Derivative Liabilities

9 Months Ended

Mar. 31, 2014

Notes to Financial Statements

Derivative Liabilities

As of February 7, 2014 and March 31, 2014, there were 833,424 (post 1 for 100 Reverse Split) outstanding derivative warrants with 416,712 common shares issuable upon exercise. The warrants qualify as derivative liabilities due to the existence of reset provisions which cause the instruments to no longer be indexed to the Company’s own stock under FASB ASC Topic 815, Derivatives and Hedging. The estimated fair value of the derivative warrants were calculated using the Black-Scholes option pricing model. The fair value of the warrants was determined to be $324,642 and $986,905 as of February 7, 2014 and March 31, 2014, respectively. The company recorded a $662,263 loss on the change in fair value as non-operating expense for the period from February 7, 2014 through March 31, 2014.

The range of significant assumptions used in the Black-Scholes option pricing model as of March 31, 2014 and February 7, 2014 were as follows:

	Range
Common stock issuable upon exercise of warrants		416,712
Exercise price		$3.00 - $6.00
Market price of the Company’s common stock		$0.008 - $0.024
Risk free interest rate		0.34% - 0.44%
Dividend yield		0%
Volatility		347.74% - 381.90%
Expected term	1.73 - 3.12 years

Fair Value Measurements

The Company measures its financial assets and liabilities in accordance with the requirements of FASB ASC Topic 820, Fair Value Measurements and Disclosures. FASB ASC Topic 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

Level 1.  Observable inputs such as quoted prices in active markets;

Level 2.  Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3.  Unobservable inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions.

The Company uses Level 3 inputs to estimate the fair value of its derivative liabilities.

The following table sets forth the fair value hierarchy within our financial assets and liabilities by level that they were accounted for at fair value on a recurring basis as of March 31, 2014 and June 30, 2013:

	Fair Value Measurement at March 31, 2014
		Level 1		Level 2		Level 3
Liabilities:
Warrant derivative liabilities	$	—	$	—	$	986,905
Total	$	—	$	—	$	986,905

	Fair Value Measurement at June 30, 2013
		Level 1		Level 2		Level 3
Liabilities:
None	$	—	$	—	$	—
Total	$	—	$	—	$	—

The following table sets forth the changes in the fair value of derivative liabilities for the period from February 7, 2014 through March 31, 2014:

Balance, February 7, 2014	$	324,642
Change in fair value of derivative liabilities		662,263
Balance, March 31, 2014	$	986,905