Quarterly report pursuant to Section 13 or 15(d)

Derivative Liabilities

v3.19.3.a.u2
Derivative Liabilities
 6 Months Ended
Nov. 30, 2019
Derivative Liability
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 warrant holder 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,
and the fair value as of
May 31, 2019 and November 30, 2019:
 
     Shares Indexed      Derivative Liability  
Inception
to
date September 15, 2016
      7,733,334      $ 5,179,200  
Balance May 31, 2019
      7,733,334        409,132  
Balance November 30, 2019
      7,733,334      $ 122,372  
The Company recognized approximately $280,000 of
non-cash
gain and $466,000 of
non-cash
loss, due to the changes in the fair value of the liability associated with such classified warrants during the
six
months ended
November
 3
0
, 2019 and
November
 3
0
, 2018, 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, 2019 and
November
 3
0
, 2019, using the following assumptions:
 
     September 15,
2016		     May 31,
2019		    
November
 3
0
,
2019		  
Fair value of underlying stock
    $ 0.78     $ 0.39     $ 0.28  
Risk free rate
      1.20 %      1.94 %      1.61 % 
Expected term (years)
      5       2.29       1.79  
Stock price volatility
      106 %      61 %      63 % 
Expected dividend yield
      —         —         —     
Probability of Fundamental Transaction
      50 %      50 %      50 % 
Probability of holder requesting cash payment
      50 %      50 %      50 % 
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 above, the redemption provision embedded in the June 2018 and January 2019 Notes required bifurcation and measurement at fair value as a derivative. The fair value of the Note redemption provision derivative liabilities was calculated using a Monte Carlo Simulation which uses randomly generated stock-price paths obtained through a Geometric Brownian Motion stock price simulation. 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 estimated the fair value of the redemptive provision using the following assumptions on the closing date of November 15, 2018, January 30, 2019 and
May 31, 2019 and
November 30, 2019:
 
 
 
 
November 15,
 
 
  
January 30,
 
 
May 31, 2019
 
 
November 30
, 2019
 
   
2018
    
2019
    
June
Note
 
 
 
January
Note
  
 
June
Note
    
January
Note
  
Fair value of underlying stock
    $
 
 
 
 
 
 
 
 
 
 
 
0.57		     $ 0.49    
$
 
0.39
 
 
$
0.39
    
$
 
 0.28    
$
 0.28  
Risk free rate
      2.78 %     2.52 %  
 
2.21
%
 
 
1.95
%
  
 
 1.63 %      1.60 % 
Expected term (in years)
      1.61       2    
 
1.07
 
 
 
1.67
    
 
 0.57       1.17  
Stock price volatility
      58.8 %      61 %   
 
62.2
%
 
 
62.2
%
  
 
 66.3 %      64.1 % 
Expected dividend yield
      —         —      
 
—  
 
 
 
—  
    
 
 —          —     
Discount factor
      85 %      85 %   
 
85
%
 
 
85
%
  
 
 85 %      85 % 
The following table summarizes the fair value of the convertible note redemption provision derivative liability as of inception dates November 15, 2018, January 30, 2019 and
the fair value as of May 31, 2019 and
November
 3
0
, 2019:  
 
     Net Proceeds      Derivative Liability  
     Inception date
 
 
May 31, 2019
     
November
 3
0
, 2019		  
Inception date June 2018 Note, November 15, 2018
    $ 5,000,000      $ 1,284,988
 
 
$
 
847,103
      $ 481,345  
Inception date January 2019 Note, January 30, 2019
      5,000,000        1,465,008
 
 
 
 
1,158,034
        975,053  
                 
 
 
 
 
     
 
 
  
                 
 
 
$
 
2,005,137
      $ 1,456,398  
The Company recognized approximately $549,000 of
non-cash
gain, due to the changes in the fair value of the liability associated with such classified redemption provision for the
six
months ended
Nov
ember
 3
0
, 2019.