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
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Historical Milestones
To date, the Company has achieved the following milestones:
* OnOctober 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. * InMay 2016 , the Company completed its first closing under a financing arrangement pursuant to which the Company issued to two investors Senior Secured Convertible Debentures dueMay 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 beforeMay 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$9,511,300 as ofDecember 31, 2020 . Interest will continue to be accrued until such time as the Debentures are repaid or converted to common shares. 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. * OnOctober 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 theNike 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. * InJune 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 drill 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$4.6 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 . 15 Current Primary Activity
The Company's current primary activity is to complete a major financing and/or enter into a suitable joint venture relationship, 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 the 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.
The Company has received a number of suspensions, extensions and modifications of the Commitment. The current remaining Commitment is as follows:
* Year 3 endingOctober 28, 2021 - Shoot 2D seismic data totaling approximately 62 miles (100 km.) and shoot 3D seismic data totaling approximately 77 sq. miles (200 sq. km.) and drill two wells. * Year 4 endingOctober 29, 2022 - Shoot 3D seismic data totaling approximately 77 sq. miles (200 sq. km.) and drill two wells. * Year 5 endingOctober 29, 2023 - Drill three wells.
The Company needs a significant amount of additional capital to fulfill its
obligations under the Commitment. Moreover, the Debentures mature in
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, November 30, November 30, November 30,
2020 2019 2020 2019
Revenue $ - $ - $ - $ -
Operating expenses (319,004 ) (421,570 ) (1,884,361 ) (2,838,206 )
Other income/(expenses) (612,955 ) (564,228 ) (1,805,551 ) (1,664,647 )
Net loss $ (931,959 ) $ (985,798 ) $ (3,689,912 ) $ (4,502,853 )
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Operating expenses for the three- and nine-month periods ended
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
November 30, November 30, November 30, November 30,
2020 2019 2020 2019
Stock-based compensation $ - $ - $ - $ 802,500
General and administrative 309,004 406,045 1,077,873 1,257,559
Warrant modification expense - - 769,888 735,697
Exploration costs 10,000 15,525 36,600 42,450
Total Operating Expenses $ 319,004 $ 421,570 $ 1,884,361 $ 2,838,206 Results of Operations for the Three-Month Periods Ended
2019
Revenues. The Company did not earn any revenues for either of the three-month
periods ended
Operating Expenses. Total operating expenses incurred during the three months
ended
Net Income (Loss). The Company had a net loss of
Results of Operations for the Nine-Month Periods EndedNovember 30, 2020 and 2019
Revenues. The Company did not earn any revenues for either of the nine-month
periods ended
Operating Expenses. Total operating expenses incurred during the nine months
ended
Net Loss. The Company had a net loss of
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Cash Flows for the Nine-Month Periods Ended November 30, 2020 and 2019
Cash Used in Operating Activities: Operating activities for the nine months
ended
Cash Used in Investing Activities: No cash was used for investing activities
during the nine-month periods ended
Cash Provided by Financing Activities: Financing activities totaled
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Liquidity and Capital Resources
Financing History and Immediate, Short-Term Capital Needs
Early Financings. From
Debentures Financings. 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 plus accrued interest on the Debentures is due and payable in a
single balloon payment on or before May 27, 2021 .
* Discovery is not entitled to prepay the Debentures prior to their maturity.
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* 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 Debentures having an aggregate 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, which would
cause the conversion prices to adjust downward to the price of any securities
issued by the Company at a price less than the conversion prices then in
effect. The Company 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 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 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 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 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
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 the
Company's business could cease and all or substantially all stockholders'
equity could be lost.
Each of the Warrants includes the following features:
* The initial per-Common 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 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 will remain so until their expiration date ofFebruary 28, 2021 . * 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. 19
Currently, the Company is in discussion to extend the maturity date of the Debentures. The Company has no assurance that the holders of the Debentures will agree to such an extension, in which case the Company could suffer the consequences described in the section captioned "Consequences of a Financing Failure" below.
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 Debentures 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 Paycheck Protection
Program established by the Coronavirus Aid, Relief, and Economic Security Act,
the Company borrowed the sum of
Available Cash. As of
20 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, reports and results of drilling activities including data collected from log runs, production history and cost estimates. However, all of the preceding plans are subject to the availability of sufficient funding from one or more additional financings or a joint venture farmout, and the receipt of all governmental approvals.
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 has not completely abandoned this
strategy, the Company 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. During a two-year period beginning in
The interpretation and analysis of the
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Sales from production as a result of successful 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.
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 initially experienced no material impacts from the COVID-19 pandemic
with respect to Liquidity and Capital. However, the negative reaction in
financial markets was significant. Initially, the pandemic resulted in a severe
decrease in demand for Hydrocarbons, in particular transportation fuels. This
decrease resulted in a major drop in the price of crude oil and its resulting
impact on financial markets in general and in particular, the energy industry.
Demand has now recovered substantially, crude oil prices have increased to above
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