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Note 5. Derivative Liability
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Dec. 31, 2011
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| Derivative Instruments and Hedging Activities Disclosure [Text Block] |
Note
5. Derivative Liability
The
Company deems financial instruments which do not have fixed
settlement provisions to be derivative instruments. The
common stock purchase warrants issued with the
Company’s August 13, 2007 private placement, and the
common stock purchase warrants issued to the placement agent
in the transaction, do not have fixed settlement provisions
because their exercise prices may be lowered if the Company
issues securities at lower prices in the future. The Company
was required to include the reset provisions in order to
protect the warrant holders from the potential dilution
associated with future financings. At issuance, the warrants
were recognized as equity instruments and have since been
re-characterized as derivative liabilities. Accordingly, the
warrant obligations are adjusted to fair value at the end of
each reporting period with the change in value reported in
the statement of operations. Such fair values were estimated
using the Black-Scholes valuation model. Although the Company
determined the common stock warrants include an implied
down-side protection feature, it performed a Monte-Carlo
simulation and concluded that the value of the feature is de
minimis and the use of the Black-Scholes valuation model is
considered to be a reasonable method to value the warrants.
The Company will continue to adjust the warrant liability for
changes in fair value until the earlier of the exercise, at
which time the liability will be reclassified to
stockholders’ deficit, or expiration of the
warrants.
The
derivative liabilities were valued using the Black-Scholes
option valuation model and the following assumptions on the
following dates:
The
fair value of the derivative liability decreased to $34,000
at December 31, 2011 from $337,000 at March 31, 2011.
Accordingly, the Company decreased the derivative liability
by $303,000 to reflect the change in fair value at December
31, 2011. This amount is included as a change in the fair
value of derivative instruments in the accompanying
consolidated statement of operations for the nine months
ended December 31, 2011. The fair value of the derivative
liability decreased to $273,000 at December 31, 2010 from
$472,000 at March 31, 2010. Accordingly, the Company
decreased the derivative liability by $199,000 to reflect the
change in fair value at December 31, 2010. This amount is
included as a change in the fair value of derivative
instruments in the accompanying consolidated statement of
operations for the nine months ended December 31, 2010. The
following table sets forth a summary of the changes in the
fair value of our Level 3 financial liabilities that are
measured at fair value on a recurring basis:
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