Note 11 – Fair Value Measurement

Fair value measurements

At June 30, 2019 and 2018, the fair value of derivative liabilities is estimated using a lattice model that is based on the individual characteristics of our warrants, preferred and common stock, the derivative liability on the valuation date as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread. The derivative liabilities are the only Level 3 fair value measures.

At June 30, 2019 and 2018, the estimated fair values of the liabilities measured on a recurring basis are as follows:


	Fair Value Measurements at
	June 30, 2019:
	(Level 1)		(Level 2)		(Level 3)

Derivative liability – Warrants	$	—		—	$	1,645,606
Total derivatives	$	—	$	—	$	1,645,606


	Fair Value Measurements at
	June 30, 2018:
	(Level 1)		(Level 2)		(Level 3)

Derivative liability – Warrants	$	—		—	$	298,092
Total derivatives	$	—	$	—	$	298,092

In a concurrent private placement to the Offering on February 27, 2019, the Purchasers received warrants (the “Warrants”) to purchase up to 6,944,446 shares of common stock. The Warrants have an exercise price of $0.61 per share, shall be exercisable on the six month anniversary of issuance and will expire five (5) years thereafter. The Warrants are exercisable for cash or, solely in the absence of an effective registration statement or prospectus, by cashless exercise.

The Company accounts for stock purchase warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreements. Under applicable accounting guidance contained in ASU 2017-11, adopted by the Company on January 1, 2019, stock warrants are to be accounted for as equity if the warrants contain full-ratchet anti-dilution provisions. The warrants issued on February 27, 2019, contained a full-ratchet anti-dilution feature but also contained other adjustment features which required that the warrants be classified as a derivative liability.

The Company used a lattice model to calculate the fair value of the derivative warrants based on a probability weighted discounted cash flow model. This model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the exercise and full reset provisions.

The multi-nomial lattice methodology was used to value the Warrants (issued February 27, 2019) as of June 30, 2019, with the following assumptions:


Assumptions	June 30, 2019
Dividend yield		0.00	%
Risk-free rate for term		1.95	%
Volatility		76.1	%
Maturity dates (term remaining)		5.16	years
Stock Price	$	0.24

The Warrants were valued as of February 27, 2019 (the issuance date) and June 30, 2019 with the following assumptions:

The 5.5 year warrants issued on February 27, 2019 (expire February 27, 2024) included with an exercise price of $0.61 (subject to adjustments – full ratchet reset and fundamental transactions).

The stock price would fluctuate with the Company projected volatility.

The Holder would exercise the warrant as they become exercisable (effective registration at issuance) at target prices of the higher of 2 times the projected reset exercise price or 2 times the stock price.

The Holder would exercise the warrant at maturity if the stock price was above the project reset prices.

The next capital raise is projected to occur during 2020 (annually 12 months from issuance) at prices approximating 100% of market triggering a reset event and exercise price adjustment.

The fundamental transaction projected with 0% probability increasing 1% per quarter to maximum of 10% and settlement based on the Black Scholes value.

The stock price would fluctuate with an annual volatility. The projected volatility curve was based on historical volatilities of the Company for the valuation period.

In conjunction with the Company’s registered direct offerings of Units, consisting of the Company’s common stock and warrants, on September 12, 2013 and January 24, 2014 the Company issued warrants. At June 30, 2019 and June 30, 2018, respectively, the total number of these warrants outstanding were -0- and 5,425,222 respectively.

The Company accounts for stock purchase warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreements. Under applicable accounting guidance, stock warrants must be accounted for as derivative financial instruments if the warrants contain full-ratchet anti-dilution provisions, which preclude the warrants from being considered indexed to its own stock. The warrants described above contained a full-ratchet anti-dilution feature and were thus classified as a derivative liability.

The Warrants were valued as of June 30, 2018 with the following assumptions:

The 5‑year warrants issued on 9/12/13 and 1/24/14 included Investor and Placement Agent Warrants with an exercise price of $5.25 and $6.05 (subject to adjustments-full ratchet reset). A reset event occurred during the quarter ended September 30, 2014 adjusting the $6.05 exercise price to $5.25

The stock price would fluctuate with the Company projected volatility.

The Holder would exercise the warrant as they become exercisable (effective registration at issuance) at target prices of the higher of 2 times the projected exercise/reset price or 2 times the stock price.

The next capital raise would fluctuate with an annual volatility. The projected volatility curve was based on historical volatilities of the Company for the valuation periods. The projected annual volatility for the valuation dates are:


1 Year
6/30/18	56	%

The primary factors driving the economic value of options are stock price; stock volatility; reset events and exercise behavior. Projections of these variables over the remaining term of the warrant are either derived or based on industry averages. Based on the above, a probability was assigned to each scenario for each future period, and the appropriate derivative value was determined for each scenario. The option value was then probability weighted and discounted to the present.

The following table presents the activity for liabilities measured at estimated fair value using unobservable inputs for the years ended June 30, 2017, 2018 and 2019:


			Fair Value Measurement
			Using Significant
			Unobservable Inputs
	Obligation		Derivative		Derivative		Derivative
	to issue		liability –		liability –		liability -
	shares		Series B		Series C		warrant
Balance at July 1, 2016	$	—	$	203,030	$	343,673	$	3,197,182
Additions during the year				—		—		—
Change in fair value		—		(203,030)		(311,460)		(1,181,828)
Transfer in and/or out of Level 3				—		—		—
Balance at July 1, 2017	$	—	$	—	$	32,213	$	2,015,354
Additions during the year		5,864,337		—		—		—
Change in fair value		(819,994)		—		(16,764)		(1,717,262)
Transfer in and/or out of Level 3		(5,044,343)		—		(15,449)		—
Balance at July 1, 2018	$	—	$	—	$	—	$	298,092
Additions during the year		—		—		—		1,527,259
Change in fair value		—		—		—		(179,745)
Transfer in and/or out of Level 3		—		—		—		—
Balance at June 30, 2019	$	—	$	—	$	—	$	1,645,606