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Derivative Financial Instruments
 9 Months Ended
Mar. 31, 2013
Derivative Financial Instruments  
Derivative Financial Instruments

13. Derivative Financial Instruments

 

The Company accounted for the June 2012 Warrants issued to investors under the June 11, 2012 Securities Purchase Agreement (see Note 12 above) in accordance with ASC 815-10, Derivatives and Hedging (“ASC 815-10”). ASC 815-10 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. This applies to any freestanding financial instrument or embedded feature that has all the characteristics of a derivative under ASC 815-10, including any freestanding financial instrument that is potentially settled in an entity’s own stock.

 

Due to certain adjustments that may be made to the exercise price of the June 2012 Warrants if the Company issues or sell shares of its Class A common stock at a price which is less than the then current warrant exercise price, the June 2012 Warrants have been classified as a liability as opposed to equity in accordance with ASC 815-10 as it was determined that the June 2012 Warrants were not indexed to the Company’s Class A common stock. As a result, the fair value of the June 2012 Warrants were remeasured on March 25, 2013 in conjunction with the modification of the exercise price, and again on March 31, 2013 to reflect their fair market value at the end of the current reporting period. The June 2012 Warrants will be remeasured at each subsequent financial reporting period. The change in fair value of the June 2012 Warrants is recorded in the statement of operations and comprehensive income and is estimated using the Lattice option-pricing model using the following assumptions:

 

   Pre-modification   Post-modification      
                
Inputs into Lattice model for warrants:   3/25/2013    3/25/2013    3/31/2013 
Equivalent Volatility   84.73%   84.73%   84.68%
Equivalent Interest Rate   0.30%   0.30%   0.30%
Estimated stock price  $0.6914   $0.6914   $0.6470 
Floor  $1.1500   $1.1500   $1.1500 
Greater of estimated stock price or floor  $1.1500   $1.1500   $1.1500 
Probability price < Strike   85.43%   84.68%   85.74%
FV of put  $1.0603   $1.0075   $1.0123 
Probability of Fundamental Transaction occuring   5%   5%   5%

 

All warrants issued by the Company other than the above noted June 2012 Warrants are classified as equity.

 

The June 2012 warrants are considered a recurring Level 3 fair value measurement, with a fair value of $599,194 at March 31, 2013. The following table summarizes the activity of Level 3 inputs measured on a recurring basis for the nine months ended March 31, 2013:

 

    Warrant Liability 
Fair value, June 30, 2012  $1,087,296 
Change in fair value of warrant liability   (488,102)
Fair value, March 31, 2013  $599,194