Quarterly report pursuant to Section 13 or 15(d)

Derivative Liabilities

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Derivative Liabilities
 6 Months Ended
Dec. 31, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Liabilities

Note 7. Derivative Liabilities

 

Upon closing of the private placements on May 22, 2015 and June 9, 2015, the Company issued 298,551 and 26,099 warrants, respectively, to purchase the same number of shares of common stock with an exercise price of $1.50 and a five-year term to the placement agent. Upon closing of a private placement in April 2016, the Company issued 153,713 warrants to purchase the same number of shares of common stock with an exercise price of $1.60 and a five-year term to the placement agent. The Company identified certain put features embedded in the warrants that potentially could result in a net cash settlement, requiring the Company to classify the warrants as a derivative liability.

 

During the six months ended December 31, 2016, the Company amended the existing warrant agreements to eliminate the derivative feature. Upon execution of the revised agreements, a total of 386,476 warrants with a fair value of $1,795,363 were reclassified from liability to equity.

 

Level 3 Financial Liabilities – Derivative warrant liabilities

 

Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the condensed consolidated balance sheet as of December 31, 2016:

 

    Carrying     Fair Value Measurement Using  
    Value     Level 1     Level 2     Level 3     Total  
                                         
Derivative warrant liabilities     $     $ —     $ —     $ 396,828     $ 396,828  

 

Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheet as of June 30, 2016:

 

    Carrying     Fair Value Measurement Using  
    Value     Level 1     Level 2     Level 3     Total  
                                         
Derivative warrant liabilities   $ 1,322,729     $ —     $ —     $ 1,322,729     $ 1,322,729  

 

The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended December 31, 2016:

 

    Fair Value
Measurement
Using Level 3
Inputs		  
    Total  
Balance, July 1, 2016   $ 1,322,729  
Change in fair value of derivative warrant liabilities     869,462  
Derivative liability cease to exist     (1,795,363 )
Balance, December 31, 2016   $ 396,828  

  

The fair value of the derivative feature of the warrants on the issuance dates and at the balance sheet date were calculated using a binomial option model valued with the following weighted average assumptions: 

 

    December 31, 2016     June 30, 2016  
Risk free interest rate     1.70 %     1.01 %
Dividend yield     0.00 %     0.00 %
Expected volatility     65 %     39 %
Remaining term (years)     3.39 – 4.29       3.89-4.79  

 

Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.

 

Dividend yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.

 

Volatility: The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s peer group stock price for a period consistent with the warrants’ expected term.

 

Remaining term: The Company’s remaining term is based on the remaining contractual maturity of the warrants.

 

During the six months ended December 31, 2016 and 2015, the Company marked the derivative feature of the warrants to fair value and recorded a loss of $869,462 and a gain of $19,429, respectively, relating to the change in fair value.