Quarterly report pursuant to Section 13 or 15(d)

Derivative Liabilities

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Derivative Liabilities
3 Months Ended
Sep. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE LIABILITIES

NOTE 7 - DERIVATIVE LIABILITIES

 

ASC Topic No. 815 - Derivatives and Hedging provides guidance on determining what types of instruments or embedded features in an instrument issued by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. These requirements can affect the accounting for warrants and convertible preferred instruments issued by the Company. At September 30, 2018 and June 30, 2018, the Company had warrants resulting from equity offerings in May 2014 and June 2014 that do not have fixed settlement provisions because their exercise prices may be lowered if the Company issues securities at lower prices in the future, the Company concluded that the instruments are not indexed to the Company’s stock and are to be treated as derivative liabilities. In determining the fair value of the derivative liabilities, the Company used the Black-Scholes option pricing model at September 30, 2018 and June 30, 2018.

 

The following is a summary of the assumptions used in the valuation model at September 30, 2018 and June 30, 2018:

 

    September 30,     June 30,  
    2018     2018  
Common stock issuable upon exercise of warrants     2,574,570       2,574,570  
Market value of common stock on measurement date   $ 1.12     $ 1.01  
Exercise price   $ 7.50 and $11.25     $ 7.50 and $11.25  
Risk free interest rate (1)     2.50 %     2.33 %
Expected life in years   $ 0.69     $ 0.95  
Expected volatility (2)     125 %     102 %
Expected dividend yields (3)     None        None  

 

(1) The risk-free interest rate was determined by management using the applicable Treasury Bill as of the measurement date.
(2) The historical trading volatility was determined by calculating the volatility of the Company’s stock at September 30, 2018 and June 30, 2018.
(3) The Company does not expect to pay a dividend in the foreseeable future.

 

At September 30, 2018, the Company had promissory notes with a redemption feature which is not clearly and closely related to the host instrument and therefore is considered an embedded derivative which was bifurcated and recorded as a derivative liability. In determining the fair value of the derivative liabilities, the Company used the Monte-Carlo pricing model. The assumptions used in the valuation model considers the probability of redemption, the length of time to maturity and value of the redemption feature.

 

The following table sets forth, by level within the fair value hierarchy, the Company’s financial liabilities that were accounted for at fair value on a recurring basis as of September 30, 2018:

 

    Markets for
Identical
Assets
    Other
Observable
Inputs
    Significant
Unobservable
Inputs
    Carrying
Value as of
September 30,
 
Description   (Level 1)     (Level 2)     (Level 3)     2018  
Derivative liabilities - warrant instruments   $        -     $         -     $ 59,397     $ 59,397  
Derivative liability – embedded redemption feature  of promissory notes     -       -       4,453,778       4,453,778  
    $ -     $ -     $ 4,513,175     $ 4,513,175  

 

The following table sets forth, by level within the fair value hierarchy, the Company’s financial liabilities that were accounted for at fair value on a recurring basis as of June 30, 2018:

 

    Markets for
Identical
Assets
    Other
Observable
Inputs
    Significant
Unobservable
Inputs
    Carrying
Value as of
June 30,
 
Description   (Level 1)     (Level 2)     (Level 3)     2018  
Derivative liability – warrant instruments   $       -     $          -     $ 30,526     $ 30,526  
Derivative liabilities – embedded redemption feature  of promissory notes     -       -       4,164,108       4,164,108  
    $ -     $ -     $ 4,194,634     $ 4,194,634  

 

The following table sets forth a reconciliation of changes in the fair value of financial liabilities classified as level 3 in the fair value hierarchy:

 

    Significant Unobservable
Inputs (Level 3)
 
    September 30,     September 30,  
    2018     2017  
Beginning balance   $ 4,194,634     $ 175,853  
Fair value of derivative liabilities for redemption feature of promissory notes payable     289,670       2,336,456  
Change in fair value of derivative liabilities - warrants     28,871       5,702  
Ending balance   $ 4,513,175     $ 2,518,011