Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE WARRANT LIABILITY

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DERIVATIVE WARRANT LIABILITY
9 Months Ended
Jun. 30, 2017
Notes to Financial Statements  
NOTE 5. DERIVATIVE WARRANT LIABILITY

Derivative financial instruments are recognized as a liability on the consolidated balance sheet and measured at fair value. At June 30, 2017 and September 30, 2016, the Company had outstanding warrants to purchase 140,819 shares and 307,778 shares, respectively, of its common stock that are considered to be derivative instruments since the agreements contain “down round” provisions whereby the exercise price of the warrants is subject to adjustment in the event that the Company issues common stock for a lower price per share than the investors paid within a specified time period after the original issuance of the warrants (see Note 6).

 

The Company performs valuations of the warrants using the Black-Scholes option pricing model which value was also compared to a Binomial Option Pricing Model for reasonableness. The Black-Scholes option pricing model requires input of assumptions including the risk-free interest rates, volatility, expected life and dividends. Selection of these inputs involves management’s judgment and may impact net loss. Due to our limited operating history and limited number of sales of our common stock, we estimate our volatility based on a number of factors including the volatility of comparable publicly traded pharmaceutical companies. The volatility factor used in the Black-Scholes option pricing model has a significant effect on the resulting valuation of the derivative liabilities on our balance sheet. The volatility calculated at June 30, 2017 was 95%. We used a risk-free interest rate of 1.85%, an estimated life of 4.52 years, which is the remaining weighted average contractual life of the warrants subject to “down round” provisions, and no dividends to our common stock. The volatility calculated at September 30, 2016 was 73%. We used a risk-free interest rate of 1.14%, estimated lives of 4.10 to 4.57 years, which are the remaining contractual lives of the warrants subject to “down round” provisions, and no dividends to our common stock.

 

During the nine months ended June 30, 2017, anti-dilution rights related to warrants to purchase 307,778 shares of common stock expired which resulted in a reclassification from derivative warrant liability to additional paid-in capital of $1,433,316.

 

On June 8, 2017, the Company granted anti-dilution rights to the investors and the placement agent for the 2016 Offering (see Note 6) in connection with a release agreement. The investors and placement agent hold 140,819 warrants to purchase common stock at $8.25 per share as of June 30, 2017. The exercise price of the warrants is subject to adjustment in the event that the price per share paid by investors in the Company’s securities offering pursuant to an S-1 registration statement filed with the U.S. Securities and Exchange Commission is lower than the $8.25 exercise price of the warrants. In the event that the securities are priced at less than $8.25 per share, the warrant exercise price will be reduced to the lower price. On June 8, 2017, the Company reclassified the $641,385 fair value of the warrants to derivative warrant liability.

 

The table below presents the changes in the derivative warrant liability, which is measured at fair value on a recurring basis and classified as Level 3 in the fair value hierarchy:

 

   

Nine Months

Ended

June 30,

2017

   

Nine Months

Ended

June 30,

2016

 
Derivative warrant liability, beginning of period   $ 1,681,973     $ 738,955  
Fair value of warrants issued/reclassified     641,385       1,198,564  
Total realized/unrealized losses (gains) included in net loss     (308,878 )     1,659,738  
Reclassification of liability to additional paid-in capital     (1,433,316 )     (649,656 )
Derivative warrant liability, end of period   $ 581,164     $ 2,947,601