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9. Fair Value Measurements
The FASB has established a framework for measuring fair value in generally accepted accounting principles. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described as follows:
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If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
Level 3. Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The asset or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The table below presents our assets and liabilities that are measured at fair value on a recurring basis during Fiscal 2012 and are categorized using the fair value hierarchy (in thousands):
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Fair Value Measurements at March 31, 2012 |
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Total |
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) |
|
Significant Other
Observable
Inputs
(Level 2) |
|
Significant
Unobservable
Inputs
(Level 3) |
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|
Cash equivalents
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|
$ |
39,790 |
|
$ |
39,790 |
|
$ |
— |
|
$ |
— |
|
|
Warrant liability
|
|
$ |
(791 |
) |
$ |
— |
|
$ |
— |
|
$ |
(791 |
) |
Cash equivalents includes cash held in money market and U.S. Treasury Funds at March 31, 2012.
The table below presents our assets and liabilities that are measured at fair value on a recurring basis during Fiscal 2011 and are categorized using the fair value hierarchy (in thousands):
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Fair Value Measurements at March 31, 2011 |
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Total |
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Quoted Prices in
Active Markets for
Identical Assets
(Level 1) |
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 2) |
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Significant
Unobservable
Inputs
(Level 3) |
|
|
Cash equivalents
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$ |
8,289 |
|
$ |
8,289 |
|
$ |
— |
|
$ |
— |
|
|
Restricted cash
|
|
$ |
1,250 |
|
$ |
1,250 |
|
$ |
— |
|
$ |
— |
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Warrant liability
|
|
$ |
(20,772 |
) |
$ |
— |
|
$ |
— |
|
$ |
(20,772 |
) |
Basis for Valuation
The carrying values reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair values because of the immediate or short-term maturities of these financial instruments. As the Company's obligations under the Credit Facility are based on adjustable market interest rates, the Company has determined that the carrying value approximates the fair value. The carrying values and estimated fair values of these obligations are as follows (in thousands):
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As of March 31, 2012 |
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As of March 31, 2011 |
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Carrying
Value |
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Estimated
Fair Value |
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Carrying
Value |
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Estimated
Fair Value |
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Obligations under the credit facility
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$ |
10,431 |
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$ |
10,431 |
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$ |
7,080 |
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$ |
7,080 |
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The Company adopted the amended provisions of ASC 815 on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in ASC 815. Warrants issued by the Company in prior periods with certain antidilution provisions for the holder are no longer considered indexed to the Company's own stock, and therefore no longer qualify for the scope exception and must be accounted for as derivatives. These warrants were reclassified as liabilities under the caption "Warrant liability" and recorded at estimated fair value at each reporting date, computed using the Monte Carlo simulation valuation method. The Company will continue to adjust the warrant liability for changes in fair value until the earlier of the exercise of the warrants, at which time the liability will be reclassified to stockholders' equity, or expiration of the warrants. Changes in the liability from period to period are recorded in the Statements of Operations under the caption "Change in fair value of warrant liability."
The fair value of the Company's warrant liability (see Note 8—Stockholders' Equity—Underwritten and Registered Direct Placement of Common Stock) recorded in the Company's financial statements is determined using the Monte Carlo simulation valuation method and the quoted price of the Company's common stock in an active market, a Level 3 measurement. Volatility is based on the actual market activity of the Company's stock. The expected life is based on the remaining contractual term of the warrants and the risk free interest rate is based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants' expected life.
The Company calculated the estimated fair value of warrants on the date of issuance and at each subsequent reporting date using the following assumptions:
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Fiscal Year Ended
March 31, 2012 |
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Fiscal Year Ended
March 31, 2011 |
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Risk-free interest rates range
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0.0% to 1.5% |
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0.2% to 2.1% |
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Contractual term (in years)
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0.1 years to 4.9 years |
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0.8 years to 5.1 years |
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Expected volatility range
|
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60.5% to 84.9% |
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60.0% to 92.3% |
From time to time, the Company sells common stock warrants that are derivative instruments. The Company does not enter into speculative derivative agreements and does not enter into derivative agreements for the purpose of hedging risks.
As discussed above, the Company adopted authoritative guidance issued by the FASB on contracts in an entity's own equity that requires the common stock warrants to be classified as liabilities at their estimated fair value with changes in fair value at each reporting date recognized in the statement of operations. The table below provides a reconciliation of the beginning and ending balances for the warrant liability which is measured at fair value using significant unobservable inputs (Level 3) (in thousands):
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Warrant liability:
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Balance as of April 1, 2009
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$ |
8,163 |
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Total realized and unrealized (gains) losses:
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Expense included in change in fair value of warrant liability
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22,853 |
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Purchases, issuances and settlements
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(4,213 |
) |
| |
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Balance as of March 31, 2010
|
|
$ |
26,803 |
|
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Total realized and unrealized (gains) losses:
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|
|
|
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Expense included in change in fair value of warrant liability
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|
|
3,667 |
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Purchases, issuances and settlements
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|
|
(9,698 |
) |
| |
|
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Balance at March 31, 2011
|
|
$ |
20,772 |
|
|
Total realized and unrealized (gains) losses:
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|
|
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Income included in change in fair value of warrant liability
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|
(13,872 |
) |
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Purchases, issuances and settlements
|
|
|
(6,109 |
) |
| |
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Balance at March 31, 2012
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|
$ |
791 |
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