5. Derivative Liability

9 Months Ended

Dec. 31, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Liability

In connection with the Company issuing its Series A preferred stock units described in Note 6, the Company recorded a derivative liability related to down-round protection provided to the preferred stockholders in the event that the Company sells its common stock at a price below $0.35 per share. With the assistance of a third-party valuation specialist, the Company valued the derivative liability based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1	Quoted prices in active markets that are accessible at the measurement date for assets or liabilities.
Level 2	Other inputs that are observable directly or indirectly, such as quoted prices for similar assets and liabilities or market corroborated inputs.
Level 3	Unobservable inputs that are used when little or no market data is available, which require the Company to develop its own assumptions about how market participants would value the assets or liabilities.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosure each quarter. Assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 and March 31, 2014 are summarized as follows:

	Fair Value as of December 31, 2014
	Level 1		Level 2		Level 3		Total
Liabilities
Embedded derivative	$	–	$	–	$	377,378	$	377,378

	Fair Value as of March 31, 2014
	Level 1		Level 2		Level 3		Total
Liabilities
Embedded derivative	$	–	$	–	$	109,421	$	109,421

The following table presents the fair value reconciliation of Level 3 liabilities measured at fair value on a recurring basis for the nine months ended December 31, 2014:

	Fair Value Measurements Using Significant Unobservable Inputs
	(Level 3)
	Embedded Derivative
Beginning balance, March 31, 2014	$	109,421
Issuances:
Embedded derivatives issued in conjunction with Series A preferred stock units		3,755
Total losses included in earnings		264,202
Ending balance, December 31, 2014	$	377,378

Given the nature of the derivative liability, the carrying amounts of $377,378 and $109,421 reported in the accompanying condensed consolidated balance sheets as of December 31, 2014 and March 31, 2014, respectively, were derived from Level 3 inputs and represent management’s best estimate of fair value.

Key assumptions used in the valuation of the embedded derivatives using a Monte Carlo analysis methodology are as follows:

	December 31,		March 31,
	2014		2014
Threshold barrier	$	0.35	$	0.35
Average price below $0.35 per share	$	0.11	$	0.22
Probability of offer below $0.35 per share		3%		3%
Preferred share conversion price	$	1.40	$	1.40
Conversion ratio		12.73		6.36