Note 10 - Fair Value Measurements and Other Financial Instruments

3 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Fair Value Disclosures [Text Block]

10 . Fair Value Measurements and Other Financial Instruments

The carrying amounts of the Company's financial assets and liabilities, such as cash, accounts receivable, inventory, prepaid expenses, and other current assets, accounts payable and accrued expenses approximate their fair values because of the short maturity of these instruments.

In connection with the issuance of a convertible promissory notes as discussed in Note

6,

the Company evaluated the note agreement to determine if the agreement contained any embedded components that would qualify the agreement as a derivative. The Company identified certain put features embedded in the convertible note agreement that potentially could result in a settlement in the event of a fundamental transaction, requiring the Company to classify the conversion feature as a derivative liability.  The restructuring of an aggregate principal amount of

$1,351,482

of notes payable on

July 19, 2018

resulted in the issuance of the Grid Notes described in Note

6

to these consolidated financial statements.  Such Grid Notes do

not

include a down-round feature.  This elimination of the conversion feature lowered the value of the Company's related party notes payable. 

The Company's Level

3

financial liabilities consist of the derivative conversion features of underlying convertible debt and warrants issued in

2011

to

2015.

The Company valued the conversion features using the Black Sholes model prior to the

three

months ended

September 30, 2016

and the Monte Carlo model for all periods thereafter. These models incorporate transaction details such as the Company's stock price, contractual terms maturity, risk free rates and volatility as of the date of issuance and each balance sheet date. The decrease in the value of the conversion feature of the convertible debt and warrants issued was primarily due to the change in the stock price compared with prior years.  The remaining

$1,698,169

of notes payable contain conversion features.

The Company utilized the following assumptions in valuing the derivative conversion features:

Exercise Price	$	1.20		-	$	1.22
Risk free interest rate		2.32	%	-		2.93	%
Expected volatility		130	%	-		200	%
Remaining Term (years)		0.47		-		4.82

Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis

The fair value of the Company's financial instruments, using the fair value hierarchy under U.S. GAAP detailed in

"Fair Value Measurements"

in Note

2,

"Summary of Significant Accounting Policies and Recently Issued Accounting Standards," of the Notes to the Condensed Consolidated Financial Statements are included in the tables below.

The Company uses Level

3

of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative liabilities at every reporting period and recognizes gains and losses in the statement of operations that are attributable to the change in the fair value of the derivative liabilities. Changes in the observable input values would likely cause material changes in the fair value of the Company's Level

3

financial instruments.  The significant unobservable input (probability of a down round event) used in the fair value measurement is the estimation of the likelihood of the occurrence of a change in the contractual terms of the financial instruments.  A significant increase (decrease) in this likelihood or in the volatility assumptions would result in a higher (lower) fair value measurement.

The following tables provide a summary of the changes in fair value, including net transfers in and/or out, of all financial assets / (liabilities) measured at the fair value on a recurring basis using significant unobservable inputs during the 

three

months ended

September 30, 2018.

				Convertible
	Warrants			Notes		Total
Balance - June 30, 2018	$	505,069		$	818,556	$	1,323,625
Change in fair value of derivative liabilities		(64,333	)		(444,291)		(508,624)
Balance - September 30, 2018	$	440,736		$	374,265	$	815,001

	Fair value		Level 1		Level 2		Level 3
June 30, 2018 Derivative liabilities	$	1,323,625	$	-	$	-	$	1,323,625
September 30, 2018 Derivative liabilities	$	815,001	$	-	$	-	$	815,001

Of the

$508,624

reduction in the fair value of the derivative liabilities, approximately

$457,000

was reclassified to additional paid-in capital in conjunction with the extinguishment of certain related party notes on

July 19, 2018. 

See Note

6

for further discussion.

For the

three

months ended 

September 30, 2018 

and

2017,

the Company recorded non-cash income of approximately

$509,000

and

$773,000

for the changes in fair value of the derivative liabilities.