Derivative Liabilities and Fair Value Measurements

3 Months Ended

Jun. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Liabilities and Fair Value Measurements

Note 5: Derivative Liabilities and Fair Value Measurements

Accounting Standards Codification (“ASC”) 815 - Derivatives and Hedging provides guidance to determine what types of instruments, or embedded features in an instrument, are considered derivatives. This guidance can affect the accounting for convertible instruments that contain provisions to protect holders from a decline in the stock price, referred to as anti-dilution or down-round protection. Down-round provisions reduce the exercise price of a convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments, or issues new convertible instruments that have a lower exercise price. The Company has determined that the warrant liability and related down-round provision related to the Secured Notes should be treated as derivatives. The Company is required to report derivatives at fair value and record the fluctuations in fair value in current operations.

The Company recognizes the derivative liabilities at their respective fair values at inception and on each reporting date. The Company values its financial assets and liabilities on a recurring basis and certain nonfinancial assets and nonfinancial liabilities on a nonrecurring basis 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. In order to increase consistency and comparability in fair value measurements, a fair value hierarchy that prioritizes observable and unobservable inputs is used to measure fair value into three broad levels, which are described below:

Level 1:	Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2:	Observable inputs other that Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in inactive markets; or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data.
Level 3:	Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

The Company recognizes derivative liabilities at their respective fair values at inception and on each reporting date. The Company utilized a binomial option pricing model (“BOPM”) to develop its assumptions for determining the fair value of the Warrants and related anti-dilution features. 

Key assumptions at June 30, 2014 for the Warrants discussed in Note 4 include a volatility factor of 96.0%, a dividend yield of 0%, expected life of 4.0 years and a risk free interest rate of 1.00%.

The Company estimated the fair value of the Warrants, including call options, to be $0.5590 per share and the down-round protection derivative for the same warrants is estimated at $1.1438. The number of Warrants issued was 764,960. The carrying value of the Warrants with call options at June 30, 2014 was $427,613 and the carrying value of the down-round protection derivative for the same date was $874,961.

The table below provides a reconciliation of beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3):

	Warrants			Warrant Derivative			Total
Balance, March 31, 2014	$	(1,019,539	)	$	(378,502	)	$	(1,398,041	)
Net Change in Fair Value		591,926			(496,459	)		95,467
Balance at June 30, 2014	$	(427,613	)	$	(874,961	)	$	(1,302,574	)

The derivative liabilities are considered Level 3 liabilities on the fair value hierarchy as the determination of fair values includes various assumptions about future activities and stock price and historical volatility inputs.

The following table describes the valuation techniques used to calculate fair values for assets in Level 3. There were no changes in the valuation techniques during the quarter ended June 30, 2014.

	Fair Value at 06/30/2014		Valuation Technique		Unobservable Input		Range
Warrant Derivative and Warrant Down-round Protection Derivative (combined)	$	1,302,574		Binomial Option Pricing Model		Probability of common stock issuance at prices less than exercise prices stated in agreements		75	%
						Probability of reset provision being waived		5	%

Significant unobservable inputs for the derivative liabilities include (1) the estimated probability of the occurrence of a down-round financing during the term over which the related warrants are exercisable, (2) the estimated magnitude of the down-round and (3) the probability of the reset provision being waived. These estimates which are unobservable in the market were utilized to value the anti-dilution features of the warrants as of June 30, 2014.