Annual report pursuant to Section 13 and 15(d)

Derivative Financial Instruments and Fair Value Measurements

v3.7.0.1
Derivative Financial Instruments and Fair Value Measurements
12 Months Ended
Jun. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments and Fair Value Measurements

NOTE 12 - DERIVATIVE FINANCIAL INSTRUMENTS and FAIR VALUE MEASUREMENTS

 

Derivative Financial Instruments:

 

The Company applies the provisions of ASC 815-40, Contracts in Entity’s Own Equity, under which convertible instruments and warrants, which contain terms that protect holders from declines in the stock price (reset provisions), may not be exempt from derivative accounting treatment. As a result, warrants and embedded conversion options in convertible debt are recorded as a liability and are revalued at fair value at each reporting date. If the fair value of the warrants exceeds the face value of the related debt, the excess is recorded as change in fair value in operations on the issuance date. The Company has 12,000 warrants and $1,385,271 of convertible debt, which are treated as derivative instruments outstanding at June 30, 2017.

 

The Company calculates the estimated fair values of the liabilities for derivative instruments using the Binomial Trees Method. The closing price of the Company’s common stock at June 30, 2017 and 2016 was $0.97 and $4.68. Volatility, expected remaining term and risk free interest rates used to estimate the fair value of derivative liabilities at June 30, 2017 and 2016, are indicated in the table that follows. The volatility for the September 30, 2013 initial valuation was based on comparative companies’ methods since the Company’s stock was very thinly traded and based historical volatility for subsequent revaluations. The expected term is equal to the remaining term of the warrants and the risk free rate is based upon rates for treasury securities with the same term.

 

Warrants

 

    Initial Valuation              
    September 30, 2013     June 30, 2016     June 30, 2017  
Volatility   53 %     399 %     137 %
Expected remaining term   5       2.25       1.25  
Risk-free interest rate   0.4 %     1.01 %     1.24 %
Expected dividend yield   None       None       None  

 

Convertible Debt

 

    Initial
Valuations
    June 30, 2016     June 30, 2017  
Volatility   216 - 408 %     175 %     66 - 175 %
Expected remaining term   0.83 – 2.00       0.33       .21 - 1.63  
Risk-free interest rate   0.5 – 0.7 %     0.45 %     1.03 - 1.24 %
Expected dividend yield   None       None       None  

 

Fair Value Measurements:

 

The Company measures and reports at fair value the liability for derivative instruments. The fair value liabilities for price adjustable warrants and embedded conversion options have been recorded as determined utilizing the Binomial Trees model. The following tables summarize the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2017:

 

          Quoted Prices     Significant        
          in Active     Other     Significant  
    Balance at     Markets for     Observable     Unobservable  
    June 30, 2017     Identical Assets     Inputs     Inputs  
          (Level 1)     (Level 2)     (Level 3)  
Embedded conversion option liabilities   $ 877,403     $     $     $ 877,403  
Fair value of liability for warrant derivative instruments   $ 3,769     $     $     $ 3,769  
Total   $ 881,172     $     $     $ 881,172  

 

The following tables summarize the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2016:

 

          Quoted Prices     Significant        
          in Active     Other     Significant  
    Balance at     Markets for     Observable     Unobservable  
    June 30, 2016     Identical Assets     Inputs     Inputs  
          (Level 1)     (Level 2)     (Level 3)  
                         
Embedded conversion option liabilities   $ 994,343     $     $     $ 994,343  
Fair value of liability for warrant derivative instruments   $ 55,839     $     $     $ 55,839  
Total   $ 1,050,182     $     $     $ 1,050,182  

  

The following is a roll forward for the years ended June 30, 2017 and 2016 of the fair value liability of price adjustable derivative instruments:

 

    Fair Value of  
    Liability for  
    Derivative  
    Instruments  
Balance at June 30, 2015 $ 1,049,929  
Effects of foreign currency exchange rate changes   (281,068)  
Initial fair value of embedded conversion option derivative liability recorded as debt discount   (2,462,355 )
Initial fair value of embedded conversion option derivative liability recorded as change in fair value of ECO   3,410,653  
Change in fair value included in statements of operations   (666,977 )
Balance at June 30, 2016     1,050,182  
Effects of foreign currency exchange rate changes     1,143  
Initial fair value of embedded conversion option derivative liability recorded as debt discount     650,000  
Initial fair value of embedded conversion option derivative liability recorded as change in fair value of embedded conversion option     214,758  
Change in fair value included in statements of operations     (1,034,911 )
Balance at June 30, 2017   $ 881,172