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. $75,000 in revenue
has been derived to date from REGI’s principal operations of research and development.
REGI
formed a wholly-owned subsidiary, Rad Max Technologies, Inc., on April 10, 2007 in the State of Washington.
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2.
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Significant
Accounting Policies
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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, 2018 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 2018 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 it previous
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
Cash
and cash equivalents include highly liquid investments with original maturities of three months or less.
Revenue
Recognition
Revenue
is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration
that an entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the
nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue
that is recorded reflects the consideration that the Company expects to receive in exchange for those goods. The Company applies
the following five-step model in order to determine this amount: (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 only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is
entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the
scope of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations the Company
must deliver and which of these performance obligations are distinct. The Company recognizes as revenues the amount of the transaction
price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied.
Generally, the Company’s performance obligations are transferred to customers at a point in time, typically upon delivery.
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 depreciation.
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.
Financial
instruments
Fair
Value
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.
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. The three levels
of valuation hierarchy are defined as follows:
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Level
1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
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-
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Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial
instrument.
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-
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Level
3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
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Derivative
Liabilities
The
Company recognizes derivative liabilities in the balance sheet and measures those instruments at fair value. The accounting for
changes in fair value depends on its intended use and designation and could entail recording the gain or loss through earnings
when the gain or loss is realized. Per the guidance offer By ASC Topic 820 above the Company uses “Level 3 input valuation
methodology”.
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 in accumulated other comprehensive income in shareholders’ equity.
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 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 for deferred taxes for the estimated future tax effects attributable to temporary differences and
carry-forwards when realization is more likely than not.
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, share-based payment
compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite
service period (generally the vesting period). The Company accounts for share-based payments to non-employees in accordance with
FASB ASC 505-50.
Use
of estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures
during the reporting period. Actual results could differ from these estimates. The Company regularly evaluates estimates and assumptions
related to useful life and recoverability of long-lived assets, stock-based compensation and deferred income tax asset valuation
allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors
that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities, and the accrual of costs and expenses that are not readily apparent from other sources.
The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent
there are material differences between the estimates and the actual results, future results of operations will be affected.
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.
Recent
accounting pronouncements
The
Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements.
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 January 31, 2019.
The
Company incurred net losses of $1,766,053 the nine months ended January 31, 2019 and has a working capital deficit of $2,309,006
and an accumulated deficit of $25,829,452 at January 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 January 31, 2019
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.
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4.
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Property
and Equipment
|
Property
and equipment at January 31, 2019 and April 30, 2018 consists of the following:
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January 31, 2019
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|
|
April 30, 2018
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|
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Equipment
|
|
$
|
22,040
|
|
|
$
|
7,040
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|
|
Furniture and fixtures
|
|
|
14,213
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|
|
|
14,213
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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36,253
|
|
|
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21,253
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|
|
|
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|
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Less accumulated depreciation
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12,298
|
|
|
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8,249
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|
|
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$
|
23,955
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|
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$
|
13,004
|
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Depreciation
expense totaled $4,049 and $4,301 for the nine months ended January 31, 2019 and 2018, respectively.
|
5.
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Secured
Convertible Promissory Notes
|
As
of January 31, 2019, REGI has outstanding senior secured convertible promissory notes (the “Convertible Notes”) of
$253,783 (net of unamortized discount of $28,901) issued to related parties and $1,378,472, (net of unamortized discount of $238,855)
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 nine months ended January 31, 2019 the Company issued Convertible Notes for service debt provided by related parties of $79,332
and $16,357 to non-related parties. During the nine months ended January 31, 2019 the Company issued Convertible Notes for cash
proceeds of $39,200 to related parties and $457,355 to non-related parties while redeeming $16,000 of related parties and $150,000
or non-related parties Convertible Notes for cash.
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 $220,000 (net of unamortized discount of $14,861) repayable six months after issuance, bearing simple interest of 12%
during the term of the note and simple interest rate of 24% after the due date.
As
of January 31, 2019, $17,436, $40,000, $1,682,576, $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 qualify for derivative accounting.
The
Company determined that the conversion option was subject to a beneficial conversion feature and during the nine months ended
January 31, 2019 the company recorded amortization of the beneficial conversion feature of $507,066 as interest expense.
The
FASB has issued authoritative guidance whereby instruments which do not have fixed settlement provisions are deemed to be derivative
instruments. Certain conversion features of convertible notes payable did not have fixed settlement provisions because the conversion
price is variable. In addition, since the number of shares to be issued is not explicitly limited, the Company is unable to conclude
that enough authorized and unissued shares are available to share settle the conversion option. In accordance with the FASB authoritative
guidance, the conversion feature of the convertible note was separated from the host contract (i.e., the notes) and the fair value
of the conversion price have been recognized as a derivative and will be re-measured at the end of every reporting period with
the change in value reported in the statement of operations.
The
derivative liabilities were valued at the following dates using a Black-Scholes-Merton model with the following average assumptions:
The
risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility
of its common stock to estimate the future volatility for its common stock. The expected life of the derivative securities was
determined by the remaining contractual life of the derivative instrument. For derivative instruments that already matured, the
Company used the estimated life. The expected dividend yield was based on the fact that the Company has not paid dividends to
its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.
The
derivative liabilities were valued at the following dates using a Black-Scholes-Merton model with the following average assumptions:
The
risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility
of its common stock to estimate the future volatility for its common stock. The expected life of the derivative securities was
determined by the remaining contractual life of the derivative instrument. For derivative instruments that already matured, the
Company used the estimated life. The expected dividend yield was based on the fact that the Company has not paid dividends to
its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.
During
the nine months ended January 31, 2019, the Company recorded $547,024 in derivative liability net of $59,368 of unamortized discount
as a result of conversion features from the issuance of new convertible notes payables (see Note 5).
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 January 31, 2019, there
was $115,196 due to related parties. As of April 30, 2018, there was $106,823 due to related parties.
During
the nine months ended January 31, 2019, non-related party convertible promissory notes of $270,658 and its accrued interest of
$101,173 were converted into 4,004,457 shares of REGI’s common stock at between $0.04 and $0.10 per share. During the nine
months ended January 31, 2019 non-related parties were issued 40,000 shares at $0.05 ($2,000) as payment for services and 2,000,000
shares at $0.057 ($114,000) as restricted assurance shares against an outstanding Convertible Note.
During
the nine months ended January 31, 2019, related party convertible promissory notes of $13,427 and its accrued interest of $855
were converted into 142,823 shares REGI’s common stock at $0.10 per share.
During
the year ended April 30, 2018 related party convertible promissory notes of $126,152 and accrued interest of $10,931 were converted
into a total of 1,369,964 shares of REGI’s common stock at $0.10 per share, and convertible promissory notes of $755,185
and accrued interest of $41,173 were converted into a total of 1,054,779 shares of REGI’s common stock at $0.755 per share.
During
the twelve months ended April 30, 2018 non-related party convertible promissory notes of $531,940 and accrued interest of $26,569
were converted into 5,630,543 shares of common stock at $0.10 per share, principal of $3,848 and accrued interest of $623 were
converted into 55,892 shares of common stock at $0.08 per share, principal of $10,000 and accrued interest of $879 were converted
into 99,661 shares of commons stock at $0.12 per share.
During
the twelve months ended April 30, 2018 the Company issued 155,000 shares of its common stock for options exercised at $0.10 per
share for a total of $15,500. Among the 155,000 shares of common stock, 55,000 were issued to a related party.
During
the twelve months ended April 30, 2018 the Company issued 3,310,000 shares of its common stock for services provided by the directors,
officers, employees and consultants of the Company with the total value recorded at $562,700 based on the market trading price
as of the issuance date.
On
November 2, 2017 the Company issued 3,172,269 shares of its common stock to Rand Energy. No value was assigned to these shares,
as Rand Energy did not have any assets. These shares together with 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 the 49% interest in Rand Energy, resulting in the Company owning 100% equity interest in Rand Energy.
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b)
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Common
Stock Options and Warrants
|
A
summary of REGI’s stock option activities for the nine months ended January 31, 2019 and year ended April 30, 2018 are as
follows:
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Nine months ended
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Year ended
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|
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January 31, 2019
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April 30, 2018
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Weighted
|
|
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|
|
Weighted
|
|
|
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Average
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|
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Average
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Exercise
|
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|
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Exercise
|
|
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Shares
|
|
|
Price
|
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|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Outstanding at beginning of period
|
|
|
9,355,000
|
|
|
$
|
0.52
|
|
|
|
9,138,000
|
|
|
$
|
0.31
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
1,900,000
|
|
|
|
1.17
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
(155,000
|
)
|
|
|
0.10
|
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
|
|
|
|
(1,528,000
|
)
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
9,355,000
|
|
|
$
|
0.52
|
|
|
|
9,355,000
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
9,163,750
|
|
|
$
|
0.53
|
|
|
|
9,163,750
|
|
|
$
|
0.53
|
|
The
weighted average remaining contractual life of the options is 2.92 years at January 31, 2019, and 3.67 years at April 30, 2018.
At
January 31, 2019 and April 30, 2018 there were no warrants outstanding.
The
Company is subject to the income tax laws of the United States and the States of Washington and Oregon, and uses the liability
method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences
between the carrying amounts of assets and liabilities for financial and income tax reporting purposes.
On
December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law by President Trump. The
Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate
tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing
a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. U.S. GAAP requires
that the impact of tax legislation be recognized in the period in which the law was enacted. The Company does not anticipate that
the “Tax Reform Act” will have any substantial effect on the Company’s financial position in the near future.
Deferred
tax assets consist of the tax effect of NOL carry-forwards. The Company has provided a full valuation allowance on the deferred
tax assets because of the uncertainty regarding its reliability.
The
composition of REGI’s deferred tax assets at :
|
|
|
January 31, 2019
|
|
|
April 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carry-forward
|
|
$
|
5,038,954
|
|
|
$
|
3,272,901
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
|
1,058,180
|
|
|
|
|
|
|
Less: Valuation allowance
|
|
|
(1,058,180
|
)
|
|
|
687,309
|
|
|
|
|
|
|
|
|
|
(687,309
|
)
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Management
has evaluated subsequent events from the balance sheet date through the date the financial statements were available to be issued
and notes no subsequent events to disclose.