Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments

Derivative Financial Instruments

9 Months Ended

Sep. 30, 2019

Investments, All Other Investments [Abstract]

7. DERIVATIVE FINANCIAL INSTRUMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The hierarchy is broken down into three levels based on the observability of inputs as follows:

	●	Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment;
	●	Level 2 — Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly; and
	●	Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Our derivative liabilities are measured at fair value on a recurring basis and estimated as follows:

September 30, 2019	Level 1		Level 2		Level 3		Total
Derivative liabilities		—		—		20,663		20,663
ARO liabilities		—		—		1,649,451		1,649,451

December 31, 2018
Derivative liabilities		—		—		37,013		37,013
ARO liabilities		—		—		1,509,622		1,509,622

On May 18, 2018, as an inducement to enter into an Amended and Restated Loan Agreement, the Company issued, among other instruments, warrants to acquire 320,000 shares of common stock with an exercise price of $0.10 per share in Canadian dollars (see Note 5). The warrants are valued using the Black Scholes Option Pricing Model and the derivative is fair valued at the end of each reporting period. The Company valued the derivative liability at initial recognition as $30,012.

A summary of the activity of the Company’s derivative liabilities is shown below:

Balance, January 1, 2018	$	—
Additions		30,012
Fair value adjustments		7,001
As at December 31, 2018		37,013
Fair value adjustment		(16,350	)
As at September 30, 2019	$	20,663

Derivative liability classified warrants were valued using the Black Scholes Option Pricing Model with the range of assumptions outlined below. Expected life was determined based on historical exercise data of the Company.

	September 30, 2019			December 31, 2018
Risk-free interest rate		2.27	%		2.48% - 2.88%
Expected life		2.1 years			2.4 - 3.0 years
Expected dividend rate		0	%		0	%
Expected volatility		208	%		202% - 293%