Note 8. Derivative Liabilities

Upon closing of 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 year ended June 30, 2017, the Company amended the existing warrant agreements to eliminate the derivative feature. Upon execution of the revised agreements, a total of 471,697 warrants with a fair value of $2,200,219 were reclassified from liabilities to equity.

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 years ended June 30, 2018 and 2017:

The fair value of the derivative feature of the warrants on the date of reclassification to equity was calculated using a binomial option model valued with the following weighted average assumptions: 

Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Bill 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 estimated the expected volatility of the stock price based on the historical volatilities of the Company’s common stock traded on the Nasdaq Capital Market.

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

The fair value of the derivative features of the convertible note on the issuance dates, and at the balance sheet date were calculated using the with-and-without method, a form of the income approach, valued with the following weighted average assumptions: 

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

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 estimated 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 convertible note’s expected term.

Remaining term: The Company’s remaining term is based on the remaining contractual term of the convertible note.

During the years ended June 30, 2018 and 2017, the Company marked the derivative features of liabilities to fair value and recorded a gain of $54,099 and a loss of $877,490, respectively, relating to the change in fair value.