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NOTE 9 – 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:
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Level 1:
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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.
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Level 2:
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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.
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Level 3:
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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).
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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 2019:
| |
|
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 9-30-19 |
|
$ |
— |
|
|
$ |
(3,534,456 |
) |
|
$ |
— |
|
|
$ |
(3,534,456 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivative
Financial Instrument at 9-30-20 |
|
$ |
— |
|
|
|
(1,070,551 |
) |
|
$ |
— |
|
|
$ |
(1,070,551 |
) |
The change in derivative financial instruments for the twelve months ended September 30, 2020 and 2019 is as follows:
| September 30, 2018 balance |
|
$ |
(271,710 |
) |
| Issuance of derivative financial instruments |
|
|
(3,863,599 |
) |
| Change in fair value |
|
|
600,853 |
|
| September 30, 2019 balance |
|
|
(3,534,456 |
) |
| Issuance of derivative financial instruments |
|
|
(880,462 |
) |
| Derivative instruments converted/extinguished |
|
|
707,894 |
|
| Change in fair value |
|
|
2,636,473 |
|
| September 30, 2020 balance |
|
$ |
(1,070,551 |
) |
Non-recurring fair value assessments include impaired oil and natural gas property assessments and stock-based compensation. During the year ended September 30, 2020, the Company recorded an impairment charge approximately of $2.4 million and stock-based compensation expense of approximately $1.0 million of which approximately $0.5 million was capitalized to oil and gas properties. During the year ended September 30, 2019, the Company recorded an impairment charge of approximately $6.0 million and stock-based compensation expense of approximately $1.6 million of which approximately $0.7 million was capitalized to oil and gas properties.
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