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
other
General
Recent Developments and Events
Coronavirus Pandemic. In
Severe Hydrocarbons Price Decline. Another recent development occurring more or
less simultaneously with the COVID-19 pandemic is a Hydrocarbons price war that
began in early
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Historical Milestones
To date, the Company has achieved the following milestones:
* On October 26, 2012 , the License was granted to the Subsidiary.
After the License grant, the Company's primary focus was on
completing a financing to raise sufficient funds so that the Company
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
the Company's ability to successfully complete a financing of the
type being sought.
* In May 2016 , the Company completed its first closing under a
financing arrangement pursuant to which the Company issued to two
investors Senior Secured Convertible Debentures due May 27, 2021
(each a "Debenture" and collectively the "Debentures"). To date, the
Company has issued a total of 14 Debentures having an aggregate
original principal amount of $6,850,000 . The Debentures are due and
payable on or before May 27, 2021 . Interest on the Debentures to
date has been accrued and added to principal, thereby increasing the
outstanding balance on the Debentures to approximately $9,139,000 as
of June 30, 2020 . Interest will be accrued until such time as the
Debentures are repaid or converted. Among other uses, the proceeds
from the Debentures enabled the Company to undertake required
seismic work. In conjunction with certain issuances of Debentures,
warrants ("Warrants") were issued that grant the holder the right to
purchase up to a maximum of 19,125,000 common shares at an initial
per-share exercise price of $0.20 . For more information about the
Debentures and the Warrants, see the section captioned "Liquidity
and Capital Resources - Financing History and Immediate, Short-Term
Capital Needs - Debenture Financing" below.
* On October 30, 2016 , fieldwork was completed on the Company's
proprietary Nike 3D seismic survey (the "Nike Survey ") covering an
approximately 69 sq. mile (179 sq. km.) section of the western
portion of the South Block of the Prospect and directly on trend and
in close proximity to mature producing oilfield and recent
discoveries on the blocks to the north. The Nike Survey was
completed at a "turnkey price" of approximately $2.4 million .
* The raw data from the Nike Survey was converted to analytical
quality information, processed and interpreted by the Company'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. The Company has
prioritized these initial prospective locations for presentation to
potential sources of significant capital. Technical analysis is
on-going.
* In June 2017 , the Company completed the archeological and
environmental field surveys of seven prospective drilling locations
as required by applicable laws and regulations. It subsequently
filed reports on these surveys with the South Australian government;
no material issues were identified at any of the prospective
drilling sites.
* In addition to the amounts raised pursuant to the Debentures
arrangements, since the Company adopted its current business plan,
the Company has raised funds totaling approximately $4.3 million
through private placements of the Company's common shares.
* In several transactions to date, the Company (through the
Subsidiary) purchased portions of an original 7.0% royalty interest
relating to the Prospect retained by the party that, in effect,
transferred and sold the License to the Company. As a result, the
Company (through the Subsidiary) now owns an aggregate 5.0% royalty
interest, while the previous holder of the original 7.0% royalty
interest continues to hold a 2.0% royalty interest. The aggregate
purchase price for the aggregate 5.0% royalty interest was $540,500 .
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 the Company. 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.
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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 October 28, 2020 - Shoot 2D seismic data totaling at
least approximately 62 miles (100 km.) and shoot 3D seismic data
totaling at a minimum approximately 77 sq. miles (200 sq. km.) and
drill two wells.
* Year 4 ending October 29, 2021 - Shoot 3D seismic data totaling a
minimum of approximately 77 sq. miles (200 sq. km.) and drill two
wells.
* Year 5 ending October 29, 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
Discovery needs a significant amount of capital to fulfill its obligations under
the Commitment. Moreover, the Debentures mature in
Results of Operations
Results of operations for the three-month periods ended
Three Months Ended Three Months Ended
May 31, 2020 May 31, 2019
Revenue $ - $ -
Operating expenses (407,738 ) (1,656,561 )
Other income (expenses) (590,073 ) (544,761 )
Net income (loss) $ (997,811 ) $ (2,201,322 )
Operating expenses for the three-month periods ended May 31, 2020 and 2019 are
outlined in the table below:
Three Months Ended Three Months Ended
May 31, 2020 May 31, 2019
Stock-based compensation expense $ - $ 740,000
General and administrative 404,888 524,953
Warrant Modification Expense - 364,683
Exploration costs 2,850 26,925
Total Operating Expenses $ 407,738 $ 1,656,561
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Results of Operations for the Three-Month Periods Ended
Revenues. The Company did not earn any revenues in either of the comparative quarter years. Sales revenues are not anticipated until such time as the Prospect has commenced commercial production of Hydrocarbons. As the Company 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. Total operating expenses incurred during the quarter ended
*$63,000 - Travel related expenses (as travel was curtailed to avoid exposure to COVID-19 virus) *$57,000 - Professional and General and Administrative (paid to 3rd party service providers) *$24,000 - Exploration (due to reduced activity inAustralia )
Net Income (Loss). The Company had a net loss of
Cash Flows for the Three-Month Periods Ended May 31, 2020 and 2019
Cash Used in Operating Activities: Operating activities for the three months
ended
Cash Used in Investing Activities: No cash was used for investing activities
during each of the three month periods ended
Cash Provided by Financing Activities: Financing activities totaled
Off-Balance Sheet Arrangements
Discovery has no off-balance sheet arrangements.
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Liquidity and Capital Resources
Financing History and Immediate, Short-Term Capital Needs
Early Financings. From
Debenture Financing. Beginning in
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, the Company 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 amount of and accrued interest on the Debentures are
due and payable in a single balloon payment on or before May 27,
2021 .
* We are 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 $5,887,500 is $0.16 , while the conversion price
for a Debenture with an original principal amount of $962,500 is
$0.20 . All conversion prices are subject to certain adjustments that
are believed to be customary in transactions of this nature,
including so-called "down round" financing adjustments. The Company
is subject to certain liabilities and liquidated damages for its
failure to honor timely a conversion of the Debentures, and these
liabilities and liquidated damages are believed to be customary in
transactions of this nature.
* The holders of the Debentures are entitled to have them redeemed
completely or partially upon certain events (such as a change of
control transaction involving the Company or the sale of a material
portion of the Company's assets) at a redemption price equal to 120%
of the then outstanding principal amount of the Debenture and 100%
of accrued and unpaid interest on the outstanding principal amount
of this Debenture, plus all liquidated damages and other amounts due
thereunder in respect of the Debenture.
* The Debentures feature negative operating covenants, events of
defaults and remedies upon such events of defaults that are believed
to be customary in transactions of this nature. One of the remedies
upon an event of default is the Debenture holders' ability to
accelerate the maturity of the Debenture such that all amounts owing
under the Debenture would become immediately due and payable. The
Debenture holders would then be able to resort to the collateral
securing the Debentures, if the Company did not pay the amount
outstanding, which is likely to be the case.
* The Debentures are secured by virtually all of the Company's assets
owned directly or indirectly but for the License, which is held by
the Company's Australian subsidiary, Discovery Energy SA Pty Limited
(the "Subsidiary"). Moreover, the Company has separately guaranteed
the Debentures and has pledged all of its stock in the Subsidiary to
secure such guarantee. The essential effect of these security
arrangements is that, if the Company defaults on or experiences an
event of default with respect to the Debentures, the holders of the
Debentures could exercise the rights of a secured creditor, which
could result in the partial or total loss of nearly all of the
Company's assets, in which case its business could cease and all or
substantially all stockholders' equity could be lost. For more
information about this, see the section captioned "Consequences of a
Financing Failure" below.
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Each of the Warrants includes the following features:
* The initial per-share exercise price of the Warrants is $0.20 and 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 the Company during the term of the Warrants for
less than the then applicable exercise price of the Warrants. Upon
the adjustment of the exercise price, the number of shares issuable
upon exercise of the Warrants is proportionately adjusted so the
aggregate exercise price of the Warrants remains unchanged.
* All of the Warrants are currently exercisable and remain so until
their expiration date of August 31, 2020 with respect to 17,625,000
warrant shares, or September 19, 2020 with respect to 1,500,000
warrant shares.
* The Company is subject to certain liabilities and liquidated damages
for failure to honor timely 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 the Debentures has the right to have elected to the Company's Board of Directors one nominee, but this holder has not yet exercised the right to nominate or have one director elected.
Moreover, persons holding a majority of the outstanding Debentures have the
right to require the Company to register with the
The proceeds from the Debenture placements were generally used to fund the
acquisition, processing and interpretation of the
More Recent Equity Placements. Subsequent to the start of the Debentures
placements, the Company continued certain private capital raising transactions
involving the Company's common shares. Beginning in
Paycheck Protection Program Loan. In connection with the Payroll Protection
Program established by the Coronavirus Aid, Relief, and Economic Security Act,
the Company borrowed the sum of approximately
Available Cash. As of
18 Long-Term Capital Needs
The five-year work commitment relating to the License imposes certain
obligations on the Company. The work requirements of the first two years, which
included geotechnical studies and the
If successful with the early wells, 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, field drilling and log reports, production history and costs 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 the Company from pursuing its business plan, as well as exposing the Company to the loss of the License, as discussed below. Moreover, if the business plan proceeds as just described, but the initial wells do not prove to hold producible reserves, the Company could be forced to cease its initial exploration efforts on the Prospect.
Major Financing Efforts and Other Sources of Capital
The Company's capital strategy for most of its past four fiscal years has been,
and continues to be, to attempt to engage in a single major capital raising
transaction to provide sufficient funds to satisfy its capital needs for a
number of years to come. While management did not completely abandon this
strategy, the Company did shift its emphasis in an effort to try to engage in
one or more smaller capital raising transactions to provide sufficient funds to
satisfy ongoing and future capital needs. During a two-year period beginning in
The interpretation and analysis of the
Sales from production as a result of successful exploration and drilling efforts would provide the Company with incoming cash flow. The proved reserves associated with production would most likely increase the value of the Company's rights in the Prospect. This, in turn, should enable the Company to obtain bank financing (after the wells have produced for a period of time to satisfy the lenders requirements). Both of these results would enable the Company to continue with its development activities. Positive cash flow is a critical success factor for the Company's plan of operation in the long run. Management believes that, if the Company's plan of operation successfully progresses (and production is realized) as planned, sufficient cash flow and debt financing will be available for purposes of properly pursuing its plan of operation, although the Company can make no assurances in this regard.
Finally, to reduce its cash requirements, the Company might attempt to satisfy some of its obligations by issuing common shares, which would result in dilution in the percentage ownership interests of the Company's existing stockholders and could result in dilution of the net asset value per share of the Company's existing stockholders.
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Consequences of a Financing Failure
If required financing is not available on acceptable terms, the Company could be
prevented from satisfying its work commitment obligations or developing the
Prospect to the point that the Company is able to repay the Debentures, which
become due in
COVID-19
The Company has experienced no obvious impact from the COVID-19 pandemic with
respect to Liquidity and Capital Resources. However, the result of the pandemic
may create greater uncertainty or challenges in the Company's ability to raise
capital. For further risk discussion, see the risk factor captioned "PANDEMICS
OR DISEASE OUTBREAKS (SUCH AS THE NOVEL CORONAVIRUS, ALSO KNOWN AS THE COVID-19
VIRUS) COULD MATERIALLY AND ADVERSELY AFFECT US IN A VAREITY OF WAYS" in the
Company's Annual Report on Form 10-K for the Company's fiscal year ended
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