10.

Derivative Liabilities

Share Purchase Warrants – Clay loans (Related Party)

On June 8, 2015, the Company issued 10,000,000 share purchase warrants to the Clay Group in connection with the June 2015 Loan. The share purchase warrants are exercisable until June 8, 2020 at an exercise price of $0.95. Included in the June 2015 Loan agreement was an anti-dilution provision. If the Company were to complete a financing at a share price lower than the exercise price of the share purchase warrants, the exercise price of the share purchase warrants would be adjusted to match the price at which the financing was completed.

On November 18, 2016, the Company issued 8,000,000 share purchase warrants to the Clay Group in connection with the November 2016 Loan. The share purchase warrants are exercisable until November 18, 2021 at an exercise price of $0.85. Included in the November 2016 Loan agreement was an anti-dilution provision. If the Company were to complete a financing at a share price lower than the exercise price of the share purchase warrants, the exercise price of the share purchase warrants would be adjusted to match the price at which the financing was completed.

The share purchase warrants meet the definition of a derivative liability instrument as the exercise price is not a fixed price as described above. Therefore, the settlement feature does not meet the “fixed-for-fixed” criteria outlined in ASC 815-40-15.

The fair value of the derivative liabilities related to the share purchase warrants as at September 30, 2017 is $3.1 million (December 31, 2016 - $5.5 million). The derivative liabilities were calculated using the binomial and the Black-Scholes pricing valuation models with the following assumptions:

Warrants related to June 2015 Loan	September 30, 2017			December 31, 2016
Risk-free interest rate		1.58	%		0.84	%
Expected life of derivative liability		2.69 years			3.44 years
Expected volatility		76.50	%		78.79	%
Dividend rate		0.00	%		0.00	%

Warrants related to November 2016 Loan	September 30, 2017			December 31, 2016
Risk-free interest rate		1.58	%		1.11	%
Expected life of derivative liability		4.15 years			4.89 years
Expected volatility		75.21	%		77.21	%
Dividend rate		0.00	%		0.00	%

The change in the derivative share purchase warrants is as follows:

	September 30, 2017		December 31, 2016
Balance, beginning of the period	$	5,458	$	2,498
Fair value at inception		-		3,090
Change in fair value		(2,329)		(130)
Balance, end of the period	$	3,129	$	5,458

Share Purchase Warrants – July 2016 financing

On July 25, 2016, the Company issued a total of 6,317,700 share purchase warrants in connection with the July 2016 financing with an exercise price of C$2.00 and expiry date of July 25, 2019. In accordance with the guidance in ASC 815-40-15, the share purchase warrants met the criteria of a derivative instrument liability because they were exercisable in a currency other than the functional currency of the Company and thus did not meet the “fixed-for-fixed” criteria of that guidance. As a result, the Company was required to separately account for the share purchase warrants as derivative liabilities recorded at fair value and marked-to-market each period with the changes in the fair value each period charged or credited to income.

As at September 30, 2017, the Company had re-measured the share purchase warrants and determined the fair value of the derivative liability to be $0.3 million (December 31, 2016 - $1.0 million) using the Black-Scholes option pricing model with the following assumptions:

	September 30, 2017			December 31, 2016
Risk-free interest rate		1.52	%		0.84	%
Expected life of derivative liability in years		1.82 years			2.56 years
Expected volatility		74.89	%		79.40	%
Dividend rate		0.00	%		0.00	%

The change in the derivative share purchase warrants is as follows:

	September 30, 2017		December 31, 2016
Fair value of warrants issued	$	972	$	2,701
Change in fair value of warrants		(704)		(1,729)
Balance, end of the period	$	268	$	972