| SHAREHOLDERS' EQUITY | Transaction with Synchron On October 2, 2017, the Company
and Synchron, an affiliate of General Atomic Technologies Corporation (“Synchron”), completed a transaction in accordance
with the following terms. Pursuant to an investment agreement (the “Investment Agreement”), the Company (i) issued
to Synchron 26,650,000 common shares of the Company, which constituted approximately 34% of the issued and outstanding common shares
of the Company; (ii) received gross proceeds of $4,752 in cash, less a $500 preliminary payment received in August 2017; and (iii)
granted Synchron an option (the “Option”) to purchase approximately an additional 15% of the Company’s fully
diluted common shares for an aggregate exercise price of an additional $5,040. Pursuant to an option agreement (the “Option
Agreement”), the Option term was for a period of up to four years from the initial investment. Additionally, the parties
executed an intellectual property rights agreement (the “IP Rights Agreement”), whereby Synchron received rights to
use and improve the Company’s intellectual property relating to the Company’s patents-pending and related technical
information. The Company retains the right to use any such improvements. On October 16, 2019, the Company issued to Synchron
24,175,000 common shares of the Company for a purchase price of $5,040 in connection with the exercise by Synchron of the Option.
Accordingly, (i) Synchron’s ownership of outstanding common shares of the Company increased from approximately 34%
to approximately 49%, and (ii) Synchron obtained the right to nominate an additional board member and (iii) the intellectual property
rights granted to Synchron pursuant to the IP Rights Agreement became exclusive for a perpetual term, free from a licensing fee.
The Company retains the right to use the intellectual property and any improvements made by Synchron. The Company engaged a third-party valuation
firm to determine the fair value of the three components of the Synchron transaction, namely: (i) the Investment Agreement, (ii)
the Option Agreement and (iii) the IP Rights Agreement. As of the 2017 closing date of the Synchron transaction, the gross value
of each component was determined to be as follows: $2,900 for the Investment Agreement, $825 for the Option Agreement and $1,027
for the IP Rights Agreement. The costs incurred to complete the transaction were allocated to each component based on relative
fair value to cost of equity, operating expenses and reduction to deferred income as they related to each component, respectively. The value of the common shares was determined
using a probability-weighted expected return method (“PWERM”) analysis, which included six different probability-weighted
scenarios based on the calculated enterprise value of the Company utilizing assumptions from the pre-feasibility study completed
in 2014 and trailing five-year average rare earth pricing in a discounted cash flow analysis. Due to the variability in the number of common
shares that could have been be issued upon exercise, the Option was considered a derivative liability. As a result, we revalued
the Option liability at the end of each reporting period, until the Option was exercised. Any gains or losses from the revaluation
were recorded to the Consolidated Statements of Operations. The gain (loss) on the revaluation of the Option liability was $(7)
and $8 for the three and six months ended June 30, 2019, respectively. Due to the Option exercise in October 2019, the Company
no longer has a liability related to the Option and will no longer have any gains or losses from the revaluation of the Option
liability. On June 30, 2019, the
Option was valued utilizing the Black-Scholes valuation model. The significant assumptions are as follows:
June 30, 2019
Risk-free interest rate 1.74%
Expected volatility 75%
Expected dividend yield Nil
Expected term in years 2.3
Estimated forfeiture rate Nil
Estimated exercise price $0.34
Estimated enterprise value per common share $0.00 The incremental difference
between the estimated value of the exclusive and non-exclusive IP Rights Agreement was added to the value from the Black-Scholes
model to arrive at the total value of the Option. Because Synchron and its affiliates would obtain
exclusive rights to the intellectual property upon exercise of the Option, the value of the IP Rights Agreement was considered
deferred income as the Company retains exclusive title to the intellectual property until Synchron exercises the Option. We amortized
the deferred income using the straight-line method over the term of the Option Agreement as this was the period of the Company’s
performance obligation related to the IP Rights Agreement. During the three and six months ended June 30, 2019, we amortized $64
and $128, respectively, of deferred intellectual property income. The value of the IP Rights Agreement at the transaction date
was determined using a PWERM analysis for six different probability weighted scenarios using the relief from royalty method based
on market royalty rates for similar agreements. Stock-based compensation As of June 30, 2020, we have 3,700,000 options
outstanding that were issued under the 10% Rolling Stock Option Plan. The compensation expense for stock option awards
recognized in our consolidated financial statements for the three months ended June 30, 2020 and 2019 was $106 and $19, respectively.
The compensation expense for stock option awards recognized in our consolidated financial statements for the six months ended June
30, 2020 and 2019 was $165 and $34, respectively. As of June 30, 2020, there was approximately $415 of total unrecognized compensation
cost related to 1,7750,000 unvested stock options that is expected to be recognized over a weighted-average remaining vesting period
of 1.3 years. The fair value of stock
option awards granted to directors, officers, employees and/or consultants of the Company are estimated on the grant date using
the Black-Scholes option valuation model and the closing price of our common shares on the business day prior to the grant date.
There were 750,000 and 850,000 options granted during the six months ended June 30, 2020 and 2019, respectively. The significant
assumptions used to estimate the fair value of stock option awards using the Black-Scholes option valuation model are as follows
for the six months ended June 30, 2020 and 2019:
Six months ended June 20,
2020 2019
Risk-free interest rate 1.45% 2.49%
Expected volatility 148% 141%
Expected dividend yield Nil Nil
Expected term in years 5.0 5.0
Estimated forfeiture rate Nil Nil The following table summarizes our stock option
activity for each of the six months ended June 30, 2020 and 2019:
2020 2019
Number of Stock Options Weighted Average Exercise Price Number of Stock Options Weighted Average Exercise Price
Outstanding, beginning of period 3,450,000 $ 0.16 3,385,400 $ 0.44
Granted 750,000 0.83 850,000 0.07
Exercised (500,000) 0.32 – –
Cancelled/Expired – – (161,400) 1.00
Outstanding, end of period 3,700,000 $ 0.25 4,074,000 $ 0.21
Exercisable, end of period 2,525,000 $ 0.11 2,849,000 $ 0.20
Weighted-average fair value per share of options granted during period $ 0.75 $ 0.07 |
