ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
On October 18, 2019, Discovery Energy SA Pty Ltd, a company formed under the
laws of Australia ("DESAL"), the sole subsidiary of Discovery Energy Corp.
("Discovery"), entered into two related material definitive agreements with WESI
PEL512 Pty Ltd, a company formed under the laws of New South Wales, Australia
("WESI"). Discovery's management has been advised that WESI is a recently formed
entity that plans on becoming a public entity by undertaking a reverse merger
with an existing company traded on the Australian Stock Exchange.
The first of the two agreements is a farmout agreement (the "Farmout
Agreement"). Pursuant to the Farmout Agreement, DESAL is to assign to WESI
one-half of DESAL's 100% working interest in the South and Lycium blocks
(collectively, the "Contract Area") of DESAL's 584,651 gross acres prospect (the
"Prospect") in the State of South Australia covered by Petroleum Exploration
License PEL 512 (the "License"). The assignment to WESI is referred to
hereinafter as the "Assignment." The South and Lycium blocks comprise an
aggregate of 182,364 gross acres of the Prospect. Immediately after the
Assignment, each of DESAL and WESI will own a 50% working interest in the
Contract Area. DESAL will continue to own a 100% working interest in a third
block ("West") forming a portion of the Prospect and comprising an aggregate of
402,287 gross acres of the Prospect. DESAL and WESI have agreed to work together
in good faith and use reasonable efforts to find a mutually satisfactory means
to implement the preceding arrangement beyond the terms of the Farmout
The second of the two agreements is a joint operating agreement (the "JOA"),
which implements certain operational aspects relating to the Farmout Agreement
and the subsequent working interest ownership and operation of the Contract
The next section contains a description of the Farmout Agreement and JOA, as
they operate as a whole. This description does not purport to be complete and is
qualified in its entirety by reference to the actual versions of these
documents, which will be filed as exhibits to Discovery's next Quarterly Report
on Form 10-Q. All dollar figures set forth below represent Australian ("AU")
dollars. On October 18, 2019, the exchange rate was US$1.00/AU$1.46.
Description of Agreements
The following is a summary of the terms, provisions and conditions of the
Farmout Agreement and JOA, as they operate as a whole:
* In consideration of the Assignment, WESI (a) will pay to DESAL AU$2.5 million
in cash (the "Cash Consideration") within forty five (45) days of the signing
of the Farmout Agreement and (b) will be responsible for all investment
expenditures of oil and gas exploration and development activities on the
Contract Area contemplated by an agreed work program and budget (including
those for which DESAL would otherwise be responsible) up to a maximum of
AU$30.5 million, excluding certain amounts (WESI's obligations described in
this (b) are referred to hereinafter as the "E&D Expenditure Obligations").
DESAL and WESI will bear production and sales expenses pro rata based on their
respective working interests. Management believes that the expenditures to be
made pursuant to the E&D Expenditure Obligations will be sufficient to satisfy
all or the bulk of the work commitment under the License. Quarterly, WESI will
be obligated to deposit in a designated bank account the amount of estimated
investment expenditures for the forthcoming quarter (such deposits are
referred to hereinafter as the "Quarterly Deposits"). After WESI has satisfied
its E&D Expenditure Obligations, DESAL and WESI will bear the investment
expenditures of further exploration and development activities pro rata based
on their respective working interests, except as otherwise described below.
* To secure the E&D Expenditure Obligations, WESI is obligated to obtain surety
bonds to cover estimated investment expenditures for the two calendar quarters
subsequent to the quarter for which the most recent Quarterly Deposit was
remitted and investment expenditures incurred but not previously paid, as the
same shall change from time to time, payable to DESAL after any WESI default
(collectively the "Surety Bonds").
* DESAL's obligation to complete the Assignment pursuant to the Farmout
Agreement is subject to certain conditions precedent that must be satisfied
within certain stipulated time periods (collectively, the "Conditions
Precedent"), which include the following:
** WESI shall have paid the Cash Consideration.
** All required third-party consents shall have been obtained.
** The Farmout Agreement, JOA and Assignment documents shall have been approved
and registered by the overseeing government agencies.
The Assignment is to be completed within five days after the satisfaction of the
Conditions Precedent. The Farmout Agreement will automatically terminate if WESI
fails to pay timely the Cash Consideration, and DESAL has the right to terminate
the Farmout Agreement if any of the other Conditions Precedent are not timely
* WESI will act as contract operator with respect to the Contract Area for the
sole and limited purposes of conducting, carrying out and satisfying in full
the agreed work program and budget. DESAL shall remain the named operator for
all other purposes, including maintaining its status as operator of record.
WESI could become the full operator with respect to the Contract Area after it
has fully satisfied its E&D Expenditure Obligations.
* Certain decisions relating to the business activities of DESAL and WESI are to
be made by an operating committee, in some cases upon the advice of a
technical subcommittee. Each of the operating committee and technical
subcommittee will have one representative from each of DESAL and WESI. The
operating committee is to be guided by certain principles contained in the
Farmout Agreement. Until WESI has fully satisfied its E&D Expenditure
Obligations, decisions of the operating committee are to be unanimous;
provided, however, that if (after completing a procedure provided for in the
Farmout Agreement) the operating committee cannot agree upon any initial or
annual work program and budget for operations and activities to be conducted
pursuant to the Farmout Agreement and JOA, DESAL alone shall be entitled to
decide all matters remaining unresolved. After WESI has fully satisfied its
E&D Expenditure Obligations, decisions will be made in accordance with the
JOA, whose operation is effectively similar to the decision making scheme
described earlier in this paragraph, except that DESAL would no longer have
the ability to decide unresolved matters relating to any work program and
budget, and a deadlock with respect thereto would be possible. Moreover, under
certain circumstances (such as when WESI's ownership interest in the Contract
Area increases as described immediately below and when other parties might be
added to the JOA), DESAL could effectively lose its "veto" power under the
* After WESI has satisfied its E&D Expenditure Obligations, DESAL in its
discretion may request that WESI extend DESAL's carried position by WESI
permanently being responsible for all investment expenditures of further
exploration and development activities. If WESI accepts this request, the
following results will occur:
** DESAL will assign to WESI an additional portion of its working interest in
the Contract Area such that after the second assignment WESI and DESAL shall
respectively own 77.5% and 22.5% working interests in the Contract Area.
** WESI will be responsible for all investment expenditures of further
exploration and development activities.
** WESI and DESAL will respectively have rights under the JOA of "operator" and
* If WESI fails to complete any work or pay any amounts for which it is
responsible, it will be in default and such amounts (less any amounts received
by DESAL on the Surety Bonds) shall accrue interest. If WESI fails to make a
Quarterly Deposit after an opportunity to cure or certain insolvency events
involving WESI occur, DESAL may require WESI to withdraw completely from the
JOA and the License, and reassign WESI's working interest in and to the
License to DESAL.
* The Farmout Agreement contains transfer restrictions and right of first
refusal agreements governing proposed transfers by DESAL and WESI of their
individual interests in the License and Prospect. Discovery believes that
these agreements are reasonable and appropriate.
* The Farmout Agreement and JOA contain other agreements, representations,
warranties, and indemnities that Discovery believes are customary and
reasonable for documents of their nature.
* The JOA has a specified term that approximates the term of the License with
some slight variations at the end of the term. The Farmout Agreement does not
have a specified term, but generally its terms and provisions are expected to
have little effect after the E&D Expenditure Obligations have been satisfied
in full. Nevertheless, the Farmout Agreement prohibits WESI from voluntarily
withdrawing from the Farmout Agreement and the License until the E&D
Expenditure Obligations have been satisfied in full.
In connection with the entry into the Farmout Agreement and JOA, that certain
Securities Purchase Agreement executed on May 27, 2016 initially by and among
Discovery and DEC Funding LLC and to which DESAL and Texican Energy Corporation
were later added as parties was amended to permit the transactions provided for
in the Farmout Agreement and JOA. A copy of this amendment which will be filed
as an exhibit to Discovery's next Quarterly Report on Form 10-Q.
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