Annual report pursuant to Section 13 and 15(d)

Derivative Financial Instruments and Fair Value Measurements

v3.19.3
Derivative Financial Instruments and Fair Value Measurements
12 Months Ended
Jun. 30, 2019
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 had $9,000 and $429,000 of convertible debt, which is treated as derivative instruments outstanding at June 30, 2019 and 2018 respectively. The Company had 0 and 12,000 warrants treated as derivatives at June 30, 2019 and 2018 respectively.

 

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 28, 2019, the last trading day of the fiscal year ended June 30, 2019, was $6.00. Volatility, expected remaining term and risk free interest rates used to estimate the fair value of derivative liabilities at June 30, 2019 are indicated in the table that follows. The expected term is equal to the remaining term of the warrants or convertible instruments and the risk free rate is based upon rates for treasury securities with the same term.

 

Warrants

 

    June 30, 2018     June 30, 2019  
Volatility     110 %     N/A  
Expected remaining term     .25       N/A  
Risk-free interest rate     1.93 %     N/A  
Expected dividend yield     None       N/A  

 

Convertible Debt

 

    Initial
Valuations
    June 30, 2018     June 30, 2019  
Volatility   320 %     191 - 221 %     355 %
Expected remaining term   1.00       0.56 - 1.1       0.11 - 0.90  
Risk-free interest rate   2.32 %     2.11 - 2.33 %     1.92 - 2.15 %
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, 2019:

 

    Balance at
June 30, 2019
   

Quoted

Prices

in Active

Markets for

Identical Assets

   

Significant

Other

Observable Inputs

   

Significant

Unobservable Inputs

 
          (Level 1)     (Level 2)     (Level 3)  
Embedded conversion option liabilities   $ 698,264     $     $     $ 698,264  
Total   $ 698,264     $     $     $ 698,264  

 

The following tables summarize the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2018:

 

    Balance at
June 30, 2018
   

Quoted

Prices
in Active
Markets for
Identical Assets

    Significant
Other
Observable
Inputs
    Significant
Unobservable
Inputs
 
          (Level 1)     (Level 2)     (Level 3)  
Embedded conversion option liabilities   $ 371,532     $     $     $ 371,532  
Total   $ 371,532     $     $     $ 371,532  

 

The following is a roll forward for the years ended June 30, 2019 and 2018 of the fair value liability of price adjustable derivative instruments:

 

    Fair Value of  
    Liability for  
    Derivative  
    Instruments  
Balance at June 30, 2017   $ 881,172  
Effects of foreign currency exchange rate changes     38  
Reductions due to conversions     (861,695 )
Reductions due to repayment of debt     (199,339 )
Initial fair value of embedded conversion option derivative liability recorded as debt discount     543,744  
Initial fair value of embedded conversion option derivative liability recorded as change in fair value of embedded conversion option     313,694  
Change in fair value included in statements of operations     (306,082 )
Balance at June 30, 2018     371,532  
Reductions due to repayment of debt     (936,650 )
Reduction due to conversions     (1,388,764 )
Initial fair value of embedded conversion option derivative liability recorded as debt discount     180,000  
Initial fair value of embedded conversion option derivative liability recorded as change in fair value of embedded conversion option     382,944  
Change in fair value included in statements of operations     2,089,202  
Balance at June 30, 2019   $ 698,264