DISCOVERY ENERGY CORP. CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about Discovery that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "might," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "continue," or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in Discovery's otherSecurities and Exchange Commission filings. The following discussion should be read in conjunction with Discovery's financial statements and related notes thereto included elsewhere in this report. General
Discovery Energy Corp. ("Discovery") was incorporated under the laws of the state ofNevada onMay 24, 2006 under the name "Santos Resource Corp ". Discovery's current business is the exploration and development of the 584,651 gross acres (914 sq. miles) area inSouth Australia ("Prospect") held under Petroleum Exploration License PEL 512 ("License"). InMay 2012 , Discovery incorporated a wholly owned Australian subsidiary,Discovery Energy SA Ltd. ("DESAL"), for the purpose of acquiring a 100% working interest in the License. Discovery is in the initial exploration phase of determining whether or not the Prospect contains economically recoverable volumes of crude oil, natural gas and/or natural gas liquids (collectively "Hydrocarbons"). Although Discovery's primary focus is on exploration and development of the Prospect, Discovery has received information about, and has had discussions regarding, the possible acquisition of or participation in additional Hydrocarbons opportunities. None of these discussions has led to an agreement in principle. Recent Events Farmout Agreement. OnOctober 18, 2019 , DESAL entered into a farmout agreement (the "FOA") and a joint operating agreement (the "JOA") withWESI PEL 512Pty Ltd , a company formed under the laws ofNew South Wales, Australia ("WESI"). The FOA pertains to a 182,364 gross acre subsection of the Prospect (the "Section"). 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 theAustralian Stock Exchange . As discussed below, the FOA requires WESI to deliver to DESAL AU$2.5 million as "Cash Consideration." The deadline by which WESI must remit this Cash Consideration has passed, and WESI failed to remit this amount. Although the FOA provides that it terminates automatically upon WESI failure to remit timely this Cash Consideration, Discovery continues to explore the possibility of completing a transaction on the terms, provisions and conditions contained in the FOA. Discovery has no assurance that it will complete such a transaction, and Discovery could terminate further discussions with WESI at any time. The following disclosure describes the terms, provisions and conditions contained in the FOA and the JOA, as these are the same upon which Discovery remains committed in an attempt to complete a transaction. Any final termination of discussions with WESI will be reported in a separate filing. Under the FOA, DESAL is to assign to WESI one-half of DESAL's 100% working interest in the South and Lycium blocks (collectively, the "Section") of the Prospect. 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 Section. DESAL will continue to own a 100% working interest in a third block 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 FOA. In consideration of the Assignment, WESI (a) is to pay to DESAL AU$2.5 million in cash (the "Cash Consideration") and (b) will be responsible for all investment expenditures of oil and gas exploration and development activities on the Section 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"). 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 certain surety bonds, payable to DESAL after any WESI default. Under the agreements, DESAL and WESI will bear production and sales expenses pro rata based on their respective working interests. For this consideration, WESI will receive from Discovery a 50% working interest in the Section. 14
WESI will act as contract operator with respect to the Section 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 Section after it has fully satisfied its E&D Expenditure Obligations.
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:
** WESI will receive from Discovery an additional portion of its working
interest in the Section such that WESI and DESAL shall thereupon respectively
own 77.5% and 22.5% working interests in the Section.
** 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
"non-operator."
DESAL's obligations under the FOA are subject to certain customary conditions
precedent, one of which is WESI's payment to DESAL of the Cash Consideration,
which WESI has not timely done.
Further information about the FOA and JOA can be found in Discovery's Current
Report on Form 8-K filed with the U.S. Securities and Exchange Commission on
October 24, 2019 .
Reverse Stock Split Authorization. Moreover, during the quarter ended November
30, 2019 , Discovery's stockholders overwhelmingly approved a proposed amendment
of Discovery's First Amended and Restated Articles of Incorporation to effect a
reverse stock split (the "Reverse Stock Split") of Discovery's common stock,
$.001 par value per share (the "Common Stock"), within a range from 1-for-15 to
1-for-25, with the exact ratio of the Reverse Stock Split to be determined by
Discovery's Board of Directors. There currently is no plan to implement the
Reverse Stock Split. Implementation might proceed in connection with a capital
raising transaction or the inclusion of the Common Stock in a trading market
requiring a higher trading price than the current trading price of the Common
Stock, such as the Nasdaq Capital Market and the NYSE American. In the absence
of these events, Discovery expects that it will not implement the Reverse Stock
Split. Stockholder approval of the Reverse Stock Split will expire on November
8, 2020 .
Australian Wildfires. As extensively reported, Australia is experiencing worse
than expected, annual wildfires, but these fires are nowhere near our acreage
position in PEL-512 in South Australia . The wildfires are more than 1,000 miles
away and there is no impact to Discovery properties. Furthermore, we do not
foresee any impact financially or to the Company's license and drilling plans
from this natural disaster.
Historical Milestones
To date, Discovery has achieved the following milestones:
* On
grant, Discovery's primary focus was on completing a financing to raise
sufficient funds so that Discovery could undertake a required proprietary
seismic acquisition program. After exploring a number of possible financings,
the precipitous decline in crude oil prices starting in the summer of 2014
delayed Discovery's ability to successfully complete a financing of the type
being sought.
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* In
arrangement pursuant to which Discovery issued to two investors (singly a
"Holder" and collectively the "Holders") Senior Secured Convertible Debentures
(each a "Debenture" and collectively the "Debentures"). To date, Discovery has
issued a total of 14 Debentures having an aggregate original principal amount
of
Interest on the Debentures to date has been accrued and added to principal,
thereby increasing the outstanding balance on the Debentures to approximately
until such time as the Debentures are repaid or converted. Among other uses,
the proceeds from the Debentures enabled Discovery to undertake required
seismic work. In conjunction with certain issuances of Debentures, warrants
("Warrants") were issued that grant the related Holder the right to purchase
up to a maximum of 19,125,000 shares of Discovery's Common Stock ("Common
Shares"), at an initial per-share exercise price of
information about the Debentures and the Warrants, see the section captioned
"Liquidity and Capital Resources - Financing History and Immediate, Short-Term
Capital Needs - Debentures Financings" below.
* On
3D seismic survey (the "Nike 3D Survey") covering an approximately 69 sq.
miles (179 sq. km.) section of the southwest portion of the Prospect. The Nike
3D Survey was completed at a "turnkey price" of approximately
* The raw data from the Nike 3D Survey was converted to analytical quality
information, processed and interpreted by Discovery's geophysical advisor.
Interpretation of the processed data included advanced technical analysis by
specialized consultants. This technical work identified an inventory of more
than 30 leads judged to be potential areas of crude oil accumulations.
Discovery has prioritized these initial prospective locations for
presentations to potential sources of significant capital. Technical analysis
is on-going.
Current Primary Activity
Discovery's current primary activity is to complete either a major financing or
a major joint venture relationship, or both, so that it can execute the
remaining work on the Prospect's five-year work commitment (the "Commitment") as
described below, and develop the Prospect.
The License is subject to a Commitment, which imposes certain financial obligations on Discovery. In management's view, the geotechnical work completed in Years 1 and 2 of the Commitment was sufficient to satisfy the License requirements for those two years. Required reports in connection with these activities were timely filed.
Over the last several years, a number of extensions and modifications of the Commitment have been granted. The current remaining Commitment is as follows:
* Year 3 ending
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
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.
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Discovery needs a significant amount of capital to fulfill its obligations under the Commitment. Moreover, the Debentures mature inMay 2021 , and Discovery will need to raise additional funds or generate sufficient revenues through Hydrocarbons production to timely repay the Debentures. Discovery's capital requirements and financing activities are described in the section captioned "Liquidity and Capital Requirements" below. The success of the initial phase of Discovery's plan of operations depends upon Discovery's ability to obtain additional capital or enter into a suitable joint venture arrangement in order to acquire additional seismic data and successfully drill Commitment wells. Failure to obtain required additional capital or enter into a suitable joint venture arrangement will materially and adversely affect Discovery and its stockholders in ways that are discussed in the section captioned "Liquidity and Capital Resources - Consequences of a Financing Failure" below. Discovery cannot provide assurance that it will obtain the necessary capital and/or enter into a suitable joint venture agreement. Results of Operations
Results of operations for the three- and nine-month periods ended
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
November 30, 2019 November 30, 2018 November 30, 2019 November 30, 2018
Revenue $ - $ - $ - $ -
Operating expenses (421,570 ) (399,844 ) (2,838,206 ) (1,173,485 )
Other income/(expenses) (564,228 ) (520,478 ) (1,664,647 ) (1,809,758 )
Net income/(loss) $ (985,798 ) $ (920,322 ) $ (4,502,853 ) $ (2,983,243 ) Operating expenses for the three- and nine-month periods ended
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
November 30, 2019 November 30, 2018 November 30, 2019 November 30, 2018
Stock-based
compensation $ - $ - $ 802,500 $ -
General and
administrative 406,045 331,587 1,257,559 944,923
Warrant modification
expense - - 735,697 -
Exploration costs 15,525 68,257 42,450 228,562
Total Operating
Expenses $ 421,570 $ 399,844 $ 2,838,206 $ 1,173,485
Results of Operations for the Three-Month Periods Ended
2018
Revenues. Discovery did not earn any revenues for either the quarter ended
November 30, 2019 , or the similar period in 2018. Sales revenues are not
anticipated until such time as the Prospect has commenced commercial production
of Hydrocarbons. As Discovery is presently in the exploration stage of its
operations, no assurance can be provided that commercially exploitable levels of
Hydrocarbons on the Prospect will be discovered, or if such resources are
discovered, that the Prospect will commence commercial production.
Operating Expenses. Operating expenses increased by $22,000 (5%) in the third
quarter ended November 30, 2019 when compared to the same quarter in 2018. This
increase reflects an approximately $115,000 decrease in cash costs, primarily
for third party services, which was more than offset by the recognition of
approximately $190,000 in deferred staff compensation expense, a non-cash item.
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Results of Operations for the Nine-Month Periods Ended
2018
Revenues. Discovery did not earn any revenues for either the nine months ended
November 30, 2019 or the similar period in 2018. Sales revenues are not
anticipated until such time as the Prospect has commenced commercial production
of Hydrocarbons. As Discovery is presently in the exploration stage of its plan,
no assurance can be provided that commercially exploitable levels of
Hydrocarbons on the Prospect will be discovered, or if such resources are
discovered, that the Prospect will commence commercial production.
Operating Expenses. Operating expenses increased by approximately $1.7 million
(140%) in the nine months period ended November 30, 2019 when compared to the
same period in the prior year. Cash expenses decrease by approximately $342,000
due to a reduction in exploration costs of $186,000 (completed interpretation
and analysis of Nike 3D seismic survey data) and a decrease in cash general and
administrative expenses of approximately $156,000 (primarily reduced third party
services). However, non-cash expenses increased by approximately $2.0 million
made up of the following:
* $800,000 stock based compensation;
* $700,000 for the extension of a warrants expiration date;
* $500,000 for deferred staff compensation.
Cash Flows for the Nine-Month Periods Ended November 30, 2019 and 2018
Cash Used in Operating Activities: Operating activities for the nine-month ended
Cash Used in Investing Activities: No cash was used for investing activities
during the nine months ending in
Cash Provided by Financing Activities: Financing activities totaled$350,000 during the nine-month period endedNovember 30, 2019 resulting from the private placement of 1,400,000 common shares at a price of$0.25 per common share. Financing activities totaled$1,350,000 for the nine-month period endedNovember 30, 2018 . This is due to the sale of additional Debentures with an aggregate original principal amount of$350,000 and gross proceeds of$1,040,000 from the private placement of 5,200,000 common shares during the nine months endedNovember 30, 2018 at a price of$0.20 per common share, net of associated costs of$40,000 . Off-Balance Sheet Arrangements
Discovery has no off-balance sheet arrangements.
Liquidity and Capital Resources
General
The discussion contained in this section does not take into account the possible
completion of the proposed farmout transaction with WESI. If this transaction
were completed, we believe that our liquidity and capital resources would be
materially improved. However, we have no assurance that this transaction will be
completed, and no one should rely on the completion of this transaction.
Financing History and Immediate, Short-Term Capital Needs
Early Financings. FromJanuary 2012 throughMay 27, 2016 , business activities were financed primarily through private placements of Common Shares. During that period, several rounds of equity financing were conducted which raised total "seed" capital in the amount of$2,723,750 resulting in the issuance of 19,657,501 Common Shares. Moreover, from time to time, members of management provided short-term bridge funding. These advances were repaid out of proceeds from the Debentures financings described below. Debentures Financings. Beginning inMay 2016 and continuing throughAugust 2018 , Discovery relied on a series of Debenture placements (debt instruments convertible into Common Shares). The 14 Debentures comprising this series were issued pursuant to a Securities Purchase Agreement executed onMay 27, 2016 . Debentures having an aggregate original principal amount of$6,850,000 have been placed. In conjunction with certain Debentures, Warrants were issued that grant the related Holder the right to purchase up to a maximum of 19,125,000 Common Shares at an initial per-Common Share exercise price of$0.20 . 18
Each of the Debentures includes the following features:
* The Debentures bear interest at the rate of eight percent (8%) per annum,
compounded quarterly. However, upon the occurrence and during the continuance
of a stipulated event of default, the Debentures will bear interest at the
rate of twelve percent (12%) per annum.
* Interest need not be paid on the Debentures until the principal amount of the
Debentures becomes due and payable. Instead, accrued interest is added to the
outstanding principal amount of the Debentures quarterly. Nevertheless,
Discovery may elect to pay accrued interest in cash at the time that such
interest would otherwise be added to the outstanding principal amount of the
Debentures.
* The principal plus accrued interest on the Debentures is due and payable in a
single balloon payment on or before
* Discovery is not entitled to prepay the Debentures prior to their maturity.
* The Debentures are convertible, in whole or in part, into Common Shares at the
option of Holders, at any time and from time to time. The conversion price for
Debentures having an aggregate original principal amount of
principal amount of
certain adjustments that are believed to be customary in transactions of this
nature, including so-called "down round" financing adjustments, which would
cause the conversion prices to adjust downward to the price of any securities
issued by Discovery at a price less than the conversion prices then in effect.
Discovery is subject to certain liabilities and liquidated damages for any
failure to timely honor a conversion of the Debentures, and these liabilities
and liquidated damages are believed to be customary in transactions of this
nature.
* The Holders are entitled to have their Debentures redeemed completely or
partially upon certain events (such as a change of control transaction
involving Discovery or the sale of a material portion of Discovery's assets)
at a redemption price equal to 120% of the then outstanding principal amount
of the Debentures and 100% of accrued and unpaid interest on the outstanding
principal amount of the Debentures, plus all liquidated damages and other
amounts due thereunder in respect of the Debentures.
* The Debentures feature negative operating covenants, events of default and
remedies upon such events of default that are believed to be customary in
transactions of this nature. One of the remedies upon an event of default is
the Holders' ability to accelerate the maturity of the Debentures such that
all amounts owing under the Debentures would become immediately due and
payable. The Holders would then be able to resort to the collateral securing
the Debentures, if Discovery did not pay the amount outstanding, which is
likely to be the case.
* The Debentures are secured by virtually all of Discovery's assets owned
directly or indirectly but for the License, which is held by DESAL. Moreover,
Discovery has separately guaranteed the Debentures and has pledged all of its
stock in DESAL to secure such guarantee. The essential effect of these
security arrangements is that, if Discovery defaults on or experiences an
event of default with respect to the Debentures, the Holders could exercise
the rights of a secured creditor, which could result in the partial or total
loss of nearly all of Discovery's assets, in which case Discovery's business
could cease and all or substantially all stockholders' equity could be lost.
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Each of the Warrants includes the following features:
* The initial per-Common Share exercise price of the Warrants is
subject to certain adjustments that are generally believed to be customary in
transactions of this nature. Subject to certain exceptions, the exercise price
of the Warrants involves possible adjustments downward to the price of any
Common Shares or their equivalents sold by Discovery during the term of the
Warrants for less than the then applicable exercise price of the Warrants.
Upon adjustment of the exercise price, the number of Common Shares issuable
upon exercise of the Warrants would be proportionately adjusted so that the
aggregate exercise price of the Warrants would remain unchanged.
* The Warrants are currently exercisable and remain so until their expiration
dates of
2020 with respect to 1,500,000 warrants, and
13,875,000 warrants that were recently extended from expiration on December
31, 2019.
* Discovery is subject to certain liabilities and liquidated damages for failure
to timely honor an exercise of the Warrants, and these liabilities and
liquidated damages are believed to be customary in transactions of this
nature.
The largest Holder of Debentures has the right to have elected to the Board of Directors ("Board") one nominee. To date this Holder has not exercised this right.
Moreover, persons holding a majority of the outstanding Debentures have the right to require Discovery to register with theSEC the resale of the Common Shares into which Debentures can be converted, the Common Shares that can be acquired upon the exercise of the Warrants and possibly other Common Shares. The proceeds from the Debenture placements were generally used to fund the acquisition, processing and interpretation of the Nike 3D Survey data and payment of Discovery's and the Holders' expenses associated with the placements. A portion of these proceeds were used to retire all of the then outstanding indebtedness, and to acquire a 5.0% overriding royalty interest relating to the Prospect. Funds were also used for payment of general and administrative expenses. In addition to the preceding, a portion of the proceeds was used
to pay a geophysical advisor. More Recent Equity Placements. Beginning inNovember 2016 and continuing through the date of this Report, Discovery closed on a series of equity placements in which an aggregate of 8.3 million Common Shares were issued for an aggregate purchase price of$1,730,000 . Available Cash. As ofNovember 30, 2019 , Discovery had cash of approximately$79,448 and had negative working capital of about$2,504,776 . As ofJanuary 5th, 2020 , Discovery had approximately$54,000 of cash on-hand. Management believes that the cash on hand, as of the preceding date, will be sufficient to finance general and administrative expenses throughMarch 31, 2020 although no assurance of this can be provided. However, this amount of cash will be insufficient to allow Discovery to fulfill its Commitment obligations in a timely manner. A plan for financing these obligations is discussed below. Management intends to finance all of the general and administrative expenses beyond available cash on hand through private placements of Discovery's Common Shares undertaken from time to time, until such time as a major financing or cash flow provides funds for general and administrative expenses. Currently, Discovery's goal is to raise up to$5 million through a private placement now being undertaken. If successful in raising$5 million in the private placement, it is estimated that the related net proceeds will be sufficient to finance general and administrative activities throughDecember 31, 2020 . However, no assurance can be given that the amounts will be adequate. Moreover, no assurance can be provided of successfully raising any additional funds for this purpose. Furthermore, as previously stated, the funds from private placement(s) will not be sufficient to satisfy the Commitment for future years in any meaningful way. Long-Term Capital Needs The five-year Commitment relating to the License imposes certain obligations on Discovery. The work requirements of the first two years, which included geotechnical studies and the Nike 3D Survey, have been completed and reports and certain work materials have been submitted as required by the South Australian government. Going forward, additional funds will be required to meet the seismic and drilling obligations of License Years 3, 4 and 5. Working capital will also be needed to satisfy general and administrative expenses. BetweenDecember 2019 andApril 2022 , it is estimated that Discovery will need to raise an additional$20 million to have sufficient capital to meet the remaining Commitment specified in the License and fund operations. Net revenues produced from successful wells could provide some of the funds required to meet these capital needs. However, no assurance can be given that this or any other amount of financing will be obtained or that sufficient revenue will be realized. 20
If initial wells are successful, work will continue with a full development plan, the scope of which is now uncertain but will be based on technical analysis of seismic data, drilling and log reports, production history and cost estimates. However, all of the preceding plans are subject to the availability of sufficient funding and the receipt of all governmental approvals. Without sufficient available funds to undertake these tasks, additional financings or a joint venture partner will be required. Failure to procure a joint venture partner or raise additional funds will preclude Discovery from pursuing its business plan and expose Discovery to the loss of the License. Moreover, if the business plan proceeds as described, but the initial wells do not prove to hold sufficient producible reserves, Discovery could be forced to cease its initial exploration efforts on the Prospect.
Major Financing Efforts and Other Sources of Capital
Discovery's capital strategy has been, and continues to be, a single major capital raising transaction to provide sufficient funds to satisfy its capital needs for a number of years to come. While management has not completely abandoned this strategy, Discovery has shifted its emphasis in an effort to engage in one or more smaller capital raising transactions to provide sufficient funds to satisfy ongoing and future capital needs. Discovery has issued Debentures having an aggregate original principal amount of$6,850,000 . Discovery's plan for financing its future general and administrative expenses is described in the section captioned "Financing History and Immediate, Short-Term Capital Needs - Available Cash" above. Discovery's plan for financing the Commitment is described in the following paragraph. The interpretation and analysis of Discovery's geological data resulted in an inventory of more than 30 leads judged to be potential areas of crude oil accumulations. These initial prospective locations were prioritized, and the results are being presented to prospective investors with a view to securing the capital to commence Discovery's initial drilling program and to prospective joint venture partners with a view to securing a farm-out arrangement. Discovery needs to complete a major capital raising transaction or joint venture arrangement or some combination of the two to continue moving its business plan forward. In the interim, Discovery is continuing efforts to raise comparably smaller amounts of capital to cover general and administrative expenses. Discovery has no assurance that it will be able to raise sufficient funds. Sales from production as a result of successful exploration and drilling efforts would provide Discovery with incoming cash flow. Proved reserves would most likely increase the value of Discovery's rights in the Prospect. This, in turn, should enable Discovery to obtain bank financing (after the wells have produced for a sufficient period of time to satisfy lender requirements). Both of these results would enable Discovery to continue with its development activities. Significant positive cash flow is a critical long-term success factor for Discovery's plan of operations. Management believes that, if Discovery's plan of operations successfully progresses, sufficient cash flow and debt financing will be available for purposes of pursuing the plan of operations, although Discovery can make no assurances in this regard.
Finally, to reduce required funds to be raised, Discovery might attempt to satisfy some of its obligations by issuing Common Shares, which would result in dilution in the percentage ownership interests of Discovery's then existing stockholders and could result in dilution of the net asset value per Common Share of these existing stockholders.
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Consequences of a Financing Failure
If required financing is not available on acceptable terms, Discovery could be unable to satisfy its Commitment obligations or develop the Prospect to the point that Discovery is able to timely repay the Debentures, which become due inMay 2021 . Failure to satisfy Commitment obligations could also result in the eventual loss of the License and the total loss of Discovery's assets and properties. Failure to timely pay the Debentures could result in the eventual exercise of the rights of a secured creditor and the possible partial or total loss of Discovery's assets. Failure to procure required financing on acceptable terms could prevent Discovery from developing the Prospect. If any of the preceding events were to occur, Discovery could be forced to cease operations, which could result in a complete loss of stockholders' equity. If additional equity or debt financing or a farmout is not obtained, Discovery could find it necessary to sell some portion or all of the Prospect under unfavorable circumstances and at an undesirable price. However, no assurance can be provided that Discovery will be able to find interested buyers or that the funds received from any such partial sale would be adequate to fund additional activities. Future liquidity will depend upon numerous factors, including the success of Discovery's exploration and development program, satisfactory achievement of Commitment obligations and capital raising activities.
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