Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.6
Fair Value Measurements
9 Months Ended
Dec. 31, 2011
Fair Value Measurements [Text Block]
4.  Fair Value Measurements
 
The Company follows the principles of fair value accounting as they relate to its financial assets and financial liabilities. Fair value is defined as the estimated exit price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, rather than an entry price which represents the purchase price of an asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on several factors, including the instrument’s complexity. The required fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels is described as follows:
 
 
Level 1  — Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
 
 
Level 2  — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
Level 3  — Unobservable inputs ( i.e., inputs that reflect the reporting entity’s own assumptions about the assumptions that market participants would use in estimating the fair value of an asset or liability) are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
 
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Where quoted prices are available in an active market, securities are classified as Level 1 of the valuation hierarchy. If quoted market prices are not available for the specific financial instrument, then the Company estimates fair value by using pricing models, quoted prices of financial instruments with similar characteristics or discounted cash flows. In certain cases where there is limited activity or less transparency around inputs to valuation, financial assets or liabilities are classified as Level 3 within the valuation hierarchy.
 
The Company does not use derivative instruments for hedging of market risks or for trading or speculative purposes. In conjunction with the issuance of the Platinum Notes (see Note 5, Convertible Promissory Notes and Other Notes Payable ), the Company determined that i) the cash payment option or put option, which provided the lender with the right to require the Company to repay part of the debt at a 25% premium, and ii) the note term extension option, which provided the lender with the right to extend the maturity date one year, were embedded derivatives that should be bifurcated and accounted for separately as liabilities.  Also, in conjunction with the Platinum Notes, the Company issued warrants to purchase 560,000 shares of its common stock. These warrants included certain exercise price adjustment features and, as a result, the Company determined that the warrants were liabilities, which were recorded at their estimated fair value. The Company determined the fair value of the i) put option and note term extension option using an internal valuation model with Level 3 inputs and ii) the warrant liability using a lattice model with Level 3 inputs. Inputs used to determine fair value include estimated value of the underlying common stock at the valuation measurement date, the remaining contractual term of the notes, risk-free interest rates, expected volatility of the price of the underlying common stock, and the probability of a qualified financing. Changes in the fair value of these liabilities have been recognized as a non-cash charge or income in other income (expense) in the consolidated statements of operations.
 
The fair value hierarchy for liabilities measured at fair value on a recurring basis is as follows:
 
          Fair Value Measurements at Reporting Date  
    Total Carrying Value    
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
December 31, 2011:                        
     Put option and note term extension option liabilities   $ -     $ -     $ -     $ -  
     Warrant liability   $ -     $ -     $ -     $ -  
     March 31, 2011:                                
     Put option and note term extension option liabilities   $ 90,749     $ -     $ -     $ 90,749  
     Warrant liability   $ 417,054     $ -     $ -     $ 417,054  
 
During the three and nine month periods ended December 31, 2011 and 2010, there were no significant changes to the valuation models used for purposes of determining the fair value of the Level 3 put option and note term extension option liabilities and warrant liability.
 
The changes in Level 3 liabilities measured at fair value on a recurring basis are as follows:
 
    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  
    Put Option and Note Term Extension Option Liabilities     Warrant Liability     Total  
Balance at March 31, 2011   $ 90,749     $ 417,054     $ 507,803  
Marked to market loss included in net loss     70,970       7,014       77,984  
Reclassification of liability to note discount upon modification of Platinum Notes
    (161,719 )     -       (161,719 )
Reclassification of remaining warrant liability to equity
    -       (424,068 )     (424,068 )
Balance at December 31, 2011   $ -     $ -     $ -  
 
As discussed further in Note 5, the Platinum Notes were amended and restated on May 5, 2011, eliminating the cash payment option.  Further, concurrent with the Merger transaction described in Note 1 above, the warrants are no longer considered liabilities, since the exercise price adjustment feature ended upon the Company becoming a public company as a result of the Merger.  The increase in fair value of the warrant liability of $7,014 was recognized in other expense, net in the statements of operations.  The aggregated fair value of these warrants at May 11, 2011 was reclassified from a liability to additional paid-in capital, a component of stockholders’ deficit.
 
No assets or other liabilities were carried at fair value at December 31, 2011 or March 31, 2011.