NOTE 7. WARRANT DERIVATIVE LIABILITY

The 2019 Warrants, issued with the 2019 Capital Raise, are accounted for as a derivative liability. The 2019 Warrant agreements contain a cash settlement provision whereby the holders could settle the warrants for cash based on the Black-Scholes value, upon certain fundamental transactions, as defined in the 2019 Warrant agreement, that are considered outside of the control of management, such as a change of control.

The following are the key assumptions that were used to determine the fair value of the 2019 Warrants:


		May 31, 2019		September 30, 2019
Number of shares underlying the warrants		3,000,000		3,000,000
Fair market value of stock	$	0.95	$	0.69
Exercise price	$	1.30	$	1.30
Volatility		133%		125%
Risk-free interest rate		1.93%		1.55%
Warrant life (years)		5.00		4.67

The following table sets forth a summary of the changes in the fair value of the warrant derivative liability, our Level 3 financial liabilities that are measured at fair value on a recurring basis:


		Three months ended September 30,				Nine months ended September 30,
		2019		2018		2019		2018
Beginning balance	$	2,014,560	$	–	$	–	$	–
Recognition of warrant derivative liability on May 31, 2019		–		–		2,416,422		–
Change in fair value of warrants derivative liability		(420,840)		–		(822,702)		–
Ending balance	$	1,593,720	$	–	$	1,593,720	$	–