• Filing Date: 2018-11-14
  • Form Type: 10-Q
  • Description: Quarterly report
v3.10.0.1
KFBV Loans and Derivative Liability Disclosure
9 Months Ended
Sep. 30, 2018
Notes  
KFBV Loans and Derivative Liability Disclosure

NOTE 4 - KFBV LOANS AND DERIVATIVE LIABILITY

 

On January 15, 2014, the Company entered into a binding letter agreement with KFBV which was superseded by the formal definitive loan agreement signed on February 11, 2014, and further amended on March 10, 2014, September 8, 2014, and on December 17, 2015 (the “First KF Loan Agreement”). Under the First KF Loan Agreement the Lender agreed to lend to the Company up to $2,000,000 in four equal installments of $500,000 each (the “First KF Loan”). Pursuant to the First KF Loan Agreement (as amended on March 10, 2014) the principal and interest were to become payable in 18 equal monthly installments commencing on January 1, 2015, with the  Company having the right to prepay the First KF Loan at any time in increments of not less than $250,000.  The First KF Loan is unsecured and has effective interest rate of 1,130%, which was due primarily to the recording of non-cash accretion interest.

 

In consideration for the First KF Loan Agreement, as amended on March 10, 2014 (the “March Amendment”), the Company issued to the Lender non-transferrable share purchase warrants to purchase a total of 6,904,546 shares exercisable at a price of $1.00 per share (the “First KF Warrants”). Warrants for 2,450,000 shares had an original expiry date of January 15, 2015, and warrants for 4,454,546 shares had an original expiry date of January 15, 2018. At the discretion of the Lender the First KF Warrants for up to 3,452,273 shares of common stock could have been acquired by way of a cashless exercise.

 

The First KF Warrants included a down-round provision whereby the exercise price of the First KF Warrants could have been adjusted to the lowest offering price of any options, warrants or shares issued subsequent to the issuance of the First KF Warrants (the “Down-Round Provision”). The First KF Warrants were determined to be a derivative under ASC 815; therefore, at initial measurement, the proceeds were allocated to the fair value of the warrants first and any residual proceeds to the principal of the First KF Loan.

 

At issuance date, the fair value of the First KF Warrants was $5,128,110 and a value of $Nil was allocated to the principal.

 

On September 8, 2014, the Company entered into a Second Amendment Agreement (the “September Amendment”) to extend the maturity of the First KF Loan to January 15, 2016, and replace 18 equal monthly installments with a one-time payment of principal and accrued interest. Furthermore, the Company was given an option to further extend the repayment of the First KF Loan to January 15, 2017, by issuing additional share purchase warrants (the “First Extension Warrants”) equal to one-half of the outstanding principal and unpaid interest as at January 15, 2016. The Extension Warrants were to have an initial exercise price of $0.50 per share expiring on September 1, 2021.

 

As consideration for the September Amendment, the Company issued to the Lender additional warrants for the purchase of up to 2,350,000 shares (the “September Warrants”), with an initial exercise price of $0.50 per share and expiring on January 15, 2019, with cashless exercise rights for up to 1,175,000 shares. In addition, the Company agreed to decrease the exercise price for the First KF Warrants (the “Amended Warrants”) from $1.00 per share to $0.50 per share and extend the expiration date of warrants for up to 2,450,000 shares of the Company’s common stock from January 15, 2015, to January 15, 2016. The September Warrants also included the Down-Round Provision.

 

On December 17, 2015 (the “December Amendment Date”), as part of the second definitive Letter Agreement with KFBV (the “Second KF Letter Agreement”), which was superseded by a formal Loan Agreement dated January 8, 2016, the Company agreed to decrease the exercise price for Amended Warrants and September Warrants from $0.50 per share to $0.10 per share and extend the expiration date of warrants to January 15, 2021. In addition, the Company exercised its option to extend the maturity of the First KF Loan to January 15, 2017, by issuing the Lender 1,194,332 First Extension Warrants, being an equivalent to one-half of the outstanding principal and unpaid interest on the First KF Loan as at January 15, 2016. First Extension Warrants have an initial exercise price of $0.10 per share expiring on September 1, 2021.

 

The Company did not repay the First KF Loan on January 15, 2017, when due, and as such the First KF Loan is in default. The Company recorded a penalty on unpaid balance of $131,978, representing 5% of the full balance due under the First KF Loan on January 15, 2017. The penalty has been included in financing costs. The Company has not been served with a default notice by KFBV.

 

During the nine months ended September 30, 2018, the Company recorded $359,189 (2017 - $293,378) in interest expense on the First KF Loan at 15% per annum, the default rate of interest. In addition to the accrued interest, during the nine months ended September 30, 2017, the Company recognized accretion expense of $73,250. As at January 15, 2017, the First KF Loan was fully accreted and, as such, no accretion expense was recognized during the nine months ended September 30, 2018.

 

At September 30, 2018, the fair value of the derivative liability associated with the warrants issued pursuant to the First KF Loan Agreement was $31,347 (December 31, 2017 - $53,439).

 

At September 30, 2018 and December 31, 2017, the fair values of Amended Warrants, September Warrants, and First Extension Warrants were revalued using the Binomial Lattice model using the following assumptions:

 

 

At September 30,

2018

At December 31,

2017

Expected Warrant Life

2.30 - 2.92 years

3.04 - 3.67 years

Risk-Free Interest Rate

2.81% - 2.88%

1.98%

Expected Dividend Yield

Nil

Nil

Expected Stock Price Volatility

32% - 60%

32% - 60%

 

Second KF Business Ventures Loan Agreement

 

On July 28, 2014, the Company entered into a second loan agreement with the Lender (the “Second KF Loan Agreement”). Under the Second KF Loan Agreement, the Lender agreed to lend to the Company $2,400,000 (the “Second KF Loan”), to be advanced in eight equal installments of $300,000 each, commencing on September 1, 2014, and on the first day of each consecutive calendar month thereafter until fully advanced.

 

The initial maturity date under the Second KF Loan Agreement was January 15, 2016, with an option to further extend the maturity date to January 15, 2017, by issuing additional share purchase warrants (the “Second Extension Warrants”) equal to one-half of the outstanding principal and unpaid interest as at January 15, 2016. The Second KF Loan is unsecured and has an effective interest rate of 1,729%, which was due primarily to the recording of non-cash accretion interest.

 

In consideration for the Second KF Loan Agreement, the Company issued to the Lender non-transferrable share purchase warrants for a total of 9,600,000 shares of the Company’s common stock, exercisable at a price of $0.50 per share for a period expiring September 1, 2019 (the “Second KF Warrants”). At the discretion of the Lender the Second KF Warrants for up to 4,800,000 shares of common stock can be acquired by way of a cashless exercise.

 

The Second KF Warrants were determined to be a derivative under ASC 815; therefore, at initial measurement, the proceeds were allocated to the fair value of the Second KF Warrants first and any residual proceeds to the loan principal.

 

At issuance date, the fair value of the Second KF Warrants was $5,388,652 and a value of $Nil was allocated to the principal.

 

On December 17, 2015, as part of the Second KF Letter Agreement, which was superseded by a formal Loan Agreement dated January 8, 2016, the Company agreed to decrease the exercise price for the Second KF Warrants from $0.50 per share to $0.10 per share and extend the expiration date of these warrants to January 15, 2021. The Second KF Warrants included a down-round provision whereby the exercise price of the Second KF Warrants could have been adjusted to the lowest offering price of any options, warrants or shares issued subsequent to the issuance of the Second KF Warrants.  In addition, the Company exercised its option to extend the maturity of the Second KF Loan to January 15, 2017, by issuing the Lender 1,337,320 Second Extension Warrants, being an equivalent to one-half of the outstanding principal and unpaid interest as at January 15, 2016. Second Extension Warrants have an initial exercise price of $0.10 per share expiring on September 1, 2021.

 

The Company did not repay the Second KF Loan on January 15, 2017, when due, and as such the Second KF Loan is in default. The Company recorded a penalty on unpaid balance of $147,779, representing 5% of the full balance due under the Second KF Loan on January 15, 2017. The penalty has been included in financing costs. The Company has not been served with a default notice by KFBV.

 

During the nine months ended September 30, 2018, the Company recorded $402,191 (2017 - $328,501) in interest expense on the Second KF Loan at 15% per annum, the default rate of interest. In addition to the accrued interest, during the nine months ended September 30, 2017, the Company recognized accretion expense of $165,212. As at January 15, 2017, the Second KF Loan was fully accreted and, as such, no accretion expense was recognized during the nine months ended September 30, 2018.

 

At September 30, 2018, the fair value of the derivative liabilities associated with the Second KF Warrants and the Second Extension Warrants was $32,812 (December 31, 2017 - $56,024).

 

At September 30, 2018 and December 31, 2017, the fair values of the Second KF Warrants and Second Extension Warrants were revalued using the Binomial Lattice model using the following assumptions:

 

 

At September 30,

2018

At December 31,

2017

Expected Warrant Life

2.30 - 2.92 years

3.04 - 3.67 years

Risk-Free Interest Rate

2.81% - 2.88%

1.98%

Expected Dividend Yield

Nil

Nil

Expected Stock Price Volatility

15% - 60%

15% - 60%

 

Third KF Business Ventures Loan Agreement

 

On December 17, 2015, the Company entered into a Second KF Letter Agreement with the Lender, which was ratified by the formal definitive loan agreement signed on January 8, 2016 (the “Third KF Loan Agreement”). Under the Third KF Loan Agreement, the Lender agreed to lend to the Company $1,500,000 (the “Third KF Loan”), to be advanced in five equal installments of $300,000 each, commencing on execution of the Second KF Letter Agreement, and on the first day of each consecutive calendar month thereafter until fully advanced.

 

The maturity date under the Third KF Loan Agreement was January 15, 2017. The Third KF Loan is unsecured and has an effective interest rate of 2,339%, which was due primarily to the recording of non-cash accretion interest. At the discretion of the Lender the principal and accrued but unpaid interest under the Third KF Loan may be converted into shares of the Company’s common stock at a conversion price of $0.10 per share, in minimum increments of $250,000 (the “Third KF Loan Conversion Feature”). In case of default, the conversion price is calculated based on a 50% discount to the volume weighted average price of the Company’s stock over the last five days of trading immediately preceding the date of exercise. The Down-Round Provision is included in the Third KF Loan Conversion Feature.

 

In consideration for the Third KF Loan Agreement, the Company issued to the Lender non-transferrable share purchase warrants for a total of 8,000,000 shares of the Company’s common stock, exercisable at a price of $0.10 per share for a period expiring January 15, 2021 (the “Third KF Warrants”). At the discretion of the Lender the Third KF Warrants for up to 4,000,000 shares of common stock can be acquired by way of a cashless exercise. The Down-Round Provision is included in the Third KF Warrants.

 

The Third KF Warrants and the Third KF Loan Conversion Feature were determined to be derivatives under ASC 815; therefore, at initial measurement, the proceeds were allocated to the Third KF Warrants and the Third KF Loan Conversion Feature on pro-rata basis first and any residual proceeds to the principal.

 

At issuance date, the fair value of the Third KF Warrants and the Third KF Loan Conversion Feature was $509,760 and $990,239 respectively and a value of $1 was allocated to the principal.

 

The Company did not repay the Third KF Loan on January 15, 2017, when due, and as such the Third KF Loan is in default. The Company recorded a penalty on unpaid balance of $82,399, representing 5% of the full balance due under the Third KF Loan on January 15, 2017. The penalty has been included in financing costs. The Company has not been served with a default notice by KFBV.

 

During the nine months ended September 30, 2018, the Company recorded $224,255 (2017 - $183,166) in interest expense on the Third KF Loan at 15% per annum, the default rate of interest. In addition to the accrued interest, during the nine months ended September 30, 2017, the Company recognized accretion expense of $807,809. As at January 15, 2017, the Third KF Loan was fully accreted and, as such, no accretion expense was recognized during the nine months ended September 30, 2018.

 

As a consequence of the Third KF Loan being in default, the conversion price decreased to 50% of the volume weighted average price of the Company’s stock over the last five days of trading immediately preceding the date of exercise. The decrease in price may result in the Company having to issue up to 772,912,876 shares of its common stock should KFBV decide to exercise its conversion rights under the Third KF Loan Agreement.

 

At September 30, 2018, the fair value of the derivative liability associated with the Third KF Warrants and the Third KF Loan Conversion Feature were $24,000 (2017 - $48,000) and $2,318,741 (2017 - $1,968,174), respectively.

 

At September 30, 2018 and December 31, 2017, the fair value of the Third KF Warrants was revalued using the Binomial Lattice model using the following assumptions:

 

 

At September 30,

2018

At December 31,

2017

Expected Warrant Life

2.30 years

3.04 years

Risk-Free Interest Rate

2.81%

1.98%

Expected Dividend Yield

Nil

Nil

Average Expected Stock Price Volatility

60%

60%

 

At September 30, 2018 and December 31, 2017, the fair value of the Third KF Loan Conversion Feature was revalued using the Binomial Lattice model using the following assumptions:

 

 

At September 30,

2018

At December 31,

2017

Amount Eligible for Conversion

$2,125,506

$1,901,252

Share Price

$0.0055

$0.0097

Expected Life

on demand

on demand

Risk-Free Interest Rate

2.12%

0.96%

Expected Dividend Yield

Nil

Nil

Expected Stock Price Volatility

57%

57%

 

Summary of KF Loans Payable

 

A summary of the discounted carrying value, deferred financing costs, accumulated accrued interest, penalty and principal of KF loans payable is as follows:

 

As at September 30, 2018

 

 

Principal

Outstanding

Accumulated

Accrued

Interest

Penalty

Total

 

First KF Loan Payable

$

2,000,000

$

1,404,426

$

131,978

$

3,536,404

 

Second KF Loan Payable

 

2,400,000

 

1,411,997

 

147,779

 

3,959,776

 

Third KF Loan Payable

 

1,500,000

 

625,506

 

82,399

 

2,207,905

 

 

$

5,900,000

$

3,441,929

$

362,156

$

9,704,085

 

 

 

As at December 31, 2017

 

 

Principal

Outstanding

Accumulated

Accrued

Interest

Penalty

Total

First KF Loan Payable

$

2,000,000

$

1,045,238

$

131,978

$

3,177,216

Second KF Loan Payable

 

2,400,000

 

1,009,806

 

147,779

 

3,557,585

Third KF Loan Payable

 

1,500,000

 

401,251

 

82,399

 

1,983,650

 

$

5,900,000

$

2,456,295

$

362,156

$

8,718,451

 

Summary of the Derivative Liability - Conversion Feature

 

A summary of the derivative liability associated with the Conversion Feature under the Third KF Loan Agreement is as follows:

 

As at September 30, 2018

 

 

 

 

Fair Value

at December

31, 2017

Change on

Revaluation at

Reporting

Date

Fair Value

at September 30,

2018

Third KF Loan Conversion Feature

$ 1,968,174

$350,567

$ 2,318,741

 

 

 

 

As at December 31, 2017

 

 

 

 

Fair Value

at December

31, 2016

Change on

Revaluation at

Reporting

Date

Fair Value

at December

31, 2017

Third KF Loan Conversion Feature

$ 1,576,327

$391,847

$ 1,968,174

 

Summary of the Derivative Liabilities - Warrants

 

A summary of the derivative liabilities associated with the warrants under the KF Loan Agreements and their amendments is as follows:

 

As at September 30, 2018

 

Fair Value at

December 31,

2017

Change on

Revaluation at

Reporting Date

Fair Value at

September 30, 2018

9,254,546 warrants (Amended Warrants and September Warrants)

$

46,273

$

(18,509)

$

27,764

1,194,332 warrants (First Extension Warrants)

 

7,166

 

(3,583)

 

3,583

9,600,000 warrants (Second KF Warrants)

 

48,000

 

(19,200)

 

28,800

1,337,320 warrants (Second Extension Warrants)

 

8,024

 

(4,012)

 

4,012

8,000,000 warrants (Third KF Warrants)

 

48,000

 

(24,000)

 

24,000

Total

$

157,463

$

(69,304)

$

88,159

 

As at December 31, 2017

 

Fair Value at

December 31,

2016

Change on

Revaluation at

Reporting Date

Fair Value at

December

31, 2017

9,254,546 warrants (Amended Warrants and September Warrants)

$

58,303

$

(12,030)

$

46,273

1,194,332 warrants (First Extension Warrants)

 

9,077

 

(1,911)

 

7,166

9,600,000 warrants (Second KF Warrants)

 

57,600

 

(9,600)

 

48,000

1,337,320 warrants (Second Extension Warrants)

 

10,164

 

(2,140)

 

8,024

8,000,000 warrants (Third KF Warrants)

 

59,200

 

(11,200)

 

48,000

Total

$

194,344

$

(36,881)

$

157,463

 

KF Business Ventures, Deferred Financing Costs

 

During the year ended December 31, 2015, the Company recorded $50,538 in legal fees associated with securing the KFBV Loans. These fees were amortized over the remaining life of the loans. As of September 30, 2018, the legal fees were fully amortized and the Company did not have any financing costs associated with the KFBV Loans. During the nine months ended September 30, 2017 the Company recorded $564 in financing costs associated with the amortization of the legal fees associated with KFBV Loans.