On November 13, 2018, the Company issued convertible promissory notes (the “Notes”), together with related warrants to acquire an additional 50% of the shares issued upon the conversion of the Notes (the “Warrants”), for an aggregate purchase price of approximately $2.45 million (the “Private Placement”). The Company expects to use the net proceeds of the Private Placement for general corporate and working capital purposes.

The notes carry an interest rate of 8.00% per annum and mature on May 13, 2019 (the “Maturity Date”), upon which date the outstanding principal amount of the Notes and all accrued and unpaid interest shall automatically convert into shares of the common stock of the Company at the price per share equal to the lesser of (i) $13.00 and (ii) the average closing price of the Company’s Common Stock on the Nasdaq stock market for the ten days preceding the day to the conversion of the Notes (the “Conversion Price”). The total number of shares of Common Stock to be issued upon automatic conversion shall equal the outstanding principal amount of the Note and all accrued and unpaid interest on this Note, divided by the Conversion Price.

The Warrants are exercisable for an additional fifty percent (50%) of the shares of Common Stock issued upon the conversion of the Notes (the “Warrant Shares”). The per share purchase price (the “Exercise Price”) for each of the Warrant Shares purchasable under the Warrants shall be equal to the lesser of (i) $15.00 and (ii) the average closing price of the Company’s Common Stock on the Nasdaq stock market for the ten days preceding the day of the conversion of the Notes. Each Warrant expires eighteen (18) months from the date of the conversion of the Notes (the “Expiration Date”). The Investors may exercise the Warrants at any time prior to the Expiration Date.

Due to the variable conversion price, the Notes contain characteristics of a variable share-forward sales contracts (“VSF”) under the guidance of ASC 480-10. Although management cannot predict future movements in the share price, it has concluded, for the purpose of ‎the accounting for the convertible notes, that it is more likely than not that the Conversion Price will be below $13.00, resulting in the issuance of a variable number of shares, the Notes are classified as a liability, and accounted for at amortized cost.

Due to the variable number of warrants to be issued and the variable strike price of the Warrants, these do not meet the “fixed-for-fixed” criteria under ASC 815-40. Accordingly, the warrants are classified as a derivative liability, initially measured at fair value and subsequently revalued at fair value through the income statement. The fair value was calculated using a Monte Carlo simulation.

The aggregate value of the Notes and Warrants is broken down as follows as at November 30:

The Notes contain a prepayment option which would allow the Company to repay in cash the principal balance of the Notes and all accrued and unpaid interest at any date prior to the Maturity Date. In the occasion that the Company would exercise the prepayment option, no warrants would be issued.

The Company is currently authorized by its Board of Directors (the “Board”) to raise up to $5.0 million through the issuance of convertible debt with the same conditions as described above. As at November 30, 2018, the Company has received $0.1 million of subscriptions for additional convertible debt to be issued. These funds are accounted for as restricted cash.