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Derivative Liabilities

12 Months Ended

Jun. 30, 2025

13. Derivative Liabilities

During the six months ended December 31, 2024, the Company’s embedded conversion feature on its convertible notes and its outstanding warrants had been treated as derivative liabilities for accounting purposes under ASC 815-40, “Derivatives and Hedging – Contracts in Entity’s Own Equity,” due to insufficient authorized shares to settle these outstanding equity-linked contracts, while the terms of these instruments still allowed the holders to exercise which would require the Company to net-cash settle the instrument. In such cases, the Company adopted a sequencing approach under ASC 815-40 to determine the classification of its equity-linked financial instruments at issuance and at each subsequent reporting date. Under this sequencing policy, the Company reclassified to liabilities those equity-linked financial instruments with the most recent issuance or modification date. The derivative liabilities were initially recorded at fair value and subsequently re-valued each reporting date, with changes in fair value reported in the consolidated statements of operations. The Company utilized the Black-Scholes option-pricing model to value the derivative liabilities at initial reclassification and subsequent valuation dates, adjusted for instrument-specific terms as applicable.

In August 2024, the Company issued common shares and warrants to purchase common shares under private placement subscription agreements. See further discussion at Note 14. As there were insufficient authorized shares available at the time of issuance, the warrants were classified as derivative liabilities, measured at fair value as of issuance, and re-measured to fair value as of September 30, 2024. Of the $1.9 million in proceeds received from the private placement, $0.6 million was received from related parties of the Company, including current employees and an immediate family member of the Chief Executive Officer. The Company recognized common shares and warrants to purchase common shares with a total fair value of $1.4 million, compensation expense of $0.7 million and a loss on private placement of $0.1 million in the consolidated statements of operations. The Company recognized less than a $0.1 million loss on change in fair value of these liability-classified equity-linked financial instruments.

For the remaining private placement subscription agreements, the Company recognized the fair value of the warrants of $1.7 million and a loss on private placement of $0.6 million as of issuance, and a fair value of $1.7 million as of September 30, 2024, with the loss on change in fair value of less than $0.1 million recorded to change in fair value of liability-classified equity-linked contracts in the consolidated statements of operations. The associated derivative liability was included in long-term liabilities in the consolidated balance sheets. In November 2024, a portion of the private placement subscription agreements were rescinded. Prior to rescission, a gain of $0.3 million was recognized upon revaluation of the warrant liability, reducing the warrant liability from $1.2 million to $0.9 million. A gain of less than $0.1 million was recognized upon extinguishment of the warrant liability at the rescission date. A payable of $0.9 million is included in accounts payable and accrued liabilities on the consolidated balance sheet as of December 31, 2024 for the return of the subscription agreement proceeds to the investors.

In September 2024, the Company’s convertible notes were amended to increase the conversion rate of the conversion option. See further discussion at Note 11. Upon modification, the Company no longer had sufficient authorized shares to settle all equity-linked contracts including the convertible notes upon a potential conversion and accordingly, the embedded conversion feature was bifurcated from the convertible notes to be accounted for as a derivative liability. The Company calculated a fair value of the bifurcated conversion feature of $0.7 million as of the modification date and a fair value of $0.9 million as of September 30, 2024, with the loss on change in fair value of $0.2 million recorded to change in fair value of liability-classified financial instruments in the consolidated statements of operations.

In November 2024, the Company’s shareholders approved and adopted an amendment to the articles of incorporation to increase the number of authorized shares of the Company’s common stock from 80,000,000 to 250,000,000. Upon the increase, the Company had sufficient authorized shares available to settle all equity-linked contracts including the convertible notes and warrants to purchase common shares included in derivative liabilities. As a result, the Company revalued the bifurcated conversion feature and the warrants to purchase common shares as of the shareholder approval date and reclassified the associated derivative liabilities from long-term liabilities to additional paid-in capital in the consolidated balance sheets. The Company recognized a $0.8 million gain on change in fair value of the derivative liabilities prior to the reclassification to equity from long-term liabilities. The amount reclassed to equity totaled $2.1 million.

During the period December 31, 2024 through June 30, 2025, there was no activity related to the Company’s derivative liability instruments and the balance of derivative liabilities remained unchanged throughout this period.

The table below sets forth the Black-Scholes inputs and assumptions for the Company’s valuation and re-valuation of its derivative liabilities for the fiscal year ending June 30:

	2025
Weighted average expected term (years)		0.01 – 5.00
Risk-free interest rate		3.47 – 5.47	%
Dividend yield		0	%
Volatility		6.69% - 137.84	%

A summary of the activity related to derivative liabilities for the fiscal year ending June 30, 2025, is as follows:

Schedule of Derivative Liabilities

	Warrant Derivative Liabilities			Conversion Option Derivative Liability			Total Derivative Liabilities

Balance, June 30, 2024	$	-		$	-		$	-
Change in fair value		(657,174	)		(138,061	)		(795,235	)
Fair value of issuances during the period		2,632,467			-			2,632,467
Fair value of extinguishments during the period		(87,421	)		-			(87,421	)
Fair value of reclassifications during the period		(1,887,872	)		138,061			(1,749,811	)
Balance, June 30, 2025	$	-		$	-		$	-