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. GeneralDiscovery Energy Corp. (the "Company") was incorporated under the laws of the state ofNevada onMay 24, 2006 under the name "Santos Resource Corp ". The current business of the Company 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"). The Prospect is located in the "Western Flank" area, which is the southwest Permian edge of the Cooper and Eromanga Basins, the most prolific producing onshore region inAustralia . There are three separate acreage blocks in the Prospect: West (~400,000 acres), South (~181,000 acres) and Lycium (~4,000 acres). InMay 2012 , the Company incorporated a wholly owned Australian subsidiary,Discovery Energy SA Ltd. ("Subsidiary"), for the purpose of acquiring a 100% working interest in the License. InMay 2016 , the Subsidiary's legal entity status changed from public to private and its name changed toDiscovery Energy SA Pty Ltd. The Company 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 the Company's current focus is primarily on the Prospect, management from time-to-time exchanges information with other industry participants regarding additional investment opportunities inAustralia . The Company's internet address is https://discoveryenergy.com. 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, theSecurities and Exchange Commission (the "SEC"). TheSEC maintains an internet site that contains our public filings with theSEC and other information regarding the Company, at
http://www.sec.gov.
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.
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* The Company completed the Debentures and Warrants financing described in the
section below captioned "Liquidity and Capital Resources - Financing History
and Immediate, Short-Term Capital Needs - Debentures Financing." 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 below
captioned "Liquidity and Capital Resources - Financing History and Immediate,
Short-Term Capital Needs - Debentures Financing."
* 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 Hydrocarbon accumulations. The
Company has prioritized these initial prospective locations for presentation
to potential sources of significant additional 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 accommodated several Company requests.
To date, 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.
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* Year 4 ending
approximately 77 sq. miles (200 sq. km.) and drill two wells.
* Year 5 ending April 28, 2024 - Drill three wells.
The Company needs a significant amount of additional capital to fulfill its obligations under the work commitment. Moreover, the Debentures will mature inDecember 2023 , and the Company will need to raise additional funds or generate sufficient revenues through Hydrocarbon production to timely repay the Debentures, if they are not converted. The Company's capital requirements and financing activities are described in the section below captioned "Liquidity and Capital Requirements." The success of the initial phase of the Plan of Operation depends upon the Company'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 the Company and its stockholders in ways that are discussed in the section below captioned "Liquidity and Capital Resources - Consequences of a Financing Failure." The Company 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
Nine Months
Three Months Three Months Nine Months Ended
Ended Ended Ended November 30,
November 30, 2021 November 30, 2020 November 30, 2021 2020Revenue $ - $ - $ - $ - Operating expenses (311,648 ) (319,004 ) (920,178 ) (1,884,361 ) Other income (expense), net (315,125 ) (612,955 ) (823,178 ) (1,805,551 ) Net loss $ (626,773 ) $ (931,959 )$ (1,743,356 ) $ (3,689,912 )
Operating expenses for the three- and nine-month periods ended
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
November 30, 2021 November 30, 2020 November 30, 2021 November 30, 2020
General and administrative $ 311,648 $ 309,004 $ 920,178 $ 1,077,873
Warrant modification expense - - - 769,888
Exploration costs - 10,000 - 36,600
Total Operating Expenses $ 311,648 $ 319,004 $ 920,178 $ 1,884,361
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Results of Operations for the Three-Month Periods Ended
2020
Revenues. The Company did not earn any revenues for either of the three-month
periods ended November 30, 2021 and 2020. Sales revenues are not anticipated
until such time as the Prospect has commenced commercial operations. 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 operations.
Operating Expenses. Total operating expenses incurred during the three-month
period ended
Net Loss. The Company had a net loss of$626,773 for the three-month period endedNovember 30, 2021 , compared to a net loss of$931,959 for the three-month period endedNovember 30, 2020 . The primary driver of this decrease is due to the non-cash activity in regard to the extension of the Maturity Date of the Debentures by two years toDecember 31, 2023 . Therefore, other expenses decreased by approximately$298,000 in amortization expense. Loss per common share, on both a basic and fully diluted basis, for the three-month periods endedNovember 31, 2021 and 2020 were$0.00 and$0.01 , respectively.
Results of Operations for the Nine-Month Periods Ended
2020
Revenues. The Company did not earn any revenues in either of the comparative
nine-month periods ended November 30, 2021 and November 30, 2020 . 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 nine-month
period ended November 30, 2021 decreased by $964,183 (51%), compared to those
incurred during the nine-month period ended November 30, 2020 . The decrease is
primarily due general and administrative and warrant modification expenses. For
the nine-month period ended November 30, 2021 , general and administrative
expense decreased by approximately $158,000 . This is primarily due to a decrease
of $99,000 in expense reimbursement accruals for the nine months ended November
30, 2021 . Additionally, legal fees decrease by approximately $36,000 for the
nine-month ended November 30, 2021 . Furthermore, there were approximately
$770,000 in warrant modification expense for the nine-month period ended
November 30, 2020 while there was zero modification expense for the nine-month
period ended November 30, 2021 .
Net Loss. The Company had a net loss of $1,743,356 for the nine-month period
ended November 30, 2021 , compared to a net loss of $3,689,912 for the nine-month
period ended November 30, 2020 . There were approximately $770,000 in warrant
modification expense for the nine-month period ended November 30, 2020 while
there was zero modification expense for the nine-month period ended November 30,
2021 . Additionally, general and administrative expense decreased by
approximately $158,000 . This is primarily due to a decrease of $99,000 in
expense reimbursement accruals for the nine months ended November 30, 2021 .
Additionally, legal fees decrease by approximately $36,000 for the nine-month
ended November 30, 2021 . The primary driver of the decrease in Other Expenses is
due to the non-cash activity in regard to the extension of the Maturity Date of
the Debentures by two years to December 31, 2023 . Therefore, other expenses
decreased by approximately $881,000 in amortization expense. Loss per common
share, on both a basic and fully diluted basis, were $0.01 for the nine-month
period ended November 30, 2021 and $0.02 for the nine-month period ended
November 30, 2020 .
Cash Flows for the Nine-Month Periods Ended November 30, 2021 and 2020
Cash Used in Operating Activities: Operating activities for the nine-month period endedNovember 30, 2021 used cash of$185,430 , compared to$287,080 for the nine-month period endedNovember 30, 2020 primarily due to lower third-party professional service fees during the nine-month period endedNovember 30, 2021 Cash Used in Investing Activities: No cash was used for investing activities during either of the nine-month periods endedNovember 30, 2021 andNovember 30, 2020 .
Cash Provided by Financing Activities: Proceeds from a Paycheck Protection Program loan in the amount of$120,000 was received for the nine-month period endedNovember 30, 2021 . Additionally, the Company received gross proceeds of$75,000 for an issuance of a senior secured convertible debenture with Maturity Date ofDecember 31, 2023 . Financing activities totaled$218,750 during the nine-month period endedNovember 30, 2020 , resulting from the private placement of 500,000 common shares at$0.20 per common share for gross proceeds of$100,000 , and proceeds from a Paycheck Protection Program loan in the amount of$118,750 . 18 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. 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, officers and directors of the Company provided short-term bridge funding. These advances were repaid out of proceeds from the Debentures financings described below. Debentures Financing. Beginning inMay 2016 and continuing throughAugust 2018 , the Company relied on a series of placements of convertible Debentures (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 and theFebruary 2021 extension of the maturity date of the Debentures, Warrants were issued that give the holder the right to purchase up to a maximum of 27,877,058 common shares at an initial per-share exercise price of$0.20 .
* 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.
* 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.
19
* 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 below
captioned "Consequences of a Financing Failure."
Each of the Warrants includes the following features:
* The initial per-share exercise price of the Warrants is
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
* 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 theNike Survey data and payment of the Company's and the Debentures 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 for geophysical consulting services. DuringNovember 2021 , the Company issued another Debenture having an original principal amount of$75,000 and also having a maturity date ofDecember 31, 2023 . This Debenture shall accrue interest from the Original Issue Date at the rate of eight percent (8%) per annum, compounded quarterly with a conversion rate of$0.16 . 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, and continues to be, 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 increased. The price of the Brent crude benchmark currently exceeds$80 per barrel. Exploration and production operations are recovering and funding is becoming more widely available. However, the recent increase in infection rates is concerning though there has, to date, been no negative Hydrocarbons sector activity impact. For further information on this topic, 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 endedFebruary 28, 2021 . 20
Subsequent Securities Placements. Subsequent to the start of the Debentures placements, the Company continued certain private capital raising transactions involving its common shares. Beginning inNovember 2016 and concluding inJuly 2020 , the Company closed on a series of private placements in which an aggregate of 9,075,000 shares were issued for an aggregate purchase price of$1,886,250 . 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$118,750 and a second loan during fiscal year 2022 in the amount of$120,000 . When the Company availed itself of the loan forgiveness feature of the Program, the balance of the initial loan was reduced to$18,302 , and the Company has been paying off this balance at a rate of approximately 2,000 per month. The Company is in the process of applying for the forgiveness of the second loan to the maximum extent permitted by applicable law. Available Cash. As ofJanuary 17, 2022 , the Company had cash of approximately$18,000 and had negative working capital of approximately$5,905,000 Management believes that the cash on hand, as of the preceding date, will be sufficient to finance general and administrative expenses throughFebruary 15, 2022 although no assurance of this can be provided. This amount of cash on hand stresses the Company's need to raise additional funds in the immediate future. 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 by undertaking to raise up to$10.0 million through a private placement of common shares. If successful in raising$10.0 million in the private placement, it is estimated that the related net proceeds will be sufficient to finance both general and administrative expenses, and a number of work commitment obligations throughFebruary 2023 . 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. 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 theNike 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. BetweenJanuary 2022 andApril 2024 (the month in which the Company's work commitments are currently required to be completed), the Company estimates that it will need to raise an additional$20 million (includes$10 million discussed above) to have sufficient capital to meet the remaining work commitments specified in the License and to fund operations. Net revenues produced from successful oil 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 any oil revenue will be earned. If successful with the initial wells, work will continue with a full development plan, the scope of which is now uncertain; however, all plans are subject to the availability of sufficient funding 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 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.
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 raise 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 raise transactions to provide sufficient funds to satisfy near term capital needs. During a two-year period beginning inMay 2016 , the Company completed a series of placements of its Debentures having an aggregate original principal amount of$6,850,000 . InNovember 2021 , the Company placed another Debenture having an original principal amount of$75,000 . Regarding the future financing of the Company's work commitments, the interpretation and analysis of theNike Survey 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 the Company's initial drilling program. The Company needs to complete a major capital raise transaction to continue moving its business plan forward. In the interim, the Company is continuing efforts to raise comparably smaller amounts to cover general and administrative expenses. The Company has no assurance that it will be able to raise any required funds. The Company is also pursuing efforts to secure one or more joint venture partners. 21 Sales from production as a result of successful exploration and drilling efforts would provide the Company with incoming cash flow. The associated proved reserves 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. Management believes that, if the Company's plan of operation successfully progresses (and production is realized), 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 or selling a portion of its interest to a joint venture partner. The issuance of additional shares would result in dilution in the percentage ownership interests 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 inDecember 2023 . Failure to satisfy work commitment obligations could result in the eventual loss of the License and the total loss of the Company'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 the Company's assets and properties. Failure to procure required financing on acceptable terms could prevent the Company from developing the Prospect. If any of the preceding events were to occur, the Company could be forced to cease its operations, which could result in a complete loss of stockholders' equity. If additional financing is not obtained through an equity or debt offering, the Company could find it necessary to sell all or some portion of the Prospect under unfavorable circumstances and at an undesirable price. However, no assurance can be provided that the Company 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 the Company's exploration and development program, satisfactory achievement of License commitments and capital raising activities.
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