Fair Value Measurements

12 Months Ended

Jun. 30, 2022

Note 5 – Fair Value Measurements

Our financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used for such measurements were as follows:


	June 30, 2022
	Level 1		Level 2		Level 3
Liabilities
Warrant	$	—	$	—	$	890,603
Total Liabilities	$	—	$	—	$	890,603

Fair values of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate the recorded value due to the short period of time to maturity. The Company’s Warrant is classified within Level 3 of the fair value hierarchy because its fair value is based on significant inputs that are unobservable in the market.

The valuation of the Warrant uses assumptions and estimates we believe would be made by a market participant in making the same valuations. We assess these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained.

We determined the fair value of the Warrant using Monte Carlo option-pricing models and the quoted price of our Common Stock. The Monte Carlo technique applied generates many possible (but random) price paths for the underlying (or underlyings) via simulation, and then calculates the associated payment value of the derivative features. The price of the underlying Common Stock is modeled such that it follows a geometric Brownian motion with constant drift, and constant volatility. The stock price is determined by a random sampling from a normal distribution. Since the underlying random process is the same, for enough price paths, the value of derivative is derived from path dependent scenarios and outcomes.

The features in the notes that were analyzed and incorporated into the model included the only the default provisions. The features in the warrants that were analyzed and incorporated into the model included the exercise features (including a call option) and the full ratchet reset provisions.

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Based on the instrument’s features, there are six primary events that could occur: payments are made in cash; payments are made with stock; the Holder converts the note; the Issuer redeems the note; a reset or default event occurs; or we default on the Note.

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There are four primary events that can occur in the Warrants; the Holder exercises the option at maturity; a reset or default event occurs adjusting the exercise price and the number of options; or the warrant expires.

The model simulates the underlying economic factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e., stock price, conversion price, etc.). Probabilities were assigned to each variable such as the timing and pricing of events

(future financings – potential resets, fundamental transaction, exercise, redemption, and default) over the remaining term of the instruments based on management projections.

The following table present significant assumptions utilized in the valuation of the Warrant at the issuance date of March 11, 2022 and June 30, 2022.

	As of March 11, 2022			As of June 30, 2022
Risk-free rate		1.11	%		2.39	%
Volatility		137.8	%		136.9	%
Contractual term (in years)		1.0			0.7
Exercise price	$	0.050		$	0.050

For the year ended June 30, 2022, the change in the fair value of the Warrant resulted from the change in price of our Common Stock. The changes in fair value are included in the consolidated statements of operations as a component of change in fair value of warrant liabilities and in the consolidated balance sheets as other liabilities.

FRONTERA GROUP INC. 10-K