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
25 Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations as of
Results of Operations
Results of operations for the fiscal years ended
Fiscal Year Fiscal Year Ended Ended February 29, 2020 February 28, 2019 Revenue $ - $ - Operating expenses (3,661,874 ) (1,513,622 ) Other income (expenses) (2,241,259 ) (2,272,010 ) Net income (loss)$ (5,903,133 ) $ (3,785,632 )
Operating expenses for the fiscal years ended
Fiscal Year Fiscal Year Ended Ended February 29, 2020 February 28, 2019 General and administrative $ 3,613,874 $ 1,248,775 Exploration costs 48,000 264,847 Total operating expenses $ 3,661,874 $ 1,513,622
Comparison of Fiscal Year Ended
28, 2019
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.
26
Operating Expenses. Operating expenses increased by approximately
This significant variance resulted from the following:
Non-Cash Expenses - Increases:
*$1,180,000 - Warrants and extension expiration dates *$800,000 - Equity compensation (Additional awards) *$670,000 - Staff Salaries and Fees (Accruals) Cash Expenses - Decreases: *$290,000 - General & Administrative (3rd party service providers) *$220,000 - Exploration (completedNike Survey activities)
Other Income (Expense). Other income (expense) includes interest expense related
to the Debentures (which accrues and is added to the outstanding principal
balance of the Debentures). For the year ended
Net Income (Loss). The Company had a net loss of
Cash Flows for the Fiscal Years Ended
Cash Used in Operating Activities: Operating activities for the fiscal year
ended
Cash Used in Investing Activities: No cash was used for investing activities
during the fiscal years ended in
Cash Provided by Financing Activities: Financing activities totaled
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. 27 * 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 beforeMay 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 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 remain so until their expiration date ofAugust 31, 2020 with respect to 17,625,000 warrant shares, orSeptember 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. 28
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, the holders of the 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
COVID-19. There has been no impact in respect to Liquidity and Capital Resources from the pandemic of COVID-19. However, the result of the pandemic may create greater uncertainty or challenges in the 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."
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
Payroll Protection Program Loan. In connection with the Payroll Protection
Program established by the Coronavirus Aid, Relief, and Economic Security Act,
on
Available Cash. As of
29 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 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
30 Known Trends
Management believes that it has discerned the following trends relevant to the Company:
* Australian LNG export prices are expected to decline in 2020, before gradually rising then falling again, tracking oil price-linked contract prices (at which most Australian LNG is sold). Asian LNG spot prices are forecast to recover from current record lows as the market rebalances, before declining as a new wave of LNG projects ramp up. *Australia's LNG export volumes are forecast to rise from 75 million tonnes in 2018-19 to 81 million tonnes in 2020-21, as the last two projects inAustralia's recent wave of LNG investment ramp up, before edging back down to 80 million tonnes by 2024-25. * The real value ofAustralia's LNG exports is forecast to decline from$51 billion in 2018-19 to$49 billion in 2019-20 and$44 billion in 2020-21, and remain in the$44 to$47 billion range to 2024-25. * Oil prices are forecast to averageUS$40 a barrel in 2020, as the COVID-19 outbreak impacts global air and vehicular travel, the manufacturing sector and other business and personal activities. * Annual real earnings from Australian oil exports are expected to peak in 2021-22 at$11 billion , before declining to a projected$9.6 billion in 2024-25.
(Sources: BREE - Resources and Energy Quarterly - June, 2020)
Off-Balance Sheet Arrangements
During the year ended
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