Derivative Liability

6 Months Ended

Dec. 26, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Liability

Note 8. Derivative Liability

We estimate the fair value of the embedded derivative for the Series A preferred stock using the binomial lattice model. We applied the binomial lattice model to value the embedded derivative using a "with-and-without method," where the value of the Series A preferred stock including the embedded derivative, is defined as the "with", and the value of the Series A preferred stock excluding the embedded derivative, is defined as the "without". This method estimates the value of the embedded derivative by looking at the difference in the values between the Series A preferred stock with the embedded derivative and the value of the Series A preferred stock without the embedded derivative. The lattice model requires the following inputs: (i) the Company's common stock price; (ii) conversion price; (iii) term; (iv) yield; (v) recovery rate; (vi) estimated stock volatility; and (vii) risk-free rate. The fair value of the embedded derivative was determined using level 3 inputs under the fair value hierarchy (unobservable inputs). Changes in the inputs into this valuation model have a significant impact in the estimated fair value of the embedded derivative. For example, a decrease (increase) in the stock price results in a decrease (increase) in the estimated fair value of the embedded derivative. The changes in the fair value of the bifurcated embedded derivative of $2.4 million and $0.2 million for the three and six months ended December 26, 2015, respectively, is primarily related to the change in the price of the Company's underlying common stock and is reflected in the consolidated statements of operations as "Unrealized loss on derivative liability".