Notes to the Condensed Consolidated Financial Statements
March 31, 2020
(Expressed in U.S. dollars)
(unaudited)
1.
Nature of Business and Continuance of Operations
Pharmagreen Biotech Inc. (“the Company”) was incorporated under the laws of the State of Nevada, U.S. on November 26, 2007, under the name Azure International, Inc. On October 30, 2008, and effective as of the same date, the Company filed Articles of Merger (“Articles”) with the Secretary of State of the State of Nevada, to effect a merger by and between Air Transport Group Holdings, Inc., a Nevada corporation and Azure International, Inc. As a result of the merger, the Company changed its name to Air Transport Group Holdings, Inc. The Company was previously in the business of providing technical advisory and appraisals to the aircraft and aviation business as well as providing sourcing for aircraft leases and parts. Pursuant to a Share Exchange Agreement with WFS Pharmagreen Inc. (“WFS”) on May 2, 2018, the Company changed its name to Pharmagreen Biotech Inc. and changed its principal business to the construction of a biotech complex in Deroche, British Columbia, Canada, for the purpose of producing a variety of starter plantlets for the Canadian and international high CBD hemp and medical cannabis industries through the application of the proprietary plant tissue culture in vitro process called “Chibafreen”. This proprietary process will produce plantlets that will be genetically identical and free of pests and disease free with consistent and certifiable constituent properties.
Going Concern
These condensed consolidated financial statements have been prepared on the going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. As at March 31, 2020, the Company has not earned any revenues from operations, has a working capital deficit of $1,412,987, and has an accumulated deficit of $4,939,007. During the six months ended March 31, 2020, the Company incurred a net loss of $209,684 and used cash flows for operations of $474,205. These factors raise substantial doubt upon the Company’s ability to continue as a going concern. These condensed consolidated financial statements do not reflect any adjustments that may be necessary if the Company is unable to continue as a going concern.
The recent outbreak of the novel coronavirus COVID-19, which was declared a pandemic by the World Health Organization on March 11, 2020, has led to adverse impacts on the U.S. and global economies, disruptions of financial markets, and created uncertainty regarding potential impacts to the Company’s supply chain, operations, and customer demand. The COVID-19 pandemic has impacted and could further impact the Company’s operations and the operations of the Company’s suppliers and vendors as a result of quarantines, facility closures, and travel and logistics restrictions. The extent to which the COVID-19 pandemic impacts the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the duration, spread, severity, and impact of the COVID-19 pandemic, the effects of the COVID-19 pandemic on the Company’s customers, suppliers, and vendors and the remedial actions and stimulus measures adopted by local and federal governments, and to what extent normal economic and operating conditions can resume. The management team is closely following the progression of COVID-19 and its potential impact on the Company. Even after the COVID-19 pandemic has subsided, the Company may experience adverse impacts to its business as a result of any economic recession or depression that has occurred or may occur in the future. Therefore, the Company cannot reasonably estimate the impact at this time our business, liquidity, capital resources and financial results.
2.
Significant Accounting Policies
(a)
Interim Financial Statements
These condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period.
(b)
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and are expressed in U.S. dollars. These condensed interim consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, WFS Pharmagreen Inc. (“WFS”), and its 89.7% owned subsidiary 1155097 BC Ltd. (“115BC”), companies incorporated in British Columbia, Canada. All inter-company accounts and transactions have been eliminated. The Company’s fiscal year-end is September 30.
7
PHARMAGREEN BIOTECH INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2020
(Expressed in U.S. dollars)
(unaudited)
2.
Significant Accounting Policies (continued)
(c) Use of Estimates and Judgments
The preparation of these condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles 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. The Company regularly evaluates estimates and assumptions related to the allowance for doubtful accounts, the recoverability of property and equipment, the equity component of convertible notes, fair value of derivative liabilities, fair value of stock-based payments, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
(d)
Loss Per Share
The Company computes loss per share in accordance with ASC 260, "Earnings per Share" which requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing the loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As at March 31, 2020, there were 373,968,308 (September 30, 2019 – 364,850,535) potentially dilutive shares outstanding.
(e) Recently Adopted Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07, which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The standard became effective for the Company in the first quarter of fiscal year 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In February 2016, Topic 842, Leases, was issued to replace the leases requirements in Topic 840, Leases. The main difference between previous GAAP and Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. A lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The standard became effective for the Company in the first quarter of fiscal year 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
The Company has implemented all new accounting pronouncements that are in effect and that may impact its condensed consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
8
PHARMAGREEN BIOTECH INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2020
(Expressed in U.S. dollars)
(unaudited)
3.
Property and Equipment
|
|
|
|
|
|
|
Cost
$
|
Accumulated depreciation
$
|
Net carrying
value as at
March 31,
2020
$
|
Net carrying
value as at
September 30,
2019
$
|
|
|
|
|
|
|
|
Construction in progress
|
411,425
|
–
|
411,425
|
441,095
|
As at March 31, 2020, and September 30, 2019, costs related to the construction of cannabis production complex were capitalized as construction in progress and not depreciated. Depreciation will commence when construction is completed, and the facility is available for its intended use.
4.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consists of the following:
|
|
|
|
|
March 31,
2020
$
|
September 30,
2019
$
|
|
|
|
|
|
Accounts payable
|
502,964
|
829,942
|
|
Accrued interest payable
|
46,423
|
25,824
|
|
|
|
|
|
|
549,387
|
855,766
|
During the six months ended March 31, 2020, the Company recognized a write-off of accounts payable of $292,557 (2019 - $nil) related to professional fees that are no longer owing.
5.
Promissory Note
On November 22, 2019, the Company entered into a promissory note with an unrelated party for $40,000 in connection with an equity purchase agreement (Refer to Note 10(b)). The promissory note is unsecured, due on November 30, 2020, and bears interest on the unpaid principal balance at a rate of 10% per annum. During the period ended March 31, 2020, the Company recognized accrued interest of $995 (2019 - $426).
6.
Convertible Notes
(a)
On April 4, 2018, the amount of $32,485 owed to related parties was converted to Series A convertible notes, which are unsecured, non-interest bearing, and due on April 4, 2023. These notes are convertible in whole or in part, at any time until maturity, to common shares of the Company at $0.0001 per share. The outstanding balance remaining at maturity shall bear interest at 12% per annum until fully paid. The Company evaluated the convertible notes for a beneficial conversion feature in accordance with ASC 470-20 Debt with Conversion and Other Options. The Company determined that the conversion price was below the closing stock price on the commitment date, and the convertible notes contained a beneficial conversion feature. The Company recognized the intrinsic value of the embedded beneficial conversion feature of $32,485 as additional paid-in capital and reduced the carrying value of the convertible note to $nil. The carrying value will be accreted over the term of the convertible notes up to their face value of $32,485.
During the year ended September 30, 2018, the Company issued 31,745,000 shares of common stock upon the conversion of $3,175 of Series A convertible notes, which included 18,000,000 common shares to the President of the Company and 5,320,000 common shares to family members of the President of the Company. Upon conversion, the Company immediately recognized the related remaining debt discount of $3,112 as accretion expense.
During the year ended September 30, 2019, the Company issued 3,900,000 shares of common stock upon the conversion of $390 of Series A convertible notes. Upon conversion, the Company immediately recognized the related remaining debt discount of $375 as accretion expense.
9
PHARMAGREEN BIOTECH INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2020
(Expressed in U.S. dollars)
(unaudited)
6.
Convertible Notes (continued)
As at March 31, 2020, the carrying value of the convertible notes was $2,417 (September 30, 2019 - $1,599) and had an unamortized discount of $26,504 (September 30, 2019 - $27,321). During the six months ended March 31, 2020, the Company recorded accretion expense of $812 (2019 - $659).
(b)
On September 17, 2019, the Company entered into a convertible note with an unrelated party for $78,000, of which $3,000 was paid directly to third parties for financing costs, resulting in cash proceeds to the Company of $75,000. The note is due on September 20, 2020, and bears interest on the unpaid principal balance at a rate of 10% per annum, which increases to 22% per annum upon default of the note. The note may be converted at any time after 180 days of the date of issuance into shares of Company’s common stock at a conversion price equal to 61% of the average 2 lowest trading prices during the 10-trading day period prior to the conversion date. Due to this provision, the Company considered whether the embedded conversion option qualifies for derivative accounting under ASC 815-15 Derivatives and Hedging. As the note was not convertible until 180 days following issuance, no derivative liability was initially recognized.
The convertible note became convertible on March 15, 2020. The Company evaluated the convertible note for a beneficial conversion feature in accordance with ASC 470-20 Debt with Conversion and Other Options. The Company determined that the conversion price was below the closing stock price on the measurement date, and the convertible note contained a beneficial conversion feature. The initial fair value of the conversion feature was determined to be $82,631. The Company recognized the maximum intrinsic value of the embedded beneficial conversion feature of $76,019 and reduced the carrying value of the convertible note to $500. The carrying value will be accreted over the term of the convertible note up to its face value of $75,000.
During the six months ended March 31, 2020, the Company issued 78,064 shares of common stock upon the conversion of $10,000 of the convertible note. Upon conversion, the Company immediately recognized the related remaining debt discount of $9,924 as accretion expense.
The financing costs were netted against the convertible note and are being amortized over the term using the effective interest rate method. During the six months ended March 31, 2020, the Company recognized accretion expense of $1,845 (2019 - $nil). As at March 31, 2020, the carrying value of the convertible note was $854 (September 30, 2019 - $75,105), net of an unamortized discount of $77,146 (September 30, 2019 - $2,895).
(c)
On October 1, 2019, the Company entered into a convertible note with an unrelated party for $78,000, of which $3,255 was paid directly to third parties for financing costs, resulting in proceeds to the Company of $74,745. The note is due on October 1, 2020, and bears interest on the unpaid principal balance at a rate of 10% per annum, which increases to 22% per annum upon default of the note. The note may be converted at any time after the date of issuance into shares of Company’s common stock at a conversion price equal to lower of: (i) the lowest trading price during the 10-trading day period prior to the issuance date; or (ii) 61% of the average 2 lowest trading prices during the 10-trading day period prior to the conversion date. In connection with the issuance of the above convertible note, the Company evaluated the conversion option for derivative treatment under ASC 815-15, Derivatives and Hedging, and determined the note and conversion feature qualified as derivatives. The Company classified the conversion feature as a derivative liability at fair value. The initial fair value of the conversion feature was determined to be $70,744. The Company recognized the maximum intrinsic value of the embedded beneficial conversion feature of $74,245 and reduced the carrying value of the convertible note to $500. The carrying value will be accreted over the term of the convertible note up to its face value of $78,000.
The financing costs were netted against the convertible note and are being amortized over the term using the effective interest rate method. During the six months ended March 31, 2020, the Company recognized accretion expense of $12,281. As at March 31, 2020, the carrying value of the convertible note was $12,781, net of an unamortized discount of $65,219.
.
10
PHARMAGREEN BIOTECH INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2020
(Expressed in U.S. dollars)
(unaudited)
6.
Convertible Notes (continued)
(d)
On October 17, 2019, the Company entered into a convertible note with an unrelated party for $63,000, of which $3,000 was paid directly to third parties for financing costs, resulting in cash proceeds to the Company of $60,000. The note is due on October 17, 2020, and bears interest on the unpaid principal balance at a rate of 10% per annum, which increases to 22% per annum upon default of the note. The note may be converted at any time after 180 days of the date of issuance into shares of Company’s common stock at a conversion price equal to 61% of the average 2 lowest trading prices during the 10-trading day period prior to the conversion date. In December 2019, the conversion price was amended to 46%. Due to this provision, the Company considered whether the embedded conversion option qualifies for derivative accounting under ASC 815-15 Derivatives and Hedging. As the note isn’t convertible until 180 days following issuance, no derivative liability was recognized as of March 31, 2020.
The financing costs were netted against the convertible note and are being amortized over the term using the effective interest rate method. During the six months ended March 31, 2020, the Company recognized accretion expense of $1,343. As at March 31, 2020, the carrying value of the convertible note was $61,343, net of an unamortized discount of $1,657.
(e)
On January 2, 2020, the Company entered into a convertible note with an unrelated party for $53,000, of which $3,000 was paid directly to third parties for financing costs, resulting in cash proceeds to the Company of $50,000. The note is due on January 2, 2021, and bears interest on the unpaid principal balance at a rate of 10% per annum, which increases to 22% per annum upon default of the note. The note may be converted at any time after 180 days of the date of issuance into shares of Company’s common stock at a conversion price equal to 61% of the average 2 lowest trading prices during the 10-trading day period prior to the conversion date. Due to this provision, the Company considered whether the embedded conversion option qualifies for derivative accounting under ASC 815-15 Derivatives and Hedging. As the note isn’t convertible until 180 days following issuance, no derivative liability was recognized as of March 31, 2020.
The financing costs were netted against the convertible note and are being amortized over the term using the effective interest rate method. During the six months ended March 31, 2020, the Company recognized accretion expense of $714. As at March 31, 2020, the carrying value of the convertible note was $50,714, net of an unamortized discount of $2,286.
(f)
On January 14, 2020, the Company entered into a convertible note with an unrelated party for $78,000, of which $3,000 was paid directly to third parties for financing costs, resulting in proceeds to the Company of $75,000. The note is due on January 14, 2021, and bears interest on the unpaid principal balance at a rate of 12% per annum, which increases to 15% per annum upon default of the note. The note may be converted at any time after the date of issuance into shares of Company’s common stock at a conversion price equal to lower of: (i) 65% of the lowest trading price during the 20-trading day period prior to the issuance date; or (ii) 65% of the lowest trading price during the 20-trading day period prior to the conversion date. In connection with the issuance of the above convertible note, the Company evaluated the conversion option for derivative treatment under ASC 815-15, Derivatives and Hedging, and determined the note and conversion feature qualified as derivatives. The Company classified the conversion feature as a derivative liability at fair value. The initial fair value of the conversion feature was determined to be $76,330. The Company recognized the maximum intrinsic value of the embedded beneficial conversion feature of $74,500, resulting in a loss on change in fair value of derivative liabilities of $1,830, and reduced the carrying value of the convertible note to $500. The carrying value will be accreted over the term of the convertible note up to its face value of $78,000.
The financing costs were netted against the convertible note and are being amortized over the term using the effective interest rate method. During the six months ended March 31, 2020, the Company recognized accretion expense of $1,778. As at March 31, 2020, the carrying value of the convertible note was $2,278, net of an unamortized discount of $75,722.
11
PHARMAGREEN BIOTECH INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2020
(Expressed in U.S. dollars)
(unaudited)
6.
Convertible Notes (continued)
(g)
On January 15, 2020, the Company entered into a convertible note with an unrelated party for $61,000, of which $7,400 was paid directly to third parties for financing costs. The convertible note has a purchase price of $58,000, with an original issue discount of $3,000, resulting in proceeds to the Company of $50,600. The note is due on January 15, 2021, and bears interest on the unpaid principal balance at a rate of 10% per annum, payable in common stock, which increases to 24% per annum upon default of the note. The note may be converted at any time after the date of issuance into shares of Company’s common stock at a conversion price equal 65% of the lowest trading price during the 20-trading day period prior to the conversion date. In connection with the issuance of the above convertible note, the Company evaluated the conversion option for derivative treatment under ASC 815-15, Derivatives and Hedging, and determined the note and conversion feature qualified as derivatives. The Company classified the conversion feature as a derivative liability at fair value. The initial fair value of the conversion feature was determined to be $67,846. The Company recognized the maximum intrinsic value of the embedded beneficial conversion feature of $50,100, resulting in a loss on change in fair value of derivative liabilities of $17,746, and reduced the carrying value of the convertible note to $500. The carrying value will be accreted over the term of the convertible note up to its face value of $61,000.
The financing costs were netted against the convertible note and are being amortized over the term using the effective interest rate method. During the six months ended March 31, 2020, the Company recognized accretion expense of $903. As at March 31, 2020, the carrying value of the convertible note was $1,403, net of an unamortized discount of $59,597.
(h)
On January 15, 2020, the Company entered into a convertible note with an unrelated party for $55,000, of which $2,500 was paid directly to third parties for financing costs, resulting in proceeds to the Company of $52,500. The note is due on January 15, 2021, and bears interest on the unpaid principal balance at a rate of 10% per annum, which increases to 24% per annum upon default of the note. The note may be converted at any time after the date of issuance into shares of Company’s common stock at a conversion price equal to lower of: (i) the lowest trading price during the 20-trading day period ending on the latest complete trading day prior to the issuance date; or (ii) 65% of the lowest trading price during the 20 consecutive trading day period on which at least 100 shares of common stock were traded prior to the conversion date. In connection with the issuance of the above convertible note, the Company evaluated the conversion option for derivative treatment under ASC 815-15, Derivatives and Hedging, and determined the note and conversion feature qualified as derivatives. The Company classified the conversion feature as a derivative liability at fair value. The initial fair value of the conversion feature was determined to be $61,173. The Company recognized the maximum intrinsic value of the embedded beneficial conversion feature of $52,000, resulting in a loss on change in fair value of derivative liabilities of $9,173, and reduced the carrying value of the convertible note to $500. The carrying value will be accreted over the term of the convertible note up to its face value of $55,000.
The financing costs were netted against the convertible note and are being amortized over the term using the effective interest rate method. During the six months ended March 31, 2020, the Company recognized accretion expense of $871. As at March 31, 2020, the carrying value of the convertible note was $1,371, net of an unamortized discount of $53,629.
12
PHARMAGREEN BIOTECH INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2020
(Expressed in U.S. dollars)
(unaudited)
6.
Convertible Notes (continued)
(i)
On January 21, 2020, the Company entered into a convertible note with an unrelated party for $66,150, of which $7,800 was paid directly to third parties for financing costs. The convertible note has a purchase price of $63,000, with an original issue discount of $3,150, resulting in proceeds to the Company of $55,200. The note is due on January 21, 2021, and bears interest on the unpaid principal balance at a rate of 8% per annum, payable in common stock, which increases to 24% per annum upon default of the note. The note may be converted at any time after the date of issuance into shares of Company’s common stock at a conversion price equal 60% of the lowest trading price during the 20-trading day period prior to the conversion date. In connection with the issuance of the above convertible note, the Company evaluated the conversion option for derivative treatment under ASC 815-15, Derivatives and Hedging, and determined the note and conversion feature qualified as derivatives. The Company classified the conversion feature as a derivative liability at fair value. The initial fair value of the conversion feature was determined to be $71,278. The Company recognized the maximum intrinsic value of the embedded beneficial conversion feature of $54,700, resulting in a loss on change in fair value of derivative liabilities of $16,578, and reduced the carrying value of the convertible note to $500. The carrying value will be accreted over the term of the convertible note up to its face value of $66,150.
The financing costs were netted against the convertible note and are being amortized over the term using the effective interest rate method. During the six months ended March 31, 2020, the Company recognized accretion expense of $840. As at March 31, 2020, the carrying value of the convertible note was $1,340, net of an unamortized discount of $64,810.
(j)
On January 22, 2020, the Company entered into a convertible note with an unrelated party for $78,750, of which $9,750 was paid directly to third parties for financing costs, resulting in proceeds to the Company of $69,000. The note is due on January 22, 2021, and bears interest on the unpaid principal balance at a rate of 10% per annum, payable in common stock, which increases to 24% per annum upon default of the note. The note may be converted at any time after the date of issuance into shares of Company’s common stock at a conversion price equal to 65% of the lowest trading price during the 20-trading day period ending on the latest complete trading day prior to the conversion date. In connection with the issuance of the above convertible note, the Company evaluated the conversion option for derivative treatment under ASC 815-15, Derivatives and Hedging, and determined the note and conversion feature qualified as derivatives. The Company classified the conversion feature as a derivative liability at fair value. The initial fair value of the conversion feature was determined to be $75,179. The Company recognized the maximum intrinsic value of the embedded beneficial conversion feature of $68,500, resulting in a loss on change in fair value of derivative liabilities of $6,679, and reduced the carrying value of the convertible note to $500. The carrying value will be accreted over the term of the convertible note up to its face value of $78,750.
The financing costs were netted against the convertible note and are being amortized over the term using the effective interest rate method. During the six months ended March 31, 2020, the Company recognized accretion expense of $875. As at March 31, 2020, the carrying value of the convertible note was $1,375, net of an unamortized discount of $77,375.
13
PHARMAGREEN BIOTECH INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2020
(Expressed in U.S. dollars)
(unaudited)
6.
Convertible Notes (continued)
(k)
On February 4, 2020, the Company entered into a convertible note with an unrelated party for $100,000, of which $16,970 was paid directly to third parties for financing costs, resulting in proceeds to the Company of $83,030. The note is due on February 4, 2021, and bears interest on the unpaid principal balance at a rate of 12% per annum, which increases to 24% per annum upon default of the note. The note may be converted at any time after the date of issuance into shares of Company’s common stock at a conversion price equal to lower of: (i) the lowest trading price during the 10-trading day period ending on the latest complete trading day prior to the issuance date; or (ii) 60% of the average of the two lowest trading prices during the 10-trading day period prior to the conversion date. In connection with the issuance of the above convertible note, the Company evaluated the conversion option for derivative treatment under ASC 815-15, Derivatives and Hedging, and determined the note and conversion feature qualified as derivatives. The Company classified the conversion feature as a derivative liability at fair value. The initial fair value of the conversion feature was determined to be $125,640. The Company recognized the maximum intrinsic value of the embedded beneficial conversion feature of $82,530, resulting in a loss on change in fair value of derivative liabilities of $43,110, and reduced the carrying value of the convertible note to $500. The carrying value will be accreted over the term of the convertible note up to its face value of $100,000.
The financing costs were netted against the convertible note and are being amortized over the term using the effective interest rate method. During the six months ended March 31, 2020, the Company recognized accretion expense of $750. As at March 31, 2020, the carrying value of the convertible note was $1,250, net of an unamortized discount of $98,750.
7.
Derivative Liabilities
The embedded conversion option of the Company’s convertible notes described in Note 6 contain a conversion feature that qualifies for embedded derivative classification. The fair value of this liability will be re-measured at the end of every reporting period and the change in fair value will be reported in the statement of operations as a gain or loss on change in fair value of derivative liabilities. The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities:
|
|
|
|
Balance
$
|
|
|
|
|
Balance, September 30, 2019
|
–
|
|
|
|
|
Addition of new derivative liabilities
|
630,821
|
|
Conversion of convertible notes
|
(14,488)
|
|
Change in fair value of embedded conversion option
|
61,771
|
|
|
|
|
Balance, March 31, 2020
|
678,104
|
The Company uses Level 3 inputs for its valuation methodology for the embedded conversion option liabilities as their fair values were determined by using a binomial model based on various assumptions. Significant changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As required, these are classified based on the lowest level of input that is significant to the fair value measurement. The following table shows the assumptions used in the calculations: