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

Derivative Liability

v3.3.1.900
Derivative Liability
 6 Months Ended 12 Months Ended
Nov. 30, 2015
May. 31, 2015
Derivative Liability

Note 4 – 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), November 30, 2015 and May 31, 2015:

 

     September 26,
2014		      February 6,
2015		      May 31,
2015		      November 30,
2015		  

Total derivative liability

    $ 767,038       $ 403,266       $ 2,008,907       $ —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Shares indexed to derivative liability

      2,000,000         1,500,000         5,185,185         —     
  

 

 

     

 

 

     

 

 

     

 

 

  

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 six-months ended November 30, 2015, the Company recognized a non-cash gain of approximately $646,000 due to a decrease in the derivative liability related to the embedded derivative in the two 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		     May 31,
2015		     June 24,
2015		  

Quoted market price on valuation date

    $ 0.79      $ 0.96      $ 0.99      $ 0.90   

Contractual conversion rate

    $ 1.00      $ 1.00      $ 1.00      $ 1.00   

Adjusted conversion price (a)

    $ 0.9759      $ 1.0000      $ 0.675      $ 0.675   

Contractual term to maturity (years)

      2.00        0.49        0.18-1.33        0.12   

Expected volatility

      123 %      124 %      90%-114 %      48 % 

Contractual interest rate

      5 %      2 %      1.5%-5.0 %      1.2 % 

Risk-free rate

      0.59 %      0.045 %      0.041%-0.48 %      0.001 % 

Risk adjusted rate

      2.69 %      2.78 %      2.80 %      2.80 % 

Probability of event of default

      5.00 %      5.00 %      5.00 %      5.00 % 

 

(a) The adjusted conversion price input used in the Binomial Lattice Model considers both i) the reduction of the conversion price to $0.675 on April 30, 2015, as result of the short-term convertible notes offering in which Common Stock was sold for a weighted average price of $0.75 and ii) potential 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.

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) and May 31, 2015:

 

     AVCP Notes Dated as of         
     September 26,
2014		      February 6,
2015		      May 31,
2015		  

Total derivative liability

    $ 767,038       $ 403,266       $ 2,008,907   
  

 

 

     

 

 

     

 

 

  

Shares indexed to derivative liability

      2,000,000         1,500,000         5,185,185   
  

 

 

     

 

 

     

 

 

  

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 year ended May 31, 2015, the Company recognized a non-cash expense of approximately $839,000 due to an increase in the 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		   May 31,
2015

Quoted market price on valuation date

    $0.79   $0.96   $0.99

Contractual conversion rate

    $1.00   $1.00   $1.00

Adjusted conversion price (a)

    $0.9759   $1.0000   $0.675

Contractual term to maturity (years)

    2.00   0.49   0.18-1.33

Expected volatility

    123%   124%   73% - 105%

Contractual interest rate

    5%   2%   1.2%-5.0%

Risk-free rate

    0.59%   0.045%   0.01%-0.35%

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 both i) the reduction of the conversion price to $0.675 on April 30, 2015, as result of the short-term convertible notes offering in which Common Stock was sold for a weighted average price of $0.75 and ii) potential 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.