| Derivative Liabilities |
9. Derivative Liabilities
Between August 17, 2012 and March 31, 2013,
our Company issued a total of $525,000 in convertible promissory notes to eleven accredited investors, one of which is a member
of our Board and another was a former member of our Board. The convertible promissory notes must be repaid by our Company within
six months from the date of issuance; accrue interest at the rate of 14%; and are subject to conversion at the election of the
investors at such time as our Company has raised a minimum of $500,000 in a subsequent equity financing. The conversion price will
be the lower of 80% of the per share purchase price paid for by the new investors in the subsequent financing, or $0.50 per share.
Unless these promissory notes are converted or repaid earlier, our Company must pay the note-holders the amount of the then accrued
interest on the three, six, and nine month anniversaries of the issue date. As of June 30, 2013, the Company extended the maturity
date of the notes to one year from the date of issuance.
In connection with the issuance of the promissory
notes, the investors in the aggregate received two-year warrants to purchase up to a total of 78,750 shares of common stock at
$0.50 per share, and two-year warrants to purchase up to a total of 131,250 shares of common stock at $0.01 per share. For purposes
of accounting for the detachable warrants issued in connection with the convertible notes, the fair value of the warrants was estimated
using the Black-Scholes-Merton option pricing formula. The value of all warrants granted at the date of issuance totaled $508,413
and was recorded as a discount to the notes payable. The amount will be amortized over the nine-month term of the respective convertible
note as additional interest expense. The Company recognized the conversion feature, the $0.01 warrant to purchase common
stock and $0.50 warrant to purchase common stock were derivative liabilities.
As of
March 31, 2014, the derivative liabilities were valued using the weighted-average Black-Scholes-Merton option pricing model
using the assumptions detailed below. The Company recorded $68,452 income from changes in derivative liability during the nine
months ended March 31, 2014. The results of year--end valuation were summarized as follows:
| |
Derivative |
Dividend Yield |
Expected Volatility |
Risk Free Rate |
Expected |
Fair Value as of 03/31/14 |
| Grant Date |
Liabilities |
Term |
| 8/17/2012 |
Conversion Feature |
0% |
217% |
0.19% |
2.25 |
17,000 |
| |
$0.01 Warrant |
0% |
217% |
0.19% |
0.38 |
2,000 |
| |
$0.50 Warrant |
0% |
217% |
0.19% |
0.38 |
0 |
| 8/24/2012 |
Conversion Feature |
0% |
207% |
0.19% |
2.25 |
16,000 |
| |
$0.01 Warrant |
0% |
207% |
0.19% |
0.40 |
2,000 |
| |
$0.50 Warrant |
0% |
207% |
0.19% |
0.40 |
0 |
| 9/9/2012 |
Conversion Feature |
0% |
195% |
0.19% |
2.25 |
25,000 |
| |
$0.01 Warrant |
0% |
195% |
0.19% |
0.44 |
6,000 |
| |
$0.50 Warrant |
0% |
195% |
0.19% |
0.44 |
1,000 |
| 9/13/2012 |
Conversion Feature |
0% |
196% |
0.19% |
2.25 |
32,000 |
| |
$0.01 Warrant |
0% |
196% |
0.19% |
0.38 |
4,000 |
| |
$0.50 Warrant |
0% |
196% |
0.19% |
0.38 |
1,000 |
| 9/18/2012 |
Conversion Feature |
0% |
194% |
0.19% |
0.22 |
5,000 |
| |
$0.01 Warrant |
0% |
194% |
0.19% |
0.47 |
2,000 |
| |
$0.50 Warrant |
0% |
194% |
0.19% |
0.47 |
0 |
| 9/18/2012 |
Conversion Feature |
0% |
194% |
0.19% |
0.22 |
5,000 |
| |
$0.01 Warrant |
0% |
194% |
0.19% |
0.47 |
2,000 |
| |
$0.50 Warrant |
0% |
194% |
0.19% |
0.47 |
0 |
| 9/18/2012 |
Conversion Feature |
0% |
194% |
0.19% |
0.22 |
5,000 |
| |
$0.01 Warrant |
0% |
194% |
0.19% |
0.47 |
2,000 |
| |
$0.50 Warrant |
0% |
194% |
0.19% |
0.47 |
0 |
| 9/27/2012 |
Conversion Feature |
0% |
187% |
0.19% |
0.46 |
7,000 |
| |
$0.01 Warrant |
0% |
187% |
0.19% |
0.49 |
3,000 |
| |
$0.50 Warrant |
0% |
187% |
0.19% |
0.49 |
1,000 |
| 10/5/2012 |
Conversion Feature |
0% |
188% |
0.19% |
0.10 |
1,000 |
| |
$0.01 Warrant |
0% |
188% |
0.19% |
0.52 |
1,000 |
| |
$0.50 Warrant |
0% |
188% |
0.19% |
0.52 |
0 |
| 10/25/2012 |
Conversion Feature |
0% |
157% |
0.19% |
0.15 |
3,000 |
| |
$0.01 Warrant |
0% |
157% |
0.19% |
0.57 |
4,000 |
| |
$0.50 Warrant |
0% |
157% |
0.19% |
0.57 |
1,000 |
| 10/31/2012 |
Conversion Feature |
0% |
217% |
0.19% |
0.84 |
12,000 |
| |
$0.01 Warrant |
0% |
217% |
0.19% |
0.59 |
5,000 |
| |
$0.50 Warrant |
0% |
217% |
0.19% |
0.59 |
2,000 |
| 11/27/2012 |
Conversion Feature |
0% |
217% |
0.19% |
0.84 |
12,000 |
| |
$0.01 Warrant |
0% |
217% |
0.19% |
2.25 |
5,000 |
| |
$0.50 Warrant |
0% |
217% |
0.19% |
2.25 |
3,000 |
| 12/21/2012 |
Conversion Feature |
0% |
152% |
0.19% |
0.16 |
10,000 |
| |
$0.01 Warrant |
0% |
152% |
0.19% |
0.66 |
7,000 |
| |
$0.50 Warrant |
0% |
152% |
0.19% |
0.66 |
1,000 |
| 1/31/2013 |
Conversion Feature |
0% |
136% |
0.19% |
0.22 |
12,000 |
| |
$0.01 Warrant |
0% |
136% |
0.19% |
0.73 |
18,000 |
| |
$0.50 Warrant |
0% |
136% |
0.19% |
0.73 |
6,000 |
| 8/24/2012 |
$0.50 Warrant |
0% |
136% |
0.19% |
2.40 |
17,000 |
| |
|
|
|
|
Total fair value |
$258,000 |
As
of June 30, 2013, the derivative liabilities were valued using the weighted-average Black-Scholes-Merton option pricing model
using the assumptions detailed below. The results of year--end valuation were summarized as follows:
| Grant Date |
Derivative
Liabilities |
Dividend Yield |
Expected Volatility |
Risk Free Rate |
Expected
Term |
Fair Value as of 06/30/13 |
| 8/17/2012 |
Conversion Feature |
0% |
88% |
0.15% |
0.88 |
$12,500 |
| |
$0.01 Warrant |
0% |
232% |
0.15% |
1.13 |
2,313 |
| |
$0.50 Warrant |
0% |
232% |
0.15% |
1.13 |
1,088 |
| 8/24/2012 |
Conversion Feature |
0% |
65% |
0.15% |
0.65 |
7,000 |
| |
$0.01 Warrant |
0% |
251% |
0.15% |
1.15 |
2,313 |
| |
$0.50 Warrant |
0% |
251% |
0.15% |
1.15 |
1,125 |
| 9/9/2012 |
Conversion Feature |
0% |
94% |
0.15% |
0.94 |
20,000 |
| |
$0.01 Warrant |
0% |
248% |
0.15% |
1.19 |
3,700 |
| |
$0.50 Warrant |
0% |
248% |
0.15% |
1.19 |
1,800 |
| 9/13/2012 |
Conversion Feature |
0% |
71% |
0.15% |
0.71 |
16,000 |
| |
$0.01 Warrant |
0% |
232% |
0.15% |
1.13 |
4,625 |
| |
$0.50 Warrant |
0% |
232% |
0.15% |
1.13 |
2,175 |
| 9/18/2012 |
Conversion Feature |
0% |
97% |
0.15% |
0.97 |
13,000 |
| |
$0.01 Warrant |
0% |
245% |
0.15% |
1.22 |
2,313 |
| |
$0.50 Warrant |
0% |
245% |
0.15% |
1.22 |
1,125 |
| 9/18/2012 |
Conversion Feature |
0% |
97% |
0.15% |
0.97 |
13,000 |
| |
$0.01 Warrant |
0% |
245% |
0.15% |
1.22 |
2,313 |
| |
$0.50 Warrant |
0% |
245% |
0.15% |
1.22 |
1,125 |
| 9/18/2012 |
Conversion Feature |
0% |
97% |
0.15% |
0.97 |
13,000 |
| |
$0.01 Warrant |
0% |
245% |
0.15% |
1.22 |
2,313 |
| |
$0.50 Warrant |
0% |
245% |
0.15% |
1.22 |
1,125 |
| 9/27/2012 |
Conversion Feature |
0% |
121% |
0.15% |
1.21 |
15,000 |
| |
$0.01 Warrant |
0% |
244% |
0.15% |
1.24 |
2,313 |
| |
$0.50 Warrant |
0% |
244% |
0.15% |
1.24 |
1,125 |
| 10/5/2012 |
Conversion Feature |
0% |
85% |
0.15% |
0.85 |
4,600 |
| |
$0.01 Warrant |
0% |
243% |
0.15% |
1.27 |
925 |
| |
$0.50 Warrant |
0% |
243% |
0.15% |
1.27 |
465 |
| 10/25/2012 |
Conversion Feature |
0% |
90% |
0.15% |
0.90 |
12,500 |
| |
$0.01 Warrant |
0% |
245% |
0.15% |
1.32 |
2,313 |
| |
$0.50 Warrant |
0% |
245% |
0.15% |
1.32 |
1,163 |
| 10/31/2012 |
Conversion Feature |
0% |
84% |
0.15% |
0.84 |
11,500 |
| |
$0.01 Warrant |
0% |
244% |
0.15% |
1.34 |
2,313 |
| |
$0.50 Warrant |
0% |
244% |
0.15% |
1.34 |
1,163 |
| 11/27/2012 |
Conversion Feature |
0% |
91% |
0.15% |
0.91 |
50,000 |
| |
$0.01 Warrant |
0% |
240% |
0.15% |
1.41 |
9,250 |
| |
$0.50 Warrant |
0% |
240% |
0.15% |
1.41 |
4,650 |
|
12/21/2012 |
Conversion Feature |
0% |
98% |
0.15% |
0.98 |
52,000 |
| |
$0.01 Warrant |
0% |
237% |
0.15% |
1.48 |
9,250 |
| |
$0.50 Warrant |
0% |
237% |
0.15% |
1.48 |
4,650 |
| 1/31/2013 |
Conversion Feature |
0% |
108% |
0.15% |
1.08 |
14,000 |
| |
$0.01 Warrant |
0% |
224% |
0.15% |
1.08 |
2,313 |
| |
$0.50 Warrant |
0% |
224% |
0.15% |
1.08 |
1,013 |
| |
|
|
|
|
Total fair value |
$ 326,452 |
|