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Derivative Financial Instruments (Warrant Liability)
 3 Months Ended
Sep. 30, 2013
Derivative Financial Instruments Warrant Liability  
Derivative Financial Instruments (Warrant Liability)

12. Derivative Financial Instruments (Warrant Liability)

 

The Company accounted for the June 2012 Warrants issued to investors under the June 11, 2012 Securities Purchase Agreement (see Note 11 above) in accordance with 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.

 

In accordance with Generally Accepted Accounting Principles, the fair value of the June 2012 Warrants exercised in July 2013, was re-measured just prior to exercise. The resulting fair value of these warrants of $277,070 was reclassified out of Warrant Liability and into Additional Paid-in Capital on the accompanying consolidated balance sheet during the quarter ended September 30, 2013. The fair value of the remaining outstanding June 2012 Warrants was re-measured on September 30, 2013 to reflect their fair market value at the end of the current reporting period. The June 2012 Warrants will be re-measured 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:

 

                 
   Exercise   Exercise   Exercise     
Inputs into Lattice model for warrants:  7/2/2013   7/12/2013   7/29/2013   9/30/2013 
Equivalent Volatility   81.42%   81.69%   80.95%   79.69%
Equivalent Interest Rate   0.43%   0.44%   0.41%   0.32%
Estimated stock price  $1.2686   $1.4351   $1.5195   $1.0633 
Floor  $1.1500   $1.1500   $1.1500   $1.1500 
Greater of estimated stock price or floor  $1.2600   $1.2600   $1.2600   $1.1500 
Probability price < Strike   72.70%   69.88%   68.12%   76.19%
FV of put  $0.8238   $0.7919   $0.7541   $0.7418 
Probability of Fundamental Transaction occuring   5%   5%   5%   5%

  

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

 

The warrant liabilities are considered a recurring Level 3 fair value measurement, with a fair value of $843,903 at September 30, 2013.

 

The following table summarizes the activity of Level 3 inputs measured on a recurring basis for the quarter ended September 30, 2013:

 

   Warrant Liability 
Fair value, June 30, 2013  $1,102,021 
Exercise of common stock warrants   (277,070)
Change in fair value of warrant liability   18,952 
Fair value, September 30, 2013  $843,903