5.	DERIVATIVE WARRANT LIABILITY

Derivative financial instruments are recognized as a liability on the consolidated balance sheet and measured at fair value. At June 30, 2018 and September 30, 2017, the Company had no outstanding warrants that were considered to be derivative instruments although the Company did have such warrants outstanding during the nine months ended June 30, 2017.

The Company performed valuations of these warrants using the Black-Scholes option pricing model which value was also compared to a Binomial Option Pricing Model for reasonableness. The Black-Scholes option pricing model requires input of assumptions including the risk-free interest rates, volatility, expected life and dividends. Selection of these inputs involves management’s judgment and may impact net loss. Due to our limited operating history and limited number of sales of our common stock, we estimate our volatility based on a number of factors including the volatility of comparable publicly traded pharmaceutical companies. The volatility factor used in the Black-Scholes option pricing model has a significant effect on the resulting valuation of the derivative liabilities on our balance sheet. The volatility calculated at June 30, 2017 was 95%. We used a risk-free interest rate of 1.85%, an estimated life of 4.52 years, which were the remaining contractual life of the warrants subject to “down round” provisions, and no dividends to our common stock.

During the nine months ended June 30, 2017, anti-dilution rights related to warrants to purchase 307,778 shares of common stock expired which resulted in a reclassification from derivative warrant liability to additional paid-in capital of $1,433,316.

On June 8, 2017, the Company granted anti-dilution rights to the investors and placement agent for the 2016 Offering (see Note 6) in connection with a release agreement. The investors and placement agent held 140,819 warrants to purchase common stock at $8.25 per share as of June 30, 2017. The exercise price of the warrants was subject to adjustment if the purchase price per share in the 2017 Public Offering (see Note 6) was lower than the $8.25 exercise price of the warrants. If the purchase price was less than $8.25 per share, the warrant exercise price would be reduced to the lower price. On June 8, 2017, the Company reclassified the $641,385 fair value of the warrants to derivative warrant liability. The per share purchase price in the 2017 Public Offering was $4.125 and, consequently, the exercise price of these warrants was decreased to $4.125 (see Note 6).

The table below presents the changes in the derivative warrant liability, which is measured at fair value on a recurring basis and classified as Level 3 in the fair value hierarchy:

	Nine Months Ended June 30, 2018		Nine Months Ended June 30, 2017
Derivative warrant liability, beginning of period	$	—	$	1,681,973
Fair value of warrants issued		—		641,385
Total realized/unrealized gains included in net loss		—		(308,878	)
Reclassification of liability to additional paid-in capital		—		(1,433,316	)
Derivative warrant liability, end of period	$	—	$	581,164