The accompanying
notes are an integral part of these consolidated financial statements.
The accompanying
notes are an integral part of these consolidated financial statements.
The accompanying
notes are an integral part of these consolidated financial statements.
Notes
to Consolidated Financial Statements
Years
Ended April 30, 2014 and 2013
NOTE
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature
of business
REGI
U.S., Inc.
(“REGI”) is engaged in the business of developing and commercially exploiting an improved axial
vane type rotary engine known as the Rand Cam/Direct Charge Engine (the “RC/DC Engine”) in the U.S. The worldwide
marketing and intellectual rights, other than in the U.S., are held by Reg Technologies, Inc. (“Reg”), a major shareholder,
which together with its 51% owned subsidiary, Rand Energy Group Inc. owns 10.35% of REGI’s issued and outstanding stock
at April 30, 2014. REGI owns the U.S. marketing and intellectual rights and has a project cost sharing agreement, whereby it will
fund 50% of the further development of the RC/DC Engine and Reg will fund 50%. No revenue has been derived to date and REGI’s
planned principal operations have not commenced.
REGI
formed a wholly-owned subsidiary, Rad Max Technologies, Inc., on April 10, 2007 in the State of Washington.
Principles
of consolidation
These
consolidated financial statements include the accounts of REGI, and its wholly owned subsidiary, Rad Max. All inter-company balances
and transactions have been eliminated on consolidation.
Risks
and uncertainties
REGI
operates in an emerging industry that is subject to market acceptance and technological change. REGI’s operations are subject
to significant risks and uncertainties, including financial, operational, technological and other risks associated with operating
an emerging business, including the potential risk of business failure.
Cash
and cash equivalents
Cash
and cash equivalents include highly liquid investments with original maturities of three months or less.
Financial
instruments
Fair
Value
The
carrying values of cash and cash equivalents, amounts due to related parties, bank indebtedness, accounts payable and accrued
liabilities approximate their fair values because of the short-term maturity of these financial instruments.
Interest
Rate Risk
REGI
is not exposed to significant interest rate risk due to the short-term maturity of its monetary assets and liabilities.
Credit
Risk
REGI’s
financial asset that is exposed to credit risk consists primarily of cash. To manage the risk, cash is placed with major financial
institutions.
Currency
Risk
REGI’s
functional and reporting currency is the U.S. dollar. Monetary assets and liabilities denominated in foreign currencies are translated
using the exchange rate prevailing at the balance sheet date. Gains and losses arising on translation or settlement of foreign
currency denominated transactions or balances are included in the determination of income. Foreign currency transactions are primarily
undertaken in Canadian dollars. REGI has not, to the date of these consolidated financial statements, entered into derivative
instruments to offset the impact of foreign currency fluctuations.
Income
taxes
Deferred
income taxes are reported for timing differences between items of income or expense reported in the financial statements and those
reported for income tax purposes. REGI uses the asset/liability method of accounting for income taxes. Deferred income taxes and
tax benefits are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases, and for tax losses and credit carry-forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. REGI provides for deferred taxes for the estimated future tax effects
attributable to temporary differences and carry-forwards when realization is more likely than not.
Basic
and diluted net loss per share
Basic
EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares
outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during
the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted
EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise
of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
Stock-based
compensation
REGI
accounts for stock based compensation in accordance with FASB ASC 718 which establishes the accounting treatment for transactions
in which an entity exchanges its equity instruments for goods or services. Under the provisions of FASB ASC 718, share-based payment
compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite
service period (generally the vesting period). REGI accounts for share-based payments to non-employees in accordance with FASB
ASC 505-50
Use
of estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures during the
reporting period. Actual results could differ from these estimates. REGI regularly evaluates estimates and assumptions related
to useful life and recoverability of long-lived assets, stock-based compensation and deferred income tax asset valuation allowances.
REGI bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to
be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities, and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced
by REGI may differ materially and adversely from REGI’s estimates. To the extent there are material differences between
the estimates and the actual results, future results of operations will be affected.
Research
and Development Costs
Research
and development costs are expensed as incurred. REGI expensed development costs totaling $35,612 and $84,415 during the years
ended April 30, 2014 and 2013, respectively.
Recent
Accounting Pronouncements
On
June 10, 2014, FASB issued Accounting Standards Update No. 2014-10,
Development Stage Entities
. The update removes the
definition of a development stage entity from FASB ASC 915 and eliminates the requirement for development stage entities to present
inception-to-date information on the statements of operations, cash flows and stockholders’ deficit. The Company early adopted
this standard for the periods covered by the report herein.
NOTE
2. GOING CONCERN
REGI
incurred net losses of $587,548 for the year ended April 30, 2014 and has a working capital deficit of $1,765,764 and an accumulated
deficit of $12,316,119 at April 30, 2014. These factors raise substantial doubt about the ability of REGI to continue as a going
concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As a result, REGI’s consolidated financial statements as of April 30, 2014 and for the year ended have been prepared on
a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal
course of business.
REGI
also receives interim support from affiliated companies and plans to raise additional capital through debt and/or equity financings.
There continues to be insufficient funds to provide enough working capital to fund ongoing operations for the next twelve months.
REGI may also raise additional funds through the exercise of warrants and stock options, if exercised. There is no assurance that
any of these activities will be successful.
NOTE
3. RELATED PARTIES
Amounts
due from related parties are unsecured, non-interest bearing and due on demand. Related parties consist of the President of REGI
and companies controlled or significantly influenced by the President of REGI. As of April 30, 2014, there was $1,531,106 due
to related parties. As of April 30, 2013, there was $1,499,300 due to related parties.
During
the year ended April 30, 2014, the President and CEO of REGI provided consulting services to REGI. These services were valued
at $90,000, which was accounted for as donated capital and charged to expense during the year ended April 30, 2014. The same amount
was recorded in the year ended April 30, 2013.
During
the year ended April 30, 2014, the CFO of REGI provided consulting services to REGI. These services were valued at $30,000, which
was accounted for as donated capital and charged to expense during the year ended April 30, 2014. The same amount was recorded
in the year ended April 30, 2013.
During
each of the years ended April 30, 2014 and 2013, management fees of $30,000 were accrued to a company having a common director
as REGI.
During
the year ended April 30, 2012, the Company issued a promissory note of $24,000 for amounts previously accrued and owed to a company
with common director with the Company. The promissory note bears interest rate of 6% per annum, is unsecured and due on demand.
During the years ended April 30, 2014 and 2013, there was no change to the principal amount of the promissory note and interest
expense of $1,440 was recorded each year. The principal balance of the note is included as due to related parties in the consolidated
balance sheet.
REGI
currently utilizes office space in a commercial business park building located in Richmond, British Columbia, Canada, a suburb
of Vancouver, shared by several companies related by common officers and directors. REGI does not pay rent for this office space.
As
part of an agreement with a professional law firm in which a partner of the firm is an officer and director of REGI, REGI agreed
to pay a cash fee equal to 5% of any financings with parties introduced to REGI by the law firm. REGI also agreed to pay an equity
fee equal to 5% of the equity issued by REGI to parties introduced by the law firm, in the form of options, warrants or common
stock. During the years ended April 30, 2014 and 2013, no legal services have been charged to the Company by the law firm.
NOTE
4. STOCKHOLDERS’ EQUITY
a)
Common Stock Options and Warrants
REGI
has a 2000 Stock Option Plan to issue up to 2,500,000 shares to certain key directors and employees.
All
transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably
measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized
based on the fair value of the equity instruments issued.
All
options granted by REGI under the 2000 plan have the following vesting schedule:
i)
|
Up
to 25% of the option may be exercised at any time during the term of the option; such
initial exercise is referred to as the “First Exercise”.
|
|
|
ii)
|
The
second 25% of the option may be exercised at any time after 90 days from the date of
First Exercise; such second exercise is referred to as the “Second Exercise”.
|
|
|
iii)
|
The
third 25% of the option may be exercised at any time after 90 days from the date of Second
Exercise; such third exercise is referred to as the “Third Exercise”.
|
|
|
iv)
|
The
fourth and final 25% of the option may be exercised at any time after 90 days from the
date of the Third Exercise.
|
|
|
v)
|
The
options expire 60 months from the date of grant.
|
On
April 12, 2007, REGI adopted its 2007 Stock Option Plan to issue up to 2,000,000 shares to certain key directors and employees.
Pursuant to the 2007 plan, REGI has granted stock options to certain directors and employees.
All
options granted under the 2007 plan have the following vesting schedule:
i)
|
Up
to 25% of the option may be exercised 90 days after the grant of the option.
|
|
|
ii)
|
The
second 25% of the option may be exercised at any time after 1 year and 90 days after
the grant of the option.
|
|
|
iii)
|
The
third 25% of the option may be exercised at any time after 2 years and 90 days after
the grant of the option.
|
|
|
iv)
|
The
fourth and final 25% of the option may be exercised at any time after 3 years and 90
days after the grant of the option.
|
|
|
v)
|
The
options expire 60 months from the date of grant.
|
During
the years ended April 30, 2014 and 2013, REGI recorded stock-based compensation related to options and warrants of $292,890 and
$198,783, respectively. At both April 30, 2014 and 2013, REGI had $401,072, of total unrecognized compensation cost related to
non-vested stock options and warrants, which will be recognized over future periods.
The
fair value of each option and warrant granted was determined using the Black-Scholes option pricing model and the following assumptions:
|
|
|
April
30,
|
|
|
|
|
2014
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
0.11
- 0.36
|
%
|
|
|
0.15
- 0.74
|
%
|
Expected life
|
|
|
0.09
- 1.64 years
|
|
|
|
0.01
- 5 years
|
|
Annualized volatility
|
|
|
191
- 300
|
%
|
|
|
205%
- 378
|
%
|
Expected dividends
|
|
|
-
|
|
|
|
-
|
|
Option
pricing models require the input of highly subjective assumptions including the expected price volatility. The subjective input
assumptions can materially affect the fair value estimate.
On
May 15, 2012, REGI modified the exercise price of 325,000 outstanding common stock options and warrants whereby the exercise price
was reduced to $0.10 per share. REGI calculated the incremental increase in the fair value using the Black-Scholes option pricing
model and determined it to be $5,853. $2,257 was expensed during the year ended April 30, 2013 and the remaining amount will be
expensed over the future vesting periods.
On
May 15, 2012, REGI granted an aggregate of 1,158,000 common stock options for services. The options are exercisable at $0.10 per
share and expire May 15, 2017. These options vest 25% upon grant, 25% 90 days after the first 25% is exercised, 25% 90 days after
the second 25% are exercised and 25% 90 days after the third 25% are exercised. REGI calculated the fair value of the options
using the Black-Scholes option pricing model and determined it to be $194,881. $48,720 was expensed during the year ended April
30, 2013 and the remaining amount will be expensed over the future vesting periods.
On
July 27, 2012, the Company extended the expiration date of 833,950 outstanding common stock warrants with expiration dates between
July 30, 2012 and February 14, 2013 by one year and reduced their exercise price from $1.50 to $0.50. REGI calculated the incremental
increase in the fair value using the Black-Scholes option pricing model and determined it to be $81,322 which was expensed in
full during the year ended April, 30, 2013.
On
April 11, 2013, REGI granted an aggregate of 1,330,000 common stock options for services. The options are exercisable at $0.20
per share and expire April 11, 2018. These options vest 25% upon grant, 25% 90 days after the first 25% is exercised, 25% 90 days
after the second 25% are exercised and 25% 90 days after the third 25% are exercised. REGI calculated the fair value of the options
using the Black-Scholes option pricing model and determined it to be $263,811. $65,953 was expensed during the year ended April
30, 2013 and the remaining amount will be expensed over the future vesting periods.
A
summary of REGI’s stock option activity for the years ended April 30, 2014 and 2013 is as follows:
|
|
|
April 30, 2014
|
|
|
April 30, 2013
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
Outstanding at beginning of
period
|
|
|
|
2,638,000
|
|
|
$
|
0.15
|
|
|
|
250,000
|
|
|
$
|
0.40
|
|
Granted
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,488,000
|
|
|
|
0.15
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(100,000
|
)
|
|
|
0.18
|
|
Forfeited
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at
end of period
|
|
|
|
2,638,000
|
|
|
|
0.15
|
|
|
|
2,638,000
|
|
|
|
0.15
|
|
Exercisable at
end of period
|
|
|
|
659,500
|
|
|
$
|
0.15
|
|
|
|
659,500
|
|
|
$
|
0.15
|
|
Weighted average
fair value of options granted
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
0.18
|
|
At
April 30, 2014, the range of exercise prices and the weighted average remaining contractual life of the outstanding options was
$0.10 to $0.20 per share and 3.38 years, respectively. The intrinsic value of “in the money” exercisable options at
April 30, 2014 was $9,810.
At
April 30, 2013, the range of exercise prices and the weighted average remaining contractual life of the outstanding options was
$0.10 to $0.20 per share and 4.38 years, respectively. The intrinsic value of “in the money” options at April 30,
2013 was $158,005.
On
November 27, 2013, the Company extended the expiration date of 1,816,200 outstanding common stock warrants from December 12, 2013
to December 12, 2014. REGI calculated the incremental increase in the fair value using the Black-Scholes option pricing model
and determined it to be $156,569 which was expensed in year ended April 30, 2014.
On
July 27, 2013, the Company extended the expiration date of 833,950 outstanding common stock warrants with expiration dates between
July 30, 2012 and December 17, 2013 by one year and reduced their exercise price from $0.50 to $0.25. REGI calculated the incremental
increase in the fair value using the Black-Scholes option pricing model and determined it to be $136,321 which was expensed in
the year ended April 30, 2014.
A
summary of REGI’s common stock warrant activity for the years ended April 30, 2014 and 2013 is as follows:
|
|
|
April 30, 2014
|
|
|
April 30, 2013
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
Outstanding at beginning of
period
|
|
|
|
3,730,150
|
|
|
$
|
0.18
|
|
|
|
1,183,950
|
|
|
$
|
0.41
|
|
Issued
|
|
|
|
1,398,666
|
|
|
|
0.22
|
|
|
|
2,746,200
|
|
|
|
0.15
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(100,000
|
)
|
|
|
0.15
|
|
Expired
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(100,000
|
)
|
|
|
0.10
|
|
Outstanding at end of period
|
|
|
|
5,128,816
|
|
|
|
0.18
|
|
|
|
3,730,150
|
|
|
|
0.18
|
|
Exercisable at end of period
|
|
|
|
5,091,316
|
|
|
$
|
0.19
|
|
|
|
3,692,650
|
|
|
$
|
0.18
|
|
At
April 30, 2014, the range of exercise prices and the weighted average remaining contractual life of the outstanding warrants was
$0.10 to $0.25 per share and 0.68 year, respectively. The intrinsic value of “in the money” exercisable warrants at
April 30, 2014 was $375.
At
April 30, 2013, the range of exercise prices and the weighted average remaining contractual life of the outstanding warrants was
$0.15 to $0.25 per share and 1.01 year, respectively. The intrinsic value of “in the money” exercisable warrants at
April 30, 2013 was $783,466.
b)
Performance Stock Plan
REGI
has allotted 2,500,000 shares to be issued pursuant to a performance stock plan adopted on June 27, 1997, and amended in June
2004. On April 27, 2007, REGI further amended the plan so that the term of the plan is extended to the twentieth anniversary of
the effective date. As of April 30, 2014, 775,000 shares have been issued under this plan and 1,725,000 remain unissued and issuable.
c)
Non-Cash Consideration
During
the year ended April 30, 2014, REGI did not issue common shares for services.
During
the year ended April 30, 2013, REGI issued a consultant 52,941 common shares for services valued at $9,000.
d)
Cash Consideration
During
the year ended April 30, 2014, the Company sold an aggregate of 434,333 units in a private placement for cash proceeds of $64,704,
net of issuance costs of $446, at $0.15 per unit. Each unit consists of one common share and two common stock purchase warrants,
with one warrant exercisable at $0.20 per share for one year and one warrant exercisable at $0.25 per share for two years into
the Company’s common stock from the closing date of the private placement. The private placement was closed on October 7,
2013.
During
the year ended April 30, 2014, the Company sold an aggregate of 530,000 units in a private placement for cash proceeds of $53,400,
at $0.10 per unit. Each unit consists of one common share and one common stock purchase warrant exercisable at $0.15 per share
for one year into the Company’s common stock from the closing date of the private placement. The private placement has not
been closed as of the date of this report.
During
the year ended April 30, 2013, REGI sold an aggregate of 2,625,000 units for cash proceeds of $252,563, net of issuance costs
of $9,937. Each unit consists of one common share and one common stock warrant. All warrants are exercisable at $0.15 per share
for one year from their issuance dates.
During
the year ended April 30, 2013 the Company issued 100,000 common shares for gross proceeds of $15,000 for warrants exercised at
$0.15 per share.
NOTE
5. COMMITMENTS
Pursuant
to a letter of understanding dated December 13, 1993 between REGI, Rand and Reg (collectively called the grantors) and West Virginia
University Research Corporation (“WVURC”), the grantors have agreed that WVURC shall own 5% of all patented technology
with regards to RC/DC Engine technology and will receive 5% of all net profits from sales, licenses, royalties or income derived
from the patented technology. To date, no sales have been accrued and no royalties have been accrued or paid.
Pursuant
to an agreement dated August 20, 1992, REGI acquired the U.S. rights to the original RC/DC Engine from Rand. REGI will pay Rand
and the original owner a net profit royalty of 5% and 1%, respectively. To date no sales have been accrued and no royalties have
been accrued or paid.
NOTE
6. INCOME TAXES
REGI
accounts for income taxes using the asset and liability method of accounting for income taxes. Deferred income taxes are recognized
for the tax consequences of “temporary differences” by applying enacted statutory tax rate applicable to future years
to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and result
primarily form differences in methods used to amortize intangible assets. A valuation allowance is provided when management cannot
determine whether it is more likely than not that the deferred tax asset will be realized. The effect on deferred income taxes
of the change in tax rates is recognized in income in the period that includes the enactment date.
REGI
has losses carried forward for income tax purposes to April 30, 2014, however, the related deferred tax asset has been fully reserved
due to management’s determination that the realization of the deferred tax assets is less than likely. The difference between
the statutory tax rate and the effective tax rate is the valuation allowance.
The
composition of REGI’s deferred tax assets at April 30, 2014 and 2013 is as follows:
|
|
April 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
10,487,694
|
|
|
$
|
10,313,036
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
$
|
3,670,693
|
|
|
$
|
3,609,563
|
|
Less: Valuation allowance
|
|
|
(3,670,693
|
)
|
|
|
(3,609,563
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
unused net operating loss carry forward balance will expire in the years 2014 through 2033.
NOTE
7. SUBSEQUENT EVENTS
During
May and June, 2014, the Company sold an aggregate of 135,000 units in a private placement for cash proceeds of $13,500, at $0.10
per unit. Each unit consists of one common share and one common stock purchase warrant exercisable at $0.15 per share for one
year into the Company’s common stock from the closing date of the private placement.
On May 5, 2014, the Company extended the expiration
date of 830,000 outstanding common stock warrants from May 27, 2014 to November 27, 2014. The warrants are exercisable at $0.15
per share.