Quarterly report pursuant to Section 13 or 15(d)

Derivative Liabilities

v3.20.2
Derivative Liabilities
3 Months Ended
Aug. 31, 2020
Derivative Liability
Note 6 – 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,
Distinguishing Liabilities from Equity
, and ASC 815,
Derivatives and Hedging,
and are recorded at fair value. All of the investors and placement agent warrants were exercised during the fiscal year ending May 31, 2020.
The following tables summarize the fair value of the warrant derivative liability and related common shares as of inception date September 15, 2016, prior fiscal year end date May 31, 2020 and current reporting date August 31, 2020 (in thousands):
 
    
Shares

Indexed
    
Derivative

Liability
 
Inception to date September 15, 2016
     7,733     $ 5,179  
Change in fair value of derivative liability
     —         (4,777
  
 
 
   
 
 
 
Balance May 31, 2019
     7,733       402  
Change in fair value of derivative liability
     —         11,547  
Fair value of warrants exercised
     7,733       (11,949
  
 
 
   
 
 
 
Balance May 31, 2020
            
Change in fair value of derivative liability
            
Balance August 31, 2020
         $  
  
 
 
   
 
 
 
Changes in the fair value of the derivative liability are reported as “Change in fair value of derivative liability” in the Consolidated Statements of Operations. The Company recognized approximately $0.1
million
of
non-cash
gain
, due to the changes in the fair value of the liability associated with such classified warrants during the three months ended August 31, 2019.
ASC 820,
Fair Value Measurement
, 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 valuation model.
The Company estimated the fair value of the warrant derivative liability as of inception date September 15, 2016, May 31, 2019 and August 31, 2019, using the following assumptions:
 
     September 15,
2016
    May 31,
2019
    August 31,
2019
 
Fair value of underlying stock
   $ 0.78     $ 0.39     $ 0.40  
Risk free rate
     1.20     1.94     1.50
Expected term (in years)
     5       2.29       2.04  
Stock price volatility
     106     61     60
Expected dividend yield
     —         —         —    
Probability of
f
undamental
t
ransaction
     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 in Note 5 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 August 31, 2019:
 
                
August 31, 2019
 
 
  
November 15,
2018
 
 
January 30,
2019
   
June
Note
   
January
Note
 
Fair value of underlying stock
   $ 0.57     $ 0.49     $ 0.40     $ 0.40  
Risk free rate
     2.78     2.52     1.76     1.76
Expected term (in years)
     1.61       2       0.82       1.42  
Stock price volatility
     58.8     61     63.8     61.6
Expected dividend yield
     —         —         —         —    
Discount factor
     85     85     85     85
As discussed above, the June 2018 and January 2019 Notes were fully satisfied during the fiscal year ended May 31, 2020 and there is no outstanding balance as of August 31, 2020.
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 August 31, 2019 (in thousands):
 
     Net Proceeds      Derivative Liability  
     Inception date      August 31, 2019  
Inception date June 2018 Note, November 15, 2018
   $ 5,000      $ 1,285      $ 373  
Inception date January 2019 Note, January 30, 2019
     5,000        1,465        1,070  
        
 
 
 
         $  1,443  
        
 
 
 
The Company recognized approximately $0.6
million
of
non-cash
gain, due to the changes in the fair value of the liability associated with such classified redemption provision for the three months ended August 31, 2019.
 
There was no gain or loss for the three months ended August 31, 2020.