Notes
to Consolidated Financial Statements
(Unaudited)
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. No revenue has
been derived to date and REGI’s planned principal operations have not commenced.
REGI
formed a wholly-owned subsidiary, Rad Max Technologies, Inc., on April 10, 2007 in the State of Washington.
Effective
February 17, 2017 REGI purchased all of Reg Tech’s assets including all rights to the technology with the issuance of 51,757,119
shares of REGI’s common stock.
Asset
Purchase Agreement
On
September 16, 2016, REGI entered into an asset purchase agreement (the “APA”) with Reg Tech, a public company whose
common stock was listed on TSX Venture Exchange to purchase all of the assets of Reg Tech, a company with a common director and
CEO with REGI with the issuance of 46,173,916 unregistered common shares of our Company. The APA was amended on February 14, 2017
to increase the consideration shares to an aggregate of 51,757,119 unregistered common shares of our Company and to amend the
list of the assets purchased. The shares are issued as of the date of this report. The Amended APA is attached as an exhibit to
this report. The transaction was closed on February 17, 2017 upon TSX Venture Exchange approval.
The
transaction is accounted for as a reverse merger recapitalization wherein Reg Tech is considered to be the accounting acquirer.
The prior year results of operations and cash flows are those of Reg Tech for all periods presented.
Upon
closing of the asset purchase agreement, all assets of Reg Tech except GST receivable were transferred from Reg Tech to REGI.
In addition, upon closing of the APA, all assets, liabilities, and equity instruments of REGI were incorporated into the surviving
company. The net adjustment to additional paid in capital for the asset purchase was a decrease of $1,243,757. The net cash received
from the reverse merger was $10,753.
The
following table summarizes the assets and liabilities of REGI U.S. on February 17, 2017:
Cash
|
|
$
|
10,753
|
|
Prepaid
|
|
|
2,000
|
|
Furniture and equipment, net
|
|
|
15,477
|
|
Accounts payable and accrued liabilities
|
|
|
(217,043
|
)
|
Due to related parties
|
|
|
(843,703
|
)
|
Convertible promissory notes
|
|
|
(351,586
|
)
|
Convertible promissory notes – related parties
|
|
|
(118,874
|
)
|
Net assets
|
|
$
|
(1,502,976
|
)
|
The
following table summarizes the assets and liabilities of Reg Tech on February 17, 2017 that were not assumed in the transaction:
Accounts payable and accrued liabilities
|
|
$
|
(86,736
|
)
|
Due to related parties
|
|
|
(172,483
|
)
|
Net Liabilities
|
|
$
|
(259,219
|
)
|
2.
|
Significant
Accounting Policies
|
Principles
of consolidation
The
accompanying unaudited interim consolidated financial statements of REGI have been prepared in accordance with accounting principles
generally accepted in the United States of America, and should be read in conjunction with the audited financial statements and
notes thereto for the year ended April 30, 2017 filed on Form 10-K with the SEC. In the opinion of management, the accompanying
unaudited interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary
to present fairly the financial position and the results of operations for the interim period presented herein. The results of
operations for interim periods are not necessarily indicative of the results to be expected for the full year or for any future
period. Notes to the unaudited consolidated financial statements which would substantially duplicate the disclosures contained
in the audited consolidated financial statements for fiscal 2017 as reported in the Form 10-K, have been omitted.
These
financial statements include the accounts of the Company, its wholly owned subsidiary RadMax Technologies, Inc., and its 51% owned
subsidiary Rand Energy Group Inc. (“Rand”), which ownership was purchased from Reg Tech effective February 17, 2017.
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.
As
part of the APA the Company purchased from Reg Tech and owns 26.1% of equity interest in Minewest Silver and Gold Inc. (“Minewest”),
a British Columbia company. Minewest owns a 70% interest subject to a 10% Net Profits Interest in mining property in British Columbia.
As at the date of the asset purchase and the date of this report, Minewest is inactive due to lack of funding. As a result, the
assets were impaired and no transactions are recorded for Minewest during the year ended April 30, 2017 or the three months ended
July 31, 2017.
Property
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 2 years. Depreciation
of office equipment is included in general and administrative expenses; Depreciation of research equipment is included in research
and development expense. During the three months ended July, 2017 depreciation of $1,198 was recorded on the research equipment.
Recent
accounting pronouncements
The
Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements. The
Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material
impact on its financial position or results of operations.
The
Company incurred net losses of $390,552 for the three months ended July 31, 2017 and has a working capital deficit of $77,814
and an accumulated deficit of $21,448,722 at July 31, 2017. 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, 2017 and for the
three months ended July 31, 2017 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.
4.
|
Secured
Convertible Promissory Notes
|
As
of July 31, 2017, REGI has outstanding senior secured convertible promissory notes (the “Convertible Notes”) of $880,254
(net of unamortized discount of $29,432) issued to related parties and $732,921 (net of unamortized discount of $324,548) issued
to non-related parties. As of April 30, 2017, REGI has outstanding senior secured convertible promissory notes (the “Convertible
Notes”) of $877,449 (net of unamortized discount of $9,888) issued to related parties and $636,539 (net of unamortized discount
of $12,944) issued to non-related parties.
During
the three months ended July 31, 2017, the Company issued convertible notes for cash proceeds of $370,000, service debt provided
by non-related parties of $37,986, and service debt provided by related parties of $37,500. 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. As of July 31, 2017, $755,185, $55,500, $963,970, $60,000 and
$132,500 of the promissory notes are convertible at any time on or after ninety days from the issuance date into the Company’s
common stocks at $0.755, $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, 2017 the Company recorded a total beneficial conversion feature of $344,284, and amortization of the beneficial conversion
feature of $13,137 as interest expense.
Amounts
due to related parties are unsecured, non-interest bearing and due on demand. Related parties consist of the directors and officers
and a former director of REGI and companies controlled or significantly influenced by these parties. As of July 31, 2017, there
was $105,614 due to related parties. As of April 30, 2017, there was $77,560 due to related parties.
On
January 6, 2017, the Company’s annual and special meeting of stockholders approved the amendment to the Company’s
articles that increased the authorized common shares from 100,000,000 to 150,000,000.
During
the three months ended July 31, 2017 related party convertible promissory notes of $15,152 and accrued interest of $830 were converted
into a total of 159,822 shares of REGI’s common stock at $0.10 per share.
During
the three months ended July 31, 2017 the Company issued 155,000 shares of its common stock for options exercised at $0.10 per
share. Among the 155,000 shares of common stock, 55,000 shares were issued to a related party.
During
the three months ended July 31, 2017 the Company issued 350,000 shares of its common stock for services provided by the directors,
officers and consultants of the Company with the total value recorded at $59,500 based on the market trading price of the issuance
date.
Treasury
Shares
At
July 31, 2017 and April 30, 2017, Rand Energy owned 827,731 shares of the Company’s common stock which have been deducted
from the total shares outstanding.
|
b)
|
Common Stock Options
and Warrants
|
On
August 12, 2016, REGI granted an aggregate of 3,700,000 common stock options for services. These options vest upon grant, expire
on July 20, 2021 and are exercisable at the following prices:
Options
|
|
|
Exercise price
|
|
|
900,000
|
|
|
$
|
0.10
|
|
|
600,000
|
|
|
$
|
0.20
|
|
|
550,000
|
|
|
$
|
0.35
|
|
|
450,000
|
|
|
$
|
0.50
|
|
|
350,000
|
|
|
$
|
0.75
|
|
|
350,000
|
|
|
$
|
1.00
|
|
|
250,000
|
|
|
$
|
1.25
|
|
|
250,000
|
|
|
$
|
1.50
|
|
|
3,700,000
|
|
|
|
|
|
On
January 1, 2017, REGI granted an aggregate of 3,500,000 common stock options for services. These options vest upon grant, expire
on January 1, 2022 and are exercisable at the following prices:
Options
|
|
|
Exercise price
|
|
|
2,500,000
|
|
|
$
|
0.10
|
|
|
300,000
|
|
|
$
|
0.20
|
|
|
300,000
|
|
|
$
|
0.35
|
|
|
300,000
|
|
|
$
|
0.50
|
|
|
100,000
|
|
|
$
|
0.75
|
|
|
3,500,000
|
|
|
|
|
|
A
summary of REGI’s stock option activities for the three months ended July 31, 2017 and the year ended April 30, 2017 are
as follows:
|
|
Three
Months Ended
|
|
|
Year
Ended
|
|
|
|
July
31, 2017
|
|
|
April
30, 2017
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
Outstanding at beginning
of period
|
|
|
9,138,000
|
|
|
$
|
0.31
|
|
|
|
1,938,000
|
|
|
$
|
0.15
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
7,200,000
|
|
|
|
0.36
|
|
Exercised
|
|
|
(155,000)
|
|
|
|
0.10
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(803,000)
|
|
|
|
0.10
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at
end of period
|
|
|
8,180,000
|
|
|
|
0.35
|
|
|
|
9,138,000
|
|
|
|
0.31
|
|
Exercisable at
end of period
|
|
|
7,445,000
|
|
|
$
|
0.35
|
|
|
|
7,684,500
|
|
|
$
|
0.34
|
|
The
weighted average remaining contractual life of the options was 3.77 and 3.61 years at July 31, 2017 and April 30, 2017 respectively.
At
July 31, 2017 and April 30, 2017, the Company had $Nil and $28,740 of total unrecognized compensation cost related to non-vested
stock options and warrants, respectively. The intrinsic value of “in the money” exercisable options at July 31, 2017
and April 30, 2017 was $255,000 and $145,580, respectively.
Pursuant
to a letter of understanding dated December 13, 1993 between REGI, Rand and Reg (collectively called the grantors) and West Virginia
University Research Corporation (“WVURC”), the grantors have agreed that WVURC shall own 5% of all patented technology
with regards to RC/DC Engine technology and will receive 5% of all net profits from sales, licenses, royalties or income derived
from the patented technology. To date, no sales have been accrued and no royalties have been accrued or paid.
Pursuant
to an agreement dated August 20, 1992, REGI acquired the U.S. rights to the original RC/DC Engine from Rand. REGI will pay Rand
and the original owner a net profit royalty of 5% and 1%, respectively. To date no sales have been accrued and no royalties have
been accrued or paid.
Subsequent
to July 31, 2017, convertible loans of $512,366 were issued. 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. The promissory notes are convertible at any time on or after ninety days from the issuance date into
the Company’s common stocks at $0.10 per share.
Subsequent
to July 31, 2017, 55,892 and 243,501 shares of the Company’s common stock were issued for convertible promissory notes at
$0.08 and $0.10 per share, respectively, and $8,652 was repaid for convertible loan redemption.
On
November 2, 2017 the Company issued 3,172,269 shares of its common stock to Rand Energy. These shares together with the 827,721
shares of common stock initially owned by Rand Energy and recorded as the Company’s treasury shares, were transferred to
the 49% shareholders of Rand Energy, as consideration for purchase of all of their 49% interest in Rand Energy, resulting in the
Company owing 100% equity interest of Rand Energy.