Quarterly report pursuant to Section 13 or 15(d)

Note 9 - Convertible Debentures

v3.10.0.1
Note 9 - Convertible Debentures
 6 Months Ended
Dec. 31, 2017
Notes to Financial Statements  
Debt Disclosure [Text Block]
NOTE
9
-
CONVERTIBLE DEBENTURES
 
During the year ended
June 30, 2017,
the Company had the following convertible debenture agreements, summarized as follows:
 
 
(a)
Power Up Lending Group, Ltd.:
 
 
●
On
February 9, 2017,
a total of
$55,000
(settled with cash) was received, net of
$3,000
in legal fees. The convertible debt was due
December 30, 2017;
and
 
●
On
March 9, 2017,
a total of
$35,000
(settled) was received, net of
$3,500
in legal fees. The convertible debt was due
November 20, 2017
 
The convertible debentures accrue interest of
12%
per annum and can be converted into common stock at the option of the holder at any time after
180
days following the date of issuance. The debenture has a conversion price equal to
63%
of the market price. Market price is defined as the average of the lowest
three
trading prices for the Company’s common stock during the
ten
-day trading period ending
one
trading day prior to the date of conversion notice with a limitation of
4.99%
of the issued and outstanding common stock at the time of conversion. Any amount of principal that is
not
paid when due bears interest at a rate of
22%
per annum.
 
The convertible debentures
may
be repaid by the Company as follows:
 
 
●
Outstanding principal multiplied by
115%
together with accrued interest and unpaid interest thereon if prepaid within a period of
30
days beginning on the date of issuance of the note;
 
●
Outstanding principal multiplied by
120%
together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning
31
days from the date of issuance of the note and ending on the date that is
60
days following the date of the note;
 
●
Outstanding principal multiplied by
125%
together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning
61
days from the date of issuance of the note and ending on the date that is
90
days following the date of the note.
 
●
Outstanding principal multiplied by
130%
together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning
91
days from the date of issuance of the note and ending on the date that is
120
days following the date of the note.
 
●
Outstanding principal multiplied by
135%
together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning
121
days from the date of issuance of the note and ending on the date that is
150
days following the date of the note.
 
●
Outstanding principal multiplied by
140%
together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning
151
days from the date of issuance of the note and ending on the date that is
180
days following the date of the note.
 
The embedded conversion feature of the convertible debentures were treated as derivative liabilities measured at fair value on inception and at each reporting date with the debt component being allocated the residual value of the debt and amortized using the effective interest method to its maturity value. Debt issuance costs have been recorded as a reduction to the debt.
 
At inception of the loans, the total net proceeds allocated to the derivative liability components were
$22,384
with the residual net proceeds of
$67,616
allocated to the debt components at inception.
 
On
August 9, 2017,
the Company paid cash of
$85,979
to settle the
February 9, 2017
convertible debt agreement with Power Up Lending Group, Ltd. The Company recognized a gain on extinguishment of
$73,450
as a result of the settlement.
 
 
(b)
L2
Capital Inc.:
 
 
●
On
May 12, 2017,
a replacement note of
$469,760
(partially extinguished) was received in exchange for the convertible note with JMJ Financial (described below). This note accrues interest at
12%
per year. The new convertible debt is due
November 12, 2017;
 
●
On
May 18, 2017,
a total of
$75,000
(partially settled) was received, net of
$13,200
in legal fees and
$31,027
in Other Issue Discount (“OID”). This note accrues interest at
8%
per year. The convertible debt is due
November 18, 2017;
 
●
On
June 8, 2017,
a total of
$25,000
(partially settled) was received, net of
$2,006
in Other Issue Discount (“OID”). This note accrues interest at
8%
per year. The convertible debt is due
December 8, 2017;
 
The convertible debentures can be converted into common stock at the option of the holder at any time after
180
days following the date of issuance. The debenture has a conversion price equal to
65%
of the market price. Market price is defined as the average of the lowest
two
trading prices for the Company’s common stock during the
twenty-one
-day trading period ending
one
trading day prior to the date of conversion notice with a limitation of
9.99%
of the issued and outstanding common stock at the time of conversion. Any amount of principal that is
not
paid when due bears interest at the lessor of (i)
24%
per annum or (ii) the maximum allowed by law.
 
 
●
On
May 19, 2017,
the Company entered into an equity purchase agreement, whereby the lender
may
purchase up to
$5,000,000
(described below) of the Company’s common shares. As consideration for the equity agreement, the Company entered into a commitment fee convertible debt note of
$105,000.
The convertible debt is due
May 5, 2020;
 
The convertible debenture associated with the equity purchase agreement accrues interest of
8%
per annum and can be converted into common stock at the option of the holder at any time after
180
days following the date of issuance. The debenture has a conversion price equal to
67.5%
of the market price. Market price is defined as the average of the lowest
two
trading prices for the Company’s common stock during the
twenty
-day trading period ending
one
trading day prior to the date of conversion notice with a limitation of
9.99%
of the issued and outstanding common stock at the time of conversion. Any amount of principal that is
not
paid when due bears interest at the lessor of (i)
24%
per annum or (ii) the maximum allowed by law.
 
If the Company enters into a convertible debt agreement with a conversion rate greater than the conversion price of the convertible debt above, then the conversion price shall be automatically adjusted to equal the most beneficial conversion rate.
 
The convertible debentures
may
be repaid by the Company as follows:
 
 
●
The
May 12,
18
and
June 8, 2017
convertible notes
may
be prepaid in cash equal to the outstanding principal multiplied by
125%
together with accrued interest and unpaid interest thereon up to the date that is
180
days following the date of the notes;
 
 
●
The
May 19, 2017
equity purchase agreement convertible notes
may
be prepaid in cash equal to:
 
●
the outstanding principal multiplied by
120%
together with accrued interest and unpaid interest thereon from inception up to the date that is
90
days following the date of the notes; and
 
●
the outstanding principal multiplied by
140%
together with accrued interest and unpaid interest thereon from inception up to the date that is
91
days following the date of inception and ending on the date that is
180
days from the date of inception;
 
The embedded conversion feature of the convertible debentures were treated as derivative liabilities measured at fair value on inception and at each reporting date with the debt component being allocated the residual value of the debt and amortized using the effective interest method to its maturity value. Debt issuance costs have been recorded as a reduction to the debt.
 
The embedded conversion feature of the equity purchase agreement commission convertible debenture was treated as a derivative liability measured at fair value on inception and at each reporting date with the debt component being allocated the residual value of the debt and amortized using the effective interest method to its maturity value. Debt issuance costs have been recorded as a deferred debt discount asset to be amortized using the effective interest method to its maturity value.
 
At inception of the convertible debt, the total net proceeds allocated to the derivative liability components were
$576,901
with the residual net proceeds of
$97,859
allocated to the debt components at inception.
 
 
(c)
SBI Investments LLC
 
 
●
On
May 12, 2017,
a replacement note of
$469,760
(partially extinguished) was received in exchange for the convertible note with JMJ Financial (described below). This note accrues interest at
12%
per year. The new convertible debt was due
November 12, 2017;
 
●
On
May 18, 2017,
a total of
$75,000
(partially settled) was received, net of
$13,200
in legal fees and
$31,027
in Other Issue Discount (“OID”). This note accrues interest at
8%
per year. The convertible debt is due
November 18, 2017;
 
●
On
June 23, 2017,
a total of
$25,000
(partially settled) was received, net of
$3,750
in Other Issue Discount (“OID”). This note accrues interest at
8%
per year. The convertible debt is due
December 23, 2017;
 
The convertible debentures can be converted into common stock at the option of the holder at any time after
180
days following the date of issuance. The debenture has a conversion price equal to
65%
of the market price. Market price is defined as the average of the lowest
two
trading prices for the Company’s common stock during the
twenty-one
-day trading period ending
one
trading day prior to the date of conversion notice with a limitation of
9.99%
of the issued and outstanding common stock at the time of conversion. Any amount of principal that is
not
paid when due bears interest at the lessor of (i)
24%
per annum or (ii) the maximum allowed by law.
 
 
●
On
May 19, 2017,
the Company entered into an equity purchase agreement, whereby the lender
may
purchase up to
$5,000,000
(described below) of the Company’s common shares. As consideration for the equity agreement, the Company entered into a commitment fee convertible debt note of
$105,000.
The convertible debt is due
May 5, 2020;
 
The convertible debenture associated with the equity purchase agreement accrues interest of
8%
per annum and can be converted into common stock at the option of the holder at any time after
180
days following the date of issuance. The debenture has a conversion price equal to
67.5%
of the market price. Market price is defined as the average of the lowest
two
trading prices for the Company’s common stock during the
twenty
-day trading period ending
one
trading day prior to the date of conversion notice with a limitation of
9.99%
of the issued and outstanding common stock at the time of conversion. Any amount of principal that is
not
paid when due bears interest at the lessor of (i)
24%
per annum or (ii) the maximum allowed by law.
 
In the Company enters into a convertible debt agreement with a conversion rate greater than the conversion price of the convertible debt above, then the conversion price shall be automatically adjusted to equal the most beneficial conversion rate.
 
The convertible debentures
may
be repaid by the Company as follows:
 
 
●
The
May 12,
18
and
June 23, 2017
convertible notes
may
be prepaid in cash equal to the outstanding principal multiplied by
125%
together with accrued interest and unpaid interest thereon up to the date that is
180
days following the date of the notes;
 
●
The
May 19, 2017
equity purchase agreement convertible notes
may
be prepaid in cash equal to:
 
●
the outstanding principal multiplied by
120%
together with accrued interest and unpaid interest thereon from inception up to the date that is
90
days following the date of the notes; and
 
●
the outstanding principal multiplied by
140%
together with accrued interest and unpaid interest thereon from inception up to the date that is
91
days following the date of inception and ending on the date that is
180
days from the date of inception;
 
The embedded conversion feature of the convertible debentures were treated as derivative liabilities measured at fair value on inception and at each reporting date with the debt component being allocated the residual value of the debt and amortized using the effective interest method to its maturity value. Debt issuance costs have been recorded as a reduction to the debt.
 
The embedded conversion feature of the equity purchase agreement commission convertible debenture was treated as a derivative liability measured at fair value on inception and at each reporting date with the debt component being allocated the residual value of the debt and amortized using the effective interest method to its maturity value. Debt issuance costs have been recorded as a deferred debt discount asset to be amortized using the effective interest method to its maturity value.
 
At inception of the convertible debt, the total net proceeds allocated to the derivative liability components were
$574,840
with the residual net proceeds of
$99,920
allocated to the debt components at inception.
 
Summary of convertible debt transactions
 
As of
December 31, 2017,
the total amortized value of the outstanding convertible debentures were
$597,242
(
June 30, 2017 -
$162,821
), the total amortized value of the deferred finance cost was
$165,794
(
June 30, 2017 -
$201,432
), the total fair value of the outstanding derivative liabilities were
$836,117
(
June 30, 2017 -
$988,463
) and the total fair value of the warrant derivative was
$357,009.
 
During the
six
months ended
December 31, 2017,
the Company recognized a fair value loss on warrant derivative of
$157,009
and fair value loss on derivative liabilities of
$504,946
(
2016
-
$29,238
). As of
December 31, 2017,
$462,543
of the fair value loss on derivative liabilities relates to the conversion features associated with the outstanding debentures with the loss being offset by a fair value gain of
$42,403
relating to the conversion feature associated with the debenture that was settled and extinguished.
 
As of
December 31, 2017,
22,970,866
(
June 30, 2017 –
55,374,342
) common shares of the Company would be required to settle the remaining convertible debentures at a weighted average conversion price of
$0.03
(
June 30, 2017 -
$0.01
) per common share.
 
As of
December 31, 2017,
the face value of convertible debentures is
$597,243
(
June 30, 2017 -
$1,439,520
), which includes accrued interest of approximately
$50,000
(
June 30, 2017 -
$22,392
).
 
During the
six
months ended
December 31, 2017,
debt discount amortization of
$814,822
(
2016
-
$24,605
) and deferred finance costs amortization of
$35,638
(
2016
-
$nil
) was recorded as interest expense.
 
The fair value of the derivative financial liabilities are calculated using the Black Sholes option pricing model.
 
The following assumptions were used in determining the fair value of the derivative liabilities at inception during the year ended:
 
   
December 31, 2017
    
June 30, 2017
  
Share price
  
 0.04
–
0.05
    
 0.04
–
0.10
  
Conversion price
  
 0.02
–
0.03
    
 0.02
–
0.06
  
Expected life (years)
  
 0.50
–
0.81
    
 0.50
–
0.81
  
Interest rate
  
 1.02
–
1.11%
    
 0.80
–
1.11%
  
Volatility
  
 132.98
–
158.06%
    
 106.63
–
158.06%
  
Dividend yield
  
 
N/A
 
    
 
N/A
 
  
Estimated forfeitures
  
 
N/A
 
    
 
N/A
 
  
 
The following assumptions were used in determining the fair value of the derivative financial liabilities as of:
 
   
December 31, 2017
    
June
3
0
,
2017
  
Share price
    
0.04
    
 
0.03
 
  
Conversion price
    
0.03
    
 
0.02
 
  
Expected life (years)
    
1.25
    
 0.39
–
0.64
  
Interest rate
    
1.31%
    
 
1.14%
 
  
Volatility
    
138.98%
    
 152.55
–
181.43%
  
Dividend yield
    
N/A
    
 
N/A
 
  
Estimated forfeitures
    
N/A
    
 
N/A
 
  
 
The following table summarizes the changes in the derivative liabilities:
 
   
Derivative liability
  
Balance, June 30, 2017
   $
988,463
  
Derivatives settled upon conversion of debt
    
(541,254
 )
Gain on extinguishment of convertible debt
    
(116,038
 )
Loss on change in fair value of the derivative
    
504,946
  
Balance, December 31, 2017
   $
836,117