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CONVERTIBLE DEBENTURES AND DERIVATIVE LIABILITIES | 12 Months Ended
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Nov. 30, 2018
CONVERTIBLE DEBENTURES AND DEFERRED FINANCING COSTS [Text Block] |
14. | CONVERTIBLE DEBENTURES AND DERIVATIVE LIABILITIES
| a) | Unsecured Convertible Debentures $ nil (2017: $40,357)
On August 6, 2014, the Company issued CAD $1,549,000 ($1,398,342) face value 12% unsecured convertible debentures with a term to August 6, 2017 (the “Maturity Date”). On December 7, 2016, the Company entered into a Securities Purchase Agreement to sell $1,500,000 of 10% senior secured convertible debentures, convertible into shares of the Company’s common stock, in a private placement (see note 14(d)). The sale of the secured notes closed on December 7, 2016. A condition to the sale of the secured notes was the exchange of at least 80% in principal amount of the Company’s outstanding 12% unsecured convertible debentures, which matured on August 6, 2017 (the “Unsecured Debentures”) for an equal principal amount of subordinate secured debentures. Concurrent with the sale of the secured notes, CAD$1,363,000 ($1,015,026) of the Company’s outstanding Unsecured Debentures, which represented approximately 88% of the outstanding Unsecured Debentures, were exchanged for an equal principal amount of the subordinate secured debentures. Unsecured convertible debentures
|  |  |  |  |  |  |  | Unsecured |
|  | Unsecured |  |  | Deferred |  |  | convertible |
|  | convertible |  |  | financing |  |  | debenture |
|  | debentures |  |  | costs |  |  | (Net) |
|  | $ |  |  | $ |  |  | $ |
Balance as of November 30, 2016 |  | (1,153,540 | ) |  | 35,769 |  |  | (1,117,771 | )
Exchanged for subordinate secured debentures |  | 1,015,026 |  |  | - |  |  | 1,015,026 |
Amortization of deferred financing costs |  | - |  |  | (35,769 | ) |  | (35,769 | )
Repayment of unsecured convertible debentures |  | 66,640 |  |  | - |  |  | 66,640 |
Conversion of unsecured convertible debentures to equity |  | 39,159 |  |  | - |  |  | 39,159 |
Foreign currency translation |  | (7,642 | ) |  | - |  |  | (7,642 | )
Balance as of November 30, 2017 |  | (40,357 | ) |  | - |  |  | (40,357 | )
Repayment of unsecured convertible debentures |  | 40,357 |  |  | - |  |  | 40,357 |
Balance as of November 30, 2018 |  | - |  |  | - |  |  | - |
On August 6, 2017, the Company repaid CAD $84,000 ($66,640) of the convertible debentures and the remaining convertible debenture holders for $40,357 executed agreements for forbearance of their debt with a new repayment date of February 16, 2018. In February 2018, the Company repaid the convertible debt for $40,357 along with accrued interest. During the year ended November 30, 2018, the Company recorded interest expense of $1,035 (November 30, 2017: $16,753). b) Secured Convertible Debentures $978,361 (2017: $892,176) The CAD$1,363,000 ($1,015,026) of Series B Secured Convertible Debentures (Subordinate Secured Debentures) were issued pursuant to the Trust Indenture agreement dated December 7, 2016 (the “Indenture”) in exchange for the Unsecured Debentures in equal principal amount and an additional CAD$36,000 ($26,809) of Series B Secured Convertible Debentures were issued pursuant to the Indenture in payment of accrued interest. These debentures mature on June 6, 2019 and bear interest at 12% per annum, payable semi-annually. The debentures are secured by all the assets of the Company. The principal amount, plus accrued interest, may be converted at the option of the holder at any time during the term to maturity into shares of the Company’s common stock at a conversion price of $0.24 (CAD $0.31) per share subject to anti-dilution protection with a minimum conversion price of $0.135 and for capital reorganization events. The debentures also embody certain traditional default provisions that are linked to credit or interest risks, such as bankruptcy proceedings, liquidation events and corporate existence. The Company has concluded that the embedded conversion option is not indexed to its stock because it did not pass all eight conditions of equity classification provided in ASC 815. The embedded conversion option is subject to classification in the financial statements in liabilities at fair value both at inception and subsequently. The Company has evaluated the terms and conditions of the debentures under the guidance of ASC 815. All three criteria under ASC 815-15-25-1 are met, therefore, the conversion feature requires classification and measurement as derivative financial instruments. Accordingly, the evaluation resulted in the conclusion that this derivative financial instrument requires bifurcation and liability classification, at fair value. Current standards contemplate that the classification of financial instruments requires evaluation at each report date. The following table reflects the allocation of the purchase on December 7, 2016:
Secured convertible cotes |  | Face Value |
(CAD $1,399,000) | $ | 1,041,835 |
Proceeds |  | 1,041,835 |
Embedded derivative |  | (285,612 | )
Carrying value | $ | 756,223 |
The carrying value of these debentures at November 30, 2018 is CAD $1,301,359 ($978,361) and at November 30, 2017 was CAD $1,149,563 ($892,176). Discounts (premiums) on the convertible notes arise from (i) the allocation of basis to other instruments issued in the transaction, (ii) fees paid directly to the creditor and (iii) initial recognition at fair value, which is lower than face value. Discounts (premiums) are amortized through charges (credits) to interest expense over the term of the debt agreement. Amortization of debt discounts (premiums) amounted to CAD $151,795 ($118,898) during the year ended November 30, 2018 and CAD$134,089 ($103,034) during the prior year ended November 30, 2017. During the year ended November 30, 2018, the Company recorded interest expense for $131,085 (November 30, 2017: $125,079). c) Convertible Notes $167,077 (2017: $nil) On October 22, 2018, the Company entered into a Securities Purchase Agreement with several accredited investors to sell $1,275,000 of units, with each $1,000 of unit consisting of (i) a $1,000 10% interest unsecured convertible promissory note (collectively the “Notes”) due April 15, 2020, convertible into the Company’s common stock at a conversion price of $0.15 per share, and (ii) four thousand (4,000) warrants each exercisable for one share of common stock at an exercise price of $0.25 per share on or before the five year anniversary of the issuance. The notes are secured secondary by all of the Company assets and accrue interest at 10% per annum, payable in cash at maturity. However, the principal amount, plus accrued interest, may be converted at the option of the holder at any time during the term to maturity into shares of common stock at a conversion price of $0.15 per share subject to anti-dilution protection. The note embodies certain traditional default provisions that are linked to credit or interest risks, such as bankruptcy proceedings, liquidation events and corporate existence. The Company concluded that the embedded conversion option is not indexed to the Company’s stock because it did not pass all eight conditions of equity classification provided in ASC 815. Therefore, the embedded conversion option is subject to classification in the financial statements in liabilities at fair value both at inception and subsequently. The Company evaluated the terms and conditions of the Notes under the guidance of ASC 815. All three criteria under ASC 815-15-25-1 are met, therefore, the conversion feature requires classification and measurement as derivative financial instruments. Accordingly, the evaluation resulted in the conclusion that this derivative financial instrument requires bifurcation and liability classification, at fair value. Current standards contemplate that the classification of financial instruments requires evaluation at each report date. The following table reflects the allocation of the purchase on October 22, 2018:
Proceeds |  | $ | 1,275,000 |
Convertible notes |  | $ | (131,547 | )
Derivative liability-convertible promissory notes |  | $ | (619,364 | )
Additional paid in capital (equity warrants) |  | $ | (524,089 | )
The Company issued 5,100,000 warrants (see note 6). The relative fair value of these warrants was estimated at $524,089 using the Binomial Lattice option pricing model and reflected in additional paid-in capital. Discounts (premiums) on the convertible notes arise from (i) the allocation of basis to other instruments issued in the transaction, (ii) fees paid directly to the creditor and (iii) initial recognition at fair value, which is lower than face value. Discounts (premiums) are amortized through charges (credits) to interest expense over the term of the debt agreement. Amortization of debt discounts (premiums) amounted to $35,530 during the year ended November 30, 2018 (November 30, 2017: $Nil) resulting in the carrying value of convertible notes at $167,077 as at November 30, 2018 (November 30, 2017: $Nil). During the year ended November 30, 2018, the Company recorded interest expense for $16,767 (November 30, 2017: $Nil). d) Secured Convertible Notes $nil (2017: $nil) On December 7, 2016, the Company issued a $1,500,000 10% secured convertible debenture with a term to June 9, 2019 (the “Maturity Date”). The holder has the option to convert the outstanding principal and interest into common stock at a conversion price of $0.24 per share. The conversion price is subject to adjustments in the event of subsequent equity issuances at a price per share below $0.24. During the year ended November 30, 2017, the Company incurred $103,158 in financing fees. The Company evaluated the terms and conditions of the secured convertible debentures under the guidance of ASC 815. Even though the instrument's conversion price used to calculate the settlement amount is not fixed the embedded conversion feature is still considered indexed to an entity's own stock under the guidance of ASC 815 because the only variables that could affect the settlement amount are inputs to the fair value of a fixed-for-fixed forward or option on equity shares. However, the conversion feature did not meet the conditions for equity classification provided in paragraphs 11 through 35 of ASC 815-40-25 because the contracts contain a security agreement which requires the posting of collateral. Therefore, the conversion feature requires bifurcation and liability classification. The following table reflects the allocation of the purchase on the financing date:
Convertible debentures (Face value) | $ | 1,500,000 |
Proceeds | $ | (1,396,842 | )
Embedded conversion feature |  | 889,050 |
Deferred financing costs |  | (103,158 | )
Convertible debentures |  | 610,950 |
The secured convertible debt of $1,500,000 plus accrued interest of $257,671 comprising $140,959 for the period from issuance to date of settlement calculated at 10% per annum and $116,712 calculated at 5% per annum from date of settlement to original maturity date was settled on November 28, 2017. Derivative Liabilities The carrying values of the embedded derivative liabilities is reflected on the balance sheet, with changes in the carrying value being recorded as a change in fair value of derivative liabilities on the statement of operations. The components of the embedded derivative as of November 30, 2017 are:
Financings giving rise to derivative financial instruments |  | Indexed Shares |  |  | Fair Value |
Convertible Secured Debentures December 7, 2016 |  | 8,044,853 |  | $ | 539,860 |
|  | 8,044,853 |  | $ | 539,860 |
The components of the embedded derivative as of November 30, 2018 are:
|  | Indexed |  |  |  |
Financings giving rise to derivative financial instruments |  | Shares |  |  | Fair Value |
Convertible Secured Debentures December 7, 2016 |  | 8,044,853 |  | $ | 426,016 |
Convertible Notes October 22, 2018 |  | 8,500,000 |  |  | 531,285 |
|  | 16,544,853 |  | $ | 957,301 |
The following table summarizes the effects on gain (loss) associated with changes in the fair values of derivative financial instruments by type of financing for the twelve months ended November 30, 2018 and 2017:
Financings giving rise to derivative financial instruments and the income effects: |  | Twelve Months Ended November 30, 2018 | Twelve Months Ended November 30, 2017
Convertible Secured Debentures December 7, 2016 |  | $100,464 | $(239,802)
Convertible Notes October 22, 2018 |  | $88,079 | -
|  | $188,543 | $(239,802)
Fair Value Considerations GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:
| Level 1 valuations: | Quoted prices in active markets for identical assets and liabilities.
| Level 2 valuations: | Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model- derived valuations whose inputs or significant value drivers are observable.
| Level 3 valuations: | Significant inputs to valuation model are unobservable.
The Company follows the provisions of ASC 820 with respect to the financial instruments. As required by ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The derivative financial instruments which are required to be measured at fair value on a recurring basis under of ASC 815 as of November 30, 2018 and 2017 are all measured at estimated fair value using Level 2 and 3 inputs. The embedded derivative was fair valued using the income valuation technique using the Lattice valuation model. The following table sets forth the inputs for each significant assumption:
Convertible secured debentures December 7, 2016 |  |  | November 30, 2018 |  |  | November 30, 2017 |
Derivative financial instruments |  | $ | 426,016 |  | $ | 539,860 |
Conversion price |  | $ | 0.135 |  | $ | 0.135 |
Volatility |  |  | 91% |  |  | 106% |
Remaining term (years) |  |  | 0.52 |  |  | 1.52 |
Risk free rate |  |  | 2.52% |  |  | 1.78% |
Convertible notes October 22, 2018 |  |  | November 30, 2018 |  |  | November 30, 2017
Derivative financial instruments |  | $ | 531,285 |  | $ | -
Conversion price |  | $ | 0.15 |  | $ | -
Volatility |  |  | 79% |  |  | -
Remaining term (years) |  |  | 1.38 |  |  | -
Risk free rate |  |  | 2.70% |  |  | -

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- Definition The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -URI http://asc.fasb.org/topic&trid=2208564 + Details
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