NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JULY
31, 2019
1)
NATURE OF OPERATIONS
REGI
U.S., Inc. (“we”, “our”, the “Company”, “REGI”) has been engaged in the business
of developing and building improved axial vane-type rotary devices for civilian, commercial and government applications with the
marketing and intellectual rights in the U.S. Effective February 17, 2017 REGI purchased the worldwide marketing and intellectual
rights, other than in the U.S., from Reg Technologies, Inc. (“Reg Tech”), a British Columbia company.
REGI
formed a wholly owned subsidiary, Rad Max Technologies, Inc., on April 10, 2007 in the State of Washington.
2)
SIGNFICANT ACCOUNTING POLICIES
Basis
of Presentation
This
summary of significant accounting policies is presented to assist in understanding the financial statements. The financial statements
and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These
financial statements and related notes are presented in accordance with accounting principles generally accepted in the United
States.
Principles
of consolidation
These
financial statements include the accounts of the Company, its wholly owned subsidiary RadMax Technologies, Inc., and its previously
wholly owned subsidiary Rand Energy Group Inc. (“Rand”).
All
significant inter-company balances and transactions have been eliminated upon consolidation.
Investment
in associates
Investments
in which the Company has the ability to exert significant influence but does not have control are accounted for using the equity
method whereby the original cost of the investment is adjusted annually for the Company’s share of earnings, losses and
dividends during the current year.
The
Company entered into a Mutual Accord and Purchase Agreement on March 7, 2018, to sell all of its interest in Minewest Silver &
Gold Inc. (“Minewest”), a British Columbia company, in exchange for settlement of its outstanding debt of $7,217 to
Minewest. The Company completed the final transfer of mining rights and Claim titles to Minewest on August 13, 2018.
Risks
and uncertainties
The
Company operates in an emerging industry that is subject to market acceptance and technological change. The Company’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
For
the purposes of the statement of cash flows, the Company considers all highly liquid investments with original maturities of three
months or less when acquired to be cash equivalents.
Revenue
Recognition
The
Company accounts for revenue in accordance with Accounting Standards Codification (ASC) Topic 606: Revenue from Contracts with
Customers. Revenue is recognized using the following five-step model: (i) identification of the promised goods in the contract;
(ii) determination of whether the promised goods are performance obligations, including whether they are distinct in the context
of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation
of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each
performance obligation. The Company applies this model when it is probable that the Company will collect the consideration it
is entitled to in exchange for the goods or services it transfers to the customer.
REGI,
U.S., INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JULY
31, 2019
Under
Topic 606, a performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer.
The Company’s contracts with customers typically contain a single performance obligation. A contract’s transaction
price is recognized as revenue when, or as, the performance obligation is satisfied.
The
Company considers the contractual consideration payable by the customer when determining the transaction price of each contract.
Revenue is recorded net of charges for certain sales incentives and discounts, and applicable state and local sales taxes, which
represent components of the transaction price. Charges are estimated upon shipment of the product based on contractual terms,
and actual charges typically do not vary materially from our estimates. Shipping estimates are determined by utilizing shipping
costs provided by the various service providers websites based on number of packages, weight and destination. Shipping costs are
included in the cost of goods sold as the revenue is captured in total sales.
The
Company receives payments from customers based on the terms established in the Company’s contracts. When amounts are billed
and collected before a performance obligation has been satisfied, they are included in deferred revenue.
Performance
obligations for product sales are satisfied as of a point in time. Revenue is recognized when control of the product transfers
to the customer, generally upon product shipment. Performance obligations for site support and engineering services are satisfied
over-time if the customer receives the benefits as we perform work and we have a contractual right to payment. Revenue recognized
on an over-time basis is based on costs incurred to date relative to milestones and total estimated costs at completion to measure
progress.
The
Company product revenue includes compressors and expanders. The Company also provides direct site support and engineering services
to customers, such as repair and upgrade of its products. During the year ended April 30, 2019, the Company’s revenue was
$60,000 from sale of prototypes.
During
the three months ended July 31, 2019, revenue was earned from a single contract with one customer. As of July 31, 2019, the Company
had a deferred revenue balance of $12,500 from this customer related to deliverables in progress at that date.
Furniture
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.
Depreciation
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 3 years.
Fair
value of financial instruments
The
carrying values of cash and cash equivalents, amounts due to related parties and accounts payable approximate their fair values
because of the short-term maturity of these financial instruments.
Fair
value measurements
ASC
Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments
held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures.
REGI,
U.S., INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JULY
31, 2019
When
required to measure assets or liabilities at fair value, the Company uses a fair value hierarchy based on the level of independent,
objective evidence surrounding the inputs used. The Company determines the level within the fair value hierarchy in which the
fair value measurements in their entirety fall. The categorization within the fair value hierarchy is based upon the lowest level
of input that is significant to the fair value measurement.
Level
1 uses quoted prices in active markets for identical assets or liabilities, Level 2 uses significant other observable inputs,
and Level 3 uses significant unobservable inputs. The amount of the total gains or losses for the period are included in earnings
that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting
date.
Derivative
instruments
The
Company has financing arrangements that contain freestanding derivative instruments or hybrid instruments that contained embedded
derivative features. In accordance with U.S. GAAP, derivative instruments and hybrid instruments are recognized as either assets
or liabilities in the Company’s balance sheet and are measured at fair value with gains or losses recognized in earnings
depending on the nature of the derivative or hybrid instruments. Embedded derivatives that are not clearly and closely related
to the host contract are bifurcated and recognized at fair value with changes in fair value recognized as either a gain or loss
in earnings if they can be reliably measured. When the fair value of embedded derivative features cannot be reliably measured,
the Company measures and reports the entire hybrid instrument at fair value with changes in fair value recognized as either a
gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available
market data using a Binomial model, giving consideration to all of the rights and obligations of each instrument and precluding
the use of “blockage” discounts or premiums in determining the fair value of a large block of financial instruments.
Fair value under these conditions does not necessarily represent fair value determined using valuation standards that give consideration
to blockage discounts and other factors that may be considered by market participants in establishing fair value.
Interest
Rate Risk
The
Company is not exposed to significant interest rate risk due to the short-term maturity of its monetary assets and liabilities.
Credit
Risk
The
Company’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
The
Company’s functional currency is the US dollar and the reporting currency is the US 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 US dollars. The Company has not, to
the date of these consolidated financial statements, entered into derivative instruments to offset the impact of foreign currency
fluctuations.
For
reporting purposes assets and liabilities with Canadian dollar as functional currency are translated into US dollar at the period
end rates of exchange, and the results of the operations are translated at average rates of exchange for the period. The resulting
translation adjustments are included the Company’s consolidated statements of operations and comprehensive loss. and stated
in US dollars.
Income
taxes
Deferred
income taxes are reported for timing differences between items of income or expense reported in the consolidated financial statements
and those reported for income tax purposes in accordance with ASC 740, “Income Taxes”, which requires the use of 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 assets and liabilities and their
respective tax bases, and for tax losses and credit carryforwards. 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 for deferred taxes for the estimated future tax effects attributable to temporary differences and
carry-forwards when realization is more likely than not.
REGI,
U.S., INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JULY
31, 2019
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 debt 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
The
Company 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, measurement of
the value of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of
the award. Non-employee stock-based compensation is granted at the Board of Director’s discretion to award select consultants
for exceptional performance. Prior to issuance of the awards, the Company is not under any obligation to issue the stock options.
The award vests over a specified period determined by the Company’s Board of Directors. The measurement date of the grant
is also the date of the award. The fair value of options is expensed ratably during the specified vesting period.
The
Company estimates the fair value of employee stock option awards on the date of grant using a Black-Scholes valuation model which
requires management to make certain assumptions regarding: (i) the expected volatility in the market price of the Company’s
common stock; (ii) dividend yield; (iii) risk-free interest rates; and (iv) the period of time employees are expected to hold
the award prior to exercised (referred to as the expected holding period). The expected volatility under this valuation model
is based on the current and historical implied volatilities of the Company’s common stock. The dividend yield is based on
the approved annual dividend rate in effect and current market price of the underlying common stock at the time of grant. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for bonds with maturities ranging
from one month to five years. The expected holding period of the awards granted is estimated using the historical exercise behavior
of employees. In addition, the Company estimates the expected impact of forfeited awards and recognize stock-based compensation
cost only for those awards expected to vest. The Company utilizes historical experience to estimate projected forfeitures. If
actual forfeitures are materially different from estimates, stock-based compensation expense could be significantly different
from what we have recorded in the current period. The cumulative effect on current and prior periods of a change in the estimated
forfeiture rate is recognized as compensation cost in the period of the revision.
The
Company has adopted ASC 2018-07 for non-employee stock-based compensation.
Stock
Granted to Employees and Non-Employees in Lieu of Cash Payments
The
Company periodically issues shares of its common stock in lieu of cash payments to certain consultants, vendors and employees.
The Company follows financial accounting standards that require the measurement of the value of services received in exchange
for an award of an equity instrument based on the grant-date fair value of the award.
Use
of estimates
The
preparation of financial statements in accordance with accounting principles generally accepted in the United States of America
requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use
of management assumptions and estimates relate to long-lived asset impairments and stock-based compensation valuation. Actual
results could differ from these estimates and assumptions and could have a material effect on the Company’s reported financial
position and results of operations.
REGI,
U.S., INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JULY
31, 2019
Research
and development costs
Research
and development costs are expensed as incurred.
Related
Parties
In
accordance with ASC 850 “Related Party Disclosure”, a party is considered to be related to the Company if the party
directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the
Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal
owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly
influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented
from fully pursuing its own separate interests.
Reclassifications
Certain
reclassifications have been made to the prior year financial information to conform to the presentation used in the financial
statements for the three months ended July 31, 2019.
New
Accounting Pronouncements
In
June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation, Improvements to Nonemployee Share-Based Payment Accounting.
ASU No. 2018-07 aligns accounting for share-based payment transactions for acquiring goods and services from nonemployees with
transaction with employees. The update is effective for fiscal years beginning after December 15, 2018, and interim periods within
those fiscal years.
In
February 2016, the FASB issued ASU 2016-02 Leases (Subtopic 842), which requires lessees to recognize assets and liabilities on
the balance sheet for the rights and obligations created by most leases. The update is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. The ASU is effective for the Company in the first quarter
of fiscal year 2020. The Company currently holds no leases subject to ASU 2016-02.
Other
accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements
that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or
disclosures.
3)
GOING CONCERN
The
Company incurred a net loss of $261,356 for the three months ended July 31, 2019 and has a working capital deficit of $2,054,101
and an accumulated deficit of $26,584,751 at July 31, 2019. These factors raise substantial doubt about the ability of the Company
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, the Company’s consolidated financial statements as of July 31, 2019 and for the
three 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.
The
Company also receives interim support from related parties and plans to raise additional capital through debt and/or equity financings.
There is no assurance that any of these activities will be successful. There continues to be insufficient funds to provide enough
working capital to fund ongoing operations for the next twelve months.
REGI,
U.S., INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JULY
31, 2019
4)
EARNINGS PER SHARE
Basic
Earnings Per Share (“EPS”) is computed as net income (loss) available to common stockholders divided by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from
common shares issuable through stock options and warrants.
The
outstanding securities at July 31, 2019 and April 30, 2019 that could have a dilutive effect are as follows:
|
|
|
July 31, 2019
|
|
|
April 30, 2019
|
|
|
Stock options
|
|
|
8,700,000
|
|
|
|
8,200,000
|
|
|
Convertible notes and accrued interest, non-related parties
|
|
|
12,439,448
|
|
|
|
19,520,948
|
|
|
Convertible notes and accrued interest, related parties
|
|
|
9,190,777
|
|
|
|
5,881,314
|
|
|
TOTAL POSSIBLE DILUTIVE SHARES
|
|
|
30,330,225
|
|
|
|
33,602,262
|
|
For
the three months ended July 31, 2019 and 2018, respectively, the effect of the Company’s outstanding stock options would
have been anti-dilutive and so are excluded in the diluted EPS.
5)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The
carrying values of cash and cash equivalents and conversion notes approximate fair value due to their limited time to maturity
or ability to immediately convert them to cash in the normal course. The carrying values of convertible notes is net of a discount
and does not reflect fair value of similar instruments. The approximate fair value of the convertible notes and accrued interest
based upon the number of shares into which the notes and accrued interest are convertible is $1,297,831 and $1,978,836 using the
closing price per share of stock at July 31 and April 30, 2019, respectively.
The
table below sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring
basis as of July 31, 2019 and April 30, 2019, respectively, and the fair value calculation input hierarchy that the Company has
determined has applied to each asset and liability category.
|
|
|
July 31,2019
|
|
|
April 30, 2019
|
|
|
Input Hierarchy Level
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Conversion option derivative
|
|
$
|
Nil
|
|
|
$
|
306,696
|
|
|
Level 3
|
6)
PROPERTY AND EQUIPMENT
Property
and equipment at July 31, 2019 and April 30, 2019 consists of the following:
|
|
|
July 31, 2019
|
|
|
April 30, 2019
|
|
|
Equipment
|
|
$
|
22,040
|
|
|
$
|
22,040
|
|
|
Furniture and fixtures
|
|
|
14,213
|
|
|
|
14,213
|
|
|
|
|
|
36,253
|
|
|
|
36,253
|
|
|
Less accumulated depreciation
|
|
|
(17,923
|
)
|
|
|
(15,285
|
)
|
|
TOTAL PROPERTY AND EQUIPMENT
|
|
$
|
18,330
|
|
|
$
|
20,968
|
|
Depreciation
expense totaled $2,639 and $1,389 for the three months ended July 31, 2019 and 2018, respectively.
REGI,
U.S., INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JULY
31, 2019
7)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts
payable and accrued liabilities at April 30, 2019 consist of the following:
|
|
|
Related party
|
|
|
Non-related party
|
|
|
Total
|
|
|
Accounts payable
|
|
$
|
96,721
|
|
|
$
|
46,029
|
|
|
$
|
142,750
|
|
|
Interest payable
|
|
|
33,641
|
|
|
|
168,726
|
|
|
|
202,367
|
|
|
Other accrued liabilities
|
|
|
287,425
|
|
|
|
136,912
|
|
|
|
424,337
|
|
|
|
|
$
|
417,787
|
|
|
$
|
351,667
|
|
|
$
|
769,454
|
|
Accounts
payable and accrued liabilities at July 31, 2019 consist of the following:
|
|
|
Related party
|
|
|
Non-related party
|
|
|
Total
|
|
|
Accounts payable
|
|
$
|
126,403
|
|
|
$
|
50,550
|
|
|
$
|
176,953
|
|
|
Interest payable
|
|
|
62,640
|
|
|
|
162,845
|
|
|
|
225,485
|
|
|
Other accrued liabilities
|
|
|
408,088
|
|
|
|
170,807
|
|
|
|
578,895
|
|
|
|
|
$
|
597,131
|
|
|
$
|
384,202
|
|
|
$
|
981,333
|
|
Related
parties are the officers of the Company, companies with common directors or owners, and companies indirectly controlled by directors
or officers of the Company. Amounts owed to directors or officers of the Company as of July 31, 2019 and April 30, 2019 are the
result of consulting fees that are disclosed as director or executive compensation above, including amounts paid for benefit of
the Company and represents out-of-pocket expenses that were not paid as of July 31, 2019 and April 30, 2019 respectively.
The
Company does not have written agreements relating to related party advances, except as delineated in several on-demand promissory
and convertible promissory notes, related parties (Note 9 and Note 10). The balances are non-interest bearing, unsecured and due
on demand per verbal agreements with these related parties.
During
the three months ended July 31, 2019, the Company recognized $93,750 of management fees and salaries, $7,172 of payroll tax expense
and $19,740 of directors fees for related parties. During the three months ended July 31, 2018, the Company recognized $118,584
of management fees and salaries and $5,578 of payroll tax expense for related parties.
The
amounts owed to related parties include accrued payroll, payroll taxes and board fees which, as of July 31, 2019 and April 30
2019, were $408,088 and $287,426, respectively.
8)
DUE TO RELATED PARTIES
Related
parties are the officers of the Company, companies with common directors or owners, and include companies indirectly controlled
by directors or officers of the Company.
During
the three months ended July 31, 2019, changes to the amounts owed to/by related parties are as follows:
|
|
|
April 30, 2019
|
|
|
(Repayment)/Loan
|
|
|
July 31, 2019
|
|
|
Due to Minewest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Due from Linux Gold Corp.
|
|
|
(191
|
)
|
|
|
-
|
|
|
|
(191
|
)
|
|
Due to IAS Energy, Inc.
|
|
|
7,431
|
|
|
|
-
|
|
|
|
7,431
|
|
|
Due to Information Highway, Inc.
|
|
|
18,792
|
|
|
|
-
|
|
|
|
18,792
|
|
|
Due to Teryl Resources Corp.
|
|
|
27,067
|
|
|
|
-
|
|
|
|
27,067
|
|
|
Total
|
|
$
|
53,099
|
|
|
$
|
-
|
|
|
$
|
53,099
|
|
REGI,
U.S., INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JULY
31, 2019
9)
DEMAND NOTES, RELATED PARTIES
On
March 12, 2019, the Chief Executive Officer also loaned $10,000 to the Company, payable on demand and bearing simple interest
at 12% per annum.
On
April 23, 2019, a current member of the Company’s Board of Directors loaned $15,000 to the Company, payable on demand and
being simple interest at 12% per annum.
For
the three months ended July 31, 2019, the Company recognized $791 of interest expense on the Demand Notes, related parties.
The
balance of the demand notes, related parties at July 31, 2019 and April 30, 2019 was $25,000.
10)
SECURED CONVERTIBLE PROMISSORY NOTES
THREE
MONTHS ENDED JULY 31, 2018
As
of July 31, 2018, REGI has outstanding senior secured convertible promissory notes (the “Convertible Notes”) of $195,344
(net of unamortized discount of $50,166) issued to related parties and $1,172,654 (net of unamortized discount of $422,781) issued
to non-related parties. As of April 30, 2018, REGI has outstanding Convertible Notes of $142,762 (net of unamortized discount
of $54,816) issued to related parties and $997,468 (net of unamortized discount of $523,658) issued to non-related parties.
During
the three months ended July 31, 2018 the Company issued Convertible Notes for cash proceeds of $90,000, service debt provided
by related parties of $27,932, and service debt provided by non-related parties of $16,357. During the twelve months ended April
30, 2018 the Company issued Convertible Notes for cash proceeds of $1,212,849, settled accounts payable from previous years of
$17,436, service debt provided by related parties of $131,577, and service debt provided by non-related parties of $182,696 of
which $66,600 was finders’ fee and legal fees for cash based Convertible Notes recorded as discount to the Convertible 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 with the exception of one Convertible
Note of $150,000 (net of unamortized discount of $7,684) repayable nine months after issuance, bearing simple interest of 2% during
the term of the note and simple interest rate of 15% after the due date.
As
of July 31, 2018, $17,436, $40,800, $1,622,710, $60,000 and $100,000 of the Convertible Notes are convertible at any time on or
after ninety days from the issuance date into the Company’s common stocks at $0.174, $0.12, $0.10, $0.09 and $0.08 per share
respectively.
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 determined that the conversion option was subject to a beneficial conversion feature and during the three months ended
July 31, 2018 the company recorded a total beneficial conversion feature of $5,850, and amortization of the beneficial conversion
feature of $111,377 as interest expense. During the year ended April 30, 2018 the company recorded a total beneficial conversion
feature of $1,027,441, and amortization of the beneficial conversion feature of $510,311 as interest expense.
REGI,
U.S., INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JULY
31, 2019
THREE
MONTHS ENDED JULY 31, 2019
NON-RELATED
PARTIES
On
November 30, 2018, the Company issued a Convertible Note to Labrys Fund LP (the “Labrys Note”) in the amount of $220,000,
of which $198,000 of the actual amount was received in cash proceeds by the company and the remaining $22,000 was recognized as
an Original Issuance Discount, to be amortized over the life of the note. The Labrys Note is due on May 30, 2019 and bears simple
interest of 12% per annum. Proceeds from the Labrys Note paid the remaining balance of the Firstfire Note.
The
Labrys Note allows the holder to convert outstanding debt to shares of the Company’s common stock at a price other than
a fixed conversion price per share. The conversion price of the Labrys Note is 60% of the lowest traded price of the Company’s
common stock during the twenty consecutive trading day period immediately preceding any conversion notice. Management has determined
that these provisions cause the conversion options to require derivative liability accounting.
In
connection with Labrys Note, the Company also issued 2,000,000 shares of common stock (the “Returnable Shares”) to
the holder as a commitment fee, provided however, the Returnable Shares must be returned to the Company’s treasury if the
Note is fully repaid prior to 180 days after the issuance date.
During
the three months ended July 31, 2019, the Company issued to related parties, two secured promissory notes in the amounts of $150,000
and $75,000, respectively. See Note 12 for further discussion. The Company used $220,000 of the proceeds from the notes to pay
the outstanding balance of the Labrys Note. On June 5, 2019, Labrys returned 2,000,000 shares of common stock as the Labrys Note
was repaid prior to 180 days of issuance.
During
the three months ended July 31, 2019, the Company issued additional non-related parties convertible notes which settled accounts
payable and accrued liabilities from previous years of $8,737.
As
of July 31, 2019, the Company has outstanding non-related party secured convertible promissory notes of $921,293 (net of unamortized
discount of $55,293) issued to non-related parties.
RELATED
PARTIES
During
the three months ended July 31, 2019, the Company issued Convertible Notes to related parties totaling for cash proceeds of $100,000.
The company issued convertible notes to related parties in the amounts of $27,932 for accrued liabilities.
As
of July 31, 2019, the Company has outstanding senior secured convertible promissory notes of $583,453 (net of unamortized discount
of $45,030) issued to related parties.
CONVERSION
EQUIVALENTS
Non-related
parties
As
of July 31, 2019, the aggregate principal balance of $976,587 and accrued interest balance of $162,845 due to convertible note
holders, non-related parties is convertible at any time after the original issue date into a number of shares of the Company’s
common stock, determined by dividing the amount to be converted by a weighted average conversion price of $0.092 per share, or
an aggregate of 12,439,448 shares of the Company’s common stock.
Related
parties
As
of July 31, 2019, the aggregate principal balance of $628,483 and accrued interest balance of $57,866 due to convertible note
holders, related parties is convertible at any time after the original issue date into a number of shares of the Company’s
common stock, determined by dividing the amount to be converted by a weighted average conversion price of $0.075 per share, or
an aggregate of 9,190,777 shares of the Company’s common stock.
REGI,
U.S., INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JULY
31, 2019
MATURITY
At
July 31, 2019, principal payments on the convertible promissory notes are due as follows:
|
|
|
Related party
|
|
|
Non-related party
|
|
|
Total
|
|
|
Year ending July 31, 2020
|
|
$
|
237,083
|
|
|
$
|
853,512
|
|
|
$
|
1,090,595
|
|
|
Year ending July 31, 2021
|
|
|
123,075
|
|
|
|
391,400
|
|
|
|
514,475
|
|
|
TOTAL CONVERTIBLE NOTES
|
|
$
|
360,158
|
|
|
$
|
1,244,912
|
|
|
$
|
1,605,070
|
|
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 except as disclosed on the First
Fire Note and the Labrys Note (Note 11).
11)
DERIVATIVE LIABILITY
On
April 18, 2018 and November 30, 2018, respectively, the Company issued two convertible notes (The Labrys Note and the First Fire
Note) which contained provisions allowing holders of the notes to convert outstanding debt to shares of the Company’s common
stock at a price other than a fixed conversion price per share. (Note 10). Management has determined that these provisions cause
the conversion options to require derivative liability accounting.
The
First Fire Note contained provisions which, after 180 days from the date of issuance, called for the debt conversion exercise
price to be the lower of $0.10 per share or seventy-five percent (75%) of the lowest traded price of the Company’s common
stock during the twenty consecutive trade days immediately preceding the date of a conversion. Management valued that portion
of derivative liability associated with the First Fire Note at fair value of the derivative at the earliest date in which the
holder of the note would have been eligible to convert the note to shares of the Company’s stock. The Company utilized the
assumptions in determining fair value of the initial derivative liability associated with the First Fire Note:
|
Stock price
|
|
$
|
0.0675
|
|
|
Conversion price
|
|
|
0.045075
|
|
|
Expected volatility
|
|
|
122.25
|
%
|
|
Expected term (years)
|
|
|
0.337
|
|
|
Risk free rate
|
|
|
2.28
|
%
|
|
Fair value of conversion option derivative units
|
|
$
|
106,117
|
|
The
Company recognized loss on initial recording of the conversion derivative liability of $106,117 and concurrently recorded an unamortized
discount on the derivative liability of $150,000, to be amortized over the remaining life of the note. The unamortized discount
on the derivative liability was charged to the “Capital” account.
On
November 19, 2018, the Company issued the Labrys Note, the proceeds of which paid the remaining outstanding balance of the First
Fire Note. The Labrys Note contained provisions which called for the debt conversion exercise price to be sixty percent (60%)
of the lowest traded price of the Company’s common stock during the twenty consecutive trade days immediately preceding
the date of a conversion. The Company utilized the following assumptions in determining fair value of the initial derivative liability
associated with the Labrys Note:
|
Stock price
|
|
$
|
0.0569
|
|
|
Conversion price
|
|
|
0.024
|
|
|
Expected volatility
|
|
|
167.6
|
%
|
|
Expected term (years)
|
|
|
0.5
|
|
|
Risk free rate
|
|
|
2.52
|
%
|
|
Fair value of conversion option derivative units
|
|
$
|
351,870
|
|
REGI,
U.S., INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JULY
31, 2019
The
Company recognized loss on initial recording of the conversion derivative liability associated with the Labrys Note in the amount
of $351,870 and concurrently recorded an unamortized discount on the derivative liability of $195,000, to be amortized over the
remaining life of the note. The unamortized discount on the derivative liability was charged to the “Capital” account.
At
April 30, 2019, the fair value of conversion option derivative units was estimated at the period’s end using the Binomial
option pricing model using the following assumptions:
|
Stock price
|
|
$
|
0.0779
|
|
|
Conversion price
|
|
|
0.032
|
|
|
Expected volatility
|
|
|
28.68
|
%
|
|
Expected term (years)
|
|
|
0.052
|
|
|
Risk free rate
|
|
|
2.46
|
%
|
|
Fair value of conversion option derivative units
|
|
$
|
327,166
|
|
Below
is the detail of change in conversion option liability balance for the three months ended July 31, 2019 and year ended April 30,
2019, respectively:
|
|
|
For the three months ended
|
|
|
For the year ended
|
|
|
|
|
July 31, 2019
|
|
|
April 30, 2019
|
|
|
Beginning balance
|
|
$
|
306,696
|
|
|
$
|
-
|
|
|
Initial loss on fair value of derivative liability
|
|
|
-
|
|
|
|
457,986
|
|
|
Initial fair value of derivative discount
|
|
|
-
|
|
|
|
(345,000
|
)
|
|
Amortization of derivative discount
|
|
|
20,470
|
|
|
|
310,090
|
|
|
Revaluation of conversion option liability resulting from extinguishment of convertible debt
|
|
|
(327,166
|
)
|
|
|
(91,677
|
)
|
|
Net change in fair value of conversion option liability
|
|
|
-
|
|
|
|
(24,703
|
)
|
|
Ending balance
|
|
$
|
-
|
|
|
$
|
306,696
|
|
12)
PROMISSORY NOTES
On
September 25, 2018, the Company entered into a promissory note with a director of the Company’s board. The term of the agreement
is five (5) years and has principal and interest payments of $445 per month. The agreement has a stated interest rate of 12% per
annum. The balance due to the related party at July 31, 2019 is $17,163.
On
May 30, 2019, the Company issued to related parties, two secured promissory notes in the amounts of $150,000 and $75,000, respectively.
The notes bear interest at ten percent (10%) per annum and are due and payable on May 30, 2021. The notes are secured by a General
Security Agreement dated May 30, 2019. The Company used $220,000 of the proceeds from the notes to pay the balance of the Labrys
note (Note 10). On June 5, 2019, Labrys returned 2,000,000 shares previously issued as collateral on its convertible promissory
note.
13)
STOCKHOLDERS’ EQUITY
Issuance
of common stock on exercise of convertible of notes, related parties
During
the three months ended July 31, 2019 and 2018, respectively, there were no shares of common stock issued for conversion of related
party convertible promissory notes.
REGI,
U.S., INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JULY
31, 2019
Issuance
of common stock on exercise of convertible notes, non-related parties
During
the three months ended July 31, 2018, non-related party convertible promissory note of $12,047 and its accrued interest of $916
were converted into 129,672 shares REGI’s common stock at $0.10 per share. During the three months ended July 31, 2019 non-related
party convertible promissory notes of $20,472 and accrued interest of $4,094 were converted into a total of 156,432 shares of
REGI’s common stock at conversion prices between $0.08 per share and $0.10 per share.
Common
Shares Issued In Lieu of Cash for Services
During
the three months ended July 31, 2019 and 2018, respectively, there were no shares of common stock issued for services.
Common
shares issued for exercise of options
During
the three months ended July 31, 2019 and 2018, respectively, there were no shares of common stock issued for exercise of options.
Returnable
shares
On
May 30, 2019, the Company issued to related parties, two secured promissory notes in the amounts of $150,000 and $75,000, respectively.
The notes bear interest at ten percent (10%) per annum and are due and payable on May 30, 2021. The notes are secured by a General
Security Agreement dated May 30, 2019. The Company used $220,000 of the proceeds from the notes to pay the balance of the Labrys
note (Note 10). On June 5, 2019, Labrys returned 2,000,000 shares previously issued as collateral on its convertible promissory
note.
14)
SHARES TO BE ISSUED
Between
April 15 and April 30, 2019, several holders elected to convert certain convertible notes with balance of $5,117 including accrued
interest (Note 10) into 51,167 shares of the Company’s common stock at the conversion price of $0.10 per share as per terms
of the agreements.
The
Company received proceeds of $14,000 pursuant to the terms of a Private Placement a price of $0.07 per unit for 200,000 shares
of its Common Stock and warrants to purchase an additional 200,000 shares of its common stock to an investor pursuant to a private
placement of its securities. The offering consisted of the sale of “units” of the Company’s securities at the
per unit price of $0.07. Each unit consisted of one shares of common stock and one warrants to purchase an additional share of
common stock. Warrants issued pursuant to the 2019 Offering entitle the holders thereof to purchase shares of common stock for
the price of $0.15 per share. The term of each warrant is for eighteen months commencing with its issuance date.
Between
May 7 and June 5, 2019, the Company issued 251,167 shares of its common stock for Shares to Be Issued with a balance of $19,117
in consideration of the Private Placement and Conversion of promissory notes prior to April 30, 2019.
On
July 31, 2019, as per Note 10, a holder elected to convert three non-related party notes with an aggregate balance of $1,800 including
accrued interest of $300 into 18,000 common shares pursuant to the terms of the agreement at a conversion price of $0.10 per share.
On
July 31, 2019, as per Note 10, a holder elected to convert two non-related party notes with an aggregate balance of $8,580 including
accrued interest of $1,430 into 85,800 common shares pursuant to the terms of the agreement at a conversion price of $0.10 per
share.
On
August 1, 2019, the Company issued 400,000 shares of its common stock, and warrants to purchase an additional 400,000 shares of
its common stock to an investor pursuant to a private placement of its securities (the “2019 Offering”). The 2019
Offering consisted of the sale of “units” of the Company’s securities at the per unit price of $0.05. Each unit
consisted of one shares of common stock and one warrants to purchase an additional share of common stock. Warrants issued pursuant
to the 2019 Offering entitle the holders thereof to purchase shares of common stock for the price of $0.10 per share. The term
of each warrant is for eighteen months commencing with its issuance date. The Company raised a total of $20,000 to date pursuant
to the 2019 Offering.
REGI,
U.S., INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JULY
31, 2019
As
of July 31, 2019 and April 30, 2019, the balance of Shares to be issued was $30,380 and $19,117, respectively.
15)
STOCK OPTIONS
On
August 12, 2016, the Company approved the 2016 Stock Option Plan to issue up to 5,000,000 shares to certain key directors and
employees. Pursuant to the Plan, the Company has granted stock options to certain directors, consultants and employees. This Stock
Option Plan was amended to issue up to 9,200,000 shares. All options granted by the Company under the 2016 Plan vested immediately.
The
Stock Option Plan has a fixed maximum percentage of 10% of the Company’s outstanding shares that are eligible for the plan
pool, whereby the number of Shares under the plan increases automatically increases as the total number of shares outstanding
increase. The number of shares subject to the Stock Option Plan and any outstanding awards will be adjusted appropriately by the
Board of Directors if the Company’s common stock is affected through a reorganization, merger, consolidation, recapitalization,
restructuring, reclassification dividend (other than quarterly cash dividends) or other distribution, stock split, spin-off or
sale of substantially all of the Company’s assets.
The
Stock Option plan also has terms and conditions, including without limitations that the exercise price for stock options granted
under the Stock Option Plan must equal the stock’s fair value, based on the closing price per share of common stock, at
the time the stock option is granted. The fair value of each option award is estimated on the date of grant utilizing the Black-Scholes
model and commonly utilized assumptions associated with the Black-Scholes methodology. Options granted under the Plan have a ten-year
maximum term and varying vesting periods as determined by the Board.
On
June 6, 2019, the Board of Directors authorized the grant of 500,000 options to purchase shares of common stock of the Company
for services to an officer of the Company. The Company estimated the fair value of this option grants using the Black-Scholes
model with the following information and assumptions:
|
Options issued
|
|
|
500,000
|
|
|
Exercise price (Weighted average)
|
|
$
|
0.935
|
|
|
Stock price
|
|
$
|
0.075
|
|
|
Expected volatility
|
|
|
217.24
|
%
|
|
Expected term (years)
|
|
|
5 years
|
|
|
Risk free rate
|
|
|
1.88
|
%
|
|
Fair value of options issued
|
|
$
|
48,084
|
|
The
options vest upon grant, and are exercisable at the following prices:
|
Options
|
|
Exercise price
|
|
|
50,000
|
|
$
|
0.10
|
|
|
50,000
|
|
|
0.20
|
|
|
25,000
|
|
|
0.35
|
|
|
25,000
|
|
|
0.50
|
|
|
50,000
|
|
|
0.75
|
|
|
50,000
|
|
|
1.00
|
|
|
125,000
|
|
|
1.25
|
|
|
125,000
|
|
|
1.50
|
|
|
500,000
|
|
$
|
0.94
|
|
The
expiration date of the options is June 6, 2024. The fair value of the options is $48,084 and is recognized as stock-based compensation
for the three months ended July 31, 2019. These costs are classified as management and administrative expense.
REGI,
U.S., INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JULY
31, 2019
The
following is a summary of the Company’s options issued and outstanding in conjunction with the Company’s Stock Option
Plans:
|
|
|
For the three months ended July 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
Options
|
|
|
Price (a)
|
|
|
Options
|
|
|
Price (a)
|
|
|
Beginning balance
|
|
|
8,200,000
|
|
|
$
|
0.52
|
|
|
|
9,355,000
|
|
|
$
|
0.52
|
|
|
Issued
|
|
|
500,000
|
|
|
|
0.94
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Ending balance
|
|
|
8,700,000
|
|
|
$
|
0.57
|
|
|
|
9,355,000
|
|
|
$
|
0.52
|
|
|
Exercisable at end of period
|
|
|
8,700,000
|
|
|
|
0.57
|
|
|
|
9,163,750
|
|
|
$
|
0.53
|
|
(a)
Weighted average exercise price.
The
following table summarizes additional information about the options under the Company’s Stock Option Plan as of July 31,
2019:
|
|
|
Options outstanding and exercisable
|
|
|
Date of Grant
|
|
Shares
|
|
|
Price
|
|
|
Remaining Term
|
|
|
August 12, 2016
|
|
|
3,700,000
|
|
|
$
|
0.52
|
|
|
|
1.97
|
|
|
January 1, 2017
|
|
|
2,800,000
|
|
|
|
0.14
|
|
|
|
2.42
|
|
|
March 1, 2017
|
|
|
1,200,000
|
|
|
|
0.58
|
|
|
|
3.59
|
|
|
April 30, 2018
|
|
|
500,000
|
|
|
|
3.00
|
|
|
|
3.75
|
|
|
June 6, 2019
|
|
|
500,000
|
|
|
|
0.94
|
|
|
|
4.85
|
|
|
Total options
|
|
|
8,700,000
|
|
|
$
|
0.57
|
|
|
|
2.61
|
|
The
total value of stock option awards is expensed ratably over the vesting period of the employees receiving the awards. As of April
30, 2019 and 2018, respectively, there was no unrecognized compensation cost related to stock-based options and awards.
The
intrinsic value of exercisable options at July 31, 2019 and April 30, 2019, was $Nil and $Nil, respectively.
REGI,
U.S., INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JULY
31, 2019
16)
SUBSEQUENT EVENT
Management
has evaluated subsequent events from the balance sheet date through the date the financial statements were available to be issued
and determined that no material subsequent events exist other than the following.
On
August 1, 2019, the Company issued a convertible promissory note to a related party in consideration of $50,000 The convertible
promissory note is 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. The convertible promissory note is
convertible at any time after the original issuance date into a number of shares of the Company’s common stock, determined
by dividing the amount to be converted by a weighted average conversion price of $0.05 per share.
On
or about August 1, 2019, the Company issued $50,000 in ten percent (10%) convertible debentures to a related party which are due
two (2) year after their original issue date and are convertible into 1,000,000 shares of the Company’s common stock at
the conversion price of $.05 per share.
On
September 6, 2019, the Company issued 300,000 shares of its common stock in lieu of cash for services to three members of the
board of directors with a fair value of $19,740.
On
September 20, 2019, as per Note 10, a holder elected to convert a non-related party note with a balance of $36,000 including accrued
interest of $6,000 into 300,000 common shares pursuant to the terms of the agreement at a conversion price of $0.12 per share.
On
September 20, 2019, as per Note 10, a holder elected to convert a non-related party note with a balance of $12,000 including accrued
interest of $2,000 into 100,000 common shares pursuant to the terms of the agreement at a conversion price of $0.12 per share.
On
October 14, 2019, as per Note 10, a holder elected to convert two non-related party notes with an aggregate balance of $4,020
including accrued interest of $670 into 40,200 common shares pursuant to the terms of the agreement at a conversion price of $0.10
per share.