Note 12 – Fair Value Measurement

Fair value measurements

At June 30, 2020 and 2019, the fair value of derivative liabilities is estimated using a lattice model that is based on the individual characteristics of our warrants, preferred and common stock, the derivative liability on the valuation date as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread. The derivative liabilities are the only Level 3 fair value measures.

At June 30, 2020 and 2019, the estimated fair values of the liabilities measured on a recurring basis are as follows:


	Fair Value Measurements at
	June 30, 2020:
	(Level 1)		(Level 2)		(Level 3)

Derivative liability – Warrants	$	—		—	$	—
Total derivatives	$	—	$	—	$	—


	Fair Value Measurements at
	June 30, 2019:
	(Level 1)		(Level 2)		(Level 3)

Derivative liability – Warrants	$	—		—	$	1,645,606
Total derivatives	$	—	$	—	$	1,645,606

In a concurrent private placement on February 27, 2019, the purchasers received warrants (the “Old Warrants”) to purchase up to 347,222 shares of common stock. The Old Warrants had an exercise price of $12.20 per share, shall be exercisable on the six month anniversary of issuance and were to expire five (5) years thereafter. The Old Warrants are exercisable for cash or, solely in the absence of an effective registration statement or prospectus, by cashless exercise.

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 contained in ASU 2017-11, adopted by the Company on January 1, 2019, stock warrants are to be accounted for as equity if the warrants contain full-ratchet anti-dilution provisions. The Old Warrants issued on February 27, 2019, contained a full-ratchet anti-dilution feature but also contained other adjustment features which required that the Old Warrants be classified as a derivative liability.

The Company used a lattice model to calculate the fair value of the derivative warrants based on a probability weighted discounted cash flow model. This model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the exercise and full reset provisions. The Old Warrants were valued as of June 30, 2019 with the following assumptions:

The 5 year warrants issued on February 27, 2019 (expire February 27, 2024) included with an exercise price of $12.20 (subject to adjustments – full ratchet reset and fundamental transactions).

The stock price would fluctuate with the Company projected volatility.

The holder would exercise the warrant as they become exercisable (effective registration at issuance) at target prices of the higher of 2 times the projected reset exercise price or 2 times the stock price.

The holder would exercise the warrant at maturity if the stock price was above the project reset prices.

The next capital raise is projected to occur during 2020 (annually 12 months from issuance) at prices approximating 100% of market triggering a reset event and exercise price adjustment.

The fundamental transaction projected with 0% probability increasing 1% per quarter to a maximum of 10% and settlement based on the Black Scholes value.

The stock price would fluctuate with an annual volatility. The projected volatility curve was based on historical volatilities of the Company for the valuation period.


1 Year
6/30/19	76.1	%

The Company remeasured the fair value of the derivative Old Warrants at January 24, 2020 to $8,403,468 with the following assumptions:

Valuation based on 347,222 warrants with an exercise price of $12.20

Lattice model based on market stock price of $8.45

The Holder would exercise the warrant at maturity if the stock price was above the projected exercise price.

An imminent reset event to $3.00 was projected based on the Company’s offering.

Future capital raises are projected to occur starting 1/31/21, and annually thereafter, at prices approximating 100% of market, which may trigger a reset event adjusting the exercise and the number of warrants.

The fundamental transaction was projected to occur 10% of the time, tested on an annual basis, with settlement equal to the Black Scholes value.

The stock price would fluctuate with an annual volatility. The projected volatility curve was based on historical volatility of the Company for the valuation date. The projected annual volatility for the valuation date was 106.5%.

The fair value of the New Warrants was $2,066,425 upon issuance at January 24, 2020 using the following assumptions:

Valuation based on 347,222 warrants with an exercise price of $3.00

Lattice model simulation based on market stock price of $8.45

The Holder would exercise the warrant at maturity if the stock price was above the projected exercise price.

The fundamental transaction was projected to occur 10% of the time, tested on an annual basis, with settlement equal to the Black Scholes value.

The 347,222 New Warrants were exercised on March 23, 2020 and March 25, 2020 pursuant to a cashless exercise provision resulting in the issuance of 180,087 shares of common stock. The Company remeasured the fair value of the new warrants just prior to their exercise.

The Company remeasured the fair value of the derivative New Warrants exercised at March 23, 2020 to $941,701 with the following assumptions:

Valuation based on 266,614 warrants exercised with an exercise price of $3.00

Lattice model based on market stock price of $6.11

The Holder would exercise the warrant at maturity if the stock price was above the projected exercise price.

Future capital raises are projected to occur starting 4/30/21, and annually thereafter, at prices approximating 100% of market, which may trigger a reset event adjusting the exercise and the number of warrants.

The fundamental transaction was projected to occur 10% of the time, tested on an annual basis, with settlement equal to the Black Scholes value.

The Company remeasured the fair value of the derivative New Warrants at March 25, 2020 to $212,180 with the following assumptions:

Valuation based on 80,608 warrants exercised with an exercise price of $3.00

Lattice model based on market stock price of $4.80

The Holder would exercise the warrant at maturity if the stock price was above the projected exercise price.

The fundamental transaction was projected to occur 10% of the time, tested on an annual basis, with settlement equal to the Black Scholes value.

The following table presents the activity for liabilities measured at estimated fair value using unobservable inputs for the years ended June 30, 2018, 2019 and 2020:

Fair Value Measurement

Using Significant

Unobservable Inputs


	Obligation		Derivative		Derivative
	to issue		liability –		liability -
	shares		Series C		warrant
Balance at July 1, 2017	$	—	$	32,213	$	2,015,354
Additions during the year		5,864,337		—		—
Change in fair value		(819,994)		(16,764)		(1,717,262)
Transfer in and/or out of Level 3		(5,044,343)		(15,449)		—
Balance at July 1, 2018	$	—	$	—	$	298,092
Additions during the year		—		—		1,527,259
Change in fair value		—		—		(179,745)
Transfer in and/or out of Level 3		—		—		—
Balance at July 1, 2019	$	—	$	—	$	1,645,606
Additions during the year		—		—		2,066,425
Change in fair value		—		—		5,845,313
Transfer in and/or out of Level 3		—		—		(9,557,344)
Balance at June 30, 2020	$	—	$	—	$	—