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Warrants and Derivative Liabilities
 3 Months Ended
Jun. 30, 2013
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Warrants and Derivative Liabilities
11. Warrants and Derivative Liabilities

On April 4, 2012, the Company entered into a Purchase Agreement for the Initial Note and on December 20, 2012, the Company entered into the Amendment pursuant to which it exchanged the Initial Note for the Exchanged Note, as described in Note 10. The Initial Note included a warrant to purchase 3,094,060 million shares of the Company’s common stock. The warrant is exercisable at any time on or after the date that is six months after the issuance of the warrant and entitles CVI to purchase shares of the Company’s common stock for a period of five years from the initial date the warrant becomes exercisable at a price equal to $5.45 per share, subject to certain price-based and other anti-dilution adjustments. The warrant may not be exercised if, after giving effect to the conversion, CVI together with its affiliates would beneficially own in excess of 4.99% of the Company’s common stock. This percentage may be raised to any other percentage not in excess of 9.99% at the option of CVI, upon at least 61-days prior notice to the Company, or lowered to any other percentage, at the option of CVI, at any time.

The Company calculated the fair value of the derivative liabilities and warrants utilizing an integrated lattice model. The lattice model is an option pricing model that involves the construction of a binomial tree to show the different paths that the underlying asset may take over the option’s life. A lattice model can take into account expected changes in various parameters such as volatility over the life of the options, providing more accurate estimates of option prices than the Black-Scholes model.

 

The Company accounts for the warrant as a liability due to certain adjustment provisions within the warrant, which requires that it be recorded at fair value. The warrant is subject to revaluation at each balance sheet date and any change in fair value will be recorded as a change in fair value in other income (expense) until the earlier of expiration or its exercise at which time the warrant liability will be reclassified to equity. Following is a summary of the key assumptions used to calculate the fair value of the warrant:

 

     June 30,
2013		  

Fiscal Year 2013

   

Risk-free interest rate

      1.13 % 

Expected annual dividend yield

      0.0 % 

Expected volatility

      71.9 % 

Term (years)

      4.27   

Fair Value

    $ 3.0 million   

 

     March 31,     December 31,     September 30,     June 30,     April 4,  
     2013     2012     2012     2012     2012  

Fiscal Year 2012

           

Risk-free interest rate

      0.67 %      0.75 %      0.63 %      0.77 %      1.19 % 

Expected annual dividend yield

      0.0 %      0.0 %      0.0 %      0.0 %      0.0 % 

Expected volatility

      71.7 %      80.6 %      80.9 %      80.8 %      80.0 % 

Term (years)

      4.51        4.76        5.01        5.28        5.5   

Fair Value

    $ 3.4 million      $ 4.4 million      $ 7.1 million      $ 8.6 million      $ 7.0 million   

The Company recorded the change in the fair value of the CVI warrant of $0.4 million gain and $1.6 million loss, to change in fair value of derivatives and warrants in the three months ended June 30, 2013 and 2012, respectively.

The Company determined certain embedded derivatives issued with the convertible notes required accounting as a liability, which requires they be accounted for as a standalone liability subject to revaluation at each balance sheet date with changes in fair value recorded as change in fair value of derivatives and warrants until the earlier of exercise or expiration.

The terms of the debt modification reduced the conversion price of the Initial Note from $4.85 per share to $3.19 per share in the Exchanged Note. As a result the Company revalued these derivatives pre- and post-modification and recorded the difference of $0.5 million as a debt discount and a derivative liability. (See Note 10, “Debt,” for further discussion). Following is a summary of the key assumptions used to value the convertible notes derivative feature:

 

     June 30,  
     2013  

Fiscal Year 2013

   

Principal Outstanding (000’s)

    $ 14,389   

Stock Price

    $ 2.64   

Percentage Volume Condition Met

      87.5 % 

Expected Volatility

      65.8 % 

Risk Free Rate

      0.21 % 

Bond Yield

      16.7 % 

Recovery Rate

      37.0 % 

Redeemable

      yes   

Total Time (years)

      1.26   

Dilution Effect

      yes   

Fair Value

    $ 0.5 million   

Fair Value as a Percent of Par

      3.3 % 

 

                 Post-
modification		     Pre-modification                    
     March 31,     December 31,     December 20,     December 20,     September 30,     June 30,     April 4,  
     2013     2012     2012     2012     2012     2012     2012  

Fiscal Year 2012

               

Principal Outstanding (000’s)

    $ 15,380      $ 20,944      $ 20,944      $ 24,617      $ 24,191      $ 25,278      $ 25,000   

Stock Price

    $ 2.67      $ 2.62      $ 2.95      $ 2.95      $ 4.15      $ 4.68      $ 3.97   

Percentage Volume Condition Met

      80.5 %      94.5 %      94.9 %      28.6 %      51.0 %      75.2 %      85.9 % 

Expected Volatility

      66.9 %      73.5 %      72.5 %      72.5 %      70.0 %      71.0 %      75.0 % 

Risk Free Rate

      0.20 %      0.23 %      0.25 %      0.25 %      0.23 %      0.33 %      0.44 % 

Bond Yield

      16.5 %      16.5 %      16.5 %      16.5 %      15.0 %      16.0 %      15.0 % 

Recovery Rate

      30.0 %      30.0 %      30.0 %      30.0 %      30.0 %      30.0 %      30.0 % 

Redeemable

      yes        yes        yes        yes        yes        yes        yes   

Total Time (years)

      1.51        1.76        1.79        1.79        2.01        2.28        2.5   

Dilution Effect

      yes        yes        yes        yes        yes        yes        yes   

Fair Value as a Percent of Par

      3.4 %      4.9 %      7.1 %      3.9 %      11.4 %      17.9 %      15.1 % 

Fair Value

    $
 		 0.5
million		   
  		   $
 		 1.0
million		   
  		   $ 1.5 million      $ 0.9 million      $ 2.8 million      $ 4.5 million      $ 3.8 million   

Based on historical volume-weighted average price (“VWAP”) of the Company’s common stock as well as the historic average dollar trading volume of the Company’s common stock, the percentage volume condition is the probability that the Company will convert monthly installment payments into the Company’s common stock. The expected volatility rate was estimated based on an equal weighting of the historical volatility of the Company’s common stock and the implied volatility of the Company’s traded options. To determine the risk-free interest rate, an interpolated rate was used based on the one, two and three-year United States Treasury rates. The bond yield was estimated using comparable corporate debt and yield information. The recovery rate of the Exchanged Note was estimated by reviewing historical corporate debt that went into default. The bond is redeemable by the Company at any point after the one-year anniversary of the grant date provided certain provisions within the note. The total time is based on the actual 30-month contractual terms. It was determined that there is a dilution effect based on the Company’s ability to make payments in shares of common stock.

The Company recorded the change in the fair value of the derivative liabilities of $0.1 million gain and $0.7 million loss, to changes in fair value of derivatives and warrants in the three months ended June 30, 2013 and 2012, respectively.

On June 5, 2012, the Company entered into a Loan and Security Agreement with Hercules (see Note 10, “Debt,” for additional information regarding the Loan and Security Agreement). In conjunction with this agreement, the Company issued a warrant to purchase 139,276 shares of the Company’s common stock. The warrant is exercisable at any time after the issuance of the warrant and expires on December 5, 2017, at a price equal to $3.59 per share subject to certain price-based and other anti-dilution adjustments.

The Company accounts for the warrant as a liability due to certain provisions within the warrant, which requires that it be recorded at fair value. The warrant is subject to revaluation at each balance sheet date and any change in fair value will be recorded as changes in fair value of derivatives and warrants until the earlier of expiration or its exercise at which time the warrant liability will be reclassified to equity. Following is a summary of the key assumptions used to calculate the fair value of the warrant:

 

     June 30,  
     2013  

Fiscal Year 2013

   

Risk-free interest rate

      1.20 % 

Expected annual dividend yield

      —   % 

Expected volatility

      72.3 % 

Term (years)

      4.43   

Fair Value

    $ 0.2 million   

 

     March 31,     December 31,     September 30,     June 30,     June 5,  
     2013     2012     2012     2012     2012  

Fiscal Year 2012

           

Risk-free interest rate

      0.70 %      0.75 %      0.64 %      0.80 %      0.77 % 

Expected annual dividend yield

      —   %      —   %      —   %      —   %      —   % 

Expected volatility

      72.01 %      80.14 %      81.18 %      80.32 %      79.99 % 

Term (years)

      4.68        4.93        5.18        5.44        5.5   

Fair Value

    $ 0.2 million      $ 0.2 million      $ 0.4 million      $ 0.5 million      $ 0.4 million   

The Company prepared its estimates for the assumptions used to determine the fair value of the warrants issued in conjunction with both the Convertible Note and Term Loan utilizing the respective terms of the warrants with similar inputs, as described above.

The Company recorded a loss from the change in the fair value of the Hercules warrant of $0.1 million, during the three months ended June 30, 2012.