Note 5 – Derivative Liabilities

The investor and placement agent warrants, issued in connection with a registered direct offering in September 2016, contained a provision for net cash settlement in the event that there is a fundamental transaction (contractually defined as a merger, sale of substantially all assets, tender offer or share exchange, whereby such other Person or group acquires more than 50% of the outstanding common stock). If a fundamental transaction occurs in which the consideration issued consists principally of cash or stock in a successor entity, then the warrantholder has the option to receive cash equal to the fair value of the remaining unexercised portion of the warrant. Due to this contingent cash settlement provision, the investor and placement agent warrants require liability classification as derivatives in accordance with ASC 480 and ASC 815 and are recorded at fair value.

The following tables summarize the fair value of the warrant derivative liability and related common shares as of inception date September 15, 2016, May 31, 2018, August 31, 2018 and November 30, 2018:

The Company recognized approximately $466,000 of non-cash loss and approximately $467,000 of non-cash gain, due to the changes in the fair value of the liability associated with such classified warrants during the six months ended November 30, 2018 and November 30, 2017, respectively.

ASC 820 provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition. Fair values for the warrants were determined using a Binomial Lattice (“Lattice”) valuation model.

The Company estimated the fair value of the warrant derivative liability as of inception date September 15, 2016, May 31, 2018 and November 30, 2018, using the following assumptions:

Due to the fundamental transaction provision contained in the warrants, which could provide for early redemption of the warrants, the model also considered subjective assumptions related to the fundamental transaction provision. The fair value of the warrants will be significantly influenced by the fair value of the Company’s stock price, stock price volatility, changes in interest rates and management’s assumptions related to the fundamental transaction provisions.

As described above in Note 4, the redemption provision embedded in the Note required bifurcation and measurement at fair value as a derivative. The fair value of the convertible note redemption provision derivative liability was calculated using a Monte Carlo Simulation which uses randomly generated stock-price paths obtained through a Geometric Brownian Motion stock price simulation. Various assumptions used in the valuation model included: annual volatility of 58.8%, risk free rate of 2.78%, an exercise factor of 2x and an expected term of 1.61 years.

The fair value of the derivative liability resulting from the redemption provision was approximately $1.28 million as of its inception date, November 15, 2018 and November 30, 2018. The fair value of the redemption provision will be significantly influenced by the fair value of the Company’s stock price, stock price volatility, changes in interest rates and management’s assumptions related to the redemption factor. The Company recognized approximately $1,100 of non-cash loss, due to the changes in the fair value of the liability associated with such classified redemption provision between the inception date and November 30, 2018.

The following table summarizes the fair value of the convertible note redemption provision derivative liability as of inception date November 15, 2018 and November 30, 2018:

The Company estimated the fair value of the redemption provision using the following assumptions on the closing date of November 15, 2015 and November 30, 2018: