Derivative Instruments

9 Months Ended

Sep. 30, 2014

Derivative Instruments [Abstract]

Derivative Instruments

3. Derivative Instruments

Effective January 1, 2009, the Company adopted ASC Topic 815-40, "Derivatives and Hedging" (ASC 815-40). One of the conclusions reached under ASC 815-40 was that an equity-linked financial instrument would not be considered indexed to the entity's own stock if the strike price is denominated in a currency other than the issuer's functional currency. The conclusion reached under ASC 815-40 clarified the accounting treatment for these and certain other financial instruments. ASC 815-40 specifies that a contract would not be treated as a derivative if it met the following conditions: (a) it is indexed to the Company's own stock; and (b) it is classified in stockholders' equity in the Company's statement of financial position. The Company's outstanding warrants denominated in Canadian dollars are not considered to be indexed to its own stock because the exercise price is denominated in Canadian dollars and the Company's functional currency is United States dollars. Therefore, these warrants have been treated as derivative financial instruments and recorded at their fair value as a liability. All other outstanding convertible instruments are considered to be indexed to the Company's stock, because their exercise price is denominated in the same currency as the Company's functional currency, and are included in stockholders' deficiency.

The Company's derivative instruments include warrants to purchase 2,128 shares, the exercise prices for which are denominated in a currency other than the Company's functional currency, as follows:

⋅ Warrants to purchase 1,307 shares at CAD$4.32 per whole share that expire on April 30, 2015; and

⋅ Warrants to purchase 821 shares exercisable at CAD$4.32 per whole share that expire on March 29, 2016.

These warrants have been recorded at their fair value as a liability at issuance and will continue to be re-measured at fair value as a liability at each subsequent balance sheet date. Any change in value between reporting periods will be recorded as unrealized gain/(loss) in the Statement of Operations. These warrants will continue to be reported as a liability until such time as they are exercised or expire. The fair value of these warrants is estimated using the Black-Scholes option-pricing model.

As of September 30, 2014, the fair value of the warrants expiring April 30, 2015 and March 29, 2016 was determined to be $1,587 and $1,754, respectively (December 31, 2013 – warrants expiring April 30, 2015 and March 29, 2016, fair value of $2,015 and $794 respectively). There was a gain on the warrants expiring April 30, 2015 and those expiring on March 29, 2016 of $272 and $333, respectively for the three months ended September 30, 2014 (for the three months ending September 30, 2013 - warrants expiring April 30, 2015 and March 29, 2016, loss of $1,288 and $394 respectively). There was an unrealized loss on the warrants expiring April 30, 2015 of $440 and an unrealized loss on the warrants expiring March 29, 2016 of $1,281 for the nine months ended September 30, 2014 (for the nine months ended September 30, 2013 – warrants expiring April 30, 2015 and March 29, 2016, gain of $1,681 and $555, respectively). There is no cash flow impact for these derivatives until the warrants are exercised. If these warrants are exercised, the Company will receive the proceeds from the exercise at the current exchange rate at the time of exercise.

On May 28, 2014, by majority vote the shareholders approved a warrant exchange, offering holders of warrants originally issued by the Company on or about April 30, 2010 and March 29, 2011 the opportunity to exchange 180 warrants for one new warrant to purchase one share of common stock at a lower exercise price. Each 18 warrants eligible to participate in the exchange currently entitle the holder thereof to purchase one share of the Company’s common stock at an exercise price of CAD$1.44. The new warrants issued in the exchange will entitle the holder thereof to purchase one share of the Company’s common stock at an exercise price of USD$0.50. Other than described above, the new warrants will have the same terms (including the same expiration date) as the warrants that are exchanged.

The warrant exchange concluded July 29, 2014 resulted in a gain on the change in liability for the warrants expiring April 30, 2015 and March 29, 2016 of $210 and 138, respectively for the three and nine months ending September 30, 2014, (for the three and nine months ending September 30, 2013 – warrants expiring April 30, 2015 and March 29, 2016, $0 and $0, respectively). The July 29, 2014 conclusion of the warrant exchange increased additional paid in capital for the warrants expiring April 30, 2015 and March 29, 2016 for the three and nine months ending September 30, 2014 by $657 and $183, respectively. There was no corresponding change to additional paid in capital for the three and nine month periods ending September 30, 2013 for warrants expiring April 30, 2015 and March 29, 2016.

The value of the derivative warrant liability presented on the balance sheet has typically been influenced by changes in the underlying share price of the Company. During the quarter ended September 30, 2014 the change in the derivative valuation was comprised of three factors:

⋅ A warrant exchange which concluded on July 29, 2014,

⋅ Forfeiture of contractor options denominated in Canadian dollars and;

⋅ A change in derivative liability due to share price movement.

The following table presents the overall change in derivative liability for the three and nine-months ended September 30, 2014

	Three months ended		Three months ended
Gain/(Loss) on Derivative Instruments	September 30, 2014		September 30, 2013
Warrants expiring April 30, 2015(1) (share Price effect)		272		(1,288)
Warrants expiring April 30, 2015(2) (derivative settlement)		210		-
Warrants expiring March 29, 2016(1) (share price effect)		333		(394)
Warrants expiring March 29, 2016(2) (derivative settlement)		138		-
Options to contractors(1) (share price effect)		14		(26)
Options to contractors(3) (forfeiture)		31		-
Gain/(loss) on Derivative Instruments		998		(1,708)

	Nine months ended		Nine months ended
Gain/(Loss) on Derivative Instruments	September 30, 2014		September 30, 2013
Warrants expiring April 30, 2015(1) (share Price effect)		(440)		1,681
Warrants expiring April 30, 2015(2) (derivative settlement)		210		-
Warrants expiring March 29, 2016(1) (share price effect)		(1,281)		555
Warrants expiring March 29, 2016(2) (deivative setlement)		138		-
Options to contractors(1) (share price effect)		(134)		18
Options to contractors(3) (forfeiture)		31		-
Gain/(loss) on Derivative Instruments		(1,476)		2,254

(1)Change in derivative liability resulting from the fluctuation in the price of Fennec’s shares used to value the derivative instrument.

(2)As a result of the warrant exchange concluded on July 29, 2014, holders of warrants expiring April 30, 2015 and March 29, 2016 (the “Existing (or Eligible) Warrants”) could elect to exchange their Eligible Warrants for “New Warrants”. New Warrants were denominated in the Company’s functional currency and thus, no longer considered derivative instruments under ASCA 815-40. Eligible Warrants participating in the exchange were valued on July 29, 2014 using the Black-Scholes Model and the resulting gain from the extinguishment of derivative liability was realized.

(3)Options have a three year term from the date the contractual relationship is severed and unless approved by the board, never greater than the original seven year term established from the date of issuance. Options which remain unexercised once the contractual relationship is severed after the lesser of three years from the date of severance or the seven years from date of original grant, are considered to be forfeited.

During the fiscal years ended December 31, 2011 and 2010, the Company issued 108 and 86 (respectively) options to contractors with a Canadian dollar denominated strike price. Consequently, the Company now has derivatives relating to these options since the strike price is denominated in a currency other than the US dollar functional currency of the Company. While there is an exception to this rule for employees in ASU 2010-13 "Compensation-Stock Compensation (Topic 718): Effect of Denominating the exercise price of a share based payment award in the currency of the market in which the underlying equity security trades", no such exception exists for contractors. These options will be marked to market until the earlier of their expiry or exercise. All Canadian denominated options issued to contractors fully vest at issuance and expire seven years from date of issuance. The fair value of these options at September 30, 2014 and December 31, 2013 was $158 and $54, respectively. The gain for these options for the three-months ended September 30, 2014 was $45 ($31 of this gain relates to forfeiture of contractor options and the resulting change in derivative liability valuation). There was a loss on these options for the nine-months ended September 30, 2014 of $103 ($31 of the loss was offset by the gain on the change in liability which resulted from the forfeiture of contractor options during the quarter ending September 30, 2014), for the period ended September 30, 2013 there was a three-month loss of $26 on these options but a nine-month gain of $18.

The following is a summary of Canadian denominated contractor option activity for the nine months ended September 30, 2013.

	Number of		Weighted-average
	Options Outstanding (thousands)		Exercise Price
Outstanding at December 31, 2013		65	$	1.82
Granted		-		-
Exercised		-		-
Forfeited		(10)		1.72
Outstanding at September 30, 2014		55	$	1.84