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Derivative Liabilities
 12 Months Ended
Jun. 30, 2015
Derivative Liabilities [Abstract]  
DERIVATIVE LIABILITIES

NOTE 5 - 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. As the conversion features within the Series A preferred stock, and certain detachable warrants issued in connection with the subordinated promissory notes payable and equity offerings from 2012 to 2014, do not have fixed settlement provisions because their conversion and 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 and are to be treated as derivative liabilities. Upon the reverse merger in May 2014, the Series A preferred stock, subordinated promissory notes including accrued interest were converted to common stock. The fair market value of the warrants at the time of the reverse merger was transferred to additional paid-in capital and the derivative liabilities were reduced to zero. At June 30, 2015 and 2014, the Company had warrants resulting from equity offerings in May 2014 and June 2014 that do not have fixed settlement provisions because their conversion and 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 and are to be treated as derivative liabilities. In determining the fair value of the derivative liabilities, the Company used the Black-Scholes option pricing model at June 30, 2015 and 2014.

 

The following is a summary of the assumptions used in the valuation model at June 30, 2015 and 2014:

 

  June 30,  June 30, 
  2015  2014 
Common stock issuable upon exercise of warrants  2,574,570   6,007,330 
Market value of common stock on measurement date (1) $10.15  $10.00 
Exercise price $7.50 and 11.25  $7.50 and 11.25 
Risk free interest rate (2)  1.6%  1.6%
Expected life in years  3.9   0.3 and 4.9 
Expected volatility (3)  70%   71% and 73%
Expected dividend yields (4)   None   None 

 

(1)Quoted market value of the common stock, reflects a one-for-five reverse stock split.
(2)The risk-free interest rate was determined by management using the applicable Treasury Bill interest rate as of the measurement date, when applicable.
(3)The historical trading volatility was determined by calculating the volatility of the Company’s peer group.
(4)The Company does not expect to pay a dividend in the foreseeable future.

  

During the year ended June 30, 2015, 2,033,915 A warrants were exercised and 1,398,845 A warrants expired, see Note 2, Fair Value on a Recurring Basis. The following were the summary of the assumptions at the transactions dates for the warrant exercises during the year ended June 30, 2015.

 

Common stock issuable upon exercise of warrants  2,033,915 
Market value of common stock on measurement date $15.00 
Exercise price $7.50 
Risk free interest rate  0.02%
Expected life in years  0.0 
Expected volatility  71.2%
Expected dividend yields   None 

 

The following table sets forth, by level within the fair value hierarchy, the Company’s derivative liabilities that were accounted for at fair value on a recurring basis as of June 30, 2015:

 

  Balance at
June 30,		  Initial valuation of derivative 
liabilities upon issuance of new warrants during 
the		  Increase (decrease) in fair value of derivative  Fair value of derivatives 
upon reclass to additional paid-in-		  Balance at 
June 30,		 
  2014  period  liabilities  capital  2015 
Series A warrants issued in May and June 2014 offering $10,040,822  $-  $5,255,019  $(15,295,841) $- 
Series B warrants issued in connection with May and June 2014 offering  9,894,930   -   (1,124,230)  -   8,770,700 
Placement Agent warrants issued in connection with May and June 2014 offering  5,651,181   -   (420,512)  -   5,230,669 
Total $25,586,933  $-  $(3,710,277) $(15,295,841) $14,001,369 

 

The following table sets forth, by level within the fair value hierarchy, the Company’s derivative liabilities that were accounted for at fair value on a recurring basis as June 30, 2014:

 

  Balance at December 31,  Initial valuation of derivative 
liabilities upon issuance of new warrants during 
the		  Increase (decrease) in fair value of derivative  Fair value of derivatives 
upon reclass to additional paid-in-		  Balance at 
June 30,		 
  2013  period  liabilities  capital  2014 
Convertible preferred derivative liability issued in connection with Series A preferred stock offering $11,762,115  $-  $(7,214,804) $(4,547,311) $- 
Convertible preferred derivative liability issued to Wonpung for services  2,030,589   -   (1,370,262)  (660,327)  - 
Convertible preferred derivative liability issued to lenders in connection with exchange of debt for Series A preferred stock  2,219,854   -   (1,262,858)  (956,996)  - 
Warrants issued in connection with Series A preferred stock offering  2,424,167   -   (1,945,669)  (478,498)  - 
Warrants issued as offering costs to placement agent  1,217,083   -   (1,109,421)  (107,662)  - 
Warrants issued to lenders in connection with subordinated promissory notes offering  313,258   -   (259,427)  (53,831)  - 
Warrants issued to placement agent in connection with subordinated promissory notes offering  136,359   -   (136,359)  -   - 
A warrants issued in May and June 2014 offering  -   842,370   9,198,452   -   10,040,822 
B warrants issued in connection with May and June 2014 offering  -   2,494,655   7,400,275   -   9,894,930 
Placement Agent warrants issued in connection with May and June 2014 offering  -   996,138   4,655,043   -   5,651,181 
Total $20,103,425  $4,333,163  $7,954,970  $(6,804,625) $25,586,933 

 

The following table sets forth, by level within the fair value hierarchy, the Company’s derivative liabilities that were accounted for at fair value on a recurring basis as of December 31, 2013:

 

  Balance at  Initial valuation of derivative liabilities upon issuance of new warrants  Increase in fair value of  Balance at 
  December 31,  during  derivative  December 31, 
  2012  the period  liabilities  2013 
             
Convertible preferred derivative liability issued in connection with Series A preferred stock offering $2,492,166  $1,647,910  $7,622,039  $11,762,115 
Convertible preferred derivative liability issued to Wonpung for services  880,214   -   1,150,375   2,030,589 
Convertible preferred derivative liability issued to lenders in connection with exchange of debt for Series A preferred stock  958,861   -   1,260,993   2,219,854 
Warrants issued in connection with Series A preferred stock offering  475,000   113,153   1,836,014   2,424,167 
Warrants issued as offering costs to placement agent  242,500   248,655   725,928   1,217,083 
Warrants issued to lenders in connection with subordinated promissory notes offering  29,158   83,363   200,737   313,258 
Warrants issued to placement agent in connection with subordinated promissory notes offering  13,089   41,681   81,589   136,359 
Total $5,090,988  $2,134,762  $12,877,675  $20,103,425