Note 10 – Fair Value Measurement

Fair value measurements

At June 30, 2017 and 2016, 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, 2017 and 2016, the estimated fair values of the liabilities measured on a recurring basis are as follows:

	Fair Value Measurements at
	June 30, 2017:
	(Level 1)		(Level 2)		(Level 3)

Derivative liability – Series B debentures	$	-		-	$	-
Derivative liability – Series C debentures		-		-		32,213
Derivative liability – Warrants		-		-		2,015,354
Total derivatives	$	-	$	-	$	2,047,567

	Fair Value Measurements at
	June 30, 2016:
	(Level 1)		(Level 2)		(Level 3)

Derivative liability – Series B debentures	$	-		-	$	203,030
Derivative liability – Series C debentures		-		-		343,673
Derivative liability – Warrants		-		-		3,197,182
Total derivatives	$	-	$	-	$	3,743,885

In conjunction with the Company’s registered direct offerings of Units, consisting of the Company’s common stock and warrants, on September 12, 2013 and January 24, 2014 the Company issued 2,945,428, and 2,479,935 warrants respectively, and, of which, 2,810,071 and 2,479,935 respectively are outstanding at June 30, 2017. Additionally, the Company issued 58,910 and 76,306 warrants, respectively, to the placement agents which are also outstanding at June 30, 2017, for a total number of 5,425,222 warrants outstanding pursuant to the aforesaid registered direct offerings.

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, stock warrants must be accounted for as derivative financial instruments if the warrants contain full-ratchet anti-dilution provisions, which preclude the warrants from being considered indexed to its own stock. The warrants described above contained a full-ratchet anti-dilution feature and are thus 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 features.

The Warrants were valued as of issuance, exercise, and the annual periods with the following assumptions:

The 5-year warrants issued on 9/12/13 and 1/24/14 included Investor and Placement Agent Warrants with an exercise price of $5.25 and $6.05 (subject to adjustments-full ratchet reset). A reset event occurred during the quarter ended September 30, 2014 adjusting the $6.05 exercise price to $5.25

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 exercise/reset price or 2 times the stock price.

The next capital raise would fluctuate with an annual volatility. The projected volatility curve was based on historical volatilities of the Company for the valuation periods. The projected annual volatility for the valuation dates are:

1 Year
9/12/13	87	%
1/24/14	93	%
6/30/14	92	%
6/30/15	62	%
6/30/16	83	%
6/30/17	60	%

The primary factors driving the economic value of options are stock price; stock volatility; reset events and exercise behavior. Projections of these variables over the remaining term of the warrant are either derived or based on industry averages. Based on the above, a probability was assigned to each scenario for each future period, and the appropriate derivative value was determined for each scenario. The option value was then probability weighted and discounted to the present.

The following table presents the activity for liabilities measured at estimated fair value using unobservable inputs for the years ended June 30, 2015, 2016 and 2017:

	Fair Value Measurement Using Significant
	Unobservable Inputs
	Derivative liability – Series B		Derivative liability – Series C		Derivative liability - warrant
Balance at July 1, 2014	$	5,699,702	$	-	$	5,235,682
Additions during the year		-		1,879,428		-
Change in fair value		(5,332,938)		(1,403,139)		(1,792,928)
Transfer in and/or out of Level 3		-		-		-
Balance at July 1, 2015	$	366,764	$	476,289	$	3,442,754
Additions during the year		-		-		-
Change in fair value		(163,735)		(132,616)		(245,572)
Transfer in and/or out of Level 3		-		-		-
Balance at July 1, 2016	$	203,030	$	343,673	$	3,197,182
Additions during the year		-		-		-
Change in fair value		(203,030)		(311,460)		(1,181,828)
Transfer in and/or out of Level 3		-		-		-
Balance at June 30, 2017	$	-	$	32,213	$	2,015,354