Quarterly report pursuant to sections 13 or 15(d)

Fair Value Measurements

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Fair Value Measurements
 9 Months Ended
Dec. 31, 2011
Fair Value Measurements
  4. Fair Value Measurements

 

 The Company applies the provisions of ASC 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

 

· Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

 

· Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

· Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities From Equity” and ASC 815, “Derivatives and Hedging.” Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrant and option derivatives are valued using the Black-Scholes model.

 

In accordance with ASC 820, the Company measures its cash and cash equivalents at fair value. The Company’s cash and cash equivalents are classified within Level 1 by using quoted market prices.

 

The Company uses Level 3 inputs for its valuation methodology for the warrant and convertible debt derivatives as their fair values were determined by using the Black-Scholes option pricing model based on various assumptions. The Company’s derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. On December 29, 2011, the Company issued a $7,000 convertible promissory note (“The New Convertible Note”). The Company determined that the conversion option was a beneficial conversion option that was required to be bifurcated and measured at fair value at each reporting period. Due to the New Convertible Note, the Company did not have sufficient authorized shares of common stock to satisfy all potential exercises of options, warrants and convertible notes. On December 29, 2011 the Company reclassified from additional paid in capital to derivative liabilities outstanding warrants and conversion options related to the New Convertible Note and Senior Secured Convertible Note.

 

At December 31, 2011, the Company determined the fair value of the embedded convertible option liabilities to be $17,113 using the Black-Scholes option pricing model with the following assumptions: 1) expected life between 0.997 and 1.47 years, 2) a risk free interest rate of .12%, 3) a dividend yield of 0% and 4) volatility of 175%.

 

At December 31, 2011, the Company determined the fair value of the derivative warrant liability to be $8,991 using the Black-Scholes option pricing model with the following assumptions: 1) expected life between 1.84 and 5.00 years, 2) a risk free interest rate between .25% and .84%, 3) a dividend yield of 0% and 4) a volatility of 175%.

 

The significant unobservable inputs used in the fair value measurement of the Company's derivative liabilities are volatility and risk free interest rates. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement.

 

At December 31, 2011, the Company identified the following assets and liabilities that are required to be presented on the balance sheet at fair value:

 

Fair Value Measurements

 

(in thousands)   Total     Level 1     Level 2     Level 3  
                         
Embedded conversion option liabilities, current portion   $ 6,068     $ -     $ -     $ 6,068  
                                 
Warrant derivative liabilities     8,991       -       -       8,991  
                                 
Long term embedded conversion option liabilities     11,045       -       -       11,045  
                                 
Total derivative liabilities   $ 26,104     $ -     $ -     $ 26,104  

 

During the nine months ended December 31, 2011, the Company recorded a loss of $76 for the change in the valuation of the aforementioned liabilities, which is recorded as other expense in the accompanying consolidated statements of operations.

 

The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the consolidated balance sheets at fair value in accordance with ASC 825.

 

The following table represents a reconciliation of liabilities measured on a recurring basis using significant unobservable inputs (level 3) as of December 31, 2011.

 

    Fair Value Measurement Using Significant
    Unobservable Inputs
    (Level 3)
         
         
Balance, April 1, 2011     $ 223  
Total gains or losses (realized/unrealized)
included in earnings		       76  
Purchases, issuances and settlements       25,805  
Ending balance, December 31, 2011       26,104  
           
Total amount of gains and losses for the period included in earnings attributable to the change in unrealized gains or losses related to liabilities still held at the reporting date       76  

 

The Company did not have any level 3 derivative liabilities measured at fair value for the 9 month period ended December 31, 2010.

 

Measured at Fair Value on a Nonrecurring Basis

 

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). As of March 31, 2011 the Company had incurred cumulative impairment losses on goodwill and other intangible assets of $68,770 based on the fair value measurement methods and criteria described in Note 9. For the period ended December 31, 2011 the Company determined that there was no evidence of impairment and therefore no additional impairment loss was recorded.