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Fair Value Measurements
 3 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
Fair Value Measurements
6. Fair Value Measurements

 

At September 30, 2019, the estimated fair value of derivative liabilities measured on a recurring basis are as follows:

 

   Fair Value Measurements at
   September 30, 2019
   Level 1  Level 2  Level 3  Total
             
Derivative liability – Warrants  $—     $—     $8,109,724   $8,109,724 
Derivative liability -Conversion option on convertible debenture   —      —      2,533,668    2,533,668 
   Total derivatives  $—     $—     $10,643,392   $10,643,392 

 

The following table presents the activity for liabilities measured at fair value using unobservable inputs for the three months ended September 30, 2019:

 

   Derivative liabilities - Warrants  Derivative liability - Conversion Option on Convertible Debenture
       
Beginning balance at July 1, 2019  $—     $—   
Additions to level 3 liabilities   8,367,012    2,638,966 
Change in in fair value of level 3 liability   (257,288)   (105,298)
Transfer in and/or out of Level 3   —      —   
Balance at September 30, 2019  $8,109,724   $2,533,668 

 

Derivative liability – Warrants

 

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 that are precluded from being indexed to the Company’s own stock because of full-rachet anti-dilution provisions or the adjustments to the strike price due to an occurrence of a future event; are accounted for as derivative financial instruments. The stock warrants issued September 24, 2019 were not considered indexed to the Company’s own stock because of the adjustment to strike price, an occurrence of a future event such as the Company’s pending capital raise.

 

The warrants associated with the level 3 liability were issued on September 24, 2019 and were valued using the Black-Scholes-Merton model with the following assumptions: stock price of $0.0716, exercise price of $0.032, term of 5 years expiring September 2024, volatility of 71.44%, dividend yield of 0%, and risk-free interest rate of 1.52%. The valuation at September 30, 2019 used the following assumptions: stock price of $0.0698, exercise price of $0.032, term of 5 year expiring September 2024, volatility of 71.42%, dividend yield of 0%, and risk-free interest rate of 1.55%. (See note 5 “Related Party Transactions – Convertible debenture transactions”)

 

Derivative liability – Conversion option in convertible debenture

 

The Company valued the conversion option of the $2 million 10% OID Convertible Delayed Draw Debenture which may be convertible into shares of common stock at $0.032 per share prior to the completion of an offering or, subsequent to the closing of the offering, the lower of $0.032 or 80% of the offering price per unit to the public in this offering and are mandatorily redeemable upon such closing at 100% of the accrued principal amount and unpaid interest to the date of redemption. (See note 5 “Related Party Transactions – Convertible debenture transactions with Acuitas” as of September 24, 2019). The conversion option was valued on September 24, 2019 using the Black Scholes-Mertons model with the following assumptions: stock price of $0.0716, conversion price of $0.032, term of 1 year expiring September 2020, volatility of 75.48%, dividend yield of 0%, and risk-free interest rate of 1.78%. The valuation at September 30, 2019 used the following assumptions: stock price of $0.0698, conversion price of $0.032, term of 1 year expiring September 2020, volatility of 75.5%, dividend yield of 0%, and risk-free interest rate of 1.75%.