Annual report pursuant to Section 13 and 15(d)

Derivative Liability

v3.5.0.2
Derivative Liability
 12 Months Ended
May 31, 2016
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) and fiscal year end May 31, 2016 and May 31, 2015:

 

     September 26,
2014		      February 6,
2015		      May 31,
2015		      May 31,
2016		  

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, 2016 and May 31, 2015, the Company recognized a non-cash loss/gain of approximately $647,000 and $839,000, respectively, 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		     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 a private placement 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.