Quarterly report pursuant to Section 13 or 15(d)

Derivative Liabilities

v3.19.1
Derivative Liabilities
9 Months Ended
Mar. 31, 2019
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 March 31, 2019 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.

 

Until September 30, 2018, the Company followed ASC Topic No 815 and treated the warrants as derivative liabilities. In determining the fair value of the derivative liabilities, the Company used the Black-Scholes option pricing model at September 30 and June 30, 2018.

 

As noted in Note 2, the Company elected to early adopt ASU 2017-11 and reversed the derivative liability into equity effective July 1, 2018. The warrants balance of $59,397 was reversed to equity effective July 1, 2018.

 

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

 

    June 30,  
    2018  
Common stock issuable upon exercise of warrants     2,574,570  
Market value of common stock on measurement date   $ 1.01  
Exercise price     $7.50 and $11.25  
Risk free interest rate (1)     2.33 %
Expected life in years   $ 0.95  
Expected volatility (2)     102 %
Expected dividend yields (3)     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.
(3) The Company does not expect to pay a dividend in the foreseeable future.

  

Until October 18, 2018, the Company had promissory notes with a redemption feature that was 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.

 

On October 12 and 18, 2018, the Company conducted closings on its private placement of securities. As a result of these closings, the outstanding promissory notes converted into common stock. The redemption feature associated with the promissory notes was valued on October 18, 2018 using the Black-Scholes model. The change in value of the derivative between October 1, 2018 and the October 18, 2018 was recorded as income. The notes were converted to common stock on October 18, 2018.

 

The Company had no financial liabilities accounted for at fair value on a recurring basis as of March 31, 2019.

 

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 for the nine months ended March 31, 2019 and 2017:

 

    Nine months ended  
    March 31,     March 31,  
    2019     2018  
Beginning balance   $ 4,194,634     $ 175,853  
Adoption of ASU 2017-11 – warrants     (59,397 )     -  
Fair value of derivative liabilities for redemption feature of promissory notes payable     -       3,862,095  
Change in fair value of derivative liabilities     54,634       (80,542 )
Extinguishment of derivative liabilities on conversion of promissory notes.     (4,189,871 )     -  
Ending balance   $ -     $ 3,957,406