DERIVATIVE FINANCIAL INSTRUMENTS | 6 Months Ended |
Sep. 30, 2013 |
DERIVATIVE FINANCIAL INSTRUMENTS [Text Block] | ' |
8(a) | DERIVATIVE FINANCIAL INSTRUMENTS | | | | | | | | |
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Derivative financial instruments, as defined in FASB Accounting Standards Codification (“ASC”) 815-10-15-83 Derivatives and Hedging, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets. |
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The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has entered into certain other financial instruments and contracts, such as secured convertible debenture and warrant financing arrangements that are either (i) not afforded equity classification or (ii) embody risks not clearly and closely related to host contracts. As required by ASC 815, these instruments are required to be carried as derivative liabilities, at fair value, in the financial statements. |
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The following table summarizes the components of the derivative liabilities as of September 30, 2013 and inception of the instruments: |
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May 2010 Private Placement: | | 30-Sep-13 | | | Inception May 12, 2010 | | | | |
Investor warrants | $ | - | | $ | 1,519,144 | | | | |
Broker warrants | | - | | | 273,442 | | | | |
Credit facility warrants | | - | | | 523,440 | | | | |
Make Good warrants | | - | | | 131,891 | | | | |
Acquisition advisory fees: | | | | | | | | | |
Make Good warrants | | - | | | 62,176 | | | | |
Total derivative liabilities | $ | - | | $ | 2,510,093 | | | | |
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At inception, warrants were classified as liabilities due to the fact that they were considered not to be indexed to the company's own stock and due to the firm registration rights embodied in the agreements. At March 31, 2012 all variability and rights resulting in liability classification were removed and the instruments were re-measured and reclassified to equity. |
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The following table summarizes the common shares indexed to the derivative instruments as of September 30, 2013 and inception of the instruments: |
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May 2010 Private Placement: | | 30-Sep-13 | | | Inception May 12, 2012 | | | | |
Investor warrants | | - | | | 1,044,803 | | | | |
Broker warrants | | - | | | 188,062 | | | | |
Credit facility warrants | | - | | | 360,000 | | | | |
Make Good warrants | | - | | | 47,597 | | | | |
Acquisition advisory fees: | | | | | | | | | |
Make Good warrants | | - | | | 22,438 | | | | |
| | - | | | 1,662,900 | | | | |
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Make Good warrants indexed to 1,537,349 shares of common stock vested when the Company did not meet the performance condition as of March 31, 2011 and additional Make Good warrants indexed to 1,537,349 shares of common stock vested when the Company did not meet the March 31, 2012 performance condition. At March 31, 2012 all variability and rights resulting in liability classification were removed and the instruments were re-measured and reclassified to equity |
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8(b) | MAY 2010 PRIVATE PLACEMENT | | | | | | | | |
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On May 12, 2010, the Company commenced a private placement of (i) 2,089,593 shares of common stock for an aggregate purchase price of $5,809,000, or $2.78 per share, (ii) Closing Warrants to purchase up to 1,044,803 shares of common stock, and (iii) Make Good Warrants to purchase up to an aggregate of 2,089,593 shares of common stock (the “May 2010 Private Placement). In connection with the May 2010 Private Placement, the Company entered into a Registration Rights Agreement related to the common stock and warrants that requires the Company to, among other things, file a Registration Statement within 65 days from the closing of the May 2010 Private Placement and achieve effectiveness as soon as possible , but in no event later than the 180 th day following the Final Closing Date or the 5 th trading day following the date on which the Company is notified that the initial Registration Statement will not be reviewed or is no longer subject to review and comments. The Registration Rights Agreement does not provide for an alternative or contain a penalty in the event the Company is unable to fulfill its requirements. As a result of the registration rights obligation to file within a specified period, which is presumed not to be within the Company’s control, the Company is required to classify the common stock outside of stockholders’ equity as redeemable common stock. At March 31, 2012 the Company reclassified these securities to permanent equity due to the fact that the registration requirement had been met. |
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The Closing warrants included in the May 2010 Private Placement are indexed to 1,044,803 shares of the Company’s common stock and may be exercised until the fourth anniversary of their issuance at an exercise price of $3.61 per share. Pursuant to the Securities Purchase Agreement, the Company also agreed to issue Make Good warrants to investors to purchase up to an aggregate amount of 2,089,593 shares of its common stock at an exercise price of $0.01 per share which became exercisable when the Company did not meet certain financial performance targets in 2011 and 2012. The “make good” provisions established minimum net income thresholds of $14,382,102 and $15,179,687 for the 2011 and 2012 fiscal years, respectively. If, in a given fiscal year 90% of the applicable minimum net income threshold was not met, such aggregate number of Make Good warrants became exercisable equal to the amount by which the Company’s actual net income was less than the applicable financial target, divided by the financial target, and multiplied by 50% of the total warrant shares underlying the warrant agreement. The Closing and Make Good warrants were evaluated under the guidance of ASC 480, Distinguishing Liabilities and Equity for purposes of their classification. Due to the Make Good warrants contingent exercise provisions, they did not meet the definition of “indexed to a Company’s own stock” and were required to be classified as liabilities and measured at inception and an ongoing basis at fair value. As of March 31, 2012 the Make Whole warrants were no longer contingently exercisable and the registration rights agreement had been fulfilled. Accordingly, at March 31, 2012, the warrants met the 8 conditions for equity classification provided in ASC 815-40 and were revalued and reclassified to equity. |
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The total basis in the financing was allocated first to derivative instruments, required to be classified as liabilities with the remaining basis being allocated to the common stock. |
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The following table illustrates the initial allocation: |
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| | | | | Financing | | | | |
| | Proceeds | | | Cost | | | Final | |
| | Allocation | | | Allocation | | | Allocation | |
Gross proceeds | $ | 5,809,000 | | $ | - | | $ | 5,809,000 | |
Financing costs paid in cash | | - | | | (522,810 | ) | | (522,810 | ) |
| | 5,809,000 | | | (522,810 | ) | | 5,286,190 | |
Derivative liabilities: | | | | | | | | | |
Closing warrants: | | | | | | | | | |
Investor warrants | | (1,519,144 | ) | | - | | | (1,519,144 | ) |
Broker warrants | | - | | | (273,442 | ) | | (273,442 | ) |
Credit facility warrants | | - | | | (523,440 | ) | | (523,440 | ) |
Make Good warrants | | (131,891 | ) | | - | | | (131,891 | ) |
Total derivative liabilities | | (1,651,035 | ) | | (796,882 | ) | | (2,447,917 | ) |
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Redeemable common stock | | (4,157,965 | ) | | - | | | (4,157,965 | ) |
Financing costs paid in cash | | - | | | 407,792 | | | 407,792 | |
Financing costs paid with warrants | | - | | | 621,568 | | | 621,568 | |
Total redeemable common stock | | (4,157,965 | ) | | 1,029,360 | | | (3,128,605 | ) |
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Deferred finance costs | $ | - | | $ | 290,332 | | $ | 290,332 | |
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The Company amortized deferred finance cost by $nil during the six month period ended September 30, 2013 (2012: $54,550). Deferred finance costs outstanding as of September 30, 2013 relating to this financing is $nil (2012: $53,768) |
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The direct financing costs are allocated to the financial instruments (redeemable common stock and warrants), based upon their relative fair values. Amounts related to the warrants are recorded as deferred finance costs and amortized through charges to interest expense over the term of the arrangement using the effective interest method while amounts related to the common stock directly offset the carrying value of the redeemable common stock. |
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8(c) | CONVERTIBLE PROMISSORY NOTE AND MAKE GOOD WARRANT | | | | | | | | |
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HFG provided certain advisory services to the Company in connection with the acquisition of Minera and the May 2010 Private Placement. Pursuant to an advisory agreement that Minera entered into with HFG on April 16, 2009, HFG agreed to (a) advise Minera with regard to its desire to effect a combination transaction with a U.S. domiciled public shell corporation, (b) help Minera identify suitable investment bank(s) to act as placement agent for its contemplated private placement transactions and (c) counsel management on matters related to the operating a U.S. domiciled public company. Under the terms of the advisory agreement, HFG was entitled to receive a cash payment of $450,000 at the closing of the reverse acquisition of Minera. In lieu of such cash payment, HFG agreed to accept a cash payment of $260,000 and the HFG Note in the principal amount of $190,000 that accrues simple annual interest at a rate of 3% per annum. The HFG Note is due and payable on the sooner of the closing of the next equity financing (including the receipt of additional funds by the Company from any subsequent closing of the May 12 private placement) or the 180th day following the date of its issuance. In addition, at any time that the HFG Note remains outstanding, it may be converted at HFG’s option into shares of our common stock at a conversion price of $2.78. |
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The Company has evaluated the terms and conditions of the HFG Note under the guidance of ASC 815, Derivatives and Hedging. The embedded conversion feature (“ECF”) is an equity-linked feature that is not clearly and closely related to the risks of the host debt instrument. However, current accounting standards afforded an exemption to bifurcation of the ECF because it is both indexed to the Company’s own stock and otherwise met the definition of Conventional Convertible based upon the fixed conversion price. |
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At the closing, the Company had also issued to HFG the HFG Make Good Warrant for the purchase of up to 985,104 shares of common stock. The terms of the HFG Make Good Warrant are identical to the terms of the Make Good Warrants issued to the investors in the private placement and accordingly, they did not meet the definition of “indexed to a Company’s own stock” and were required to be classified as liabilities and measured at inception and an ongoing basis at fair value. As of December 31, 2012, HFG had exercised warrants for 492,552 common shares. |
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The fair value of the HFG Note was estimated based upon the present value of its future cash flows, using credit risk adjusted rates, as enhanced by the fair value of the ECF. Since the Company does not have an established credit rating, the credit risk adjusted yield of 15.51% was determined by reference to comparable instruments in public markets and industry-specific risk. The fair value of the ECF was determined using the Monte Carlo Simulation (“MCS”). MCS is an option-based model that embodies assumptions that would likely be considered by market participants who trade the financial instrument. In addition to more traditional assumptions, such as stock price, trading volatilities and risk-free rates, MCS assumptions include credit risk, interest risk and redemption considerations. Significant assumptions included in the MSC valuation technique were as follows: |
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| | Assumption | | | | | | | |
Linked common shares | | 68,345 | | | | | | | |
Stock price | $ | 2.78 | | | | | | | |
Expected life (years) | | 4 | | | | | | | |
Volatility (based on peers) | | 58.24%- 63.55% | | | | | | | |
Risk adjusted yield | | 15.51%- 16.94% | | | | | | | |
Risk adjusted interest rate | | 1.52%- 1.65% | | | | | | | |
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The advisory fee expense was determined based upon the fair value of the HFG Note and the HFG Make Good Warrants. In accordance with APB 14, the premium on the HFG Note, representing the difference between the fair value and the face value of the note, was recorded to additional paid in capital. |
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On May 8, 2012, the Company also entered into Loan Repayment Agreements (the “ Repayment Agreements ”) with HFG (“ Lender ”). Pursuant to the Repayment Agreements, Lender agreed that the Company is entitled to defer payment, and the Lender shall not demand payment, of any amounts due under certain loans made by the Lender to the Company, and the Lender shall not commence the exercise of any remedies it may have against the Company or any of its assets arising out of the Company’s breach of its obligations under the loans until the later of: (i) twelve (12) months from the date of closing of the transactions contemplated by the Purchase Agreement, and (ii) such time as the Company reports positive net income in quarterly or annual financial statements filed with the U.S. Securities and Exchange Commission. Notwithstanding the foregoing, the deferment shall be operative only so long as any notes remain outstanding. |
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The following table illustrates the initial allocation: |
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| | Initial | | | | | | | |
| | Allocation | | | | | | | |
Convertible Promissory Note | $ | 190,000 | | | | | | | |
Make Good warrants | | 62,176 | | | | | | | |
Additional paid in capital | | 13,835 | | | | | | | |
Total | $ | 266,011 | | | | | | | |
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Fair value Disclosures: |
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ASC 820, Fair value Measurements and Disclosures, provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition. Financial instruments arising from the May 2010 Private Placement that are measured at fair value on a recurring basis are (i) the investor warrants, (ii) the broker warrants, (iii) the credit facility warrants and (iii) Make Good warrants, respectively. |
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The warrants were valued using the Lattice technique, and the Company estimated (i the volatility, based upon a reasonable peer group, (iii) the risk free rate as the published rate for zero coupon government securities with terms consistent with the contractual term. |
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Information and significant assumptions embodied in our warrant valuations (including ranges for certain assumptions) as of March 31, 2012 are illustrated in the following tables: |
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| | Fair value | | | Closing | | | Make Good | |
| | hierarchy | | | Warrants | | | warrants | |
Warrants to purchase common stock: | | | | | | | | | |
Stock price (1) | | -2 | | $ | 2 | | $ | 2 | |
Strike price | | n/a | | $ | 3.61 | | $ | 0.01 | |
Volatility (2) | | -2 | | | | | | | |
Range of volatilities | | | | | 55.47% - 78.29% | | | 55.47% - 78.29% | |
Equivalent volatility | | | | | 65.65% | | | 65.65% | |
Term (years) (3) | | -3 | | | 2.12 | | | 2.12 | |
Risk-free rate (2) | | -2 | | | | | | | |
Range of risk free rates | | | | | 0.07% - 0.33% | | | 0.07% - 0.33% | |
Equivalent risk free rate | | | | | 0.18% | | | 0.18% | |
Dividends | | n/a | | | - - | | | - - | |
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Fair value hierarchy: |
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-1 | Level 1 inputs are quoted prices in active markets for identical assets and liabilities, or derived there from. The Company used its trading market price as of March 31, 2012 as input into the model which is a Level 1 input. | | | | | | | | |
-2 | Level 2 inputs are inputs other than quoted prices that are observable. The Binomial Lattice model provides for multiple assumptions related to volatility and risk free rate over the remaining term of the warrants. The equivalents or averages of these assumptions are also provided above. The Company uses the current published yields for zero- coupon US Treasury Securities for its risk free rate. The Company did not have a historical trading history sufficient to develop an internal volatility rate for use in the Binomial Lattice model. As a result, the Company has used a peer approach wherein the historical trading volatilities of certain companies with similar characteristics and who had a sufficient trading history were used as an estimate of the Company’s volatility. In developing this model, no one company was weighted more heavily. | | | | | | | | |
-3 | Level 3 inputs are unobservable inputs. Inputs for which any parts are Level 3 inputs are classified as Level 3 in their entirety. The remaining term used equals the remaining contractual term as our best estimate of the expected term. The probability-weighted outcomes of achieving the performance conditions are also a Level 3 input. | | | | | | | | |
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Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of the Company’s common stock, which has a high estimated volatility. Since derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes. |
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The following tables summarize the effects on the Company’s income (loss) associated with changes in the fair values of the derivative financial instruments for the year ended March 31 2012: |
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May 2010 Private Placement: | | | | | | | | | |
Investor warrants | $ | 468,072 | | | | | | | |
Broker warrants | | 84,251 | | | | | | | |
Credit facility warrants | | 304,200 | | | | | | | |
Make Good warrants | | (1,086,244 | ) | | | | | | |
Acquisition advisory fees: | | | | | | | | | |
Make Good warrants | | (512,091 | ) | | | | | | |
| $ | (741,812 | ) | | | | | | |
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The following represents a reconciliation of the changes in our derivatives and the related changes in fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended March 31, 2013 and 2012 and six month period ended September 30, 2013: |
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Balances at March 31, 2011 | $ | 5,866,285 | | | | | | | |
Fair value adjustments | | 741,812 | | | | | | | |
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Transfer to additional paid in capital | | (6,608,097 | ) | | | | | | |
Balances at March 31, 2012 | $ | - | | | | | | | |
Balances at March 31, 2013 and September 30, 2013 | $ | - | | | | | | | |