Quarterly report pursuant to Section 13 or 15(d)

Derivative Liability

 v2.3.0.11
Derivative Liability
 3 Months Ended
Jun. 30, 2011
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
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’ equity, 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:

   
June 30,
2011
   
March 31,
2011
 
Expected life
 
1.62 years
   
1.87 years
 
Risk-free interest rate
   
 0.47
%
   
 0.61
%
Dividend yield
   
 0.00
%
   
 0.00
%
Volatility
   
 84
%
   
 83
%
Warrants outstanding
   
 725,866
     
 725,866
 
Fair value of warrants
 
$
241,000
   
$
337,000
 
 
The fair value of the derivative liability decreased to $241,000 at June 30, 2011 from $337,000 at March 31, 2011. Accordingly, the Company decreased the derivative liability by $96,000 to reflect the change in fair value at June 30, 2011. This amount is included as a change in the fair value of derivative instruments in the accompanying consolidated statement of operations for the three months ended June 30, 2011. 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:

   
Three Months Ended
June 30,
 
   
2011
   
2010
 
Beginning balance
 
$
(337)
   
$
(472)
 
Net unrealized gain
   
96
     
88
 
 Ending balance
 
$
(241)
   
$
(384)