GSPE Gulfslope Energy Inc (CE)

Notes to Condensed Financial Statements

June 30, 2021

(Unaudited)

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

GulfSlope Energy, Inc. (the “Company” or “GulfSlope”) is an independent oil and natural gas exploration company whose interests are concentrated in the United States Gulf of Mexico federal waters offshore Louisiana. The Company currently has under lease three federal Outer Continental Shelf blocks (referred to as “prospect,” “portfolio“ or “leases”) and licensed three-dimensional (3-D) seismic data across its area of concentration.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

The condensed financial statements included herein are unaudited. However, these condensed financial statements include all adjustments (consisting of normal recurring adjustments), which, in the opinion of management are necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods. The results of operations for interim periods are not necessarily indicative of the results to be expected for an entire year. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed financial statements and accompanying notes. Actual results could differ materially from those estimates.

Certain information, accounting policies, and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to certain rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed financial statements should be read in conjunction with the audited financial statements for the year ended September 30, 2020, which were included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020 and filed with the Securities and Exchange Commission on December 29, 2020.

Cash

GulfSlope considers highly liquid investments with original maturities to the Company of three months or less to be cash equivalents. There were no cash equivalents at June 30, 2021 and September 30, 2020.

Liquidity / Going Concern

The Company has incurred accumulated losses as of June 30, 2021 of $59.7 million, has negative working capital of $12.0 million and for the nine months ended June 30, 2021 generated losses of $1.7 million. Further losses are anticipated in developing our business. As a result, there exists substantial doubt about our ability to continue as a going concern. As of June 30, 2021, we had $1.8 million of unrestricted cash on hand. The Company estimates that it will need to raise a minimum of $10.0 million to meet its obligations and planned expenditures. The $10.0 million is comprised primarily of capital project expenditures as well as general and administrative expenses. It does not include any amounts due under outstanding debt obligations, which amounted to $11.9 million of current principal and accrued interest as of June 30, 2021. The Company plans to finance operations and planned expenditures through the issuance of equity securities, debt financings and farm-out agreements, asset sales or mergers. The Company also plans to extend the agreements associated with all loans, the accrued interest payable on these loans, as well as the Company’s accrued liabilities. There are no assurances that financing will be available with acceptable terms, if at all, or that obligations can be extended. If the Company is not successful in obtaining financing or extending obligations, operations would need to be curtailed or ceased, or the Company would need to sell assets or consider alternative plans up to and including restructuring. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Accounts Receivable

The Company records accounts receivable for the sale of crude oil, NGL, and natural gas production, and joint interest billings to our partners for their share of expenses on joint venture properties for which we are the operator. The Company estimates allowances for doubtful accounts based on the aged receivable balances and historical losses. If the Company determines any account to be uncollectible based on significant delinquency or other factors, the receivable and the underlying asset are assessed for recovery. As of June 30, 2021 and September 30, 2020, there was no allowance for doubtful accounts receivable. Gross accounts receivable was nil and approximately $0.4 million at June 30, 2021 and September 30, 2020, respectively. 

Full Cost Method

The Company uses the full cost method of accounting for its oil and gas exploration and development activities. Under the full cost method of accounting, all costs associated with successful and unsuccessful exploration and development activities are capitalized on a country-by-country basis into a single cost center (“full cost pool”). Such costs include property acquisition costs, geological and geophysical (“G&G”) costs, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells. Overhead costs, which includes employee compensation and benefits including stock-based compensation, incurred that are directly related to acquisition, exploration and development activities are capitalized. Interest expense is capitalized related to unevaluated properties and wells in process during the period in which the Company is incurring costs and expending resources to get the properties ready for their intended purpose. For significant investments in unproved properties and major development projects that are not being currently depreciated, depleted, or amortized and on which exploration or development activities are in progress, interest costs are capitalized. Proceeds from property sales will generally be credited to the full cost pool, with no gain or loss recognized, unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these costs. A significant alteration would typically involve a sale of 25% or more of the proved reserves related to a single full cost pool. 

Proved properties are amortized on a country-by-country basis using the units of production method (“UOP”), whereby capitalized costs are amortized over total proved reserves. The amortization base in the UOP calculation includes the sum of proved property, net of accumulated depreciation, depletion and amortization (“DD&A”), estimated future development costs (future costs to access and develop proved reserves), and asset retirement costs, less related salvage value.

The costs of unproved properties and related capitalized costs (such as G&G costs) are withheld from the amortization calculation until such time as they are either developed or abandoned. Unproved properties and properties under development are reviewed for impairment at least quarterly and are determined through an evaluation that considers, among other factors, seismic data, requirements to relinquish acreage, drilling results, remaining time in the commitment period, remaining capital plan, and political, economic, and market conditions. In countries where proved reserves exist, exploratory drilling costs associated with dry holes are transferred to proved properties immediately upon determination that a well is dry and amortized accordingly. In countries where a reserve base has not yet been established, impairments are charged to earnings. At June 30, 2021, the Company continues to pursue the development of its unproved properties and is actively finalizing the permitting of the Tau No. 2 well. As such, project economics continue to support cost incurred plus future development therefore no impairment is required at June 30, 2021.

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. Capitalized exploratory well costs remain pending the outcome of exploration activities involving the drilling of the Tau No. 2 well (twin well). Accordingly, these costs are included as suspended well costs at June 30, 2021 and it is expected that a final analysis will be completed upon the drilling of the Tau No. 2 well or within the next twelve months at which time the costs will be transferred to the full cost pool upon final evaluation.

As of June 30, 2021, the Company’s oil and gas properties consisted of unproved properties, wells in process and no proved reserves. 

Due to a combination of the COVID-19 pandemic and related pressures on the global supply-demand balance for crude oil and related products, commodity prices significantly declined in 2020. Despite a strong recovery of prices in 2021, oil and gas operators have reduced exploration budgets and activity. The Company has evaluated the effect of these factors on its business and notes these factors have caused a delay in the plans for the Company’s 2021 drilling program. The Company continues to monitor the economic environment and evaluate the impact on the business.

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. The Company drilled two well bores in 2018 and 2019 and these wellbores were both plugged with no further cost required and as such, the asset retirement obligation was completely extinguished. 

Derivative Financial Instruments

The accounting treatment for derivative financial instruments requires that the Company record certain embedded features 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. The Company evaluates each warrant and embedded feature to discern whether derivative accounting is required. As of June 30, 2021, the Company accounts for certain warrants and a make whole provision as derivative liabilities.

Prior to November 19, 2020, the Company had a certain note payable which contained a variable conversion feature with no floor, and accordingly, the Company had adopted a sequencing policy in accordance with ASC 815-40-35-12 whereby all stock-based instruments issued after such note payable was issued and prior to it being extinguished were classified as derivative liabilities with the exception of instruments related to share-based compensation issued to employees or directors. Such sequencing policy ceased upon the extinguishment of the note payable on November 19, 2020.

Basic and Dilutive Earnings Per Share

Basic income (loss) per share (“EPS”) is computed by dividing net income (loss) (the numerator) by the weighted average number of common shares outstanding for the period (denominator). Diluted EPS is computed by dividing net income (loss) by the weighted average number of common shares and potential common shares outstanding (if dilutive) during each period. Potential common shares include stock options, warrants, and convertible notes payable. The number of potential common shares outstanding relating to stock options and warrants, is computed using the treasury stock method. The number of potential common shares related to convertible notes payable is determined using the if-converted method.

As the Company has incurred losses for the three and nine months ended June 30, 2021 and 2020, the potentially dilutive shares are anti-dilutive and are thus not added into the loss per share calculations. As of June 30, 2021 and 2020, there were 299,064,844 and 586,722,166 potentially dilutive shares, respectively.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, “Leases”, and in March 2019, the FASB issued ASU No. 2019-01, “Leases: Codification Improvements”, which updated the accounting guidance related to leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. They also clarify implementation issues. These updates are effective for public companies for annual periods beginning after December 15, 2018, including interim periods therein. Accordingly, the standard was adopted by the Company on October 1, 2019. The standard was applied utilizing a modified retrospective approach and is reflected in these financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payments (“ASU 2018-07”). This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company adopted this new standard effective October 1, 2019, with no material impact to stock compensation issued to non-employees.

The Company has evaluated all other recent accounting pronouncements and believes that none of them will have a significant effect on the Company’s financial statements.

NOTE 3 – OIL AND NATURAL GAS PROPERTIES

The Company currently has under lease three federal Outer Continental Shelf blocks and has licensed 2.2 million acres of three-dimensional (3-D) seismic data in its area of concentration.

The Company, as the operator of two wells drilled in the Gulf of Mexico, has incurred tangible and intangible drilling costs for the wells in process and has billed its working interest partners for their respective share of the drilling costs to date. The intangible drilling and all other costs related to the first well have been impaired. The second well, Tau No 1, was drilled to a measured depth of 15,254 feet, as compared to the originally permitted 29,857 foot measured depth. Producible hydrocarbon zones were not established to that depth, but hydrocarbon shows were encountered. Complex geomechanical conditions required two by-pass wellbores, one sidetrack wellbore, and eight casing strings to reach that depth. Equipment limitations prevented further drilling. In addition, the drilling rig had contractual obligations related to another operator. The Company elected to plug this well in a manner that would allow for re-entry at a later time. The Company plans to re-drill this prospect within the next twelve months, however, the impact of the COVID-19 pandemic on offshore operations is still under mitigation by operators and will influence the potential timing of a re-drill. The Company plans to finance operations and planned expenditures through equity and/or debt financings, farm-out agreements, and/or other transactions.

In January 2019, the Tau well experienced an underground control of well event and as a result, the Company filed an insurance claim pursuant to its insurance policy with its insurance underwriters (the “Underwriters”). The total amount of the claim was approximately $10.8 million for 100% working interest after the insurance deductible amount. The Company received approximately $2.5 million of this amount and credited wells in process for approximately $0.9 million for the Company’s portion, and recorded an accrued payable for approximately $1.6 million, pending evaluation of distributions to the working interest owners. In December 2019, the accrued payable was settled by the issuance to the working interest partner of approximately 38.4 million shares of the Company’s common stock.

In May 2019, the Tau No. 1 well experienced a second underground control of well event and as a result, the Company filed an insurance claim. The claim was related to a subsurface well occurrence that happened during the drilling of the Company’s Tau No. 1 well on May 5, 2019 at a measured depth of 15,254 feet. The Company subsequently controlled the occurrence and ceased drilling operations and plugs were placed in the well to meet regulatory requirements prior to rig release. Pursuant to the Policy terms and conditions, the Underwriters were obligated to reimburse GulfSlope for qualified actual costs and expenses incurred to (i) regain control of the well, and (ii) restore or re-drill the well to 15,254 feet. Total costs and expenses to regain control of the well were determined to be approximately $4.8 million (net of deductible) for 100% working interest and all of this amount has been received. GulfSlope’s share of this amount was approximately $1.2 million.

On July 27, 2020, the Company entered into a settlement with the Underwriters of the well control events insurance policy for their claims associated with the re-drilling of the Tau No. 1 well. In accordance with the settlement, in lieu of the insurer paying for the redrill of the well and for a complete release of any further liability under the insurance policy, the Company will receive approximately $6.6 million in cash net to its 25% working interest. All of this amount has been received.

As of June 30, 2021, the Company’s oil and natural gas properties consisted of unproved properties, wells in process and no proved reserves. During the three months ended June 30, 2021 and 2020, the Company capitalized nil and approximately $1.2 million of interest expense to oil and natural gas properties, respectively, and approximately $0.04 million and $0.3 million of general and administrative expenses, capitalized to oil and natural gas properties, respectively. During the nine months ended June 30, 2021 and 2020, the Company capitalized nil and approximately $2.3 million of interest expense to oil and natural gas properties, respectively, and approximately $0.1 million and $0.7 million of general and administrative expenses, capitalized to oil and natural gas properties, respectively.

NOTE 4 – RELATED PARTY TRANSACTIONS 

During April 2013 through September 2017, the Company entered into convertible promissory notes whereby it borrowed a total of approximately $8.7 million from John Seitz, the chief executive officer (“CEO”). The notes are due on demand, bear interest at the rate of 5% per annum, and approximately $5.3 million 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 June 30, 2021, the total amount owed to John Seitz is approximately $8.7 million. This amount is included in loans from related parties within the condensed balance sheets. There was approximately $2.9 million of unpaid interest associated with these loans included in accrued interest payable within the balance sheet as of June 30, 2021.

On November 15, 2016, a family member of the CEO entered into a $50,000 convertible promissory note with associated warrants (“Bridge Financing”) under the same terms received by other investors (see Note 6).

Domenica Seitz CPA, related to John Seitz, has provided accounting services to the Company through September 30, 2020, as a consultant and beginning October 2020 as an employee. During the three months ended June 30, 2021 and 2020, the services provided were valued at approximately $19,000 and $15,000, respectively. During the nine months ended June 30, 2021 and 2020, the services provided were valued at approximately $56,000 and $45,000, respectively. 

PPP Loan 

On April 16, 2020, GulfSlope Energy, Inc. entered into a promissory note (the “Note”) evidencing an unsecured $100,300 loan under the Paycheck Protection Program (the “PPP Loan”). The Paycheck Protection Program was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The PPP Loan was made through Zions Bancorporation, N.A. dba Amegy Bank (the “Lender”). On December 17, 2020, the PPP Loan plus accrued interest of approximately $600 was formally forgiven in full by the U.S. Small Business Administration. The forgiven loan balance and related interest totaling approximately $100,900 was accounted for as a gain on debt extinguishment in the Condensed Statements of Operations for the nine months ended June 30, 2021.

Insurance Note Payable

In November 2019, the Company purchased an insurance policy for approximately $241,000 and financed $220,629 of the premium by executing a note payable at an interest rate of 5.6%. The note was paid in full in October 2020. The balance of the note payable was nil and approximately $21,000 on June 30, 2021 and September 30, 2020, respectively. This note is included in the Notes Payable balance in the Condensed Balance Sheet.

Bridge Financing Notes

Between June and November 2016, the Company issued eleven convertible promissory notes (“Bridge Financing Notes”) with associated warrants in a private placement to accredited investors for total gross proceeds of $837,000, including $222,000 from related parties. These notes and associated warrants had a maturity of one year (which has been extended at maturity to April 30, 2022), an annual interest rate of 8% and can be converted at the option of the holder at a conversion price of $0.025 per share. In addition, the convertible notes will automatically convert if a qualified equity financing of at least $3 million occurs before maturity and such mandatory conversion price will equal the effective price per share paid in the qualified equity financing. The note balances, as of June 30, 2021 and September 30, 2020, were $277,000, with unamortized debt discounts of approximately $72,000 and $11,000, respectively. Debt discount amortization for the three months ended June 30, 2021 and 2020 was approximately $16,000 and $17,000, respectively. Debt discount amortization for the nine months ended June 30, 2021 and 2020 was approximately $26,000 and $103,000, respectively. In consideration for the extension of the notes, the Company extended the term of the related warrants until April 30, 2022, and recognized approximately $87,000 of additional debt discount which represented the incremental value of the modified warrants over the pre-modification warrants.

June 2019 Convertible Debenture

On June 21, 2019, the Company entered into a securities purchase agreement to borrow up to $3,000,000 through the issuance of convertible debentures (“Convertible Debentures”) and associated warrants. On June 21, 2019, approximately $2,100,000 (“Tranche 1”) of Convertible Debentures were purchased with other tranches closing on August 7, 2019 for $400,000 (“Tranche 2”) and November 6, 2019 (“Tranche 3”) for $500,000. All tranches accrue interest at eight percent per annum, and mature one year after each respective closing date, and are convertible at the option of the holder any time after issuance into common stock at a conversion rate of the lesser of: (1) $0.05 per share; or (2) 80% of the lowest volume weighted adjusted price (as reported by Bloomberg, LP) for the ten consecutive trading days immediately preceding conversion, and in the event of default the conversion rate adjusts to 60% of the lowest volume weighted average price in the previous 20 trading days.

In addition, the holder received warrants to purchase an aggregate of 50 million shares of common stock at an exercise price of $0.04 per share (subsequently reduced to an exercise price $0.02 in 2020). Such warrants expire on the fifth anniversary of issuance. In total the offering costs incurred related to this Convertible Debenture were approximately $398,000. 

The Company evaluated the conversion feature and concluded that it should be bifurcated and accounted for as a derivative liability due to the variable conversion feature which does not contain an explicit limit on the number of shares that are required to be issued upon conversion. In addition, the Company concluded the warrants required treatment as derivative liabilities as the Company could not assert it has sufficient authorized but unissued shares to settle the warrants upon exercise when taking into account other stock-based commitments including the Convertible Debentures. Accordingly, the embedded conversion feature and warrants were recorded at fair value at issuance and are subsequently re-measured to fair value each reporting period.

In June 2020, the Company extended the maturity dates of Tranche 1 and Tranche2 to August 21, 2020 in exchange for a cash payment of $50,000. The extension was treated as a modification for accounting purposes which resulted in the $50,000 being recognized as an additional debt discount allocated on a pro-rata basis between Tranche 1 and Tranche 2 and will be amortized using the effective interest method over the remaining life of the respective tranches.

On July 27, 2020, the Company and the holder agreed to the following cash payments in full satisfaction of the obligations thereunder: (1) $50,000 on the date of the Agreement; (2) $700,000 on or before August 21, 2020; (3) $750,000 on or before September 30, 2020; and (4) any remaining principal amount outstanding on or before November 30, 2020. As of the date of the agreement, the principal balance outstanding on the Convertible Debenture was $1,900,000, which amount may be reduced in the event that holder elects to convert to equity all or any portion of principal prior to repayment. In connection with the agreement, the holder agreed not to convert more than $300,000 of principal of the Debenture between the date of the agreement and November 30, 2020. Upon the timely payment by the Company of the amounts set forth above, all other amounts due on the Debentures, including any interest or fees accrued or that will accrue or become due or payable on the Debentures, will be extinguished. The Company accounted for this arrangement as a modification of the existing debt.  

During the year ended September 30, 2020, the lender converted approximately $1,200,000 of principal of Tranche 1 and approximately $139,000 of accrued interest into common stock. The remaining balance of the convertible debenture at September 30, 2020 was $300,000.

In November 2020, the Company made a $300,000 payment in full to satisfy the remaining balance of the convertible debenture.

The fair value of the embedded conversion feature at September 30, 2020 was determined utilizing a Geometric Brownian Motion Stock Path Based Monte Carlo Simulation that utilized the following key assumptions:

In addition to the fixed exercise price noted above, the model incorporated the variable conversion price which is simulated as 80% of the lowest trading price within the ten consecutive days preceding presumed conversion.

NOTE 7 – 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:

As required by ASC 820-10, financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

Fair Value on a Recurring Basis

The following table sets forth by level within the fair value hierarchy the Company’s derivative financial instruments that were accounted for at fair value on a recurring basis as of September 30, 2020, and June 30, 2021, respectively:

The change in derivative financial instruments for the nine months ended June 30, 2021 is as follows:

Non-recurring fair value assessments include oil and natural gas impairments and stock-based compensation. During the nine months ended June 30, 2021 and 2020, the Company recorded an impairment charge of nil and approximately $2,125,000, and stock-based compensation of approximately $65,000 none of which was capitalized to oil and gas properties and approximately $968,000 of which approximately $498,000 was capitalized to oil and gas properties, respectively.

NOTE 8 – COMMON STOCK/PAID IN CAPITAL

Nine Months Ended June 30, 2021

In October 2020, the Company issued approximately 17.5 million common shares with a fair value of approximately $0.1 million that were reflected on the September 30, 2020 balance sheet as additional paid in capital – shares to be issued. 

Nine Months Ended June 30, 2020

The Company issued approximately 106 million common shares with a fair value of approximately $2.1 million upon partial conversions of the notes and related accrued interest during the nine months ended June 30, 2020. The common shares were valued based upon the closing common share prices on the respective conversion dates.

The Company issued 38,423,221 common shares with a fair value of $1,536,929 to extinguish an accrued expense that totaled $1,613,775 during the nine months ended June 30, 2020. The common shares were valued based upon the closing common share price on the date of settlement resulting in a gain on the extinguishment of the obligation of approximately $77,000.

NOTE 9 – STOCK-BASED COMPENSATION 

Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award using the Black Scholes option pricing model, and is recognized over the vesting period. The Company recognized stock-based compensation of approximately $65,000 and $961,000 for the nine months ended June 30, 2021 and 2020, respectively. Of the $65,000 of stock compensation expense for the nine months ended June 30, 2021, all was recorded as general and administrative expense, and of the approximately $961,000 of stock-based compensation recognized for the nine months ended June 30, 2020, approximately $498,000 was capitalized to unproved oil and gas properties, with the remainder recorded as general and administrative expense.

During the nine months ended June 30, 2020, upon the passing of a member of the management team, the Company modified a stock option grant for three million shares made to said management team member in June 2018 to vest such award immediately. The Company recorded approximately $8,000 in additional compensation expense related to this modification. 

The following table summarizes the Company’s stock option activity during the nine months ended June 30, 2021:

As of June 30, 2021, there was approximately $0.06 million of unrecognized stock-based compensation expense.

NOTE 10 – 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 is 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 Company accounted for this lease as an operating lease in accordance with ASC 842, Leases. As of June 30, 2021, the right-of-use asset, net related to this lease is approximately $14,000 and the operating lease liability is approximately $24,000. All remaining payments totaling approximately $25,000 are payable within the current fiscal year.

The Company reached an agreement in August 2018 for the settlement of approximately $1 million in debt owed to a third party. As required under the terms of the settlement, the Company made a payment of approximately $0.16 million in cash and 10 million shares of common stock at such time. The agreement also contained a provision such that upon the sale of the common stock by the holder, if the proceeds received were not sufficient to fully satisfy the original debt balance, additional payment by the Company 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. The agreement was determined to meet the definition of a derivative in accordance with ASC 815. As of June 30, 2021, there is a derivative financial instrument liability recorded of approximately $0.7 million related to this agreement.