Notes
to the Consolidated Financial Statements
(Unaudited)
1.
Nature of Operations
The
principal business of Discovery Energy Corp. (“Company”) is the exploration and development of the 584,651 gross acres
(914 sq. miles) in South Australia (“Prospect”) covered by Petroleum Exploration License PEL 512 (“License”).
In May 2012, the Company incorporated a wholly-owned Australian subsidiary, Discovery Energy SA Ltd., for the purpose of acquiring
a 100% working interest in the License. On May 25, 2016, its status changed from a public to a private legal entity and its name
to Discovery Energy SA Pty Ltd. (“Subsidiary”). To date, the Company has not determined whether or not the Prospect,
which overlies portions of the Cooper and Eromanga basins, contains any crude oil and/or natural gas reserves that are economically
recoverable. While the Company’s present focus is on the Prospect, it may consider pursuing other attractive crude oil and/or
natural gas exploration opportunities.
2.
Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally
accepted accounting principles in the United States of America (“GAAP”) and the rules of the U.S. Securities and Exchange
Commission (“SEC”).
Principles
of Consolidation
These
consolidated financial statements include the accounts of the Company and the Subsidiary. Inter-company transactions and balances
have been eliminated upon consolidation.
Use
of Estimates
The
preparation of these 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 as of the date of these financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments with a maturity of three months or less at the time of acquisition to be cash
equivalents. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits as guaranteed
by the Federal Deposit Insurance Corporation. As of November 30, 2019, approximately $800 of the Company’s cash balances
were uninsured. The Company has not experienced any losses on such accounts.
Oil
and Gas Property and Exploration Costs
The
Company is in the exploration stage of evaluating the Prospect and has not yet realized any revenues from its operations. It applies
the successful efforts method of accounting for crude oil and natural gas properties. Under this method, exploration costs such
as exploratory geological and geophysical costs, delay rentals and exploratory overhead are expensed as incurred. Costs to acquire
mineral interests in crude oil and/or natural gas properties, drill and equip exploratory wells that find proved reserves and
drill and equip development wells are capitalized. Acquisition costs of unproved leaseholds are assessed for impairment during
the holding period and transferred to proven crude oil and/or natural gas properties to the extent associated with successful
exploration activities. Significant undeveloped leases are assessed individually for impairment, based on the Company’s
current exploration plans, and a valuation allowance is provided if impairment is indicated. Capitalized costs from successful
exploration and development activities associated with producing crude oil and/or natural gas leases, along with capitalized costs
for support equipment and facilities, are amortized to expense using the unit-of-production method based on proved crude oil and/or
natural gas reserves on a field-by-field basis, as estimated by qualified petroleum engineers.
Long-lived
Assets
The
carrying values of long-lived assets are reviewed on a regular basis for the existence of facts or circumstances that may suggest
impairment. The Company recognizes impairment when the sum of the expected undiscounted future cash flows is less than the carrying
amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated
fair value.
Fair
Value of Financial Instruments and Derivative Financial Instruments
The
carrying amounts of cash, receivables, accounts payable, accrued liabilities and shareholder loans approximate their fair values
due to the short maturity of these items. Certain fair value estimates may be subject to and involve uncertainties and matters
of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect
these estimates. The Company does not hold or issue financial instruments for trading purposes, nor does it utilize derivative
instruments in the management of its foreign exchange, commodity price, and/or interest rate market risks.
Income
Taxes
Deferred
income taxes are reported for timing differences between items of income or expense reported in these financial statements and
those reported for income tax purposes. The Company uses the asset/liability method of accounting for income taxes. Deferred income
taxes and tax benefits are recognized for the future tax consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax bases, and for tax loss and credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The Company provides a valuation allowance for deferred taxes
for the estimated future tax effects attributable to temporary differences and carry-forwards when realization is not more likely
than not.
The
Tax Cuts and Jobs Act of 2017 was signed into law on December 22, 2017. The law includes significant changes to the U.S. corporate
income tax system, including a federal corporate rate reduction from 34% to 21%. In accordance with ASC 740, the impact of a change
in the tax law is recorded in the period of enactment.
The
Company accounts for uncertain income tax positions by recognizing in the financial statements, the impact of a tax position,
if that position is more likely than not of being sustained on examination by taxation authorities, based on the technical merits
of the position.
Foreign
Currency Translation
The
Company’s functional and reporting currency is the United States dollar. Monetary assets and liabilities denominated in
foreign currencies are translated using exchange rates prevailing at the balance sheet date. Non-monetary assets are translated
at historical exchange rates, and revenue and expense items at average rates of exchange prevailing during the period. Differences
resulting from translation are presented in equity as accumulated other comprehensive income (loss). Gains and losses arising
on settlement of foreign currency denominated transactions or balances are included in the determination of income. Foreign currency
transactions are primarily undertaken in Canadian and Australian dollars. The Company has not, to the date of these financial
statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
Fair
Value Considerations
Historically,
the Company followed Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,”
as amended by FASB Financial Staff Position (“FSP”) No. 157 and related guidance. These provisions relate to the Company’s
financial assets and liabilities carried at fair value and the fair value disclosures related to financial assets and liabilities.
ASC 820 defines fair value, expands related disclosure requirements, and specifies a hierarchy of valuation techniques based on
the nature of the inputs used to develop the fair value measures. Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, assuming
the transaction occurs in the principal or most advantageous market for that asset or liability.
There
are three levels of inputs to fair value measurements - Level 1, meaning the use of quoted prices for identical instruments in
active markets; Level 2, meaning the use of quoted prices for similar instruments in active markets or quoted prices for identical
or similar instruments in markets that are not active or are directly or indirectly observable; and Level 3, meaning the use of
unobservable inputs. The Company uses Level 1 inputs for its fair value measurements whenever there is an active market, with
actual quotes, market prices, and observable inputs on the measurement date. The Company uses Level 2 inputs for fair value measurements
whenever there are quoted prices for similar securities in an active market or quoted prices for identical securities in an inactive
market. The Company uses observable market data whenever available.
In
accordance with ASC 815-40-25 and ASC 815-10-15 “Derivatives and Hedging” and ASC 480-10-25 “Liabilities-Distinguishing
Liabilities from Equity”, the embedded derivative associated with the convertible note payable and warrant were accounted
for as liabilities during the term of the related note payable and warrant as of February 28, 2018.
In
July 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-11, Earnings Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial
Instruments with Down Round Features. These amendments simplify the accounting for certain financial instruments with down
round features. The amendments require companies to disregard the down round feature when assessing whether the instrument is
indexed to its own stock, for purposes of determining liability or equity classification. The standard was adopted as of March
1, 2018.
Loss
Per Share
Basic
Earnings Per Share (“EPS”) is computed by dividing net income (loss) available to common shareholders (numerator)
by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the
if-converted method. In computing diluted EPS, the average stock price for the period is used to determine the number of shares
assumed to be purchased from the exercise of stock options and/or warrants. Diluted EPS excludes all dilutive potential shares
if their effect is anti-dilutive.
For
the three and nine months ended November 30, 2019 and 2018, the following share equivalents related to convertible debt and warrants
to purchase shares of common stock were excluded from the computation of diluted net loss per share, as the inclusion of such
shares would be anti-dilutive.
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
Nine
Months
Ended
|
|
|
Nine
Months
Ended
|
|
Common
Shares Issuable for:
|
|
November
30,
2019
|
|
|
November
30,
2018
|
|
|
November
30,
2019
|
|
|
November
30,
2018
|
|
Convertible
debt
|
|
|
53,126,230
|
|
|
|
49,080,546
|
|
|
|
53,126,230
|
|
|
|
49,080,546
|
|
Stock
warrants
|
|
|
19,125,000
|
|
|
|
19,125,000
|
|
|
|
19,125,000
|
|
|
|
19,125,000
|
|
|
|
|
72,251,230
|
|
|
|
68,205,546
|
|
|
|
72,251,230
|
|
|
|
68,205,546
|
|
Comprehensive
Income (Loss)
The
Company recognizes currency translation adjustments as a component of comprehensive income (loss).
Recent
Accounting Pronouncements
In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts
and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning
after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply,
in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company adopted
this standard on March 1, 2019, and determined that it had no receipts or payments meeting the criteria of the ASU. Therefore,
the adoption had no impact on the Company’s November 30, 2019 consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The new lease guidance supersedes Topic
840. The core principle of the guidance is that entities should recognize the assets and liabilities that arise from leases. Topic
840 does not apply to leases to explore for or use minerals, oil, natural gas and similar nonregenerative resources, including
the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained.
In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”, which provides
entities with an alternative modified transition method, for which, comparative periods, including the disclosures related to
those periods, are not restated.
In
addition, the Company elected practical expedients provided by the new standard whereby, the Company has elected to not reassess
its prior conclusions about lease identification, lease classification, and initial direct costs and to retain off-balance sheet
treatment of short-term leases (i.e., 12 months or less and does not contain a purchase option that the Company is reasonably
certain to exercise). As a result of the short-term expedient election, the Company has no leases that require the recording of
a net lease asset and lease liability on the Company’s consolidated balance sheet or have a material impact on consolidated
earnings or cash flows as of November 30, 2019. Moving forward, the Company will evaluate any new lease commitments for application
of Topic 842.
In
July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features.
These amendments simplify the accounting for certain financial instruments with down round features. The amendments require companies
to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining
liability or equity classification. The Company adopted the standard as of March 1, 2018.
The
Company does not anticipate that the adoption of other recently issued accounting pronouncements will have a significant impact
on its financial statements.
3.
Going Concern
These
financial statements were prepared on a going concern basis, which implies that the Company will continue to realize its assets
and discharge its liabilities in the normal course of business. The Company has not generated revenues since inception, and is
unlikely to generate earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent
upon the ability of the Company to obtain necessary equity or debt financing to continue operations, successfully develop the
Prospect and/or obtain producing properties, with a goal of attaining profitable operations. The Company is currently attempting
to complete a significant financing, and in this connection might (a) place a significant amount of additional debentures similar
to those described below, (b) secure an alternative financing arrangement, possibly involving the Company’s equity securities,
or (c) some combination of (a) and (b). The Company has no assurance that it will be able to raise significant additional funds
to develop the Prospect or the additional funds needed for general corporate purposes.
As
of November 30, 2019, the Company had not generated any revenues and had an accumulated loss of $24,177,745 since inception. These
factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements
do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of
liabilities that might be necessary should the Company be unable to continue as a going concern.
4.
Oil and Gas Properties
The
License covers 584,651 gross acres (914 sq. miles) in the State of South Australia. The License grants a 100% working interest
in the preceding acreage, which overlies portions of the Cooper and Eromanga basins.
On
October 26, 2012, a 100% interest in the License was officially issued to the Subsidiary.
On
May 19, 2014, the Company received notice from the Government of South Australia that it had issued certain modifications to the
License and had suspended the License for a period of six months. Such a suspension functions like an extension. Under the amended
License, the Company is required to drill 7 exploratory wells rather than 12, as originally required. The 7 required wells must
be drilled in years 3, 4, and 5 (2, 2, and 3 wells, respectively). The amount of required 2D seismic was also reduced to 62 miles
(100 km.) in year 3 from 155 miles (250 km.) in year 2 but the total 3D seismic work guarantee increased to 193 sq. miles (500
sq. km.) from 154 sq. miles (400 sq. km.). However, the 3D seismic survey requirement is spread over three years with 39 sq. miles
(100 sq. km.) in year 2, 77 sq. miles (200 sq. km.) in year 3 and 77 sq. miles (200 sq. km.) in year 4. Subsequent to this modification
and suspension, the Company received two additional six-month suspensions, one in February 2015 and one in July 2015 (this additional
suspension commenced upon the conclusion of the suspension received in February 2015). In February 2016, the Company received
a third additional suspension, which was for one year and which commenced upon the conclusion of the suspension received in July
2015. Combined, these three additional suspensions amount to an accumulated total suspension of two years.
On
June 22, 2016, the Company terminated the February 2016 License suspension in preparation for a 3D seismic survey (the “Survey”)
that was comprised of approximately 69 sq. miles (179 sq. km.) on the southwest portion of the Prospect. After archaeological
and environmental reviews of the survey area, fieldwork by the seismic contractor began on July 26, 2016. The Survey and field
work were completed on October 30, 2016 and the License was suspended again on November 1, 2016.
In
July 2017, the License suspension was lifted in order to conduct a Work Area Clearance Survey (“WAC”) of several
potential drill sites located in the southern portion of the License. After completing the Survey, the Company requested and received
four additional six-month suspensions, one in July 2017, one in June 2018 and one in February 2019 resulting in a new expiration
date of April 30, 2022.
As
a result of the activities, modifications and suspensions described above, the remaining work commitments are now as follows:
|
*
|
Year
3 ending April 30, 2020 - Shoot 2D seismic data totaling at least 62 miles (100 km.) and shoot 3D seismic data totaling at
a minimum of 77 sq. miles (200 sq. km.) and drill two wells.
|
|
|
|
|
*
|
Year
4 ending April 30, 2021 - Shoot 3D seismic data totaling at a minimum of 77 sq. miles (200 sq. km.) and drill two wells.
|
|
|
|
|
*
|
Year
5 ending April 30, 2022 - Drill three wells.
|
Discovery
does not believe that it will be able to complete its Year 3 Commitment obligations by their due date of April 30, 2020. Accordingly,
Discovery expects to seek an extension of such obligations prior to the due date. While Discovery has to date been successful
in obtaining such extensions, it has no assurance that any further extensions will be obtained. The failure to obtain the required
extension will materially and adversely impact Discovery. See the section captioned “Liquidity and Capital Resources - Consequences
of a Financing Failure” below
In
four transactions, the Company acquired portions of the royalty interest associated with the PEL 512 License so that the Company
now owns an aggregate 5.0% royalty interest, while the previous holders of the original 7.0% royalty interest continue to hold
a 2.0% royalty interest.
On
October 18, 2019, DESAL entered into a farmout agreement (the “Farmout Agreement”) and a joint operating agreement
with WESI PEL 512 Pty Ltd, an unrelated third party company formed under the laws of New South Wales, Australia (“WESI”).
Under the Farmout Agreement, WESI agreed to pay AU$2.5 million upfront cash payment to the Company in exchange for a 50% working
interest in a specified 182,364 gross acre section of the Company’s Prospect.
WESI will be responsible for 100% of the cost of a defined development work program for this section of the Prospect up to a maximum
amount of AU$30.5 million. No accounting related to the Farmout Agreement is reflected in any of the financial statements comprising
a part of this Report until such time as when the cash consideration has been paid to the Company. As of the filing of these financial
statements, the Company has not yet received this cash.
5.
Related Party Transactions
As
of November 30, 2019 and February 28, 2019, the Company owed $765,420 and $149,190, respectively, to certain Company directors
for accrued compensation and reimbursement of expenses paid on behalf of the Company.
During
fiscal year 2019, the Company entered a verbal agreement with Keith D. Spickelmier, the Company’s Chairman of the Board,
as a contractor. The Company paid a consulting fee for the nine months ended November 30, 2019 of $52,000.
During
fiscal year 2019, the Company entered into a verbal consulting agreement with an affiliated entity owned by Keith McKenzie, the
Company’s Chief Executive Officer. Initially, varying amounts of consulting fees were paid depending on the type and amount
of services provided. Since September 2018, a set monthly fee of $5,000 has been paid.
On
April 15, 2019, the Board of Directors of the Company approved an award of shares of the Company’s common stock to several
of the Company’s officers, each of whom is also a director of the Company. In approving these awards, each director abstained
from participating in the consideration and approval of such director’s own award. The shares were awarded for services
provided to the Company as officers over the past seven years, and were made pursuant to the Company’s 2012 Equity Incentive
Plan. The awarded shares were fully vested at the time of the award and can be immediately sold, subject to applicable federal
securities law restrictions on such sales. The following table provides information about the officers receiving an award and
the number of shares awarded:
Name
of Officer
|
|
Offices
Held
|
|
Number
of Award Shares
|
Keith
D. Spickelmier
|
|
Chairman
of the Board
|
|
1,250,000
|
Keith
J. McKenzie
|
|
Chief
Executive Officer
|
|
500,000
|
William
E. Begley
|
|
President,
Chief Financial Officer
and
Chief Operating Officer
|
|
750,000
|
The
fair value of these shares was $500,000 based on the market price of $0.20 per share on the grant date.
6.
Convertible Debentures Payable
From
May 27, 2016 through November 30, 2019, the Company issued eleven rounds (I thru XI) of senior secured convertible debentures,
the proceeds of which have funded the initial 3D seismic survey with respect to the Prospect, the interpretation of seismic data
acquired, expenses associated with the seismic survey, costs associated with the debenture issuances, and general and administrative
expenses. The debentures are secured by virtually all of the Company’s assets owned, directly or indirectly, but for the
License. As discussed elsewhere, the Company may in the future sell additional senior secured convertible debentures having the
same terms as those currently outstanding. The table below provides a summary of the senior secured convertible debentures issued
through November 30, 2019 and related debt discount and amortization details.
Round
|
|
Issue
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Conversion
Price
|
|
|
Principal
Amount
|
|
|
Debt
Discount
|
|
|
Debentures,
net of Debt
Discount
|
|
Outstanding
as of February 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
I
|
|
May
27, 2016
|
|
May
27, 2021
|
|
|
8
|
%
|
|
$
|
0.16
|
|
|
$
|
3,500,000
|
|
|
$
|
3,500,000
|
|
|
|
|
|
II
|
|
Aug
16, 2016
|
|
May
27, 2021
|
|
|
8
|
%
|
|
$
|
0.16
|
|
|
|
200,000
|
|
|
|
199,999
|
|
|
|
|
|
|
|
Aug
16, 2016
|
|
May
27, 2021
|
|
|
8
|
%
|
|
$
|
0.16
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
III
|
|
Dec
30, 2016
|
|
May
27, 2021
|
|
|
8
|
%
|
|
$
|
0.16
|
|
|
|
287,500
|
|
|
|
237,587
|
|
|
|
|
|
IV
|
|
Feb
15, 2017
|
|
May
27, 2021
|
|
|
8
|
%
|
|
$
|
0.16
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
V
|
|
Mar
31,2017
|
|
May
27, 2021
|
|
|
8
|
%
|
|
$
|
0.20
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
|
|
VI
|
|
Jul
5, 2017
|
|
May
27, 2021
|
|
|
8
|
%
|
|
$
|
0.20
|
|
|
|
137,500
|
|
|
|
137,500
|
|
|
|
|
|
|
|
Jul
5, 2017
|
|
May
27, 2021
|
|
|
8
|
%
|
|
$
|
0.16
|
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
|
|
VII
|
|
Sept
19, 2017
|
|
May
27, 2021
|
|
|
8
|
%
|
|
$
|
0.16
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
|
|
|
|
Sept
19, 2017
|
|
May
27, 2021
|
|
|
8
|
%
|
|
$
|
0.16
|
|
|
|
100,000
|
|
|
|
82,125
|
|
|
|
|
|
VIII
|
|
Oct
10, 2017
|
|
May
27, 2021
|
|
|
8
|
%
|
|
$
|
0.20
|
|
|
|
137,500
|
|
|
|
72,806
|
|
|
|
|
|
IX
|
|
Jan
3, 2018
|
|
May
27, 2021
|
|
|
8
|
%
|
|
$
|
0.20
|
|
|
|
137,500
|
|
|
|
137,500
|
|
|
|
|
|
X
|
|
April
2, 2018
|
|
May
27, 2021
|
|
|
8
|
%
|
|
$
|
0.20
|
|
|
|
137,500
|
|
|
|
137,500
|
|
|
|
|
|
XI
|
|
May
16, 2018
|
|
May
27, 2021
|
|
|
8
|
%
|
|
$
|
0.20
|
|
|
|
212,500
|
|
|
|
212,500
|
|
|
|
|
|
Amortized
discount as of February 28, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,049,544
|
)
|
|
|
|
|
Balance
as of February 28, 2019
|
|
|
|
|
|
|
|
|
|
|
6,850,000
|
|
|
|
3,667,973
|
|
|
$
|
3,182,027
|
|
Activity
for the nine months ended
November
30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of discount for the nine months ended November 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,159,837
|
)
|
|
|
|
|
Balance
as of November 30, 2019
|
|
|
|
|
|
|
|
|
|
$
|
6,850,000
|
|
|
$
|
2,508,136
|
|
|
$
|
4,341,864
|
|
The
Company recognized $394,846 and $364,671 in debt discount amortization related to all of the debentures during the three months
ended November 30, 2019 and 2018, respectively. The Company recognized $1,159,837 and $1,054,504 in debt discount amortization
related to all of the debentures during the nine months ended November 30, 2019 and 2018, respectively.
7.
Derivative Liabilities
Historically,
the Company accounted for certain instruments as derivative instruments in accordance with FASB ASC 815-40, Derivative and
Hedging – Contracts in Entity’s Own Equity. This was due to the debentures and related warrants issued by the
Company containing a price-reset provision. The Company measured its derivative liability at fair value and recognized the derivative
value as a current liability and recorded the derivative value on its consolidated balance sheet. Changes in the fair values of
the derivative were recognized as earnings or losses in the current period in other income (expenses) on the consolidated statement
of operations and other comprehensive income (loss).
As
of March 1, 2018, the Company early adopted ASU 2017-11, which revised the guidance for instruments with price-reset provisions.
As such, the Company treats outstanding warrants as free-standing equity-linked instruments that are recorded to equity in the
consolidated balance sheet as of March 1, 2018.
The
impact of the adoption was as follows:
Derivative
liabilities
|
|
$
|
(16,172,119
|
)
|
Additional
paid-in capital
|
|
|
12,544,607
|
|
Accumulated
deficit
|
|
|
3,627,512
|
|
Total
stockholders’ deficit
|
|
$
|
16,172,119
|
|
8.
Commitments and Contingencies
Office
Lease
Change
in Accounting Policy. The Company adopted ASU No. 2016-02, “Leases (Topic 842)” and ASU NO. 2018-11, “Leases
(Topic 842): Targeted Improvements”, March 1, 2019, using the alternative modified transition method, for which, comparative
periods, including the disclosures related to those periods, are not restated as of March 1, 2019. Refer to Note 2 –
Summary of Significant Accounting Policies above for additional information.
The
Company leases virtual office space in Houston, Texas, with a 4-month term ending March 31, 2020 for $193 per month and has a
remaining obligation as of November 30, 2019 of $772. The Subsidiary leases virtual office space in Melbourne, Australia,
on a month-to-month basis for AU$175. The Company’s server space is also leased on a month-to-month basis for CA$500 inside
the office of Keith McKenzie, an officer and director of the Company.
During
the three months ended November 30, 2019 and 2018, the Company incurred lease expense of $2,024 and $3,439, respectively, for
the combined leases. For the nine months ended November 30, 2019 and 2018, the Company incurred lease expense of $7,393 and $8,728,
respectively, for the combined leases.
9.
Shareholders’ Deficit
On
April 15, 2019 and July 26, 2019, the Company issued 3,700,000 and 250,000 shares of its common stock, respectively, for services
at a fair value of $0.20 and $0.25 per share, respectively, to certain officers, board members, employees and professional service
providers, based on the stock price on the date of grant with a total grant date fair value of $802,500 (of which 2,500,000 shares
were issued to the certain related parties as discussed in Note 5).
Additionally,
the Company received gross proceeds of $350,000 from the private placement of 1,400,000 shares of common stock during the nine
months ended November 30, 2019 at a price of $0.25 per common share.
Warrants
The
table below presents information about the Company’s outstanding warrants as of February 28, 2019 and November 30, 2019.
Pursuant to debenture agreements dated May 27, 2016 and August 16, 2016, warrants to purchase 13,875,000 shares of the Company’s
common stock had an original expiration date of May 27, 2019. On May 27, 2019, the Company entered into agreements to extend the
related expiration dates to July 27, 2019. As a result of the modification, the Company recorded additional expense of approximately
$365,000 for the incremental fair value of the warrants, calculated using the Black-Scholes option-pricing model. Variables used
in the Black-Scholes option-pricing model include: (1) risk free interest rate of 2.35%, (2) expected life of 2 months, (3) expected
volatility of 80%, and (4) zero expected dividends. On July 27, 2019, the Company entered into agreements to further extend the
related expiration dates to December 31, 2019. As a result of the modification, the Company recorded additional expense of approximately
$371,000 for the incremental fair value of the warrants, calculated using the Black-Scholes option-pricing model. Variables used
in the Black-Scholes option-pricing model include: (1) risk free interest rate of 2.1%, (2) expected life of 5 months, (3) expected
volatility of 80%, and (4) zero expected dividends. The expense related to these modifications was included in general and administrative
expense on the statement of operations.
No
expense was recorded by the Company for the incremental fair value of the warrants due to the early adoption of ASU 2017-11 as
noted in Footnote 2.
Warrant
activity during the nine months ended November 30, 2019 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Number
of
|
|
|
Average
|
|
|
Term
|
|
|
|
Warrants
|
|
|
Exercise
Price
|
|
|
(Years)
|
|
Outstanding
at February 28, 2019
|
|
|
19,125,000
|
|
|
$
|
0.20
|
|
|
|
0.49
|
|
Expired/Cancelled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable as of November 30, 2019
|
|
|
19,125,000
|
|
|
$
|
0.20
|
|
|
|
0.17
|
|
The
intrinsic value of warrants outstanding at November 30, 2019 and February 28, 2019 was $5,718,375 and $-0-, respectively.
10.
Subsequent Events
On
December 3, 2019, the Company sold 250,000 shares of common stock, at a price of $0.20 per common share, to a private investor
in exchange for gross proceeds of $50,000 pursuant to private placements.
On
December 31, 2019, the Company entered into agreements to further extend the warrants dated May 27, 2016 and August 16, 2016 to
February 29, 2020.