Notes
to Consolidated Financial Statements
(Unaudited)
NOTE
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The
accompanying unaudited interim consolidated financial statements of REGI U.S., Inc. (“REGI”, the “Company”)
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 the 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 and electronic equipment 2 years. Amortization
of office equipment is included in general and administrative expenses; amortization of research equipment is included in research
and development expense.
NOTE
2. GOING CONCERN
REGI
incurred net losses of $751,017 for the nine months ended January 31, 2017 and has a working capital deficit of $2,042,530 and
an accumulated deficit of $13,701,549 at January 31, 2017. 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 January 31, 2017 and for the
nine 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 January 31, 2017, there
was $1,842,507 due to related parties. As of April 30, 2016, there was $1,916,876 due to related parties.
During
the nine month period ended January 31, 2017, the CEO paid on behalf of the Company $11,827 for the purchase of the office furniture.
During
the nine month period ended January 31, 2017, the Chief Engineer who is also a director of the Company paid on behalf of the Company
$4,848 for the purchase of the research equipment.
During
the nine month period ended January 31, 2017, the Company’s CEO and Chief Engineer agreed to convert $96,152 of payables
due to them into convertible note promissory notes.
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.
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 a common director with the Company. The promissory note bears interest rate of 6% per annum, is unsecured and due on demand.
During the nine months ended January 31, 2017 and 2016, there was no change to the principal amount of the promissory note and
interest expense of $1,080 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 nine months ended January 31, 2017 the Company recorded gain on debt settlement of $666 with a service provider.
NOTE
5. SECURED CONVERTIBLE PROMISSORY NOTES
During
the nine months ended January 31, 2017, the Company issued senior secured convertible promissory notes (the “Convertible
Notes”) for cash proceeds of $312,250. Under the same convertible notes the Company issued convertible notes to settled
accounts payable due to unrelated parties for $38,791 and $96,152 to settle accounts payable due to related party. 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
On
January 6, 2017, the Company’s annual and special meeting of stockholders approved the amendment to the Company’s
articles that increased the authorized common shares from 100,000,000 to 150,000,000.
On
September 16, 2016, the Company entered into an asset purchase agreement with Reg Technologies Inc., a public company whose common
stock was listed on TSX Venture Exchange to purchase all of the assets of Reg Technologies, a company with a common director and
CEO with REGI. An aggregate of 50,929,388 unregistered common shares of our company were issued by January 31, 2017 as consideration
for the asset purchase. The transaction was not closed until February 17, 2017 upon TSX Venture Exchange approval, which was a
condition for the closing.
|
b)
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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%.
On
January 1, 2017, REGI granted an aggregate of 3,500,000 common stock options for services. These options vest upon grant, expire
on January 1, 2022 and are exercisable at the following prices:
Options
|
|
Exercise
price
|
2,500,000
|
|
$
|
0.10
|
|
300,000
|
|
$
|
0.20
|
|
300,000
|
|
$
|
0.35
|
|
300,000
|
|
$
|
0.50
|
|
100,000
|
|
$
|
0.75
|
|
3,500,000
|
|
|
|
|
The
fair value of the options was determined to be $170,268 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 1.93% expected
life (in years) 5.00 expected volatility 214.63% and expected dividend yield 0.0%.
A
summary of REGI’s stock option activity for the nine months ended January 31, 2017 is as follows:
|
|
Nine months ended
January 31, 2017
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
Outstanding at beginning of period
|
|
|
1,938,000
|
|
|
$
|
0.15
|
|
Granted during the period
|
|
|
7,200,000
|
|
|
$
|
0.36
|
|
Outstanding at end of period
|
|
|
9,138,000
|
|
|
$
|
0.31
|
|
Exercisable at end of period
|
|
|
7,684,500
|
|
|
$
|
0.34
|
|
Weighted average fair value of options granted
|
|
|
|
|
|
$
|
0.05
|
|
At
January 31, 2017, 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 January
31, 2017 was $Nil.
A
summary of REGI’s common stock warrant activity for the nine months ended January 31, 2017 is as follows:
|
|
January 31, 2017
|
|
|
|
|
|
|
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
January 31, 2017, the exercise price and the weighted average remaining contractual life of the outstanding warrants was $0.25
per share and 0.35 year, respectively. The intrinsic value of “in the money” exercisable warrants at January 31, 2017
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 January 31, 2017, the Company received cash proceeds of $132,500 for issuance of Convertible Notes.
In
relation to the asset purchase from Reg Technologies, an additional 217,422 common shares of the Company were issued to Reg Technologies
in March, 2017.