Quarterly report pursuant to Section 13 or 15(d)

NOTE 9. FAIR VALUE MEASUREMENTS

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NOTE 9. FAIR VALUE MEASUREMENTS
9 Months Ended
Dec. 31, 2011
Fair Value Disclosures [Text Block]

NOTE 9. FAIR VALUE MEASUREMENTS


We follow FASB ASC 820, "FAIR VALUE MEASUREMENTS AND DISCLOSURES" (“ASC 820”) in connection with financial assets and liabilities measured at fair value on a recurring basis subsequent to initial recognition. The guidance applies to our derivative liabilities.


ASC 820 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories: We measure the fair value of applicable financial and non-financial assets based on the following fair value hierarchy:


Level 1: Quoted market prices in active markets for identical assets or liabilities.


Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.


Level 3: Unobservable inputs that are not corroborated by market data.


The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.


The fair value of our recorded derivative liabilities is determined based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. We record derivative liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of operations.


Our fair value measurements at the December 31, 2011 reporting date are classified based on the valuation technique level noted in the table below:


 
 
 
 
Description
 
 
 
 
 
 
 
 
December 31,
2011
 
 
 
 
 
 
 
 
 
 
Quoted Prices
in
Active Markets for
Identical Assets
(Level 1)
 
 
 
 
 
 
 
 
 
 
Significant
Other
Observable
Inputs
(Level 2)
 
 
 
 
 
 
 
 
 
 
 
 
Significant
Unobservable Inputs
(Level 3)
 
 
 
 
 
Derivative Liabilities   $ 1,250,705     $ --     $ --     $ 1,250,705  
Total   $ 1,250,705     $ --     $ --     $ 1,250,705  

Prior to the third fiscal quarter ended December 31, 2010 (“Q3 2011”), the fair value estimate relating to an aggregate of 25,066,944 warrants classified as derivative liabilities had been based on a Black-Scholes valuation model.  During Q3 2011, we changed to a binomial lattice model for valuation of these warrants as we determined that use of a binomial lattice model was more representative of fair value in the circumstances. In accordance with accounting guidance in ASC 820-10, Fair Value Measurements and Disclosures, this was accounted for as a change in accounting estimate.


The following outlines the significant weighted average assumptions used to estimate the fair value information presented, in connection with our April 2011 convertible notes, July & August 2011 10% convertible notes and the September 2011 convertible notes and with respect to warrant and embedded conversion option derivative instruments utilizing the Binomial Lattice option pricing model:


  Nine Months Ended December 31, 2011
Risk free interest rate 0.02% - 2.24%
Average expected life 0.25 - 5 years
Expected volatility 51.9% - 128.5%
Expected dividends None

The table below sets forth a summary of changes in the fair value of our Level 3 financial instruments for the nine months ended December 31, 2011:


 
 
 
 
 
 
 
 
April 1,
2011
 
 
 
 
 
 
 
Recorded
New Derivative
Liabilities
 
 
 
 
 
Change in
estimated fair
value recognized
in results
of operations
 
 
 
 
 
Reclassification
of Derivative
Liability to
Paid in
capital
 
 
 
 
 
 
 
 
December 31,
2011
                   
Derivative liabilities $ 2,002,896   $ 1,107,940   ($ 1,596,442)   ($ 263,689)   $1,250,705

The fair value of derivative liabilities that we recorded in the nine months ended December 31, 2011 was related to our April 2011 convertible note, July & August 2011 10% convertible notes and the September 2011 convertible note offerings (see Note 5) and was based upon an independent valuation report.


The table below sets forth a summary of changes in the fair value of our Level 3 derivative liabilities for the nine months ended December 31, 2010:


    Fair Value at
March 31, 2010
  Recorded Fair
Value of
Derivative
Liabilities
in the nine month period ended December 2010
  Change in
Estimated Fair
Value Recognized
in Results of
Operations
  Fair Value at
December 31, 2010
Derivative liabilities   $ 1,054,716     $ 6,980,347     $ (2,098,954 )   $ 5,936,109  
                                 

The fair value of derivative liabilities that we recorded in the nine months ended December 2010 was related to the restructuring of the Amended and Restated Convertible Notes and to the embedded derivatives and associated warrants related to a number of our convertible note offerings (see Note 5) and was based upon an independent valuation report.