The accompanying notes are an integral part of the consolidated financial statements.
Notes to the Consolidated Financial Statements
NOTE 1 -
NATURE OF OPERATIONS
Integral Technologies, Inc. (the “Company” or “Integral”) was incorporated under the laws of the state of Nevada on February 12, 1996 and has recently relocated its head office to Evansville, Indiana, USA. The Company is in the business of researching, developing and commercializing new electrically-conductive resin-based materials called ElectriPlast.
The Company will be devoting all of its resources to the research, development and commercialization of its ElectriPlast technology.
NOTE 2 -
SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and are presented in United States dollars. We have prepared the consolidated financial statements included herein, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The consolidated financial statements include the Company’s wholly owned subsidiaries. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed from the accompanying consolidated financial statements. The accompanying comparative year end consolidated balance sheet was derived from the audited financial statements included in the annual financial statements. The accompanying interim financial statements are unaudited, and reflect all adjustments which are in the opinion of management, necessary for a fair statement of the Company’s consolidated financial position, results of operations, and cash flows for the periods presented. Unless otherwise noted, all such adjustments are of a normal, recurring nature. All intercompany transactions and balances have been eliminated in consolidation. The Company’s results of operations and cash flows for the interim periods are not necessarily indicative of the results of operations and cash flows that it may achieve in future periods. Nevertheless, we believe that the disclosures are adequate to ensure the information presented is not misleading. These unaudited consolidated financial statements should be read in conjunction with our audited financial statements and the notes thereto for the year ended June 30, 2015 included in the Company’s 10-K filed with the SEC on September 28, 2015.
Principles of consolidation
These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Integral Operating LLC (“Operating”), Integral Vision Systems, Inc. ("IVSI"), Antek Wireless Inc. ("Antek"), Electriplast Corp. (formerly Plastenna, Inc.) (“Electriplast”), and Integral Technologies Asia, Inc. (“Asia”) and its 76.625%-owned subsidiary, Emergent Technologies Corp. ("ETC"), which is currently inactive. ETC's non-controlling interest balance is immaterial to the financial statements. All intercompany balances and transactions have been eliminated.
Basic and diluted net loss per share
Basic net loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the year. Diluted net loss per common share is computed by dividing the net loss by the weighted-average number of common shares and dilutive common share equivalents outstanding during the period. Because the Company has reported a net loss for all years presented, diluted net loss per common share is the same as basic net loss per common share for those years.
Integral Technologies, Inc
.
Notes to the Consolidated Financial Statements
NOTE 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock issued in exchange for services
The valuation of common stock issued in exchange for services to non-employees is valued at an estimated fair market value of the Company’s stock price based upon trading, sales and other issuances of the Company's common stock. Stock-based compensation expense related to awards to non-employees is recognized based on the then-current fair value at each measurement date over the associated service period of the award, which is generally the vesting term, using the accelerated attribution method. The fair value of non-employee stock options is estimated using the Black-Scholes valuation model with assumptions generally consistent with those used for employee stock options, with the exception of the expected term, which is the remaining contractual life at each measurement date. Restricted shares are issued or become issuable when they vested and are measured at their grant date and recorded evenly over the vesting period.
Revenue recognition
The Company has not generated significant revenue since inception. Although the Company has begun to receive revenue from the sale of material for commercial applications, the Company is devoting substantially all its efforts to developing the business.
The Company signed a ten year license agreement with Hanwha Advanced Materials Corp. (“Hanwha”), of South Korea. For license agreements that the Company enters into, revenue is recognized when all four of the following criteria are met: (i) a contract is executed, (ii) the contract price is fixed and determinable, (iii) delivery of the service or products has occurred, and (iv) collectability of the contract amounts is reasonably assured.
The Company’s license agreements can provide for upfront license fees, maintenance payments, and/or substantive milestone payments. In accordance with revenue recognition guidance, the Company identifies all of the deliverables at the inception of the agreement. License fees which are nonrefundable fees will be evaluated for standalone value to the licensor and may be recognized upon delivery pursuant to terms of the agreement. Upfront nonrefundable fees associated with license and development agreements where the Company has continuing involvement that does not meet the requirement of a separate deliverable are recorded as deferred revenue and recognized over the estimated service period.
The Company may also enter into agreements to provide engineering services. The Company recognizes revenue from engineering services as the service has been performed and amounts are reasonably assured of collection.
Foreign currency translation
The Company’s functional and reporting currency is the US dollar. Transactions and balances for the Company’s operations that are not in US dollars are translated into US dollars at the exchange rates in effect at the balance sheet dates for monetary assets and liabilities, and at historical exchange rates for non-monetary assets and liabilities. Revenues and expenses are translated at the rate of exchange on the date of the transaction, except for amortization and depreciation, which are translated on the same basis as the related assets. Resulting translation gains or losses are included in the consolidated statements of operations. The foreign currency impact on the consolidated financial statements is immaterial.
Advertising
Advertising costs are charged to operations when incurred. Advertising expense was $34,802 and $82,171 for the nine months ended March 31, 2016 and 2015, respectively. Advertising expense was $3,719 and $17,052 for the three months ended March 31, 2016 and 2015, respectively.
Research and development
The Company expenses all research and development expenditures as incurred.
Integral Technologies, Inc
.
Notes to the Consolidated Financial Statements
NOTE 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates include valuation allowance for deferred income tax assets, the determination of the assumptions used in calculating the fair value of stock-based compensation and the determination of the assumptions used in calculating the fair value of derivative financial liabilities. Actual results could differ from those estimates and could impact future results of operations and cash flows.
Financial instruments
We have issued financial instruments that contain embedded conversion features that qualify as derivatives and are therefore accounted for as liabilities. The derivative liability is initially recorded at fair value, with gains and losses arising from changes in fair value recognized in the consolidated statements of operations at each period end while such instruments are outstanding. The liability is valued using a Black-Scholes Model.
Fair value measurements
Assets and liabilities recorded at fair value in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. For certain of the Company’s financial instruments including cash and accounts payable, the carrying values approximate fair value due to their short-term nature.
ASC 820
Fair Value Measurements and Disclosures
specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820, these inputs are summarized in the three broad levels listed below:
|
·
|
Level 1 – Quoted prices in active markets for identical securities;
|
|
·
|
Level 2 – Other significant observable inputs that are observable through corroboration with market data (including quoted prices in active markets for similar securities); and
|
|
·
|
Level 3 – Significant unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability.
|
The fair value measurement of the derivative liability is classified as a Level 3 measurement as further discussed under Fair Value Measurements.
Income taxes
The Company uses the asset and liability approach in its method of accounting for income taxes that requires the recognition of deferred tax liabilities and assets for expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance against deferred tax assets is recorded if, based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The impact of an uncertain tax position that is more likely than not of being sustained upon audit by the relevant taxing authority is recognized at the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained.
Integral Technologies, Inc
.
Notes to the Consolidated Financial Statements
NOTE 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-based compensation
The Company accounts for stock-based compensation expense associated with stock options and other forms of equity compensation by estimating the fair value of share-based payment awards on the date of grant using the market price of common stock or the Black-Scholes option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated statements of operations. The Company uses the straight-line single-option method to recognize the value of stock-based compensation expense for all share-based payment awards. Stock-based compensation expense recognized in the consolidated statements of operations is reduced for estimated forfeitures, as it is based on awards ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Property and Equipment
Property and equipment are recorded at cost and depreciated over the estimated useful lives using the straight-line method of depreciation. Amortization of the leasehold improvements is computed using the straight-line method over the lesser of the estimated useful lives of the underlying assets and the term of the related lease.
Reclassifications
For comparability certain 2015 amounts have been reclassified to conform to classifications adopted in 2016. These reclassifications did not have an impact on stockholders’ deficit or net loss on the comparative consolidated financial statements.
Debt issuance costs
The Company present debt issuance costs as a direct deduction from the carrying value of that debt liability.
Recent Accounting Pronouncements
In May 2014, the FASB issued amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The requirements are effective for annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. We are evaluating the impact of the amended revenue recognition guidance on our financial statements.
Integral Technologies, Inc
.
Notes to the Consolidated Financial Statements
NOTE 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (Continued)
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosure if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” ASU 2014-15 applies to all entities and is effective for annual period ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting,
which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of this ASU will have on our financial statements.
NOTE 3 -
GOING CONCERN
These consolidated financial statements have been prepared on a going concern basis, which assumes the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the ordinary course of business. The Company’s operations have resulted in a net loss of $3,812,593 for the nine months ended March 31, 2016 (2015 - $3,108,687), and an accumulated deficit of $56,795,177 (fiscal year ended June 30, 2015 - $52,982,584) and a working capital deficiency of $1,938,995 as of March 31, 2016 (fiscal year ended June 30, 2015 - $488,067). The Company does not have sufficient revenue-producing activities to fund its expenditure requirements to continue to advance researching, developing and commercializing its conductive plastics technology, ElectriPlast. On May 5, 2016, the Company raised $900,000 through a convertible debt issuance which will be used to find operations (note 12). The Company estimates that it will require further equity and debt funding to complete its operational objectives within the next six months. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
These consolidated financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate because management believes that the actions already taken or planned will mitigate the adverse conditions and events that raise doubts about the validity of the going concern assumption used in preparing these consolidated financial statements. Management intends to raise additional capital through stock and debt issuances to finance operations. If none of these events occur, there is a risk that the business will fail.
NOTE 4 -
STOCKHOLDERS’ DEFICIT
Common stock
During the nine months ended March 31, 2016, the Company completed the following private placement:
|
(i)
|
Completed a private placement amounting to $28,000 for the issuance of 56,000 shares of common stock at $0.50 per share.
|
During the nine months ended March 31, 2016, the Company issued shares of common stock to settle the following debt:
Integral Technologies, Inc
.
Notes to the Consolidated Financial Statements
NOTE 4 -
STOCKHOLDERS’ DEFICIT (CONTINUED)
Common stock (continued)
|
(i)
|
Pursuant to a promissory note agreement, the Company issued 13,000 shares of common stock measured at a fair value of $0.48 per share resulting in a total value of $6,220 which was recorded in common stock and paid in capital in excess of par.
|
|
(ii)
|
The Company issued 4,201,374 shares of common stock to settle $1,047,184 of a convertible debt and derivative liability (note 9).
|
Stock-based compensation
During the nine months ended March 31, 2016 and 2015, the Company recorded stock-based compensation expense with respect to vesting restricted stock of $134,688 and $139,636, respectively. During the three months ended March 31, 2016 and 2015, the Company recorded stock-based compensation expense with respect to vesting restricted stock of $44,896 and $44,896, respectively. Stock-based compensation expense is included in selling, general, and administrative expenses.
Stock-based compensation not yet recognized at March 31, 2016 relating to non-vested restricted stock was $241,471, which will be recognized over a weighted average life of 1.34 years.
During the nine months ended March 31, 2016, there were no new stock option or restricted stock grants or modifications.
Stock purchase warrants
The following summarizes information about the Company’s stock purchase warrants outstanding:
|
|
Number of
Warrants
|
|
|
Price Per Share
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2015
|
|
|
25,554,938
|
|
|
$
|
0.25 - $0.60
|
|
|
$
|
0.33
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(11,033,060
|
)
|
|
$
|
0.30 - $0.60
|
|
|
$
|
0.33
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(3,265,569
|
)
|
|
$
|
0.30 - $0.50
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2016
|
|
|
11,256,309
|
|
|
$
|
0.30 - $0.50
|
|
|
$
|
0.35
|
|
The following summarizes modifications to share purchase warrants outstanding during the nine months ended March 31, 2016:
|
·
|
3,313,572 investor warrants expiring October 1, 2015 and exercisable at $0.30 were extended to December 21, 2015;
|
|
·
|
150,000 investor warrants expiring October 1, 2015 and exercisable at $0.30 were extended to March 31, 2016;
|
|
·
|
400,000 investor warrants expiring October 1, 2015 and exercisable at $0.30 were extended to March 31, 2016;
|
|
·
|
955,646 investor warrants expiring October 1, 2015 and exercisable at $0.30 were extended to November 25, 2016;
|
|
·
|
100,000 investor warrants expiring October 1, 2015 and exercisable at $0.50 were extended to March 31, 2016 and re-priced to $0.30;
|
Integral Technologies, Inc
.
Notes to the Consolidated Financial Statements
NOTE 4 -
STOCKHOLDERS’ DEFICIT (CONTINUED)
Stock purchase warrants (continued)
|
·
|
135,294 investor warrants expiring December 1, 2015 and exercisable at $0.30 were extended to March 31, 2016;
|
|
·
|
800,000 investor warrants expiring December 1, 2015 and exercisable at $0.50 were extended to March 31, 2016;
|
|
·
|
112,875 investor warrants expiring December 1, 2015 and exercisable at $0.30 were extended to February 16, 2016;
|
|
·
|
588,236 investor warrants expiring December 1, 2015 and exercisable at $0.30 were extended to November 25, 2016;
|
|
·
|
3,313,572 investor warrants expiring December 21, 2015 and exercisable at $0.30 were extended to March 31, 2016;
|
|
·
|
157,000 investor warrants expiring December 31, 2015 and exercisable at $0.30 were extended to November 25, 2016;
|
|
·
|
1,484,050 investor warrants expiring February 16, 2016 and exercisable at $0.30 were extended to March 31, 2016; and
|
|
·
|
466,629 investor warrants expiring February 16, 2016 and exercisable at $0.30 were extended to November 25, 2016;
|
The modifications of warrants resulted in no additional expense.
Share obligations
Pursuant to a consulting agreement with the CFO dated August 19, 2013, the Company is obligated to pay $5,000 to $12,500 per month based on the number of hours worked and to issue 6,000 shares of common stock per month beginning September 1, 2013.
As of March 31, 2016, no shares have been issued. As such, a total of 186,000 shares of common stock are issuable. The obligation to issue shares of common stock was measured at a weighted average fair value of $0.45 per share on the date each series of shares became issuable. During the nine months ended March 31, 2016, $23,340 (2015 - $33,660) was recorded as an obligation to issue shares and during the three months ended March 31, 2016, $5,280 (2015 - $11,580) was recorded as an obligation to issue shares within selling, general and administration expense
. As of March 31, 2016, a total balance of $83,820 remains as an obligation to issue the shares within equity, as this obligation can only be satisfied in shares of common stock.
During the three months ended March 31, 2016, the Company received conversion notices to issue 950,000 shares of common stock to settle $280,282 of convertible debentures and derivative liabilities (note 9) recorded as an obligation to issue shares within equity. These shares were issued in April 2016.
NOTE 5 -
INCOME TAXES
There are no current or deferred tax expenses for the nine months ended March 31, 2016, due to the Company's loss position. The Company has fully reserved for any benefits of these losses. The deferred tax consequences of temporary differences in reporting items for financial statement and income tax purposes are recognized as appropriate. Realization of the future tax benefits related to the deferred tax assets is dependent on many factors, including the Company's ability to generate taxable income within the net operating loss carry-forward period. Management has considered these factors in reaching its conclusion to provide a full valuation allowance for financial reporting purposes. As of March 31, 2016, the Company had a net operating loss carry-forward of $43,044,000.
Integral Technologies, Inc
.
Notes to the Consolidated Financial Statements
NOTE 6 -
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
Nine Months
Ended March 31,
2016
|
|
|
Nine Months
Ended March 31,
2015
|
|
Changes in working capital
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
(7,770
|
)
|
|
$
|
-
|
|
Prepaid expenses
|
|
|
39,152
|
|
|
|
39,231
|
|
Accounts payable and accruals
|
|
|
591,523
|
|
|
|
(54,431
|
)
|
|
|
$
|
622,905
|
|
|
$
|
(15,200
|
)
|
|
|
|
|
|
|
|
|
|
Shares issued for:
|
|
|
|
|
|
|
|
|
Subscriptions received
|
|
$
|
107,500
|
|
|
$
|
158,625
|
|
Settlement of debt
|
|
|
-
|
|
|
|
125,000
|
|
Settlement of convertible debenture
|
|
|
1,047,182
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Debt reduction adjustment on extinguishment (note 9)
|
|
|
348,437
|
|
|
|
-
|
|
Financed prepaid D&O insurance (note 10(a))
|
|
|
91,221
|
|
|
|
90,705
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
14,760
|
|
|
$
|
11,275
|
|
NOTE 7 -
RELATED PARTY TRANSACTIONS
As of March 31, 2016, $36,000 (June 30, 2015 - $60,480) was included in accounts payable and accruals owed to the Company's executives for outstanding managements fees, consulting fees and business related reimbursements, and are without interest or stated terms of repayment.
NOTE 8 -
SEGMENT INFORMATION
The Company operates primarily in one business segment, the development of electronically-conductive resin-based materials, with operations located in the US.
Integral Technologies, Inc
.
Notes to the Consolidated Financial Statements
NOTE 9 -
CONVERTIBLE DEBENTURES
During the nine months ended March 31, 2016, the Company had the following convertible debenture agreements, summarized as follows:
|
(a)
|
Vis Vires Group, Inc.:
|
|
·
|
On July 23, 2015, a total of $165,000 (extinguished during the three months ended September 30, 2015) was received, net of $4,000 in legal fees. The convertible debt was due April 27, 2016;
|
|
·
|
On August 20, 2015, a total of $100,000 (extinguished during the three months ended September 30, 2015) was received, net of $4,000 in legal fees. The convertible debt was due May 25, 2016;
|
|
·
|
On November 17, 2015, a total of $100,000 (extinguished during the three months ended March 31, 2016) was received, net of $4,000 in legal fees. The convertible debt was due August 19, 2016; and
|
|
·
|
On January 28, 2016, a total of $75,000 (extinguished during the three months ended March 31, 2016) was received, net of $3,500 in legal fees. The convertible debt was due November 1, 2016.
|
The convertible debentures accrue interest of 8% per annum and can be converted into common stock at the option of the holder at any time after 180 days following the date of issuance. The debenture has a conversion price equal to 63% of the market price. Market price is defined as the average of the lowest three trading prices for the Company’s common stock during the ten-day trading period ending one trading day prior to the date of conversion notice with a limitation of 4.99% of the issued and outstanding common stock at the time of conversion. Any amount of principal that is not paid when due bears interest at a rate of 22% per annum.
The convertible debentures may be repaid by the Company as follows:
|
·
|
Outstanding principal multiplied by 107% together with accrued interest and unpaid interest thereon if prepaid within a period of 30 days beginning on the date of issuance of the note;
|
|
·
|
Outstanding principal multiplied by 113% together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning 31 days from the date of issuance of the note and ending on the date that is 60 days following the date of the note;
|
|
·
|
Outstanding principal multiplied by 118% together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning 61 days from the date of issuance of the note and ending on the date that is 90 days following the date of the note.
|
|
·
|
Outstanding principal multiplied by 123% together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning 91 days from the date of issuance of the note and ending on the date that is 120 days following the date of the note.
|
|
·
|
Outstanding principal multiplied by 128% together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning 121 days from the date of issuance of the note and ending on the date that is 150 days following the date of the note.
|
|
·
|
Outstanding principal multiplied by 130% together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning 151 days from the date of issuance of the note and ending on the date that is 180 days following the date of the note.
|
After the expiration of the 180 days following the date of issuance of the debentures, the Company will have no right of prepayment.
On September 23, 2015, the first two convertible debentures with Vis Vires Group, Inc. were transferred to River North Equity LLC with identical terms with the exception of the maturity date of the note (note 9(b)). The transfer of debt was accounted for as an extinguishment of debt with a gain on extinguishment of $1,927 recognized in the consolidated statement of operations.
Integral Technologies, Inc
.
Notes to the Consolidated Financial Statements
NOTE 9 -
CONVERTIBLE DEBENTURES (CONTINUED)
|
(a)
|
Vis Vires Group, Inc. (continued):
|
On March 21, 2016, the second two convertible debentures with Vis Vires Group, Inc. were transferred to Vista Capital Investments, LLC with identical terms with the exception of the maturity date of the note and a lower interest rate (note 9(c)). The transfer of debt was accounted for as an extinguishment of debt with a gain on extinguishment of $67,148 recognized in the consolidated statement of operations during the three months ended March 31, 2016.
The embedded conversion feature of the convertible debentures were treated as derivative liabilities measured at fair value on inception and at each reporting date with the debt component being allocated the residual value of the debt and amortized using the effective interest method to its maturity value. Debt issuance costs have been recorded as a reduction to the debt.
During the nine months ended March 31, 2016, the total net proceeds allocated to the derivative liability components were $136,974 with the residual net proceeds of $38,026 allocated to the debt components at inception.
|
(b)
|
River North Equity LLC
|
|
·
|
On September 23, 2015, a replacement note of $273,000 (extinguished during the three months ended March 31, 2016) was received in exchange with the two convertible notes with Vis Vires Group, Inc. (described above). The new convertible debt is due September 21, 2016. The terms of this convertible debt are identical to the terms with Vis Vires Group, Inc. (above);
|
|
·
|
On September 24, 2015, a total of $98,950 (extinguished during the three months ended March 31, 2016) was received, net of $5,000 in legal fees and $61,050 in Other Issue Discount (“OID”). The convertible debt is due December 31, 2016;
|
The convertible debenture accrues interest of 8% per annum and can be converted into common stock at the option of the holder at any time after 180 days following the date of issuance. The debenture has a conversion price equal to 63% of the market price. Market price is defined as the average of the lowest trading price for the Company’s common stock during the ten-day trading period ending one trading day prior to the date of conversion notice with a limitation of 9.99% of the issued and outstanding common stock at the time of conversion. Any amount of principal that is not paid when due bears interest at a rate of 18% per annum.
The convertible debenture may be repaid by the Company as follows:
|
·
|
Outstanding principal multiplied by 105% together with accrued interest and unpaid interest thereon if prepaid within a period of 30 days beginning on the date of the Note
|
|
·
|
Outstanding principal multiplied by 110% together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning 31 days from the date of the Note and ending on the date which is 60 days following the date of the Note
|
|
·
|
Outstanding principal multiplied by 118% together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning 61 days from the date of the Note and ending on the date which is 90 days following the date of the Note
|
|
·
|
Outstanding principal multiplied by 123% together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning 91 days from the date of the Note and ending on the date which is 120 days following the date of the Note
|
|
·
|
Outstanding principal multiplied by 130% together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning 121 days from the date of the Note and ending on the date which is 180 days following the date of the Note
|
Integral Technologies, Inc
.
Notes to the Consolidated Financial Statements
NOTE 9 -
CONVERTIBLE DEBENTURES (CONTINUED)
|
(b)
|
River North Equity LLC (continued)
|
After the expiration of the 180 days following the date of issuance of the debenture, the Company will have no right of prepayment.
The two outstanding convertible debt notes with River North LLC (described above) were exchanged for new convertible debentures as follows:
|
(i)
|
On February 4, 2016, a portion of the $273,000 convertible debenture was transferred to an independent lender. A new note totalling $127,786 was issued representing the original principle of $104,000, accrued interest of $3,100 and an additional $20,686 as consideration for the amending the terms of the convertible debt.
|
The maturity date of the new convertible debt is February 1, 2018 and is stated without interest.
As of the effective date of the convertible debt note, the lender may convert all or part of the unpaid principal and accrued interest into common stock at its sole discretion. All balances outstanding have a variable conversion price equal to 63% of the market price. The market price is defined as the lowest five trading prices in the 25 days prior to the conversion date. The lender is limited in its sale of the Company’s common shares to the greater of 15% of the total number of common shares traded in that same week, or $10,000 in dollar volume per week and a limitation of 4.99% of the issued and outstanding common stock at the time of conversion unless the market capitalization of the Company falls below $2,500,000, then the limit will increase to 9.99%.
|
(ii)
|
On February 5, 2016, the remaining convertible debentures were transferred to SBI Investments, LLC and an independent lender. The replacement notes were issued with identical terms as described above with the exception of the maturity dates of the notes being extending to February 5, 2017:
|
The replacement notes with SBI Investment total $273,575, representing transferred principle of $222,667, accrued interest of $6,375 and an additional $44,533 as consideration for amending the terms of the convertible debt.
The replacement notes with the independent lender total $136,787, representing transferred principle of $111,333, accrued interest of $3,187 and an additional $22,267 as consideration for amending the terms of the convertible debt.
The transfer of their debts were accounted for as an extinguishment of debt with a gain on extinguishment of $75,149 recognized in the consolidated statement of operations during the three months ended March 31, 2016.
The embedded conversion features of the convertible debentures were treated as derivative liabilities measured at fair value on inception and at each reporting date with the debt component being allocated the residual value of the debt and amortized using the effective interest method to its maturity value. Debt issuance costs have been recorded as a reduction to the debt.
During the nine months ended March 31, 2016, the net proceeds of the River North Equity LLC notes allocated to derivative liability components were $290,375 with the residual net proceeds of $81,575 allocated to the debt components at inception. The net proceeds of the new replacement notes allocated to derivative liability components were $508,587 with the residual net proceeds of $29,561 allocated to debt components at inception.
Integral Technologies, Inc
.
Notes to the Consolidated Financial Statements
NOTE 9 -
CONVERTIBLE DEBENTURES (CONTINUED)
|
(c)
|
Vista Capital Investments, LLC
|
|
·
|
On March 21, 2016, a new note with a principle of $126,000 (inclusive of $8,507 in interest and a premium of $13,493) was received in exchange for the $104,000 convertible note with Vis Vires Group, Inc. (note 9(a)). The new convertible debt is due January 1, 2017; and
|
|
·
|
On March 21, 2016, a new note with a principle of $89,250 (inclusive of $5,858 in interest and a premium of $4,892) was received in exchange for the $78,500 convertible note with Vis Vires Group, Inc. (note 9(a)). The new convertible debt is due January 1, 2017;
|
The convertible debentures include an up-front interest charge of 5% due at maturity and can be converted into common stock at the option of the holder at any time after date of issuance. The debenture has a conversion price equal to 63% of the market price. Market price is defined as the lowest trading price for the Company’s common stock during the twenty-five day trading period ending one trading day prior to the date of conversion notice with a limitation of 4.99% of the issued and outstanding common stock at the time of conversion unless the market capitalization of the Company falls below $2,500,000, then the limit will increase to 9.99%.
The convertible debentures may be repaid by the Company as follows:
|
·
|
Outstanding principal multiplied by 145% together with accrued interest and unpaid interest thereon if prepaid within a period of 150 days beginning on the date of issuance of the note;
|
After the expiration of the 150 days following the date of issuance of the debentures, the Company will have no right of prepayment.
The embedded conversion feature of the convertible debentures were treated as derivative liabilities measured at fair value on inception and at each reporting date with the debt components being allocated the residual value of the debt and amortized using the effective interest method to its maturity value. Debt issuance costs have been recorded as a reduction to the debt.
During the nine months ended March 31, 2016, the total net proceeds allocated to the derivative liability components were $215,250 with the residual net proceeds of $0 allocated to the debt components at inception.
Integral Technologies, Inc
.
Notes to the Consolidated Financial Statements
NOTE 9 -
CONVERTIBLE DEBENTURES (CONTINUED)
The total amount that may be borrowed with JMJ Financial is $650,000, which includes an upfront OID fee of 8%.
On signing the agreement, the first advance of $300,000 was received by the Company from the lender. At the sole discretion of the lender, additional consideration may be advanced to the Company; however, the Company has the right to reject any of those payments within 24 hours of receipt of payment. Each advance received by the Company is due two years from delivery of payment. As at March 31, 2016, the following amount is payable:
|
·
|
On September 30, 2015, received $300,000, net of an upfront fee of $26,087;
|
No interest will be applied to the principal balance for the first 90 days after cash advance. After the first 90 days, an interest charge of 8% will be immediately applied to the principal.
On delivery of consideration, the lender may convert all or part of the unpaid principal and up-front fee into common stock at its sole discretion. All balances outstanding have a variable conversion price equal to 75% of the market price. The market price is defined as the lowest two trading prices in the 20 days prior to the conversion date. The lender is limited to holding no more than 4.99% of the issued and outstanding common stock at the time of conversion. After the expiration of 90 days following the delivery date of any consideration, the Company will have no right of prepayment.
The embedded conversion feature of the convertible debenture was treated as a derivative liability measured at fair value on inception and at each reporting date with the debt component being allocated the residual value of the debt and amortized using the effective interest method to its maturity value. Debt issuance costs have been recorded as a reduction to the debt.
During the nine months ended March 31, 2016, the net proceeds allocated to the derivative liability component was $234,087 with the residual net proceeds of $65,913 allocated to the debt component at inception.
Integral Technologies, Inc
.
Notes to the Consolidated Financial Statements
NOTE 9 -
CONVERTIBLE DEBENTURES (CONTINUED)
During the nine months ended March 31, 2016, $419,641 of the face value of debentures were extinguished by issuing 4,201,374 shares of common stock of the Company, and $1,047,184 representing the fair value of the derivative liabilities and the amortized cost of convertible debentures settled was included as additional paid in capital.
As of March 31, 2016, the total amortized value of the outstanding convertible debentures were $106,960 (June 30, 2015 - $94,107) and the total fair value of the outstanding derivative liabilities were $710,512 (June 30, 2015 - $87,821).
During the nine months ended March 31, 2016, a fair value loss on the derivative liability of $887,707 (2015 - $11,994 gain) was recognized. During the three months ended March 31, 2016, a fair value loss on the derivative liability of $848,208 (2015 – fair value gain of $12,990) was recognized. As of March 31, 2016, $731,532 of the fair value loss relates to the conversion features associated with the outstanding debentures with the remaining $156,175 related to the conversion features associated with the debentures that were settled and extinguished.
As of March 31, 2016, 4,809,087 (June 30, 2015 - 343,177) common shares of the Company would be required to settle the remaining tranches of convertible debt at a weighted average conversion price of $0.12 (June 30, 2015 - $0.26) per common share.
As of March 31, 2016, the face value of convertible debentures is $566,770 (June 30, 2015 - $133,976), which includes accrued interest of $13,884 (June 30, 2015 - $4,976).
During the nine months ended March 31, 2016, debt discount amortization of $380,577 (2015 - $103,956) was recorded as interest expense. During the three months ended March 31, 2016, debt discount amortization of $176,273 (2015 - $74,333) was recorded as interest expense.
The fair value of the derivative financial liability is calculated using the Black-Scholes valuation method at inception and the consolidated balance sheet date.
The following assumptions were used in determining the fair value of the derivative liabilities at inception during the nine months ended:
|
|
March 31, 2016
|
|
Share price
|
|
|
0.23 – 0.50
|
|
Conversion price
|
|
|
0.11 – 0.37
|
|
Expected life (years)
|
|
|
0.78 – 2.00
|
|
Interest rate
|
|
|
0.42 - 0.63%
|
|
Volatility
|
|
|
76.39 – 94.03%
|
|
Dividend yield
|
|
|
N/A
|
|
Estimated forfeitures
|
|
|
N/A
|
|
Integral Technologies, Inc
.
Notes to the Consolidated Financial Statements
NOTE 9 -
CONVERTIBLE DEBENTURES (CONTINUED)
The following assumptions were used in determining the fair value of the derivative financial liabilities as of:
|
|
March 31, 2016
|
|
|
June 30, 2015
|
|
Share price
|
|
|
0.25
|
|
|
|
0.64
|
|
Conversion price
|
|
|
0.11 – 0.14
|
|
|
|
0.39
|
|
Expected life (years)
|
|
|
0.76 – 1.85
|
|
|
|
0.27
|
|
Interest rate
|
|
|
0.39 - 0.55%
|
|
|
|
0.58%
|
|
Volatility
|
|
|
92.02 – 108.46%
|
|
|
|
65.73%
|
|
Dividend yield
|
|
|
N/A
|
|
|
|
N/A
|
|
Estimated forfeitures
|
|
|
N/A
|
|
|
|
N/A
|
|
NOTE 10 –
LOANS PAYABLE
During the nine months ended March 31, 2016, the Company entered into the following loan agreements, summarized as follows:
|
(a)
|
On Jan 1, 2016, the Company entered into a new financing arrangement to cover directors’ and officers’ liability insurance for the period December 31, 2015 to December 31, 2016. The amount financed was $91,221, which bears interest at 3.189% annually. A down payment on the loan of $18,045 was made at inception of the loan. Monthly payments of $8,084 are required to settle amounts owing. The balance outstanding as of March 31, 2016 was $56,915.
|
As of March 31, 2016, $68,415 (June 30, 2015 – $45,351), representing the unamortized portion of prepaid insurance, is included in prepaid expenses on the consolidated balance sheet.
|
(b)
|
On January 1, 2016, the Company entered into a short term loan agreement with a maturity date of July 1, 2016, for $110,000. A one-time interest charge of 5% or $5,500 is due at maturity of the loan. The loan was entered into to settle marketing fees payable. As of March 31, 2016, the loan balance on the consolidated balance sheet is $112,750, which includes accrued interest of $2,750.
|
In the event of a default on the loan, the unpaid principal amount together with the interest shall immediately increase by 130% and the lender will have the right to convert the outstanding balance into shares of the Company’s common stock.
The outstanding balance will have a variable conversion price equal to 65% of the market price. The market price is defined as the lowest trading price in the 15 days prior to the conversion date. The lender is limited to 4.99% of the issued and outstanding common stock at the time of conversion unless the market capitalization of the Company falls below $2,500,000, then the limit will increase to 9.99%.
The Company is not currently in default of the loan and expects to settle the debt with cash, no consideration for the default conversion feature has been accounted for.
Integral Technologies, Inc
.
Notes to the Consolidated Financial Statements
NOTE 10 –
LOANS PAYABLE (CONTINUED)
|
(c)
|
On March 8, 2016, the Company entered into a short term loan agreement with a maturity date of May 8, 2016, for $120,000 net of legal fees of $6,000. A one-time OID fee of $20,000 was applied to the balance at inception of the loan. As of March 31, 2016, the loan balance on the consolidated balance sheet is $127,869 which includes amortization of debt issue costs of $10,230.
|
In the event of a default on the loan, the unpaid principal amount together with the OID shall bear interest at 22% and the lender will have the right to convert the outstanding balance into shares of the Company’s common stock.
The outstanding balance will have a variable conversion price equal to 60% of the market price. The market price is defined as the lowest trading price in the 25 days prior to the conversion date. The lender is limited to 4.99% of the issued and outstanding common stock at the time of conversion unless the market capitalization of the Company falls below $2,500,000, then the limit will increase to 9.99%.
As the Company is not in default of the loan and expects to settle the debt with cash, no consideration for the conversion feature has been accounted for.
|
(d)
|
On March 30, 2016, the Company entered into a short term loan agreement with a maturity date of April 4, 2016, for $10,000. A one-time interest charge of $250 was applied to the balance at inception of the loan. This loan was subsequently repaid in cash. As of March 31, 2016, the loan balance on the consolidated balance sheet was $10,000.
|
NOTE 11 -
DEFERRED REVENUE
On June 21, 2013, the Company signed a ten-year license agreement with
Hanwha
, of South Korea. The agreement grants Hanwha exclusive rights to sell, distribute and manufacture Integral's patented line of conductive plastics, ElectriPlast, in South Korea, as well as non-exclusive sales and distribution rights to ElectriPlast for Japan, Taiwan and the China markets.
The agreement called for license fees as follows:
|
·
|
$250,000 (received) to be paid to the Company within 15 business days; and
|
|
·
|
$250,000 (received) payment to be paid to the Company no later than one year after signing the agreement.
|
The payments have been recorded as deferred revenue, which will be recognized as license fee revenue in the consolidated statements of operations over the life of the ten-year contract. During the nine months ended March 31, 2016, $37,500 (fiscal year ended June 30, 2015 - $50,000) has been recognized as revenue.
As of March 31, 2016 and June 30, 2015, the remaining deferred revenue was as follows:
|
|
March 31, 2016
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
Non-current
|
|
|
333,333
|
|
|
|
370,833
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
383,333
|
|
|
$
|
420,833
|
|
Integral Technologies, Inc
.
Notes to the Consolidated Financial Statements
NOTE 12 -
SUBSEQUENT EVENTS
Subsequent to March 31, 2016, the following events occurred:
|
(a)
|
On April 4, 2016, the company entered into a convertible debt agreement with Vis Vires Group, Inc. A total of $125,000 was received, net of $3,500 in legal fees. The convertible debenture is due December 29, 2016, and has identical terms and conditions to those as described in note 9(a);
|
|
(b)
|
The Company issued 1,650,000 (of which 750,000 included in obligation to issue shares) common shares to settle face value of convertible debt of $191,125, with JMJ Financial (note 9(d));
|
|
(c)
|
During April 2016, the Company issued 529,174 (of which 200,000 included in obligation to issue shares) common shares to settle face value of convertible debt of $53,622 with an independent lender (note 9(b)(i));
|
On April 22, 2016, the Company issued 2,000,000 common shares to settle face value of convertible debt of $126,000 with Vista Capital Investments, Inc. (note 9(c));
|
(d)
|
On May 5, 2016, the Company entered into a convertible debt agreement with JMJ Financial. A total of $900,000 was received, net of an upfront OID 10% fee of $100,000. The convertible debenture is due May 5, 2017.
|
No interest will be applied to the principal balance for the first 90 days after cash advance. After the first 90 days, a one-time interest charge of 12% will be immediately applied to the principal.
On delivery of consideration, the lender may convert all or part of the unpaid principal and up-front fee into common stock at its sole discretion. All balances outstanding have a variable conversion price equal to 65% of the market price. The market price is defined as the lowest two trading prices in the 25 days prior to the conversion date. The lender is limited to holding no more than 4.99% of the issued and outstanding common stock at the time of conversion. After the expiration of 120 days following the delivery date of any consideration, the Company will have no right of prepayment without written consent of the lender.
The convertible debenture may be repaid by the Company as follows:
|
·
|
Outstanding principal multiplied by 120% together with accrued interest and unpaid interest thereon if prepaid within a period of 90 days beginning on the date of the Note.
|
|
·
|
Outstanding principal multiplied by 140% together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning 91 days from the date of the Note and ending on the date which is 180 days following the date of the Note.
|
Pursuant to the terms of the financing, the Company is required to use a portion of the proceeds to settle all outstanding convertible debentures with other lenders.
In addition to the convertible debt, the Company issued 1,250,000 share purchase warrants with an expiry date of May 5, 2018. The exercise price of the warrants will be the lessor of $0.20 per share, the lowest trade price in the 10 days previous to exercise or the adjusted price.
At any time while the warrants are outstanding, any subsequent sale of shares of common stock, or any agreement whereby the holder may acquire common stock at an effective exercise price per share less than the warrant exercise price in effect, the exercise price of these warrants will automatically adjust to this new lower exercise price. Further, these warrants are cashless and the number of shares received will be equivalent to the gain between the market price of shares at the time of exercise and the exercise price of warrant.