Quarterly report pursuant to Section 13 or 15(d)

10. DERIVATIVE FINANCIAL INSTRUMENTS and FAIR VALUE MEASUREMENTS

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10. DERIVATIVE FINANCIAL INSTRUMENTS and FAIR VALUE MEASUREMENTS
9 Months Ended
Mar. 31, 2014
Notes to Financial Statements  
10. DERIVATIVE FINANCIAL INSTRUMENTS and FAIR VALUE MEASUREMENTS

Derivative Financial Instruments:

 

The Company applies the provisions of ASC Topic 815-40, Contracts in Entity’s Own Equity (“ASC Topic 815-40”), 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 are recorded as a liability and are revalued at fair value at each reporting date. Further, under derivative accounting, the warrants are recorded at their fair value. 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 3,000,000 warrants with repricing options outstanding at March 31, 2014.

 

The Company calculates the estimated fair values of the liabilities for warrant derivative instruments at each quarter-end using the BSM option pricing model. The closing price of the Company’s common stock at September 30, 2013 and March 31, 2014 was $0.20 and $0.10, respectively. Volatility, expected term and risk free interest rates used to estimate the fair value of derivative liabilities at March 31, 2014, are indicated in the table that follows. The volatility was based on the comparative companies method since the Company’s stock is very thinly traded, 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

 

   

September 30,

2013

   

March 31,

2014

 
Volatility     53     53 %
Expected Term     2.25       1.75  
Risk Free Interest Rate     0.4     0.44 %
Expected dividend yield   none     none  

 

 

Fair Value Measurements:

 

We currently measure and report at fair value the liability for warrant derivative instruments. The fair value liabilities for price adjustable warrants have been recorded as determined utilizing the BSM option pricing model and Monte Carlo simulations. The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2014:

 

          Quoted Prices     Significant      
    Balance at     in Active     Other     Significant
    March 31,     Markets for     Observable     Unobservable
    2014     Identical Assets     Inputs     Inputs
            (Level 1)     (Level 2)     (Level 3)
                               
Fair value of liability for warrant derivative instruments     $ 111,343       $ —       $ —       $ 111,343

 

The following is a roll forward for the nine months ended March 31, 2014 of the fair value liability of price adjustable warrant derivative instruments:

 

    Fair Value of  
    Liability for  
    Warrant  
    Derivative  
    Instruments  
       
Balance at June 30, 2013   $ 0  
Initial fair value recording of warrant derivative liability as debt discount     144,241  
Effects of foreign currency exchange rate changes     (5,882)  
Change in fair value included in statements of operations     (27,016)  
Balance at March 31, 2014   $ 111,343