Notes
to the Unaudited Consolidated Financial Statements
1.
Nature of Operations
The
principal business of Discovery Energy Corp. (“Company”) is the exploration and development of the 584,651 gross acres (914
sq. miles) in South Australia (“Prospect”) covered by Petroleum Exploration License PEL 512 (“License”). In May
2012, the Company incorporated a wholly-owned Australian subsidiary, Discovery Energy SA Ltd., for the purpose of acquiring a 100% working
interest in the License. On May 25, 2016, its status changed from a public to a private legal entity and its name changed to Discovery
Energy SA Pty Ltd. (“Subsidiary”). To date, the Company has not determined whether or not the Prospect, which overlies portions
of the Cooper and Eromanga basins, contains any crude oil and/or natural gas reserves that are economically recoverable. While the Company’s
present focus is on the Prospect, it may consider pursuing other attractive crude oil and/or natural gas exploration opportunities.
2.
Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying audited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted
accounting principles in the United States of America (“GAAP”) and the rules of the U.S. Securities and Exchange Commission
(“SEC”).
Principles
of Consolidation
These
consolidated financial statements include the accounts of the Company and the Subsidiary. Inter-company transactions and balances have
been eliminated upon consolidation.
Use
of Estimates
The
preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of these financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments with a maturity of three months or less at the time of acquisition to be cash equivalents.
The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits as guaranteed by the Federal Deposit
Insurance Corporation. As of August 31, 2021, approximately $1,100 of the Company’s cash balances were uninsured, related to the
Company’s Australian subsidiary. The Company has not experienced any losses on such accounts.
Oil
and Gas Property and Exploration Costs
The
Company is in the exploration stage of evaluating the Prospect and has not yet realized any revenues from its operations. It applies
the successful efforts method of accounting for crude oil and natural 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/or 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 proven crude oil and/or natural 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 from successful exploration and development activities associated with producing
crude oil and/or natural gas leases, along with capitalized costs for support equipment and facilities, are amortized to expense using
the unit-of-production method based on proved crude oil and/or natural gas reserves on a field-by-field basis, as estimated by qualified
petroleum engineers.
Long-lived
Assets
The
carrying values of long-lived assets are 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.
Income
Taxes
Deferred
income taxes are reported for timing differences between items of income or expense reported in these 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 statements 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.
The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position
for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be
sustained on audit, including resolution of related appeals or litigation processes, if any. Once it is determined that the position
meets the recognition threshold, the second step requires us to estimate and measure the largest amount of tax benefit that is more likely
than not to be realized upon ultimate settlement. The difference between the amount of recognizable tax benefit and the total amount
of tax benefit from positions filed or to be filed with the tax authorities is recorded as a liability for uncertain tax benefits. It
is inherently difficult and subjective to estimate such amounts, as the Company has to determine the probability of various possible
outcomes. The Company reevaluates uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not
limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Such
a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision.
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 exchange rates prevailing at the balance sheet date. Non-monetary assets are translated at historical
exchange rates, and revenue and expense items at average rates of exchange prevailing during the period. Differences resulting from translation
are presented in equity as accumulated other comprehensive income (loss). 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
Historically,
the Company followed Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,”
as amended by FASB Financial Staff Position (“FSP”) No. 157 and related guidance. These 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.
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 derivative associated with the convertible note payable and warrant were accounted for
as liabilities during the term of the related note payable and warrant as of February 28, 2018.
In
July 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-11, Earnings Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments
with Down Round Features. These amendments simplify the accounting for certain financial instruments with down round features. The
amendments require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for
purposes of determining liability or equity classification. The standard was adopted as of March 1, 2018.
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 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 to determine the number of shares assumed to be purchased from
the exercise of stock options and/or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
For
the three and six months ended August 31, 2021 and 2020, 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.
Schedule
of Antidilutive Securities Excluded from Computation of Earnings Per Share
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
Six Months
Ended
|
|
|
Six Months
Ended
|
|
Common Shares Issuable for:
|
|
August 31, 2021
|
|
|
August 31, 2020
|
|
|
August 31, 2021
|
|
|
August 31, 2020
|
|
Convertible debt
|
|
|
61,039,844
|
|
|
|
56,391,400
|
|
|
|
61,039,844
|
|
|
|
56,391,400
|
|
Stock warrants
|
|
|
27,877,058
|
|
|
|
19,125,000
|
|
|
|
27,877,058
|
|
|
|
19,125,000
|
|
Common shares excluded
from computation of diluted net loss per share
|
|
|
88,916,902
|
|
|
|
75,516,400
|
|
|
|
88,916,902
|
|
|
|
75,516,400
|
|
Comprehensive
Income (Loss)
The
Company recognizes currency translation adjustments as a component of comprehensive income (loss).
Recent
Accounting Pronouncements
In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 is
intended to simplify accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and amends existing
guidance to improve consistent application.
In August 5, 2020, the
FASB issued ASU 2020-06. ASU 2020-06 is intended to simplify accounting for certain financial instruments with characteristics of
liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU 2020-06 is effective
for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years. The Company is currently
evaluating and assessing the impact this guidance will have on its consolidated financial statements.
The
Company does not anticipate that the adoption of other recently issued accounting pronouncements will have a significant impact on its
financial statements.
3.
Going Concern
These
financial statements were prepared on a going concern basis, which implies that 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 is unlikely to 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 or debt financing to continue operations, successfully develop the Prospect and/or obtain producing
properties, with a goal of attaining profitable operations. The Company is currently attempting to complete a significant financing,
and in this connection might (a) place a significant amount of additional debentures similar to those described below, (b) secure an
alternative financing arrangement, possibly involving the Company’s equity securities, or (c) some combination of (a) and (b).
The Company has no assurance that it will be able to raise significant additional funds to develop the Prospect or the additional funds
needed for general corporate purposes.
As
of August 31, 2021, the Company had not generated any revenues and had an accumulated deficit of $32,778,321
since inception. As of August 31, 2021, the cash
balance of the Company was $8,155 and
had negative working capital of $5,459,117.
These factors raise substantial doubt regarding the Company’s
ability to continue as a going concern for the 12 months following the issuance of these financial statements. These financial statements
do not include any adjustments related 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.
The
current COVID-19 pandemic could continue to, and future similar epidemics or pandemics could also, materially and adversely impact our
ability to finance and conduct the Company’s business once it becomes operational and could materially and adversely impact its
operations, funding, and/or financial performance. The COVID-19 pandemic has had no material impact on the Company’s current business
activities which are primarily focused on compliance and fund raising tasks. The Company has had and continues to have the same staff,
same service providers and same processes as was the case prior to the pandemic.
4.
Oil and Gas Properties
The
License covers 584,651 gross acres (914 sq. miles) in the State of South Australia. The License grants a 100% working interest in the
Prospect, which overlies portions of the Cooper and Eromanga basins.
On
October 26, 2012, a 100% interest in the License was officially issued to the Subsidiary.
On
May 19, 2014, the Company received notice from the Government of South Australia that it had issued certain modifications to the License
and had suspended the License for a period of six months. Such a suspension functions like an extension. Under the amended License, the
Company is required to drill 7 exploratory wells rather than 12, as originally required. The 7 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 62 miles (100 km.) in year 3 from
155 miles (250 km.) in year 2 but the total 3D seismic work guarantee increased to 193 sq. miles (500 sq. km.) from 154 sq. miles (400
sq. km.). However, the 3D seismic survey requirement is spread over three years with 39 sq. miles (100 sq. km.) in year 2, 77 sq. miles
(200 sq. km.) in year 3 and 77 sq. miles (200 sq. km.) in year 4. Subsequent to this modification and suspension, the Company received
two additional six-month suspensions, one in February 2015 and one in July 2015 (this additional suspension commenced upon the conclusion
of the suspension received in February 2015). In February 2016, the Company received a third additional suspension, which was for one
year and which commenced upon the conclusion of the suspension received in July 2015. Combined, these three additional suspensions amount
to an accumulated total suspension of two years.
On
June 22, 2016, the Company terminated the February 2016 License suspension in preparation for a 3D seismic survey (the “Nike Survey”)
that was comprised of approximately 69 sq. miles (179 sq. km.) on the southwest portion of the Prospect. After archaeological and environmental
reviews of the survey area, fieldwork by the seismic contractor began on July 26, 2016. The Nike Survey and field work were completed
on October 30, 2016 and the License was suspended again on November 1, 2016.
In
July 2017, the License suspension was lifted in order to conduct a Work Area Clearance Survey (“WAC”) of several potential
drill sites located in the southern portion of the License. After completing the Nike Survey, the Company requested and received five additional six-month suspensions in each of July 2017, June 2018, February 2019, July 2019 and January 2020, a twelve-month suspension in August 2020 and an additional six-month suspension in August 2021, resulting in a new
expiration date of April 28, 2024.
As
a result of the activities, modifications and suspensions described above, the remaining work commitments are now as follows:
|
*
|
Year
3 ending April 28, 2022 - Shoot 2D seismic data totaling at least approximately 62 miles (100 km.) and shoot 3D seismic data totaling
at a minimum approximately 77 sq. miles (200 sq. km.) and drill two wells.
|
|
|
|
|
*
|
Year
4 ending April 29, 2023 - Shoot 3D seismic data totaling a minimum of approximately 77 sq. miles (200 sq. km.) and drill two wells.
|
|
|
|
|
*
|
Year
5 ending April 28, 2024 - Drill three wells.
|
In
four transactions, the Company acquired portions of the royalty interest associated with the PEL 512 License so that the Company now
owns an aggregate 5.0% royalty interest, while the previous holders of the original 7.0% royalty interest continue to hold a 2.0% royalty
interest. While the Company has to date been successful in obtaining such extensions, it has no assurance that any further extensions
will be obtained.
5.
Related Party Transactions
As
of August 31, 2021 and February 28, 2021, the Company owed $1,636,865 and $1,273,030, respectively, to certain Company directors for
accrued compensation and reimbursement of expenses paid on behalf of the Company.
6.
Notes Payable
In
connection with the Paycheck Protection Program established by the Coronavirus Aid, Relief, and Economic Security Act, on April 27, 2020
and March 3, 2021 the Company borrowed $118,750
and $120,000,
respectively, at an annual interest rate of 1
percent. The loans dated April 27, 2020 and March
3, 2021 mature on April
27, 2022 and March
3, 2026, respectively. Accrued interest for the
three months and six months ended August 31, 2021 is $505
and $1,097,
respectively. Accrued interest for the three months and six months ended August 31, 2020 was $299
and $413,
respectively. On July 28, 2021, the principal amount of $100,448
and accrued interest of $1,275
were forgiven for the loan dated April 27, 2020.
The Company recognized a gain on forgiveness of PPP loan of $101,723
on the statement of operations as a result.
The remaining principle of that loan of $18,302,
plus interest, will be paid $2,068 per month until the balance reaches zero. The
final payment will be on May 27, 2022.
7.
Convertible Debentures Payable
From
May 27, 2016 through May 16, 2018, the Company issued eleven rounds (I thru XI) of senior secured convertible debentures, the proceeds
of which have funded the initial Nike Survey with respect to the Prospect, the interpretation of seismic data acquired, expenses associated
with the Nike Survey, costs associated with the debenture issuances, and general and administrative expenses. The debentures are secured
by virtually all of the Company’s assets owned, directly or indirectly, but for the License. As discussed elsewhere, the Company
may in the future sell additional senior secured convertible debentures having the same terms as those currently outstanding. The Maturity
Date of the Debentures was extended to December 31, 2023. Due to the extension, a debt modification was determined and the amortization
of discount was recorded accordingly to the new Maturity Date of December 31, 2023. Table below provides a summary of the senior secured
convertible debentures issued through August 31, 2021 and related debt discount and amortization details.
Schedule of Convertible Debentures Payable
Round
|
|
Issue
Date
|
|
|
Maturity
Date
|
|
|
Interest
Rate
|
|
|
Conversion
Price
|
|
|
Principal
Amount
|
|
|
Debt
Discount
|
|
|
Debentures,
net of Debt
Discount
|
|
Outstanding as of February 29, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
I
|
|
|
May 27, 2016
|
|
|
|
December 31, 2023
|
|
|
|
8
|
%
|
|
$
|
0.16
|
|
|
$
|
3,500,000
|
|
|
$
|
3,500,000
|
|
|
|
|
|
II
|
|
|
Aug 16, 2016
|
|
|
|
December 31, 2023
|
|
|
|
8
|
%
|
|
$
|
0.16
|
|
|
|
200,000
|
|
|
|
199,999
|
|
|
|
|
|
|
|
|
Aug 16, 2016
|
|
|
|
December 31, 2023
|
|
|
|
8
|
%
|
|
$
|
0.16
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
III
|
|
|
Dec 30, 2016
|
|
|
|
December 31, 2023
|
|
|
|
8
|
%
|
|
$
|
0.16
|
|
|
|
287,500
|
|
|
|
237,587
|
|
|
|
|
|
IV
|
|
|
Feb 15, 2017
|
|
|
|
December 31, 2023
|
|
|
|
8
|
%
|
|
$
|
0.16
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
V
|
|
|
Mar 31,2017
|
|
|
|
December 31, 2023
|
|
|
|
8
|
%
|
|
$
|
0.20
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
|
|
VI
|
|
|
Jul 5, 2017
|
|
|
|
December 31, 2023
|
|
|
|
8
|
%
|
|
$
|
0.20
|
|
|
|
137,500
|
|
|
|
137,500
|
|
|
|
|
|
|
|
|
Jul 5, 2017
|
|
|
|
December 31, 2023
|
|
|
|
8
|
%
|
|
$
|
0.16
|
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
|
|
VII
|
|
|
Sept 19, 2017
|
|
|
|
December 31, 2023
|
|
|
|
8
|
%
|
|
$
|
0.16
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
Sept 19, 2017
|
|
|
|
December 31, 2023
|
|
|
|
8
|
%
|
|
$
|
0.16
|
|
|
|
100,000
|
|
|
|
82,125
|
|
|
|
|
|
VIII
|
|
|
Oct 10, 2017
|
|
|
|
December 31, 2023
|
|
|
|
8
|
%
|
|
$
|
0.20
|
|
|
|
137,500
|
|
|
|
72,806
|
|
|
|
|
|
IX
|
|
|
Jan 3, 2018
|
|
|
|
December 31, 2023
|
|
|
|
8
|
%
|
|
$
|
0.20
|
|
|
|
137,500
|
|
|
|
137,500
|
|
|
|
|
|
X
|
|
|
April 2, 2018
|
|
|
|
December 31, 2023
|
|
|
|
8
|
%
|
|
$
|
0.20
|
|
|
|
137,500
|
|
|
|
137,500
|
|
|
|
|
|
XI
|
|
|
May 16, 2018
|
|
|
|
December 31, 2023
|
|
|
|
8
|
%
|
|
$
|
0.20
|
|
|
|
212,500
|
|
|
|
212,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt discount from warrant grant from debt modification
|
|
942,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
discount as of February 28, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,204,925
|
)
|
|
|
|
|
Balance as of February 28, 2021
|
|
|
|
|
|
|
|
|
6,850,000
|
|
|
|
1,455,404
|
|
|
$
|
5,394,596
|
|
Activity for the six months ended August 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of discount for the six months
ended August 31, 2021
|
|
|
|
|
|
(215,985
|
)
|
|
|
|
|
Balance as of August 31, 2021
|
|
|
|
|
$
|
6,850,000
|
|
|
$
|
1,239,419
|
|
|
$
|
5,610,581
|
|
The
Company recognized $110,065
and $418,790
of debt discount amortization during the three
months ended August 31, 2021 and 2020, respectively. The Company recognized $215,985
and $829,075
of debt discount amortization during the six
months ended August 31, 2021 and 2020, respectively. During the three months ended August 31, 2021 and 2020, the Company incurred interest
expense directly related to the Convertible Debentures of $198,201
and $183,108,
respectively, at a rate of 8%
per year, compounded quarterly. During the six months ended August 31, 2021 and 2020, the Company incurred interest expense directly
related to the Convertible Debentures of $392,497
and $362,595,
respectively, at a rate of 8%
per year, compounded quarterly.
8.
Commitments and Contingencies
Office
Lease
The
Company leases virtual office space in Houston, Texas, on a month-to-month basis for $193
per month. The Subsidiary leases virtual office
space in Melbourne, Australia, on a month-to-month basis for AU$175.
The Company’s server is located in the personal office of Keith McKenzie, an officer and director of the Company. The office space
is leased on a month-to-month basis for CA$500.
During
the three months ended August 31, 2021 and August 31, 2020, the Company incurred office lease expense of $2,257 and $2,234, respectively.
During the six months ended August 31, 2021 and August 31, 2020, the Company incurred office lease expense of $4,485 and $4,234, respectively.
9.
Shareholders’ Deficit
The
Company received gross proceeds of $100,000 from the private placement of 500,000 shares of common stock during the six months ended
August 31, 2020 at a price of $0.20 per common share.
Warrants
Pursuant
to debenture agreements dated May 27, 2016 and August 16, 2016, warrants to purchase 13,875,000 shares of the Company’s common
stock had an original expiration date of May 27, 2019. On May 27, 2019, the Company entered into agreements to extend the related expiration
dates to July 27, 2019. As a result of the modification, the Company recorded additional expense of approximately $365,000 for the incremental
fair value of the warrants, calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing
model include: (1) risk free interest rate of 2.35% based on the applicable US Treasury bill rate, (2) expected life of 2 months, (3)
expected volatility of 80% based on the trading history of the Company, and (4) zero expected dividends. On July 27, 2019, the Company
entered into agreements to further extend the related expiration dates to December 31, 2019. As a result of this extension, the Company
recorded additional expense of approximately $371,000 for the incremental fair value of the warrants, calculated using the Black-Scholes
option-pricing model. Variables used in the Black-Scholes option-pricing model include: (1) risk free interest rate of 2.1% based on
the applicable US Treasury bill rate, (2) expected life of 5 months, (3) expected volatility of 80% based on the trading history of the
Company, and (4) zero expected dividends. On December 31, 2019, the Company entered into agreements to further extend the related expiration
dates to February 29, 2020. As a result of the modification, the Company recorded additional expense of approximately $26,000 for the
incremental fair value of the warrants, calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes
option-pricing model include: (1) risk free interest rate of 1.48% based on the applicable US Treasury bill rate, (2) expected life of
2 months, (3) expected volatility of 80% based on the trading history of the Company, and (4) zero expected dividends. On February 29,
2020, the Company entered into agreements to further extend the related expiration dates to August 31, 2020. As a result of this extension,
the Company recorded additional expense of approximately $340,000 for the incremental fair value of the warrants, calculated using the
Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model include: (1) risk free interest rate of
1.11% based on the applicable US Treasury bill rate, (2) expected life of 6 months, (3) expected volatility of 100% based on the trading
history of the Company, and (4) zero expected dividends. The expense related to these modifications was included in general and administrative
expense on the statement of operations. On August 31, 2020 the Company entered into agreements to further extend the related expiration
dates to February 28, 2021. As a result of this extension, the Company recorded additional expense of approximately $559,000 for the
incremental fair value of the warrants, calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes
option-pricing model include: (1) risk free interest rate of 0.105% based on the applicable US Treasury bill rate, (2) expected life
of 6 months, (3) expected volatility of 76% based on the trading history of the Company, and (4) zero expected dividends. The expense
related to these modifications was included in general and administrative expense on the statement of operations.
Pursuant
to debenture agreements dated February 15, 2017, warrants to purchase 3,750,000 shares of the Company’s common stock had an original
expiration date of February 15, 2020. On February 15, 2020, the Company entered into agreements to extend the related expiration dates
to August 31, 2020. As a result of this extension, the Company recorded additional expense of approximately $82,000 for the incremental
fair value of the warrants, calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing
model include: (1) risk free interest rate of 1.55% based on the applicable US Treasury bill rate, (2) expected life of 6.5 months, (3)
expected volatility of 101% based on the trading history of the Company, and (4) zero expected dividends. The expense related to these
modifications was included in general and administrative expense on the statement of operations. On August 31, 2020, the Company entered
into agreements to further extend the related expiration dates to February 28, 2021. As a result of this extension, the Company recorded
additional expense of approximately $151,000 for the incremental fair value of the warrants, calculated using the Black-Scholes option-pricing
model. Variables used in the Black-Scholes option-pricing model include: (1) risk free interest rate of 0.105% based on the applicable
US Treasury bill rate, (2) expected life of 6 months, (3) expected volatility of 76% based on the trading history of the Company, and
(4) zero expected dividends. The expense related to these modifications was included in general and administrative expense on the statement
of operations.
Pursuant
to a debenture agreement dated September 19, 2017, warrants to purchase 1,500,000 shares of the Company’s common stock had an original
expiration date of September 19, 2020. On August 31, 2020, the Company entered into an agreement to extend the related expiration date
to February 28, 2021. As a result of this extension, the Company recorded additional expense of approximately $60,000 for the incremental
fair value of the warrants, calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing
model include: (1) risk free interest rate of 0.105% based on the applicable US Treasury bill rate, (2) expected life of 6 months, (3)
expected volatility of 76% based on the trading history of the Company, and (4) zero expected dividends. The expense related to this
modification was included in general and administrative expense on the statement of operations.
Pursuant
to debenture agreements dated May 27, 2016, August 16, 2016, February 10, 2017, and September 19, 2017, warrants to purchase 19,125,000
shares of the Company’s common stock had an expiration date of May 27, 2021. On February 4, 2021, the Company entered into an agreement
to extend the related expiration date to December 31, 2023. As a result of this extension, the Company recorded additional expense of
approximately $1,940,278 for the incremental fair value of the warrants, calculated using the Black-Scholes option-pricing model. Variables
used in the Black-Scholes option-pricing model include: (1) risk free interest rate of 0.17% based on the applicable US Treasury bill
rate, (2) expected life of 35 months, (3) expected volatility of 152% based on the trading history of the Company, and (4) zero expected
dividends. The expense related to this modification was included in general and administrative expense on the statement of operations.
On
February 4, 2021, the Termination Date of the then outstanding Warrants was also extended to December 31, 2023. In connection with this
extension, the Company agreed to issue to the Original Purchaser 8,752,058 additional common shares at an initial per-share exercise
price of $0.20, subject to adjustment upon the occurrence of certain customary events. The additional warrants were issued on May 28,
2021, and have an expiration date of December 31, 2023. As a result of this agreement, the Company capitalized as debt discount $942,812
for the incremental fair value of the warrants, calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes
option-pricing model include: (1) risk free interest rate of 0.17% based on the applicable US Treasury bill rate, (2) expected life of
35 months, (3) expected volatility of 152% based on the trading history of the Company, and (4) zero expected dividends.
No
expense was recorded by the Company for the incremental fair value of the warrants due to the early adoption of ASU 2017-11 as noted
in Footnote 2.
Warrant
activity during the six months ended August 31, 2021 is as follows:
Summary of Warrant Activity
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Weighted
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Average
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Weighted
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Remaining
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Number of
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Average
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Term
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Warrants
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Exercise Price
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(Years)
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Outstanding at February 28, 2021
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27,877,058
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$
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0.20
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2.84
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Expired/Cancelled
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-
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-
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Outstanding and exercisable as of August 31, 2021
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27,877,058
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$
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0.20
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2.29
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The
intrinsic value of warrants outstanding at August 31, 2021 and 2020 were $-0-.