DISCOVERY ENERGY CORP. General
The Company has experienced losses and negative cash flows since inception, and
it expects to incur such losses and negative cash flows for the foreseeable
future. The Company has an accumulated deficit of
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations as of
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Results of Operations
Results of operations for the fiscal years ended
Fiscal Year Fiscal Year
Ended Ended
February 28, 2021 February 29, 2020
Revenue $ - $ -
Operating expenses (3,755,298 ) (3,661,874 )
Other expenses (2,328,415 ) (2,241,259 )
Net loss $ (6,083,713 ) $ (5,903,133 ) Operating expenses for the fiscal years ended
Fiscal Year Fiscal Year
Ended Ended
February 28, 2021 February 29, 2020
Stock-based compensation $ - $ 802,500
General and administrative 1,008,532 1,627,008
Warrant modification expense 2,710,166 1,184,366
Exploration costs 36,600 48,000
Total operating expenses $ 3,755,298 $ 3,661,874
Comparison of Fiscal Year Ended
29, 2020
Revenues. The Company did not earn any revenues in either of the comparative fiscal 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 fiscal year
ended
Net Loss. The Company had a net loss of
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Cash Flows for the Fiscal Years Ended
Cash Used in Operating Activities: Operating activities for the fiscal year
Cash Used in Investing Activities: No cash was used for investing activities
during the fiscal year ended
Cash Provided by Financing Activities: Financing activities totaled
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 December 31, 2023 .
* We are 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 $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.
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* 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' ability 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 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 Risk Factors
captioned "THE EXERCISE OF SECURED CREDITOR RIGHTS COULD RESULT IN A
SIGNIFICANT OR COMPLETE LOSS" herein.
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 ofDecember 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.
Moreover, the holders of the 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
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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
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
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.
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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 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 abandon 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 shares of 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
31 Known Trends
Management believes that it has discerned the following trends relevant to the Company:
* Oil consumption in 2020 declined by 6.7% to 93 million barrels a day. This was
the largest historical decline in volume terms, and the first recorded decline
since 2009. Consumption fell in most countries, as COVID-19 containment
measures impacted road and air travel and industrial production.
* Oil consumption is forecast to increase by 1.8% in 2021, reaching 95 million
barrels a day. A large proportion of this recovery is due to higher transport
related demand.
* In 2022, consumption is forecast to rise by 3.7% to 99 million barrels a day
(Figure 8.1). Consumption is projected to reach 102 million barrels a day in
2024, before declining marginally to 101 million barrels in 2026.
* Oil prices are forecast to average $61 per barrel in 2021, significantly
higher than 2020, when prices were severely affected by COVID-19. Over the
medium term, prices are projected to remain around $60 a barrel, prices are
projected to average $65 a barrel in 2024, before falling to $62 a barrel in
2025
* Australian oil consumption is forecast to recover to 2018-19 levels in
2021-22. For the rest of the outlook period, Australian oil consumption is
projected to increase marginally, reaching 1.1 million barrels a day by
2025-26.
* The forecast for Australia's crude and condensate export earnings has been
revised up by around $120 million in 2020-21 and $260 million in 2021-22
(nominal terms), due to higher oil price forecasts.
* Australian export earnings (in real terms) are projected to increase from
A$7.7 billion in 2020-21 to A$10 billion in 2025-26, as prices recover.
(Sources: BREE - Resources and Energy Quarterly - March, 2021)
Off-Balance Sheet Arrangements
During the year ended
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