| Convertible Promissory Notes Payable [Text Block] | 10.
Convertible Promissory Notes Payable
July 31, 2015 January 31, 2015
Senior Secured Convertible Debentures, bearing interest at
6% per annum, collateralized by a priority general security agreement over all of the present and future assets of the company ranked pari passu to First and Second Kalamalka Amendment Agreement, due June 10, 2017 (i).
$
6,997,577
$
7,169,832
First and Second Kalamalka Amendment Agreement, bearing interest at
6% per annum, collateralized by a priority general security agreement over all of the present and future assets of the company ranked pari passu to Senior Secured Convertible Debentures due June 10, 2017 (ii)
600,000
600,000
Less: debt discounts
(6,972,964
)
(7,163,982
)
$
624,613
$
605,850
(i)
Senior Secured Convertible Debentures
On June 10, 2014 and July 8, 2014, the Company entered into Subscription Agreements (collectively, the “Subscription Agreements”) with several investors (collectively, the “Purchasers”) in connection with a private placement offering (the “Offering”) for aggregate gross proceeds of $7,309,832
through the sale of
292
units (the “Units”) at a price of $25,000
per Unit. Each Unit consisted of (i) a
6% convertible senior secured debenture in the principal amount of $25,000
(each, a “Debenture”) and (ii) warrants to purchase
4,167
of our common shares at an exercise price of $6.00
per share, subject to certain adjustment as set out in the warrant agreements (the “Warrants”).
In connection with the close of the Offering, the Company issued Debentures in the aggregate principal amount of $7,309,832. As consideration, the Company (i) received gross cash proceeds equal to $6,094,100, before deducting agent fees and other transaction-related expenses; and (ii) exchanged
6% senior secured convertible notes in the aggregate amount of $1,094,159, being the principal and accrued interest due under such notes, for the issuance of Debentures in the aggregate principal amount of $1,215,732, at an exchange rate equal to
90% of the purchase price paid in the Offering.
The aggregate principal amount matures on June 10, 2017 and bears interest at the rate of
6% per annum, payable quarterly, in cash or in shares of common stock, at the option of the Company provided certain equity conditions of the Debentures have been met, valued at the then conversion price of the Debentures. At July 31, 2015, such equity conditions had not been met and, consequently, payment of interest owing in shares of common stock is not permitted under the terms of the Debentures, unless such condition is formally waived by each holder. During the six months ended July 31, 2015 and in connection with the second interest payment dates, the Company received waivers from holders of $5,537,577
in outstanding principal amounts of the Debentures. Such holders received payment of interest in shares of common stock of the Company, resulting in the issuance of
55,427
shares of our common stock as payment for $166,127
in interest due, based on a contractual conversion price of $3
applied to the cash amount of interest owing. The fair value of the shares issued of $280,452
was determined with reference to the quoted market price of the shares on the date they were issued. The difference between the fair value of the shares issued and the cash amount of interest payable was recorded as interest expense on the consolidated statement of operations for the three and six months ended July 31, 2015.
The Debentures, along with any accrued and unpaid interest thereon, may be converted at any time, at the option of the holder, into common shares of the Company at a conversion price of $3.00
per share, subject to adjustment under the terms of the Debentures.
Repayment of the Debentures are collateralized against all the assets of the Company and its subsidiary, pursuant to a security agreement between the Company and an agent for the Purchasers.
The Company issued an aggregate of
1,218,308
Warrants to the Purchasers to purchase, for a period of five years from the date of issuance, up to
1,218,308
shares of common stock at an initial exercise price of $6.00
per share, subject to adjustment. The Company has the right to call the Warrants if the volume weighted average closing price of its common shares exceeds $16.00
per share for more than
20
consecutive trading days at any time after June 10, 2016. In that event, the Warrants will expire
30
days following the date the Company delivers notice in writing to the Warrant holders announcing the call of the Warrants.
At the date of issuance of the Debentures and Warrants, the Company was authorized to issue
2,500,000
shares of common stock, which was insufficient to settle the conversion of the Debentures and exercise of the Warrants. Consequently, under the guidance of ASC 815, management recorded a derivative financial instrument in the Company’s consolidated financial statements (Note 11).
In connection with the Subscription Agreements, the Company also entered into a Registration Rights Agreement with each Purchaser (the “Registration Rights Agreement”), pursuant to which the Company has agreed to file with the Securities and Exchange Commission (the “SEC”) a registration statement to register for resale the shares that have been or may be issued to the Purchasers upon conversion of the Debentures and upon exercise of the Warrants (the “Registration Statement”). The terms of the Registration Rights Agreement also trigger the requirement to account for the related embedded conversion option and investor warrants that have not been included in an effective registration statement as derivative financial instruments pursuant to the guidance of ASC 815. The Company also agreed to grant piggyback registration rights whereby the Company is required to include the shares of common stock issuable pursuant to exercise of the Agent Warrants in the Registration Statement.
The Company allocated the proceeds from the issuance of the Debentures first to the derivative financial instruments, at their fair values, with the remainder being allocated to the Debentures. The fair value of the derivative financial instruments of $19,338,215
at issuance resulted in a debt discount at issuance of $7,309,832, the entire aggregate principal balance of the Debentures. The remaining derivative financial instruments value over the proceeds of the debt at issuance of $12,028,383
was immediately expensed on the consolidated statement of operations as derivative expense, during the year ended January 31, 2015. This discount was being amortized using the effective interest method over the term of the Debentures.
During the three and six months ended July 31, 2015, the Company recorded accretion expense of $12,888
and $18,940, respectively (2014: $521
and $521, respectively) in accretion of this discount.
In connection with the Offering, the Company incurred finance fees of $2,021,213
as follows:
(i)
The Company paid a cash commission of $468,513, or
8% of the gross proceeds raised from certain of the Purchasers;
(ii)
The Company issued
276,592
warrants to acquire common shares equal to
8% of the aggregate number of shares issuable upon conversion of the Debentures and exercise of the Warrants with respect to certain of the Purchasers (the “Agent Warrants”), on the same terms as the Warrants, except that the Agent Warrants are (i) exercisable at
100% of the conversion or exercise price of the Debentures and Warrants issued to the Purchasers in the Offering and (ii) contain a cashless exercise provision.
The fair value of the finder’s warrants of $1,552,700
was determined using an option pricing model under the following assumptions:
June 10, 2014 July 8, 2014
Risk-free interest rate
1.71%
1.70%
Expected life (years)
5.00
5.00
Expected volatility
(1)
147.39%
147.39%
Stock price at issuance $
6.00
$
6.50
Dividend yields
0.00%
0.00%
(1)
As the Company has insufficient historical data on which to estimate expected future share price volatility, the Company estimated expected share price volatility based on the historical share price volatility of comparable entities.
The finance fees were allocated to the Debentures and related derivative financial instruments in the same proportion as the allocation of proceeds to each instrument at the issuance date and, consequently, since the derivative financial instruments were allocated
100% of the proceeds, these finance charges were allocated to the derivative financial instrument at issuance and, as a result of these instruments being carried at fair value, were recorded as an immediate finance expense on the consolidated statement of operations during the six months ended July 31, 2014.
On September 8, 2014, the Company filed an initial prospectus on Form S-1 with the Securities and Exchange Commission (SEC) to register the sale of up to
1,039,227
shares issuable upon exercise of certain of the warrants issued in connection with the Offering, including
60,000
warrants issued under the Kalamalka Notes (Note 8(ii)) which contained piggyback registration rights, and
979,227
of the Warrants. On October 8, 2014, the SEC declared the registration statement effective.
During the six months ended July 31, 2015, the Company issued an aggregate of
58,411
shares of common stock pursuant to the conversion of debt, including
57,421
shares pursuant to the conversion of $172,255
in principal and
990
shares as payment for $2,967
in interest amounts owing under the Debentures for principal amounts converted. During the six months ended July 31, 2015 In connection with these conversion, the Company recorded accelerated accretion expense of $172,074
(2014: $Nil).
(ii)
Senior Secured Convertible Note Agreements with Kalamalka Partners
On August 10, 2012, and November 14, 2013, the Company and its wholly owned subsidiary, Naked, entered into certain Agency Agreements with Kalamalka and certain lenders (the “Lenders”) as set out in the Agency Agreements whereby the Company agreed to borrow up to $800,000
from the Lenders under a revolving loan arrangement by the issuance of convertible promissory notes (the “Notes”) from time to time as such funds are required by the Company.
The Notes were collateralized by a first priority general security agreement over the present and future assets of the Company and were bearing interest at
12% per annum, calculated and payable monthly. The principal amounts outstanding under any Note and all accrued and unpaid interest therein, were convertible into common shares at $30
per share at any time at the option of the Lender. These terms were later amended, as described below. On November 13, 2013, the Company entered into another Agency and Interlender Agreement with Kalamalka and certain lenders whereby the Company agreed to borrow up to an additional $300,000.
On April 4, 2014, the Company entered into another Amendment Agreements with Kalamalka and certain of the Lenders (the “Amendment Agreements”). In connection with the Amendment Agreements, the Company amended several of the Notes in the aggregate principal amount of $600,000
as follows; (i) the Company extended the due date of the Notes to October 1, 2016; (ii) the Company reduced the interest rate accruing under the Notes to
6% per annum, calculated and payable quarterly; (iv) the Company removed certain borrowing margin requirements; (iii) the Company reduced the conversion price on Notes in the aggregate principal amount of $400,000
from $20
per share to $10
per share; and (v)
12,500
share purchase warrants exercisable at a strike price of $20
until August 10, 2017 held by Kalamalka and
2,500
share purchase warrants at a strike price of $20
until August 10, 2018 (the “Existing Warrants”) were exchanged for
15,000
New Warrants, as defined and described below (the “Exchanged Warrants”).
As consideration for facilitating such amendments, the Company granted
45,000
share purchase warrants to the Lenders and Kalamalka (the “New Warrants”).
Each New Warrant issued to Kalamalka and the Lenders is exercisable into one common share at a price of $6
per share for a period of five years. The Company has the right to call the New Warrants if the volume weighted average closing price of the Company’s shares exceeds $16
per share for more than
20
consecutive trading days at any time after June 10, 2016. In that event, the New Warrants will expire
30
days following the date the Company delivers notice in writing to the warrant holders announcing the call of the Warrants. In addition, the New Warrants contained piggyback registration rights on any subsequent registration statement filed with the SEC. The New Warrants were included in the registration statement declared effective by the SEC on October 8, 2014 (Note 10(i)).
The Company assessed the guidance under ASC 470-60
Troubled Debt Restructurings
Risk-free interest rate
0.66%
Expected life (years)
2.50
Expected volatility
(1)
141.72%
Stock price $
9.20
Dividend yields
0.00%
The fair value of the New Warrants of $384,100
was determined using the Black Scholes option pricing model with the following assumptions:
Risk-free interest rate
1.71%
Expected life (years)
5.00
Expected volatility
(1)
149.76%
Stock price at date of issuance $
9.20
Dividend yields
0.00%
The fair value of the Exchanged Warrants of $23,300
was determined as the difference between the fair value of these warrants exchanged and the fair value of the New Warrants received. The fair values were determined using the Black Scholes option pricing model with the following weighted average assumptions:
Existing Exchanged
Warrants Warrants
Risk-free interest rate
0.96%
1.71%
Expected life (years)
3.52
5.00
Expected volatility
(1)
146.70%
149.76%
Stock price at date of issuance $
9.20
$
9.20
Dividend yields
0.00%
0.00%
(1)
As the Company has insufficient historical data on which to estimate expected future share price volatility, the Company estimated expected share price volatility based on the historical share price volatility of comparable entities.
The loss was recorded on the consolidated statement of operations six months ended July 31, 2014, with a corresponding credit to additional paid in capital. In connection with the Amendment Agreements, the Company incurred $36,993
in financing fees. These cost have been recorded as a deferred financing charge and are being amortized using the effective interest method over the term of the amended Notes. During the three and six months ended July 31, 2015, the Company recorded financing expense of $7,198
and $14,254, respectively (2014: $7,101
and $9,124, respectively) in respect of the amortization of these charges.
During the six months ended July 31, 2014, the remaining Note in the aggregate principal amount of $100,000
plus $1,868
in accrued interest therein was settled by the issuance of
25,467
common shares of the Company at a conversion price of $4
per share. During the six months ended July 31, 2014, the Company recorded debt conversion expense of $187,438, related to the fair value of the additional units issued as a result of converting at the lower conversion price than the contractual conversion rate. The fair value of the shares issued was determined with reference to their quoted market price on the date of issuance.
(iii)
On June 5, 2014, the Company entered into a Note Termination Agreement pursuant to which the Company agreed to settle the full amount outstanding under a convertible promissory note in the principal amount of $124,444
in exchange for (i) a one-time cash payment of $175,000
and (ii)
8,250
common shares of the Company. The promissory note had been convertible, at any time by the lender, into shares of common stock of the Company at a price which is the lesser of $0.265
or
60% of the lowest trade price in the
25
trading days prior to the conversion (the “Conversion Price”). This resulted in a loss on extinguishment of debt of $38,405, being the fair value of aggregate consideration given of $217,240
less the book value of this Note of $3,735
(after a debt discount of $120,709) and a related embedded conversion feature being accounted for as a derivative liability of $175,100. The fair value of $5.12
per share related to the share consideration was determined with reference to the quoted market price of the Company’s stock on the date of issuance.
(iv)
During the six months ended July 31, 2014, the Company repaid various convertible promissory notes in the aggregate principal amount of $133,500
through cash payments of $189,640. The repayment of these promissory resulted in net gains on extinguishment of debt of $30,693, being the cash consideration paid upon redemption less the carrying value of the Note and any related embedded conversion features of $64,900, which were being accounted for as derivative financial instruments. |
