Notes
to Consolidated Financial Statements
(Unaudited)
NOTE
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The
accompanying unaudited interim financial statements of REGI U.S., Inc. (“REGI”) have been prepared in accordance with
accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission,
and should be read in conjunction with the audited financial statements and notes thereto for the year ended April 30, 2016 filed
on Form 10-K with the SEC. In the opinion of management, the accompanying unaudited interim consolidated financial statements
reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position and the
results of operations for the interim period presented herein. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year or for any future period. Notes to the unaudited consolidated financial
statements which would substantially duplicate the disclosures contained in the audited consolidated financial statements for
fiscal 2016 as reported in Form 10-K, have been omitted.
Property,
plant and equipment
Property
and equipment are stated at cost, which includes the acquisition price and any direct costs to bring the asset into use at its
intended location, less accumulated amortization.
Amortization
of property and equipment is calculated using the straight-line method to write off the cost, net of any estimated residual value,
over their estimated useful lives of the assets as follows: Office equipment 5 years. Amortization of office equipment is included
in general and administrative expenses.
NOTE
2. GOING CONCERN
REGI
incurred net losses of $371,562 for the six months ended October 31, 2016 and has a working capital deficit of $2,076,583 and
an accumulated deficit of $13,322,094 at October 31, 2016. 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 unaudited consolidated financial statements as of October 31, 2016 and for the
six months 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 directors and officers
and a former director of REGI and companies controlled or significantly influenced by these parties. As of October 31, 2016, there
was $1,881,716 due to related parties. As of April 30, 2016, there was $1,916,876 due to related parties.
During
the six month period ended October 31, 2015, the former President and CEO of REGI provided consulting services to REGI valued
at $45,000, which were accounted for as donated capital and charged to expense during the period. $Nil was recorded in the six
month period ended October 31, 2016.
During
the six month period ended October 31, 2015, the CFO of REGI provided consulting services to REGI valued at $15,000, which were
accounted for as donated capital and charged to expense during the period. $Nil was recorded in the six month period ended October
31, 2016.
During
the six month period ended October 31, 2016, the the CEO advanced $95,633 to the Company, of which $11,827 was for the purchase
of the office furniture. During the six months ended October 31, 2016 the CEO was repaid $46,000, of which $30,000 was with the
issuance of secured convertible promissory notes.
During
the six month period ended October 31, 2016, the the Chief Engineer who is also a director of the Company advanced $19,094 to
the Company, of which $4,848 was for the purchase of the office equipment. During the six months ended October 31, 2016 the Chief
Engineer was repaid $41,517 for balance owed to him, of which $15,152 was with the issuance of secured convertible promissory
notes.
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 six months ended October 31, 2016 and 2015, there was no change to the principal amount of the promissory note and
interest expense of $720 was recorded each year. The principal balance of the note is included as due to related parties in the
consolidated balance sheets.
NOTE
4. GAIN ON DEBT SETTLEMENT
During
the six months ended October 31, 2016 the Company recorded gain on debt settlement of $666 with a service provider.
NOTE
5. SECURED CONVERTIBLE PROMISSORY NOTES
During
the six months ended October 31, 2016, the Company issued senior secured convertible promissory notes (the “Convertible
Notes”) for total proceeds of $205,152. The Convertible Notes are secured against all assets of the Company, repayable two
years after the issuance, bearing simple interest rate of 10% during the term of the notes and simple interest rate of 20% after
the due date, and convertible at any time on or after ninety days from the issuance date into the Company’s common stocks
at $0.10 per share.
The
Company analyzed the conversion option in the notes for derivative accounting treatment under ASC Topic 815, “Derivatives
and Hedging,” and determined that the instrument does not qualify for derivative accounting.
The
Company therefore performed an analysis to determine if the conversion option was subject to a beneficial conversion feature and
determined that the instrument does not have a beneficial conversion feature.
NOTE
6. STOCKHOLDERS’ EQUITY
a)
Common Stock Options and Warrants
On
August 12, 2016, REGI granted an aggregate of 3,700,000 common stock options for services. These options vest upon grant, expire
on July 20, 2021 and are exercisable at the following prices:
Options
|
|
|
Exercise
price
|
|
900,000
|
|
|
$
|
0.10
|
|
600,000
|
|
|
$
|
0.20
|
|
550,000
|
|
|
$
|
0.35
|
|
450,000
|
|
|
$
|
0.50
|
|
350,000
|
|
|
$
|
0.75
|
|
350,000
|
|
|
$
|
1.00
|
|
250,000
|
|
|
$
|
1.25
|
|
250,000
|
|
|
$
|
1.50
|
|
3,700,000
|
|
|
|
|
|
The
fair value of the options was determined to be $216,088 using the Black-Scholes option pricing model, which requires management
to make estimates that are subjective and may not be representative of the actual results. Changes in assumptions can materially
affect estimates of fair value. The following assumptions were used for the calculation: risk free interest rate 1.16% expected
life (in years) 4.94 expected volatility 228.65% and expected dividend yield 0.0%.
A
summary of REGI’s stock option activity for the six months ended October 31, 2016 is as follows:
|
|
Six
months ended October 31, 2016
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
Outstanding at beginning of period
|
|
|
1,938,000
|
|
|
$
|
0.15
|
|
Granted during
the period
|
|
|
3,700,000
|
|
|
$
|
0.52
|
|
Outstanding at end of period
|
|
|
5,638,000
|
|
|
$
|
0.39
|
|
Exercisable at end of period
|
|
|
4,184,500
|
|
|
$
|
0.48
|
|
Weighted average fair value of
options granted
|
|
|
|
|
|
$
|
0.06
|
|
At
October 31, 2016, the Company had $266,707 of total unrecognized compensation cost related to non-vested stock options and warrants,
which will be recognized over future periods. The intrinsic value of “in the money” exercisable options at October
31, 2016 was $Nil.
A
summary of REGI’s common stock warrant activity for the six months ended October 31, 2016 is as follows:
|
|
October
31, 2016
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
Outstanding
at beginning of period
|
|
|
200,000
|
|
|
$
|
0.25
|
|
Outstanding
at end of period
|
|
|
200,000
|
|
|
|
0.25
|
|
Exercisable
at end of period
|
|
|
200,000
|
|
|
$
|
0.25
|
|
At
October 31, 2016, the exercise price and the weighted average remaining contractual life of the outstanding warrants was $0.25
per share and 0.60 year, respectively. The intrinsic value of “in the money” exercisable warrants at October 31, 2016
was $Nil.
NOTE
7. 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
8. SUBSEQUENT EVENTS
Subsequent
to October 31, 2016, the Company issued Convertible Notes for total proceeds of $38,000.
On
September 16, 2016, the Company entered into an asset purchase agreement with Reg Technologies Inc. to purchase all of the assets
of Reg Technologies, a company with a common director and the CEO. The consideration for the purchase was an aggregate of 50,929,388
unregistered common shares of our company, which were issued in December, 2016 after Reg Technologies obtained shareholder approval
by special resolution at a special meeting of the shareholders on November 18, 2016,. The transaction is subject to TSX Venture
Exchange approval.