General form of registration statement for all companies including face-amount certificate companies

Derivative Liability

v2.4.1.9
Derivative Liability
 9 Months Ended
Feb. 28, 2015
Derivative Liability

Note 5—Derivative Liability:

The following tables summarize the fair value of the derivative liability and linked common shares as of the derivative liability inception dates (September 26, 2014 and February 6, 2015) at February 28, 2015:

 

     September 26,
2014		      February 6,
2015		      February 28,
2015		  

Total derivative liability

    $ 767,038       $ 403,266       $ 714,294   
  

 

 

     

 

 

     

 

 

  

Shares indexed to derivative liability

   2,000,000      1,500,000      3,500,000   
  

 

 

     

 

 

     

 

 

  

 

Changes in the fair value of the derivative liability, carried at fair value, are reported as “Change in fair value of derivative liability” in the Consolidated Statements of Operations. During the three and nine months ended February 28, 2015, the Company recognized a non-cash gain of approximately $1,262,000 and $456,000 due to the change in derivative liability related to the embedded derivative in the AVCP Notes.

ASC 815 does not permit an issuer to account separately for individual derivative terms and features embedded in hybrid financial instruments that require bifurcation and liability classification as derivative financial instruments. Rather, such terms and features must be combined together and fair valued as a single, compound embedded derivative. The Company selected a Binomial Lattice Model to value the compound embedded derivative because it believes this technique is reflective of all significant assumptions that market participants would likely consider in negotiating the transfer of this convertible note. Such assumptions include, among other inputs, stock price volatility, risk-free rates, credit risk assumptions, early redemption and conversion assumptions, and the potential for future adjustment of the conversion price due to a future dilutive financing.

Significant inputs and assumptions used in the Binomial Lattice Model for the derivative liability are as follows:

 

     September 26,
2014		    February 6,
2015		    February 28,
2015

Quoted market price on valuation date

    $0.79    $0.96    $0.84

Contractual conversion rate

    $1.00    $1.00    $1.00

Adjusted conversion price (a)

    $0.9759    $1.0000    $1.0000

Contractual term to maturity (years)

    2.00    0.49    0.43 – 1.58

Expected volatility

    123%    124%    90% – 114%

Contractual interest rate

    5%    2%    1.5% – 5.0%

Risk-free rate

    0.59%    0.045%    0.041% – 0.48%

Risk adjusted rate

    2.69%    2.78%    2.80%

Probability of event of default

    5.00%    5.00%    5.00%

 

(a) The adjusted conversion price input used in the Binomial Lattice Model considers the potential for an adjustment to the stated conversion price due to a future dilutive issuance. This input was calculated using a probability-weighted approach which considered the likelihood of various scenarios occurring including (i) potential success or failure of various phases for PRO 140, (ii) the probability the Company will enter into a future financing and (iii) and the potential price of a future financing.

The fair value of the derivative liability is significantly influenced by the Company’s trading market price, stock price volatility, changes in interest, assumptions regarding the adjusted conversion price and early redemption or conversion of the AVCP Notes.