Washington, D.C. 20549
Algae Dynamics Corp.
Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
As of February 16, 2016 there were 9,746,781 shares of the issuer's non par value common shares issued and outstanding.
| 1.) | Nature of the Business and Going Concern |
Algae Dynamics Corp. (the “Company”) was incorporated under the Canada Business Corporations Act on October 7, 2008 as Converted Carbon of Canada Corp. On November 19, 2010, the Company amended its Articles of Incorporation to change its name to Converted Carbon Technologies Corp. and a further amendment was approved by the shareholders on August 28, 2014 to change the name to Algae Dynamics Corp.
The Company is a nutrient ingredient company and has developed a scalable Pure-BioSilo™ for sanitary cultivation of microalgae targeted to the functional food and beverage additives and supplement markets. The Company’s planned principal operations are the design, engineering and manufacturing of a proprietary algae cultivation system for the high volume production of pure contaminant-free algae biomass. The Company is currently conducting research and development activities to operationalize certain patented technology so it can produce pure contaminate-free algae biomass.
During the year ended March 31, 2014, the Company secured a research facility in Mississauga, Ontario, which houses all of its employees and research and development activities. The Company is also in the process of raising additional equity capital to support the completion of its development activities to begin production of pure contaminate-free algae biomass as soon as possible.
The Company filed a Form S-1 registration Statement with the U.S Securities and Exchange Commission (SEC) as an initial registration of common shares. The registration was declared effective by the SEC on November 21, 2014. In addition, the Company had an application for a trading symbol cleared by FINRA as “ADYNF” on July 17, 2015.
The Company’s activities are subject to significant risks and uncertainties, including failing to obtain patents and failing to secure additional funding to operationalize the Company’s current technology before another company develops similar technology.
These condensed interim financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company is in the development stage and has not yet realized profitable operations and has relied on non-operational sources to fund operations. The Company has suffered recurring losses and additional future losses are anticipated as the Company has not yet been able to generate revenue. In addition, as of December 31, 2015, the Company has a working capital deficiency of $668,509 (March 31, 2015 - $845,406) and an accumulated deficit of $2,609,076 (March 31, 2015 - $1,809,373). The Company’s ability to continue as a going concern is dependent on successfully executing its business plan, which includes the raising of additional funds. The Company will continue to seek additional forms of debt or equity financing, but it cannot provide assurances that it will be successful in doing so. These circumstances raise substantial doubt as to the ability of the Company to meet its obligations as they come due and accordingly, the appropriateness of the use of accounting principles applicable to a going concern. The accompanying condensed interim financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Such adjustments could be material.
Algae Dynamics Corp. (Formerly Converted Carbon Technologies Corp.)
Notes to the Condensed Interim Financial Statements
(Stated in Canadian Dollars)
(unaudited)
December 31, 2015 and 2014
2.) Presentation of Financial Statements
Basis of Presentation
These unaudited condensed interim financial statements should be read in conjunction with the financial statements for the Company’s most recently completed fiscal year ended March 31, 2015. These condensed interim financial statements do not include all disclosures required in annual financial statements, but rather are prepared in accordance with recommendations for interim financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). These unaudited condensed interim financial statements have been prepared using the same accounting policies, and methods as those used by the Company in the annual audited financial statements for the year ended March 31, 2015, except when disclosed below.
The unaudited condensed interim financial statements contain all adjustments (consisting of only normal recurring adjustments) which are necessary to present fairly the financial position of the Company as at December 31, 2015, and the results of its operations for the three and nine month periods ended December 31, 2015 and 2014 and its cash flows for the nine month periods ended December 31, 2015 and 2014. Note disclosures have been presented for material updates to the information previously reported in the annual audited financial statements.
In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-10 “ASU 2014-10” to eliminate certain financial reporting requirements for development stage entities. The amendments in ASU 2014-10 remove the incremental financial reporting requirements from US GAAP for development stage entities, including the presentation of inception-to-date information in the statements of income, cash flows and shareholder equity, and disclosure of the financial statements as those of a development stage entity. The Company has chosen to early adopt these amendments effective for its fiscal year ended March 31, 2013 and onwards.
Estimates
The preparation of these condensed interim financial statements has required management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of the revenues and expenses during the reporting period.
On an ongoing basis, the Company evaluates its estimates, including those related to provision for doubtful accounts, accrued liabilities and contingencies, and the valuation of income taxes, stock based compensation, warrants, convertible debt and intangible assets. The Company bases its estimates on historical experiences and on various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates. As adjustments become necessary, they are reported in earnings in the period in which they become known.
Algae Dynamics Corp. (Formerly Converted Carbon Technologies Corp.)
Notes to the Condensed Interim Financial Statements
(Stated in Canadian Dollars)
(unaudited)
December 31, 2015 and 2014
| 3.) | Equipment and Leasehold Improvements |
| | | | December 31, 2015 | | | March 31, 2015 | |
| | | | Cost | | | Accumulated Amortization | | | Cost | | | Accumulated Amortization | |
| | | | | | | | | | | | | | | | | | |
| | Computer equipment | | $ | 3,558 | | | $ | 1,931 | | | $ | 3,558 | | | $ | 1,459 | |
| | Production equipment | | | 6,7367 | | | | 25,261 | | | | 67,367 | | | | 17,831 | |
| | Leasehold improvements | | | 33,649 | | | | 13,198 | | | | 33,649 | | | | 7,784 | |
| | Total | | $ | 104,574 | | | $ | 40,390 | | | $ | 104,574 | | | $ | 27,074 | |
| | Net carrying amount | | | | | | $ | 64,184 | | | | | | | $ | 77,500 | |
During the nine month periods ended December 31, 2015, the Company recorded total amortization of $13,316 (2014 - $14,192) which was recorded to amortization expense on the statements of operations.
The Company has patents and patents pending with a cost of $21,094 as at December 31, 2015 (March 31, 2015 - $15,970) that are not currently being amortized and accordingly, the Company did not record amortization expense relating to its intangible assets for the nine month periods ended December 31, 2015 and 2014.
| 5.) | Advances from Shareholders and Related Parties |
As at December 31, 2015, the Company had received cumulative working capital advances in the amount of $352,474 (March 31, 2015 - $367,267) from two shareholders who are also officers and directors of the Company and a related party who is a family member of one of the officers. The advances from shareholders are unsecured, non-interest bearing and payable upon demand. During the three months ended December 31, 2015, advances of $75,846 (including interest of $8,721) were converted into common shares at (USD$1.11) $1.54 based on the terms in the equity purchase agreement (See Note 8), being a 35% discount to the market price of the Company's shares. The equity purchase agreement (“EPA”) has been signed with an independent third party who has committed to purchase up to USD$750,000 worth of the Company’s common shares, therefore the Company has concluded that common shares issued under the EPA are more reflective of the fair value of the common shares than the market trading price which has demonstrated a low volume of trading activity since the Company began trading in November 2015. The advances from the related party are unsecured, payable upon demand and bear interest at 20% per annum.
On May 6, 2015, the Company agreed to a one year term loan (maturing May 5, 2016) with a family member of an officer. The loan bore interest at 12% per annum paid quarterly. The face value of the loan was $33,000. The carrying value of the loan was recorded net of $3,000 of transaction costs.
Algae Dynamics Corp. (Formerly Converted Carbon Technologies Corp.)
Notes to the Condensed Interim Financial Statements
(Stated in Canadian Dollars)
(unaudited)
December 31, 2015 and 2014
6.) Term Loan (continued)
The term loan plus the accrued interest was converted to common shares on December 31, 2015 at a 35% discount to the market price (USD$1.11) $1.54 based on the terms of the EPA (See Note 8). The EPA has been signed with an independent third party who has committed to purchase up to USD$750,000 worth of the Company’s common shares, therefore the Company has concluded that common shares issued under the EPA are more reflective of the fair value of the common shares than the market trading price which has demonstrated a low volume of trading activity since the Company began trading in November 2015.
On September 2, 2015, the Company entered into a convertible note with a principal amount of USD$25,000 ($34,600). The convertible note matures on September 1, 2016 and accrues interest at the rate of 12% per annum. The convertible note is convertible at any time after six months, in whole or in part, at the holder’s option into common shares of the Company’s capital stock at a variable conversion price equal to a 45% discount from the lowest trading price in the twenty (20) trading days prior to the day that the holder requests conversion. The beneficial conversion feature was recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital in accordance with ASC 470-20. The intrinsic value at issuance was $27,227.
The issuance of convertible debt with a beneficial conversion feature results in a tax basis difference. The recognition of deferred taxes for the temporary difference of the convertible debt with a beneficial conversion feature is recorded as an adjustment to additional paid-in capital. A deferred income tax liability of $7,215 was recognized upon the issuance of the convertible note.
The discount to the carrying value of the convertible note is being amortized as a non-cash interest expense over the term of the convertible note using the effective interest rate method, at a rate of 93%. During the three and nine months periods ended December 31, 2015, the Company accreted $6,857 and $8,933, respectively (2014 - $Nil and $Nil, respectively) in non-cash accretion expense in connection with the convertible note, which is included in accretion expense on the condensed interim statements of operations and comprehensive loss.
(a) Common Shares
Authorized
The Company is authorized to issue an unlimited number of common shares with no par value.
Issued and Outstanding
On June 25, 2015, 12,500 common shares purchase warrants were exercised at USD$0.04 ($0.048) per warrant for total cash proceeds of USD$500 ($620).
Algae Dynamics Corp. (Formerly Converted Carbon Technologies Corp.)
Notes to the Condensed Interim Financial Statements
(Stated in Canadian Dollars)
(unaudited)
December 31, 2015 and 2014
8.) Capital Stock (continued)
(a) Common Shares (continued)
On November 5, 2015, 31,000 common shares purchase warrants were exercised at USD$0.04 ($0.052) per warrant for total cash proceeds of USD$1,240 ($1,632).
On December 18, 2015, 51,600 common shares purchase warrants were exercised at USD$0.04 ($0.054) per warrant for total cash proceeds of USD$2,064 ($2,834).
On December 22, 2015, 31,000 common shares purchase warrants were exercised at USD$0.04 ($0.056) per warrant for total cash proceeds of USD$1,240 ($1,735).On December 31, 2015, 48,400 common shares purchase warrants were exercised at USD$0.04 ($0.055) per warrant for total cash proceeds of USD$1,936 ($2,683).
On December 31, 2015, 23,094 common shares were issued to convert the term loan (see Note 6) into common shares at a value of $35,604 based upon a fair market value of USD$1.11 ($1.54).
On December 31, 2015, 49,371 common shares were issued to convert advances from related parties made to the Company into common shares at a value of $75,846 based upon a fair market value of USD$1.11 ($1.54). (see Note 5)
On December 31, 2015 45,000 common shares were issued to three officers of the Company at a fair market value of USD$1.11 ($1.54) per share for a total value of $69,131 as compensation.
On December 31, 2015, a private placement was completed to issue 31,532 common shares at USD$1.11 per share for gross proceeds of USD$35,000 ($48,441). The shares were subscribed for by a family member of an officer.
On December 31, 2015, a consultant was issued 10,000 common shares for services rendered in the amount USD$11,100 ($15,362), another consultant was issued 93,000 common shares for services rendered in the amount of USD$103,229 ($142,870) (see Note 10) and a third consulting firm was issued 13,874 common shares for services rendered in the amount of USD$15,400 ($21,314), these amounts have been recorded as professional fees on the condensed interim statements of operations and comprehensive loss.
The value of the shares issued on December 31, 2015 was based on the EPA which has been signed with an independent third party who has committed to purchase up to USD$750,000 worth of the Company’s common shares, therefore the Company has concluded that common shares issued under the EPA are more reflective of the fair value of the common shares than the market trading price which has demonstrated a low volume of trading activity since the Company began trading in November 2015.
Algae Dynamics Corp. (Formerly Converted Carbon Technologies Corp.)
Notes to the Condensed Interim Financial Statements
(Stated in Canadian Dollars)
(unaudited)
December 31, 2015 and 2014
8.) Capital Stock (continued)
Equity Purchase Agreement
On September 10, 2015 the Company entered into the “EPA”. The holder of the EPA is committed to purchase up to USD$750,000 worth of the Company’s common shares (the “Put Shares”) over the 12 month term of the EPA. The Company paid to the holder of the EPA a commitment fee for entering into the EPA equal to 50,000 restricted common shares of the Company, valued at $67,195, based on the stock price in the most recent private placement.
From time to time over the EPA, commencing on the trading day immediately following the date on which the registration statement covering the resale of the Put Shares (the “Registration Statement”) is declared effective by the Securities and Exchange Commission (the ”Commission”), the Company may, in its sole discretion, draw upon the EPA periodically during the term by the Company’s delivery to the holder of the EPA, a written notice requiring the holder to purchase a dollar amount in common shares (the “Draw Down Notice”). The shares issuable pursuant to a Draw Down Notice, when aggregated with the shares then held by the holder on the date of the draw down may not exceed the lessor of (i) 4.99% of the Company’s outstanding common shares, (ii) USD$62,500 in any 30 days period or (iii) 100% of the aggregate trading volume for the 10 trading days immediately preceding the date of the Draw Down Notice without the prior written consent of the holder. The purchase price per common share purchased under the EPA shall equal 65% of the lowest closing bid for the 10 days immediately preceding the date of the Draw Down Notice. The Registration Statement was filed with the Commission on October 1, 2015 and to-date it has not been declared effective by the Commission.
(b) Warrants
As at December 31, 2015, the following warrants were outstanding:
| | | | | | | | | | | | | | | | Fair Value at | |
| | | | | | | | | | | | | | | | December 31, | |
| | | | | | | Number of | | | Weighted | | | Grant Date | | | 2015 of Vested | |
| | | | Number of | | | Warrants | | | Average | | | Fair Value | | | Warrants - | |
| | Expiry Date | | Warrants | | | Exercisable | | | Exercise Price | | | Equity | | | Liability | |
| | June 6, 2016 | | | 300,383 | | | | 300,383 | | | $ | 2.24 | | | $ | 170,908 | | | $ | - | |
| | June 7, 2016 | | | 5,000 | | | | 5,000 | | | $ | 1.12 | | | | 3,180 | | | - | |
| | June 6, 2017 | | | 22,500 | | | | 22,500 | | | $ | 1.12 | | | | 16,110 | | | - | |
| | April 1, 2017 | | | 425,500 | | | | 100,500 | | | USD $0.04 | | | | - | | | | 150,449 | |
| | | | | | | | | | | | $ | (0.055 | ) | | | | | | | | |
| | October 22, 2016 | | | 3,350 | | | | 3,350 | | | USD $1.50 | | | | - | | | | 2,265 | |
| | | | | | | | | | | | $ | (2.07 | ) | | | | | | | | |
| | November 30, 2016 | | | 8,850 | | | | 8,850 | | | USD $2.00 | | | | - | | | | 5,868 | |
| | | | | | | | | | | | $ | (2.77 | ) | | | | | | | | |
| | | | | 765,583 | | | | 440,583 | | | | 0.99 | | | $ | 190,198 | | | $ | 158,582 | |
Algae Dynamics Corp. (Formerly Converted Carbon Technologies Corp.)
Notes to the Condensed Interim Financial Statements
(Stated in Canadian Dollars)
(unaudited)
December 31, 2015 and 2014
8.) Capital Stock (continued)
| | i) | In connection with a consulting agreement (see Note 10), the Company granted 625,000 common share purchase warrants with each warrant entitling the grantee to acquire one common share in the capital of the Company at an exercise price of USD$0.04 ($0.055) at any time prior to April 1, 2017. Of the warrants granted, 300,000 vested on September 3, 2014 with the unvested portion vesting pro-rata for each USD$250,000 ($346,000) raised in an offering, fully vesting upon USD$1,500,000 ($2,076,000) being raised. The fair value of the 625,000 warrants at the date of grant of $500,000 was estimated using the Black-Scholes option pricing model, based on the following assumptions: expected dividend yield of 0%; expected volatility of 159%; risk free interest rate of 1.25%; and expected term of 3 years. |
For the three and nine month periods ended December 31, 2015, the Company recorded $Nil and $Nil, respectively, (2014 - $Nil and $358,325, respectively) as compensation expense for warrants issued to a consultant for service, net of a market adjustment for the three and nine month periods ended December 31, 2015 of $42,811 and $42,811, respectively (2014 - $141,000 and $151,000, respectively). This expense was recorded as professional fees on the statements of operations and comprehensive loss.
ASC 815 "Derivatives and Hedging" indicates that warrants with exercise prices denominated in a currency other than an entity's functional currency should not be classified as equity. As a result, warrants with a USD exercise price have been treated as derivatives and recorded as liabilities carried at their fair value, with period-to-period changes in the fair value recorded as a gain or loss in the statements of operations and comprehensive loss.
As at December 31, 2015, the fair value of the 437,700 warrants exercisable in USD, was $645,177 which was estimated using the Black-Scholes option pricing model based on the following weighted average assumptions: expected dividend yield of 0%; expected volatility of 158%; risk-free interest rate of 0.4% and expected term of 1.24 years. Of this amount, $158,582 was reflected as a liability as at December 31, 2015, representing the percentage of the fair value of the warrants that is equal to the percentage of the requisite service that has been rendered at December 31, 2015.
The warrant liability is classified as Level 3 within the fair value hierarchy (See Note 12). The Company’s computation of expected volatility during the period ended December 31, 2015 is based on the market close price of comparable public entities over the period equal to the expected life of the warrants. The Company’s computation of expected life is calculated using the contractual life.
(c) Stock-based compensation
The Company’s stock-based compensation program (the "Plan") includes stock options in which some options vest based on continuous service. For those equity awards that vest based on continuous service, compensation expense is recorded over the service period from the date of grant.
Algae Dynamics Corp. (Formerly Converted Carbon Technologies Corp.)
Notes to the Condensed Interim Financial Statements
(Stated in Canadian Dollars)
(unaudited)
December 31, 2015 and 2014
8.) Capital Stock (continued)
(c) Stock-based compensation (continued)
The total number of options outstanding as at December 31, 2015 was 505,000 (March 31, 2015 – 505,000). The weighted average grant date fair value of options granted during the period ended December 31, 2015 was $n/a (2014 - $1.18). The maximum number of options that may be issued under the Plan is floating at an amount equivalent to 15% of the issued and outstanding common shares, or 1,462,017 as at December 31, 2015 (March 31, 2015 – 1,388,461).
For the three and nine month periods ended December 31, 2015, the Company recorded $94,849 and $282,875, respectively (2014 - $234,066 and $234,066, respectively) as stock-based compensation for options and common shares issued to directors, officers and consultants based on continuous service. This expense was recorded as stock based compensation on the statements of operations and comprehensive loss. Additionally, for the three and nine month periods ended December 31, 2015, the Company recorded $179,546 and $179,546, respectively (2014 - $nil and $nil, respectively) as professional fees for common shares issued to consultants for services rendered. This expense was recorded as professional fees on the statements of operations and comprehensive loss. The activities in options outstanding are as noted below:
| | | | Number of Options Granted | | | Weighted Average Exercise Price | |
| | Balance, March 31, 2015 | | | 505,000 | | | $ | 1.73 | |
| | Granted | | | - | | | | - | |
| | Balance, December 31, 2015 | | | 505,000 | | | $ | 1.73 | |
The following table presents information relating to stock options outstanding and exercisable at December 31, 2015.
| | Options Outstanding | | | Options Exercisable | |
| | Exercise Price | | | Number of Shares | | | Weighted Average Remaining Contractual Life (Years) | | | Number of Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life (Years) | |
| | $ | 1.73 | | | | 505,000 | | | | 3.95 | | | | 398,333 | | | $ | 1.73 | | | | 3.95 | |
The Company has no taxable income under Canadian Federal and Provincial tax laws for the nine month periods ended December 31, 2015 and 2014. The Company has non-capital loss carryforwards at December 31, 2015 totalling approximately $1,338,000, which may be offset against future taxable income. If not used, the loss carryforwards will expire between 2029 and 2036.
Algae Dynamics Corp. (Formerly Converted Carbon Technologies Corp.)
Notes to the Condensed Interim Financial Statements
(Stated in Canadian Dollars)
(unaudited)
December 31, 2015 and 2014
10.) Commitments and Contingencies
The Company entered into a five (5) year operating lease for office and production facilities. The lease commenced on December 1, 2013 and expires on November 30, 2018. The base monthly rental is $1,362 plus the Company’s estimated portion of property taxes and operating expenses which are currently $804 per month. The future commitments pursuant to this lease arrangement, including property taxes and operating expenses for the fiscal periods ending March 31 are:
| | 2016 (remaining) | $ 6,500 | |
| | 2017 | 25,994 | |
| | 2018 | 26,328 | |
| | 2019 | 17,552 | |
For the three and nine month periods ended December 31, 2015, rental expenses related to this lease were $6,500 and $19,499 (2014 – $6,433 and $19,299).
On March 11, 2014, and as amended on July 18, September 3, 2014, September 5, 2014 and again on December 31, 2015, the Company entered into a consulting agreement with Connectus, Inc. to assist and advise the Company in matters concerning corporate finance and the Company’s current and proposed financing activities for the period commencing April 1, 2014 and ending December 31, 2014. On December 31, 2015, the Company extended the contract to December 31, 2016. In consideration of the contract extension, the Company issued 93,000 common shares to Connectus, Inc. as compensation, which has been recorded as professional fees on the condensed interim statements of loss and comprehensive loss. Pursuant to this agreement, the Company agreed to issue to this consulting corporation (the “Consultant”), 625,000 warrants of the Company. Each warrant is exercisable at USD$0.04 ($0.055) per share for a period of three years. Of the warrants granted, 300,000 vested on September 3, 2014 with the unvested portion vesting pro-rata for each USD$250,000 ($346,000) raised in an offering, fully vesting upon USD$1,500,000 ($2,076,000) being raised. During the year ended March 31, 2015, the President of the Consultant became a director of the Company.
Algae Dynamics Corp. (Formerly Converted Carbon Technologies Corp.)
Notes to the Condensed Interim Financial Statements
(Stated in Canadian Dollars)
(unaudited)
December 31, 2015 and 2014
10.) Commitments and Contingencies (continued)
On April 23, 2014, the Company entered into employment agreements with three officers of the Company effective July 1, 2014. The initial contracts contain minimum aggregate commitments of approximately $427,000 per year for three years and additional contingent payments of up to approximately $600,000 in aggregate upon the occurrence of a change of control. As a triggering event has not taken place, the contingent payments have not been reflected in these financial statements. If employment is terminated by the Company other than upon a change of control or for just cause, the officers will be entitled to an amount equal to twelve months compensation including benefits, which shall be increased by one month for each full year of service completed. The employment agreements were amended whereby any salary from the commencement of the employment agreements has been waived until such a time when the Company is able to raise additional financing. Salaries will be earned based upon the Company’s success in raising future capital in accordance with the following schedule:
| | Cumulative Funds Raised 1 | | Effective Monthly Salary % | |
| | $100,000 | | 10.00% | |
| | $175,000 | | 15.00% | |
| | $250,000 | | 25.00% | |
| | $375,000 | | 37.50% | |
| | $500,000 | | 50.00% | |
| | $750,000 | | 62.50% | |
| | $1,000,000 | | 75.00% | |
| | $1,250,000 | | 87.50% | |
| | $1,500,000 | | 100.00% | |
1 Cumulative funds raised is inclusive of all sources including without limitation capital raised, grants received, revenue recorded, debt raised, and assets sold.
On September 24, 2015, the Company signed a consulting agreement with an Investor Relations firm with terms commencing immediately and ending on September 30, 2016. Consideration payable under the consulting agreement include a monthly fee of USD$7,500 payable in a combination of cash and restricted stock.
In addition, the Company has a contingent commitment to pay its US Legal Firm an amount of USD$50,000 ($69,200) upon future funds being raised. The payable is contingent upon the successful raising of future financing. A liability of an estimated amount of USD$50,000 ($69,200) has been accrued as the Company has determined that the loss contingency is probable and included in accounts payable and accrued liabilities on the condensed interim balance sheet.
Algae Dynamics Corp. (Formerly Converted Carbon Technologies Corp.)
Notes to the Condensed Interim Financial Statements
(Stated in Canadian Dollars)
(unaudited)
December 31, 2015 and 2014
11.) Related Party Transactions
Included in accounts payable and accrued liabilities as at December 31, 2015 is $52,030 (March 31, 2015 - $52,030) owing to two directors who are also officers and significant shareholders of the Company for unpaid management fees. This balance is unsecured, non-interest bearing and due on demand.
See also Notes 5, 6, 8(a) and 8(c).
Amounts receivable from shareholder as at December 31, 2015 of $21,064 (March 31, 2015 - $29,967) is owing from a shareholder, who is also a director and officer of the Company for funds advanced under the employment agreement (See Note 10). The amount receivable is unsecured, non-interest bearing and repayable upon demand.
12.) Financial Instruments
(a) Liquidity risk
Liquidity risk is the risk that the Company will not have sufficient cash resources to meet its financial obligations as they come due. The Company’s liquidity and operating results may be adversely affected if its access to the capital market is hindered, whether as a result of a downturn in stock market conditions generally or matters specific to the Company. The Company generates cash flow primarily from its financing activities and advances from shareholders. As at December 31, 2015, the Company had cash of $29,723 (March 31, 2015 - $3,084) to settle current liabilities of $794,482 (March 31, 2015 - $894,022). All of the Company's financial liabilities other than the warrant liability of $158,581 (March 31, 2015 - $364,878) and the Convertible Note of USD$25,000 ($34,600) (March 31, 2015 - $nil) have contractual maturities of less than 30 days and are subject to normal trade terms. The Company regularly evaluates its cash position to ensure preservation and security of capital as well as liquidity.
In the normal course of business, management considers various alternatives to ensure that the Company can meet some of its operating cash flow requirements through financing activities, such as private placements of common stock, preferred stock offerings and offerings of debt and convertible debt instruments as well as through merger or acquisition opportunities. Management may also consider strategic alternatives, including strategic investments and divestitures. As future operations may be financed out of funds generated from financing activities, the ability to do so is dependent on, among other factors, the overall state of capital markets and investor appetite for investments in the green technology industry and the Company’s securities in particular. Should the Company elect to satisfy its cash commitments through the issuance of securities, by way of either private placement or public offering or otherwise, there can be no assurance that the efforts to obtain such additional funding will be successful, or achieved on terms favorable to the Company or its existing shareholders. If adequate funds are not available on favorable terms, the Company may have to reduce substantially or eliminate expenditures or obtain funds through other sources such as divestiture or monetization of certain assets or sublicensing (where permitted) of certain rights to certain of the Company’s technologies or products.
Algae Dynamics Corp. (Formerly Converted Carbon Technologies Corp.)
Notes to the Condensed Interim Financial Statements
(Stated in Canadian Dollars)
(unaudited)
December 31, 2015 and 2014
| 12.) | Financial Instruments (continued) |
| (b) | Concentration of credit risk |
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits. Cash deposits with a major Canadian chartered bank are insured by the Canadian Deposit Insurance Corporation up to $100,000. As at December 31, 2015, the Company held $29,723 (March 31, 2015 - $3,084) with a major Canadian chartered bank.
| (c) | Foreign exchange risk |
| | The Company principally operates within Canada. The Company’s functional currency is the Canadian dollar and major purchases are transacted in Canadian dollars. Management believes the foreign exchange risk derived from currency conversions is negligible and therefore does not hedge its foreign exchange risk. See also Note 12 (e). |
The Company does not have any non-fixed interest-bearing debt. The Company invests any cash surplus to its operational needs in investment-grade short-term deposit certificates issued by highly rated Canadian banks. The Company periodically assesses the quality of its investments and is satisfied with the credit rating of the bank.
(e) Derivative liability – warrant liability
In connection with a consulting agreement, the Company granted warrants to purchase up to 625,000 common shares of the Company as disclosed in Note 8(b). The warrants have an exercise price of USD$0.04 ($0.055). The warrants are exercisable at any time prior to April 1, 2017. The warrants are accounted for as derivative liabilities because the exercise price is denominated in a currency other than the Company’s functional currency.
In connection with the settlement of a vendor’s account, the Company granted warrants to purchase up to 3,350 common shares of the Company. The warrants have an exercise price of USD$1.50 ($2.08). The warrants are exercisable at any time prior to October 22, 2016. The warrants are accounted for as derivative liabilities because the exercise price is denominated in a currency other than the Company’s functional currency.
In connection with a private placement, the Company granted warrants to purchase up to 8,850 common shares of the Company. The warrants have an exercise price of USD$2.00 ($2.77). The warrants are exercisable at any time prior to November 30, 2016. The warrants are accounted for as derivative liabilities because the exercise price is denominated in a currency other that the Company’s functional currency.
Algae Dynamics Corp. (Formerly Converted Carbon Technologies Corp.)
Notes to the Condensed Interim Financial Statements
(Stated in Canadian Dollars)
(unaudited)
December 31, 2015 and 2014
| 12.) | Financial Instruments (continued) |
The table below summarizes the fair value of the Company’s financial liabilities measured at fair value:
| | | | Fair Value at | | | | | | | | | | |
| | | | December 31, | | | Fair Value Measurement Using | |
| | | | 2015 | | | Level 1 | | | Level 2 | | | Level 3 | |
| | Derivative liability – Warrants | | $ | 158,582 | | | $ | - | | | $ | - | | | $ | 158,582 | |
The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (warrant derivative liability) for the periods ended December 31, 2015 and March 31, 2015:
| | | | December 31, | | | March 31, | |
| | | | 2015 | | | 2015 | |
| | Balance at beginning of period | | $ | 364,878 | | | $ | - | |
| | | | | | | | | | |
| | Additions to derivative instruments, recognized in earnings as professional fees | | | - | | | $ | 240,000 | |
| | Additions to derivative instruments as a result of issuance in settlement of debt | | | - | | | $ | 2,060 | |
| | Additions to derivative instruments as a result of issuance of units | | | - | | | $ | 6,213 | |
| | Derivative instruments exercised | | $ | (249,384 | ) | | $ | (32,675 | ) |
| | Change in fair market value, recognized in operations as professional fees | | $ | 43,088 | | | $ | 149,280 | |
| | Balance at end of period | | $ | 158,582 | | | $ | 364,878 | |
These instruments were valued using pricing models that incorporate the price of a share of common stock (based upon the price of the most recent private placement), expected volatility, risk free rate, expected dividend rate and expected estimated life. The Company estimated the value of the warrants using the Black-Scholes model. There were no transfers of assets or liabilities between Level 1, Level 2, or Level 3 during the periods ended December 31, 2015 and March 31, 2015.
The following are the key weighted average assumptions used in connection with the estimation of fair value as at December 31, 2015:
| | | | December 31, 2015 | |
| | Number of shares underlying the warrants | | | 437,700 | |
| | Fair market value of the stock | | $ | 1.54 | |
| | Exercise price | | USD$0.09 ($0.1257) | |
| | Expected volatility | | | 158 | % |
| | Risk-free interest rate | | | 0.40 | % |
| | Expected dividend yield | | | 0 | % |
| | Expected warrant life (years) | | | 1.24 | |
Algae Dynamics Corp. (Formerly Converted Carbon Technologies Corp.)
Notes to the Condensed Interim Financial Statements
(Stated in Canadian Dollars)
(unaudited)
December 31, 2015 and 2014
| (a) | The Company’s application to the OTCQB Market Place was accepted on January 5, 2016. |
| (b) | On January 4, 2016, the Company issued a total of 425,000 stock options with an exercise price of $2.43 to directors and officers of the Company with an expiry period of 5 years. The stock options vest as follows: i) 1/3 on the date of grant; ii) 1/3 on the first anniversary and iii) 1/3 on the second anniversary. |
| (c) | On January 5, 2016, additional common share purchase warrants were exercised for the purchase of 31,000 common shares for gross proceeds of USD$1,240 ($1,665). |
