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
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, are available free of
charge on our website as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the
Historical Milestones
To date, the Company has achieved the following milestones:
* On
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.
* The Company completed the Debentures and Warrants financing described in the
section captioned "Liquidity and Capital Resources - Financing History and
Immediate, Short-Term Capital Needs - Debentures Financing" below. Among other
uses, the proceeds from the Debentures enabled the Company to undertake
required seismic work. The original terms of the Debentures and Warrants
provided that the Debentures were to become due, and the Warrants were to
expire, on
Debentures and Warrants extended the maturity date of the Debentures and the
expiration date of the Warrants to
connection, the Company issued additional Warrants to purchase 8,752,058
additional common shares at a per-share exercise price of
adjustment upon the occurrence of certain customary events. 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 - Debentures Financing" below.
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* On
3D seismic survey (the "
(179 sq. km.) section of the western portion of the South Block and directly
on trend and in close proximity to mature producing oilfields and recent
discoveries on the blocks to the north.
"turnkey price" of approximately
* The raw data from the
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
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
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
Current Primary Activity
The Company'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 commitment described below, and develop the Prospect.
The License is subject to a five-year work 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. To date, no comments from the government have been received, and management understands that the relevant government agency is required by law to furnish comments within 30 days after the reports are filed. Moreover, such agency has extended and modified the work commitment a number of times since the filing of the reports, and has been very accommodating with Company requests.
Over the term of the License thus far, a number of extensions and modifications of the work commitment have been granted. The current remaining work commitment is as follows:
* Year 3 ending
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
approximately 77 sq. miles (200 sq. km.) and drill two wells.
* Year 5 ending
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Discovery believe that it will not be able to complete its Year 3 Commitment
obligations by their due date of
The Company needs a significant amount of additional capital to fulfill its
obligations under the work commitment. Moreover, the Debentures will mature in
Results of Operations
Results of operations for the three-month periods ended
Three Months Ended Three Months Ended
May 31, 2021 May 31, 2020
Revenue $ - $ -
Operating expenses (309,953 ) (407,738 )
Other income (expenses) (300,810 ) (590,073 )
Net income (loss) $ (610,763 ) $ (997,811 )
Operating expenses for the three-month periods ended
Three Months Ended Three Months Ended
May 31, 2021 May 31, 2020
General and administrative $ 309,953 $ 404,888
Exploration costs 2,850
Total Operating Expenses $ 309,953 $ 407,738
Results of Operations for the Three-Month Periods Ended
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-month
period ended
Net Income (Loss). The Company had a net loss of
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Cash Flows for the Three-Month Periods Ended May 31, 2021 and 2020
Cash Used in Operating Activities: Operating activities for the three-month
periods 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: Proceeds from a Paycheck Protection
Program loan in the amount of
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 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
* The Company is not entitled to prepay the Debentures.
* 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
amount of
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.
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* 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 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 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 Debentures holders' right to accelerate the maturity of the Debentures
such that all amounts owing under the Debentures would become immediately due
and payable. The Debentures 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 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.
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 will remain so
until their expiration date of December 31, 2023 .
* 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. To date, the holder has not exercised this right.
The proceeds from the Debentures placements were generally used to fund the
acquisition, processing and interpretation of the
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COVID-19. The Company initially experienced no material impacts from the
COVID-19 pandemic with respect to liquidity and capital. However, the negative
impact on 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, and crude oil prices have
increased to above
Equity Placements. Subsequent to the start of the Debentures placements, the
Company continued certain private capital raising transactions involving its
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 an initial loan during fiscal year 2021 in the amount of
Available Cash. As of
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, costs estimates and sales prices. 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 expose 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.
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Major Financing Efforts and Other Sources of Capital
The Company's capital strategy 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. While management has not
completely abandoned this strategy, the Company did shift 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
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 its 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
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