members’ attendance at annual meetings of security holders. During the fiscal year ended September 30, 2022, the Board held four quarterly meetings, two special meetings and a shareholder meeting. All board members were in attendance for each meeting.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who beneficially own more than 10% of our common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Directors, executive officers and more than 10% stockholders are required by SEC regulations to provide us with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of the copies of the reports furnished to us, all Section 16(a) filing requirements applicable to our directors, officers and more than 10% beneficial owners were complied with during the year ended September 30, 2022.
Code of Ethics
We have adopted a written code of ethics and whistleblower policy (the “Code of Ethics”) that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. We believe that the Code of Ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code. A copy of our Code of Ethics was previously filed as an exhibit to our Annual Report on Form 10-K for the fiscal year ended 2012 and can be found at www.sec.gov. Our Code of Ethics can also be found on our website at www.gulfslope.com. A copy of the Code of Ethics will be provided to any person, without charge, upon request to the Secretary at 1000 Main St., Suite 2300, Houston, Texas 77002.
Involvement in Certain Legal Proceedings
There are currently no material pending legal proceedings to which the Company is a party or of which any of its property is the subject, in which any of the above referenced directors or officers is a party adverse to the Company or has a material interest adverse to the Company. Furthermore, during the past ten years, none of the Company’s officers or directors described above were involved in any legal proceedings that are material to an evaluation of the ability or integrity of such directors and officers.
ITEM 11. EXECUTIVE COMPENSATION
Compensation to Officers of the Company
The following tables contain compensation data for our named executive officers for the fiscal years ended September 30, 2022, and 2021:
| Summary Compensation Table | ||||||||||||||||||||||||||||
| Name and Principal Position | Year | Salary | Bonus | Stock Awards | Stock Option Awards | All Other Compensation | Total | |||||||||||||||||||||
| John N. Seitz(1) | 2022 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| CEO | 2021 | — | — | — | — | — | — | |||||||||||||||||||||
| John H. Malanga | 2022 | 126,160 | — | — | — | — | 126,160 | |||||||||||||||||||||
| CFO | 2021 | 150,000 | — | — | 34,100 | — | 184,100 | |||||||||||||||||||||
| (1) | Mr. Seitz is not currently receiving or accruing any compensation as of the date of this Annual Report. |
Employment and Consulting Arrangements
Not applicable.
Compensation Policies and Practices as they Relate to the Company’s Risk Management
Not applicable.
Director Compensation
In January of 2017, the Company’s nonemployee directors were each awarded 2,500,000 stock options for the Company’s stock at an exercise price of $0.0278 per share, 50% vested in January 2017 and 50% vested in January of 2018. The stock options will expire in January 2024. In June of 2018, the Company’s nonemployee directors were each awarded 4,500,000 stock options for the Company’s stock at an exercise price of $0.075 per share, 1.5 million vested in June 2018, and 1.5 million vested in June 2019 and 1.5 million vested in June 2020. The stock options will expire in December 2025. In January 2021, the Company’s nonemployee directors were each awarded 5,000,000 stock options for the Company’s stock at an exercise price of $0.004 per share, 2.5 million vested in July 2021, and 2.5 million vested in January 2022. The stock options will expire in December 2025.
Grants of Plan-Based Awards
The Company shareholders approved the 2018 Omnibus Incentive Plan in May of 2018. Restricted stock and stock option awards made after this date, to executives, employees, and directors were made pursuant to the plan.
Outstanding Equity Awards at Fiscal Year End
In October 2013, two million stock options were awarded with an exercise price of $0.12 and have an expiration of October 2023. In January 2017, 28.5 million stock options were awarded to GulfSlope Energy executives and employees and five million to directors. The exercise price of the stock options is $0.0278, and they expire in January 2024. In May 2018, 0.5 million stock options were awarded to an employee, the exercise price is $0.065, and they expire in December 2025. In June 2018, 67.5 million stock options were awarded to GulfSlope Energy executives, employees, consultants, and directors. The exercise price of the stock options is $0.075, and they expire in December 2025. On January 2, 2019, the Company issued 1 million stock options to a former employee and consultant. The exercise price of the stock options is $0.045, and they expire in December 2025. All of the 2013 through 2019 stock option awards are fully vested. In January 2021, 41.5 million stock options were awarded to GulfSlope Energy executives, employees, consultants, and directors. The exercise price of the options is $0.004 per share and 50% of the options vested in July 2021 and 50% vested in January 2022. The expiration date of the options is December 31, 2025.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth the number and percentage of outstanding shares of common stock owned by: (a) each of our directors; (b) each person who is known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; (c) the named executive officers as defined in Item 402 of Regulation S-K; and (d) all current directors and executive officers, as a group. As of December 27, 2022, there were 1,268,240,346 shares of common stock deemed issued and outstanding.
Unless otherwise stated, beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Under this rule, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares (for example, upon exercise of an option or warrant) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person or group of persons, the number of shares beneficially owned by such person or group of persons is deemed to include the number of shares beneficially owned by such person or the members of such group by reason of such acquisition rights, and the total number of shares outstanding is also deemed to include such shares (but not shares subject to similar acquisition rights held by any other person or group) for purposes of that calculation. As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s actual voting power at any particular date. To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The address for each of the beneficial owners is the Company’s address.
| Named Executives Officers and Directors | Beneficially Owned Shares of Common Stock |
Percentage of Beneficially Owned Common Stock |
||||||
| John N. Seitz (1) | 261,955,676 | 20.7 | % | |||||
| John H. Malanga (3) | 46,666,667 | 3.7 | % | |||||
| Richard S. Langdon (4) | 12,916,667 | 1.0 | % | |||||
| Paul L. Morris (2) (4) | 14,228,038 | 1.1 | % | |||||
| All Executive Officers & Directors | 333,767,048 | 26.5 | % | |||||
| Greater than 5% Shareholders | ||||||||
| Delek GOM Investments LLC | 294,018,459 | 23.2 | % | |||||
| (1) | Includes 44,166,667 shares of common stock underlying the convertible demand note in the principal amount of $5.3 million and 18,203,453 shares underlying the convertible accrued interest in the amount of $2,184,414. |
| (2) | Includes 61,371 shares of common stock held by the Morris Family Limited Partnership LP, a partnership of which an entity controlled by Mr. Morris is the general partner and 2,500,000 stock options awarded in January 2017, one-half vested in January of 2017 and one-half vested in January 2018. Includes 4,500,000 stock options awarded in June 2018, one-third vested in June of 2018, one-third vested in June 2019 and one-third vested in June 2020. Includes 5,000,000 stock options awarded in January 2021, one-half vested in July of 2021, one-half vested in January 2022. |
| (3) | Includes 15,000,000 stock options awarded in January 2017, one-half vested in January of 2017 and one-half vested in January 2018. Includes 18,000,000 stock options awarded in June 2018, one-third vested in June of 2018, one-third vested in June 2019 and one-third vested in June 2020. Includes 11,000,000 stock options awarded in January 2021, one-half vested in July of 2021, one-half vested in January 2022. |
| (4) | Includes 2,500,000 stock options awarded in January 2017, one-half vested in January of 2017 and one-half vested in January 2018. Includes 4,500,000 stock options awarded in June 2018, one-third vested in June of 2018, one-third vested in June 2019 and one-third vested in June 2020. Includes 5,000,000 stock options awarded in January 2021, one-half vested in July of 2021, one-half vested in January 2022. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
For a discussion of related party transactions, see Item 8. Financial Statements and Supplementary Data, Note 6 - Related Party Transactions.
Director Independence
For purposes of determining director independence, we have applied the NYSE MKT standards for independence. The OTC Markets, on which shares of our common stock are quoted, does not have any director independence requirements. The NYSE MKT definition of independent director means a person other than an executive officer or employee of the Company or any other individual having a relationship which, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
The members of the Audit and Compliance Committee, the Compensation Committee, and the Corporate Governance and Nominating Committee are Messrs. Morris and Langdon, each, of whom, is independent.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees and Services
For the fiscal years ended September 30, 2022 and 2021 professional services were performed by Pannell Kerr Forster of Texas, P.C. The aggregate fees billed by PKF of Texas for the fiscal year ended September 30, 2022, were as follows:
| September
30, 2022 |
||||
| Audit Fees (1) | $ | 94,206 | ||
| Audit-Related Fees (2) | 70,145 | |||
| Tax Fees (3) | 15,275 | |||
| All Other Fees | — | |||
| (1) | Audit services include fees for professional services rendered only for the audit of the Company’s annual financial statements for the fiscal year ended September 30, 2021. |
| (2) | Audit-related services primarily include fees for assurance and related services by our principal accountants that are reasonably related to the performance of the review of our financial statements for the quarterly periods December 31, 2021, March 31, 2022 and June 30, 2022. |
| (3) | Tax services include fees for assistance with tax preparation and compliance during the year ended September 30, 2022. |
Audit Committee Pre-Approval Policies and Procedures
The Audit and Compliance Committee has adopted policies and procedures that will require the Company to obtain the Committee’s pre-approval of all audit and permissible non-audit services to be provided by the Company’s independent registered public accounting firm. The Committee pre-approved 100% of the non-audit services provided to the Company by PKF of Texas.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements (included under Item 8):
| Page(s) | |
| Report of Independent Registered Public Accounting Firm | 26 |
| Balance Sheets as of September 30, 2022 and 2021 | 28 |
| Statements of Operations for the Years Ended September 30, 2022 and 2021 | 29 |
| Statements of Stockholders’ Equity (Deficit) for the Years Ended September 30, 2022 and 2021 | 30 |
| Statements of Cash Flows for the Years Ended September 30, 2022 and 2021 | 31 |
| Notes to the Financial Statements | 32 - 39 |
(3) Exhibits. The following exhibits are filed as part of this Annual Report:
| (1) | Filed herewith. |
| (2) | 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. |
| (3) | Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto pursuant to Item 15(b). |
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| GulfSlope
Energy, Inc. (Registrant) | |||
| Date: December 29, 2022 | |||
| By: | /s/ John N. Seitz | ||
| John N. Seitz | |||
| Chief Executive Officer and Chairman | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date |
| /s/ John N. Seitz | Chief Executive Officer and Chairman | December 29, 2022 |
| John N. Seitz | (Principal Executive Officer) | |
| /s/ John H. Malanga | Chief Financial Officer | December 29, 2022 |
| John H. Malanga | (Principal Financial Officer) | |
| (Principal Accounting Officer) | ||
| /s/ Richard S. Langdon | Director | December 29, 2022 |
| Richard S. Langdon | ||
| /s/ Paul L. Morris | Director | December 29, 2022 |
| Paul L. Morris |