The accompanying notes are an integral part
of these unaudited interim consolidated financial statements.
The accompanying notes are an integral part
of these unaudited interim consolidated financial statements.
The accompanying notes are an integral part
of these unaudited interim consolidated financial statements.
Notes to the Unaudited Consolidated Financial
Statements
|
1.
|
Nature
of Operations and Basis of Presentation
|
The principal business
of Discovery Energy, Inc. (the “Company”) is the exploration and development of the 584,651 gross acres (the “Prospect”)
in the State of South Australia covered by Petroleum Exploration License (PEL) 512 (the “License”). The Prospect involves
a 100% working interest in the preceding acreage, which overlies portions of the Cooper and Eromanga basins. The Company has not
presently determined whether the Prospect contains any crude oil and/or natural gas reserves that are economically recoverable.
While the Company’s present focus is on the Prospect, the Company may consider the acquisition of other attractive oil and
gas properties.
In May 2012, the Company
incorporated a wholly-owned Australian subsidiary, Discovery Energy SA Ltd. (the “Subsidiary”) for purposes of acquiring
the License. On May 25, 2016, the Subsidiary changed its status from a public company to a private company (as those forms of
entities are provided under applicable Australian law) and accordingly changed its name to Discovery Energy SA Pty Ltd.
|
2.
|
Summary
of Significant Accounting Policies
|
Basis of Presentation
The accompanying unaudited
consolidated financial statements of 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 (the “SEC”), and should be
read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s February
28, 2017 Annual Report on Form 10-K filed with the SEC. In the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented
have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be
expected for the full year. Notes to the financial statements, which would substantially duplicate the disclosure contained in
the audited financial statements for the most recent fiscal year ended February 28, 2017, as reported on Form 10-K, have been
omitted.
Principles of Consolidation
The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary. Intercompany transactions and balances have
been eliminated upon consolidation.
Reclassifications
Certain reclassifications
have been made to prior period amounts to conform to the current period financial statements presentation.
Use of Estimates
The preparation of financial
statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Net Loss Per Share
Basic Earnings Per Share
(“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 give 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 would be 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.
For the quarter ended
May 31, 2017 and the year ended February 28, 2017, the following share equivalents related to convertible debt and warrants
to purchase shares of common stock were excluded from the computation of diluted net loss per share, as the inclusion of such
shares would be anti-dilutive.
|
|
Quarter Ended
|
|
|
Year Ended
|
|
Common Shares Issuable for:
|
|
May 31, 2017
|
|
|
February 28, 2017
|
|
|
|
|
|
|
|
|
|
|
Convertible debt
|
|
|
35,960,276
|
|
|
|
34,253,931
|
|
Stock warrants
|
|
|
17,625,000
|
|
|
|
17,625,000
|
|
|
|
|
53,585,276
|
|
|
|
51,878,931
|
|
Comprehensive Loss
Financial Accounting Standards
Board (“FASB”) accounting standard for “Reporting Comprehensive Income,” establishes standards for the
reporting and display of comprehensive income (loss) and its components in the financial statements. As of May 31, 2017, the Company
has recognized Currency translation adjustments as a component of comprehensive loss.
Cash and Cash Equivalents
The Company considers
all highly liquid instruments with maturities of three months or less at the time of acquisition to be cash equivalents.
Oil and Gas Property
and Exploration Costs
The Company is in the
exploration stage and has not yet realized any revenue from its planned operations. It is primarily engaged in the ongoing exploration
and development of the Prospect and the extraction of crude oil and/or natural gas located there under. The Company applies the
successful efforts method of accounting for oil and gas properties. Under this method, exploration costs such as exploratory geological
and geophysical costs, delay rentals and exploratory overhead are expensed as incurred. Costs to acquire mineral interests in
crude oil and natural gas properties, drill and equip exploratory wells that find proved reserves, and drill and equip development
wells are capitalized. Acquisition costs of unproved leaseholds are assessed for impairment during the holding period and transferred
to proved oil and gas properties to the extent associated with successful exploration activities. Significant undeveloped leases
are assessed individually for impairment, based on the Company’s current exploration plans, and a valuation allowance is
provided if impairment is indicated. Capitalized costs of producing crude oil and natural gas properties, along with support equipment
and facilities, are amortized to expense by the unit-of-production method based on proved crude oil and natural gas reserves on
a field-by-field basis, as estimated by qualified petroleum engineers.
Long-lived Assets
The carrying value of long-lived
assets is reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. The Company recognizes
impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment
losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value.
Fair Value of Financial
Instruments and Derivative Financial Instruments
The carrying amounts of cash, receivables, accounts payable and accrued liabilities, and shareholder loan approximate their fair
values because of the short maturity of these items. Certain fair values estimates may be subject to and involve uncertainties
and matters of significant judgment, and, therefore, cannot be determined with precision. Changes in assumptions could significantly
affect these estimates. The Company does not hold or issue financial instruments for trading purposes, nor does it utilize derivative
instruments in the management of its foreign exchange, commodity price, or interest rate market risks.
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. The Company 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 loss 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. The Company
provides a valuation allowance for deferred taxes for the estimated future tax effects attributable to temporary differences and
carry-forwards when realization is not more likely than not.
The Company accounts for
uncertain income tax positions by recognizing in the financial statements, the impact of a tax position, if that position
is more likely than not of being sustained on examination by taxation authorities, based on the technical merits of the position.
Foreign Currency Translation
The Company’s functional
and reporting currency is the United States dollar. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Non-monetary assets are translated at historical exchange rates,
and revenue and expense items at the average rate of exchange prevailing during the period. Differences resulting from translation
are presented in equity as Accumulated Other Comprehensive Income. Gains and losses arising on settlement of foreign currency
denominated transactions or balances are included in the determination of income. Foreign currency transactions are primarily
undertaken in Canadian and Australian dollars. The Company has not, to the date of these financial statements, entered into derivative
instruments to offset the impact of foreign currency fluctuations.
Fair Value Considerations
The Company follows ASC
820, “
Fair Value Measurements and Disclosures
,” as amended by Financial Accounting Standards Board (FASB) Financial
Staff Position (FSP) No. 157 and related guidance. Those provisions relate to the Company’s financial assets and liabilities
carried at fair value and the fair value disclosures related to financial assets and liabilities. ASC 820 defines fair value,
expands related disclosure requirements, and specifies a hierarchy of valuation techniques based on the nature of the inputs used
to develop the fair value measures. Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date, assuming the transaction occurs
in the principal or most advantageous market for that asset or liability.
There are three levels
of inputs to fair value measurements - Level 1, meaning the use of quoted prices for identical instruments in active markets;
Level 2, meaning the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar
instruments in markets that are not active or are directly or indirectly observable; and Level 3, meaning the use of unobservable
inputs. The Company uses Level 1 inputs for its fair value measurements whenever there is an active market, with actual quotes,
market prices, and observable inputs on the measurement date. The Company uses Level 2 inputs for fair value measurements whenever
there are quoted prices for similar securities in an active market or quoted prices for identical securities in an inactive market.
The Company uses observable market data whenever available.
Derivative Liabilities
In accordance with ASC
815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities from Equity, the
embedded derivatives associated with the convertible debenture payable and warrant are accounted for as liabilities during the
term of the related note payable and warrant.
Recent Accounting Pronouncements
In accordance with ASU
2014-15, the Company has addressed the going concern issue in the following footnote. The Company dose not expect the adoption
of any other recently issued accounting pronouncements to have a significant effect on its financial statements.
The accompanying unaudited
consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize
its assets and discharge its liabilities in the normal course of business. The Company has not generated revenues since inception
and has never paid dividends and is unlikely to pay dividends or generate earnings in the immediate or foreseeable future. The
continuation of the Company as a going concern is dependent upon the ability of the Company to obtain necessary equity and/or
debt financing to continue operations, the successful development of the Prospect or one or more alternative oil and gas properties,
and the attainment of profitable operations. As of May 31, 2017, the Company has not generated any revenues and has an accumulated
loss of $17,679,011 since inception. These factors raise substantial doubt regarding the Company's ability to continue as a going
concern from the filing date of these financial statements. The accompanying financial statements do not include any adjustments
to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
In May 2016, the
Company secured $3.5 million in funding through a convertible debenture sale. In August 2016, the Company secured an
additional $450,000 in funding by the sale of two additional convertible debentures, one in the original principal amount of
$200,000 acquired by the original purchaser, DEC Funding LLC (the “Original Investor”), of the first $3.5 million
Debenture and one in the original principal amount of $250,000 acquired by Texican Energy, a new purchaser (the “New
Investor”). The New Investor had an obligation to acquire additional debentures (the “Rincon-Related
Debentures”) not to exceed in the aggregate the lesser of $150,000 or those amounts that are paid to Rincon Energy, LLC
pursuant to a geophysical consulting agreement among the Company, the New Purchaser, Rincon Energy, LLC and the
Company’s subsidiary.
In December 2016, two
additional convertible debentures were issued to the New Investor, one in the original principal amount of $150,000 for amounts
paid to Rincon Energy, LLC and one in the original principal amount of $137,500.
In February 2017, an additional
$1 million in funding was secured through the sale of a debenture to the Original Investor.
On March 31, 2017, the
Company sold a Senior Secured Convertible debenture due May 27, 2021 with an original principal amount of $200,000 to the New
Investor. This new Debenture bears an interest rate of 8% per annum and a conversion price of $0.20 per Common Share.
The New Investor also
has the right, but not the obligation, to acquire additional debentures (“Additional Debentures”) through September
30, 2018, provided that a cap is imposed on the aggregate principal amount of Additional Debentures that may be acquired (the
“Principal Cap”). The Principal Cap is initially the difference between $1,250,000 and the aggregate principal amount
of any Rincon-Related Debentures purchased by the New Purchaser. Starting January 1, 2017, the Principal Cap will be reduced further
by the aggregate principal amount of any Additional Debentures acquired or (if greater) specified dollar amounts that increase
over time. The Conversion Price for Additional Debentures issued prior to January 31, 2017 was $0.16 per share, while the Conversion
Price for Additional Debentures issued after that date will be $0.20 per share.
The Original Investor
of the first Debenture has options to purchase additional Debentures having an aggregate original principal amount of up to $20.0
million and featuring an initial conversion price of $0.20 for each Common Share acquired upon conversion. These options may be
exercised in two tranches, each involving $10.0 million of Debentures.
|
4.
|
Oil
and Gas Properties
|
On May 19, 2014, the Company
received notice from the Government of South Australia that it had issued certain modifications to the License and suspended the
License for a period of six months. Such a suspension functions like an extension. Under the amended License, the Company will
be required to drill 7 exploratory wells rather than 12, as originally required. These required wells must be drilled in years
3, 4, and 5 (2, 2, and 3 wells, respectively). The amount of required 2D seismic was also reduced to 100 kilometers (in year 3)
from 250 kilometers (in year 2) but the total 3D seismic work guarantee increased to 500 square kilometers from 400 square kilometers.
However, the 3D seismic survey requirement is spread over years 2, 3 and 4 (100, 200 and 200 sq. km. respectively). Subsequent
to this modification and suspension, the Company received two additional six-month suspensions, one in February 2015 and one in
July 2015, and a one-year suspension in February 2016.
On June 22, 2016, the
Company lifted the February 2016 License suspension in preparation for a 3D seismic survey (the “
Nike 3D Seismic Survey
”)
that was comprised of approximately 179 square kilometers on the southwest portion of the Prospect. After archeological and environmental
reviews of the survey area, fieldwork by the seismic contractor began on July 26, 2016, but had to be halted due to weather conditions
at the beginning of September. Even though only security personnel remained in the survey area, the Nike 3D Seismic Survey was
considered an active project. As a result, License year-2 ran to the 365
th
day on October 5, 2016. The work crew returned
thirteen days later and completed the Nike 3D Seismic Survey on October 30, 2016. The License was suspended again on November
1, 2016. The impact of this sequence of events is that the Company has 339 days to complete the year-3 work set out below, since
the current License suspension expired on May 24, 2017.
In view of the activity,
modifications and suspensions described above, the Company’s remaining work commitments involve the following:
|
*
|
Year 3 ending April 27, 2018 - Acquire
new 2D seismic data totaling at least 100 kilometers, acquire 3D seismic data totaling
at least 200 square kilometers and drill two wells.
|
|
*
|
Year 4 ending April 27, 2019 - Acquire
new 3D seismic data totaling at least 200 square kilometers and drill two wells.
|
|
*
|
Year 5 ending April 27, 2020 - Drill
three wells.
|
|
5.
|
Related
Party Transactions
|
As of May 31, 2017
and February 28, 2017, the Company owed $86,937 and $139,948, respectively, to certain Company directors for reimbursement of expenses paid
on behalf of the Company.
Two promissory notes were
issued on October 26, 2012 to Liberty Petroleum Corporation (“Liberty”) upon delivery of the License with an aggregate
principal amount of $650,000. The original terms of the note were:
|
(i)
|
One
note in the original principal amount of $500,000 was originally due on April 26, 2013.
|
|
(ii)
|
The
other note in the original principal amount of $150,000 was originally due on July 26, 2013.
|
|
(iii)
|
Both
notes accrued interest at a floating rate equal to the one-month term LIBOR rate, plus an additional 3%. No interest was accrued
as of May 31, 2017, and February 28, 2017.
|
These promissory notes
had undergone a number of amendments, including extensions of the due dates. On September 26, 2013, these promissory notes were
combined into a single consolidation promissory note (the “Consolidated Note”) in the original principal amount of
$542,294, as some of the principal had been reduced and some interest had accrued. This note plus all accrued interest were paid
off as of February 28, 2017.
On April 20, 2016, the
Company entered into an unsecured corporate demand note with William E. Begley, a related party, in the amount of $1,800. Repayment
of the note occurred on February 16, 2017.
On May 13, 2016, the Company entered into
an unsecured corporate demand note with Keith Spickelmier, a related party, in the amount of $4,600. Repayment of the note occurred
on December 7, 2016.
|
7.
|
Convertible
Debentures Payable
|
On May 27, 2016, pursuant
to a securities purchase agreement, the Company sold a $3.5 million senior secured convertible debenture
(singly a “
Debenture
” and collectively with any similar securities issued in the future, the “
Debentures
”,
with the Debenture issued on May 27, 2016 being referred to as the “
Initial Debenture
”) to DEC Funding LLC
(the “Original Investor”). The Debenture is due on May 27, 2021 and bears interest at 8% per annum. The use of these
proceeds was limited to the payment of the Company’s and the Original Investor’s costs of the transaction (including
legal fees), the funding of the 3D seismic survey with respect to the Prospect and the interpretation of such seismic survey,
and the payment of expenses associated with the seismic survey. The remainder of these proceeds was used for general and administrative,
expenses with the Original Investor’s consent. The conversion price for the Debentures is $0.16, subject to certain adjustments
that are believed to be customary in transactions of this nature. The Initial Debenture is secured by virtually all of the Company’s
assets owned directly or indirectly but for the License. As discussed elsewhere herein, the Company has sold, and may in the future
sell, additional senior secured convertible debenture having the same terms and security as the Debenture.
Among other provisions,
the Initial Debenture sale transaction included warrants to purchase 13,125,000 shares of the Company’s
common stock (singly a “
Common Share
” and collectively the “
Common Shares
”) at $0.20. These
warrants have a three-year term. Further information regarding the details of this transaction is found in a Form 8-K filed with
the Securities and Exchange Commission on June 3, 2016. The Company incurred legal and professional fees in the amount of $180,000
related to the sale transaction.
The Company also recorded
a debt discount in the amount of $3,320,000 related to the conversion feature associated with this debenture.
The Debentures and the warrants include a
reset provision whereby the investor is entitled to reset the conversion price of the Debentures and the warrants in the event
that the Company issues securities priced below the conversion price of the Debentures and the warrants. The Company has analyzed
the reset provision of the Debentures and the warrants and calculated the fair market value of the ensuing derivative liability,
as discussed in Note 8.
On August 16, 2016, the
Company entered into a first amendment to the agreement that the Company entered into on May 27,
2016 with the Original Investor.
The parties to the
amendment include the Company, the Original Investor and Texican Energy, a new investor (the “
New
Investor
”). In connection with the amendment, the parties to the amendment also entered into related
documentation.
Pursuant to the amendment,
the Company sold the following securities: to the New Investor, a Debenture due May 27, 2021 having an original principal amount
of $250,000, and to the Original Investor, a Debenture due May 27, 2021 having an original principal amount of $200,000 and to
the Original Investor, warrants to purchase up to a maximum of 750,000 common shares (prior to any required adjustment) at an
initial per-share exercise price of $0.20.
In conjunction with the
amendment, the Company recorded debt discount of $449,999, which includes legal costs of $35,699.
Effective December 30,
2016, the Company sold a Debenture due May 27, 2021 having an original principal amount of $287,500. This Debenture was sold to
the New Investor. Of the $287,500 original principal amount this Debenture, $150,000 represents amounts that the New Investor
was obligated to purchase related to amounts paid to Rincon Energy, LLC pursuant to a consulting agreement among it, the New Investor
and the Company.
In conjunction with this issuance, the Company
recorded a debt discount of $228,089.
Effective February 15,
2017, the Company sold two additional Debentures. One of these Debentures with an original principal amount of $1,000,000 was
sold to Original Investor with a due date of May 27, 2021 and bearing interest of 8% per annum. This new Debenture features an
initial conversion price of $0.16 for each Company common share acquired upon conversion. Warrants to purchase up to a maximum
of 3,750,000 Common Shares at $0.20 were also included in this transaction.
In conjunction with the
issuance, the Company recorded debt discount of $1,009,498, which includes legal costs of $9,498.
The second of the two
Debentures was sold to the New Investor with an original purchase amount of $150,000, a due date of May 27, 2021 and
an initial conversion price of $0.16. It also bears interest at a rate of 8% per annum. The purchase price will be remitted
in monthly installments of at least $30,000 beginning February 2017, provided that the New Investor will be deemed to
have satisfied such installments for all amounts that the New Investor pays to Rincon Energy, LLC pursuant to the
supplemental consulting agreement. As of May 31, 2017 no installments had been paid pending the receipt of the Rincon February
invoice by New Investor.
Effective March 31, 2017,
a Debenture with an original principal amount of $200,000 was sold to the New Investor with a due date of May 27, 2021 and bearing
interest at 8% per annum. The debenture features an initial conversion price of $0.20 for each Company common share acquired upon
conversion.
In conjunction with the
issuance, the Company recorded debt discount of $200,000.
With the completion of the fifth round of
Debenture placements, the Company has issued Debentures having an aggregate original principal amount of $5,437,500, and warrants
to purchase 17,625,000 of the Company’s common shares, which would result in proceeds to the Company of $3,525,000 if all
such warrants were exercised.
The Company
recognized $240,836 and $7,667 in debt discount amortization related to all of the debentures during the three months ended
May 31, 2017 and May 31, 2016.
|
8.
|
Derivative
Liabilities
|
The debentures and related
warrants issued by the Company contain a price-reset provision (the “Reset Provision”) that gives rise to a derivative
liability. The Company has measured its derivative liability at fair value and recognized the derivative value as a current liability
and recorded the derivative value on its consolidated balance sheet. The derivative is valued primarily using a binomial latticed-based
model based on unobservable inputs that are supported by little to no market activity. The Level 1 input is the stock price on
the valuation date. The Level 2 inputs are the interest rate and expected volatility. There are no Level 3 inputs. These inputs
represent management’s best estimate of what market participants would use in pricing the liability at the measurement date
and thus are classified as Level 3. Changes in the fair values of the derivative are recognized as earnings or losses in the current
period in other (income) expense on the consolidated statement of operations and other comprehensive loss.
The fair values of derivative liability related
to the Reset Provision contained within the debentures as of February 28, 2017, and as of May 31, 2017, were estimated on the
transaction dates and balance sheet dates under the following assumptions:
|
|
February
28,
2017
|
|
|
Issuances
|
|
|
May
31,
2017
|
|
Shares of common stock issuable
upon exercise of debt
|
|
|
33,880,521
|
|
|
|
2,080,205
|
|
|
|
35,960,726
|
|
Estimated market value of common stock on measurement
date
|
|
$
|
0.25
|
|
|
$
|
0.51
|
|
|
$
|
0.39
|
|
Exercise price
|
|
$
|
0.16
|
|
|
$
|
0.20
|
|
|
$
|
0.16-0.20
|
|
Risk free interest rate
|
|
|
1.73-1.76
|
%
|
|
|
1.61
|
%
|
|
|
1.59-1.61
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
75.46-77.76
|
%
|
|
|
78.60
|
%
|
|
|
78.60-81.11
|
%
|
Expected exercise term in years
|
|
|
4.24
|
|
|
|
4.16
|
|
|
|
3.99
|
|
The fair values of derivative liability related
to the Reset Provision contained within the warrants as of February 28, 2017 and as of May 31, 2017, were estimated on the transaction
dates and balance sheet dates under the following assumptions:
|
|
|
|
|
February 28,
2017
|
|
|
May
31,
2017
|
|
Shares of common stock issuable
upon exercise of warrant
|
|
|
|
|
|
|
17,625,000
|
|
|
|
17,625,000
|
|
Estimated market value of common stock on measurement
date
|
|
|
|
|
|
$
|
0.25
|
|
|
$
|
0.39
|
|
Exercise price
|
|
|
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
Risk free interest rate
|
|
|
|
|
|
|
1.28-1.47
|
%
|
|
|
1.28-1.39
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
|
|
|
|
82.32-86.83
|
%
|
|
|
81.58-91.35
|
%
|
Expected exercise term in years
|
|
|
|
|
|
|
2.24 to 2.96
|
|
|
|
1.99 to 2.71
|
|
The changes in fair values of the derivative
liabilities related to the debentures and warrants for the three months ended May 31, 2017 are summarized as follows:
Fair value of derivative liabilities at February 28, 2017
|
|
$
|
8,221,135
|
|
Fair value of derivative liabilities on issuance date
|
|
|
390,360
|
|
Conversion of derivative liabilities
|
|
|
-
|
|
Change in fair value of derivative liabilities
|
|
|
6,299,288
|
|
Fair value of derivative liabilities at May 31, 2017
|
|
$
|
14,910,783
|
|
The Company recognized a net loss on the change
in fair value of derivative liabilities of $6,299,288 during the three months ended May 31, 2017 and $4,517,081 during the three months ended May 31, 2016.
|
9.
|
Stockholders’ Equity (Deficit)
|
As of both May 31, 2017 and February 28, 2017, the Company had
141,665,396 shares of its common stock issued and outstanding.
Warrants
During the fiscal year
ended February 28, 2017, the Company issued 17,625,000 warrants to purchase shares of the Company’s common stock as a part
of the convertible debentures described above in Note 7. These warrants contain a price-reset provision described above in Note
7.
A summary of the activity
in the Company’s warrants during the three months ended May 31, 2017 is presented below:
|
|
Number of
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at February 28, 2017
|
|
|
17,625,000
|
|
|
$
|
0.20
|
|
Issued
|
|
|
-
|
|
|
$
|
0.00
|
|
Outstanding and exercisable at May 31, 2017
|
|
|
17,625,000
|
|
|
$
|
0.20
|
|
The intrinsic value of
warrants outstanding at May 31, 2017 was $3,348,750.
On July 5, 2017, the Company
issued two Senior Secured Convertible Debentures due May 27, 2021 with original principal amounts of $150,000 and $137,500 to
the New Investor. These new debentures bear an interest rate of 8% per annum and conversion prices of $0.16 and $0.20 per
common share, respectively.