• Filing Date: 2012-09-13
  • Form Type: 10-Q
  • Description: Quarterly report
v2.4.0.6
Derivative Instruments and Fair Value Measurement
3 Months Ended
Jul. 31, 2012
Derivative Instruments and Fair Value Measurement [Text Block]
Note 4

Derivative Instruments and Fair Value Measurement

 

 

 

Forward Contracts

 

 

 

In the normal course of business, the Company is exposed to fluctuations in interest rates and the exchange rates associated with foreign currencies. The Company’s primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk.

 

 

 

The Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. The Company’s foreign currency risk management program includes foreign currency derivatives with cash flow hedge accounting designation that utilizes foreign currency forward contracts to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S. dollar-denominated cash flows. These instruments generally have a maturity of less than one year. For these derivatives, the Company reports the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss) in stockholders’ equity and reclassifies it into earnings in the same period in which the hedged transaction affects earnings, and within the same line item on the consolidated statements of operations as the impact of the hedged transaction. There can be no assurance that the Company’s hedging program will not result in a negative impact on the Company’s earnings and earnings per share. The Company did not enter any foreign currency derivatives designated as cash flow hedges in the quarter ended July 31, 2012.

 

 

 

The Company also routinely enter into foreign currency forward contracts, not designated as hedging instruments, to protect us from fluctuations in exchange rates. As of July 31, 2012, the Company had $2,000,000 of notional value foreign currency forward contracts maturing through February 25, 2013. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts. The fair value marked to market gain (loss) of forward contracts as of July 31, 2012 is $57,700.

 

 

 

Derivative Warrant Liability

 

 

 

Following the guidance in ASC 815-40-15, the Company recorded the warrants issued on June 14, 2011 as derivative liabilities due to their exercise price being denominated in a currency other than the Company’s U.S. Dollar functional currency. The fair value of the derivative liability is revalued at the end of each reporting period, and the change in fair value of the derivative liability is recorded as a gain or loss in the Company’s consolidated statements of operations.

 

  The warrant liability is accounted for at its fair value as follows:

      Fair Value  
  Fair value of warrant liability, at issuance $   1,311,141  
  Change in fair value of warrant liability for the period   715,803  
  Fair value of warrant liability at April 30, 2012   2,026,944  
  Change in fair value of warrant liability for the period   (727,429 )
  Warrants exercised during the period   (54,639 )
  Fair value of warrant liability at July 31, 2012 $   1,244,876  

The Company used the Binomial method to estimate the fair value of the June 14, 2011 warrants with the following assumptions:

    As at   As at the date of issuance
    July 31, 2012   June 14, 2011
  Risk-free interest rate 0.17%   1.60%
  Expected volatility 70%   70%
  Expected term 0.87 years to 0.37 years   1.5 years to 2 years
  Dividend yield 0%   0%

The warrant liability is revalued at the end of each reporting period with the change in the fair value of the derivative liability recorded as a gain or loss in the Company’s consolidated statement of operations. The fair value of the warrants will continue to be classified as a liability until such time as they are exercised, expire or there is an amendment to the respective agreements that renders these financial instruments to be no longer classified as a liability.

At the time of the June 14, 2011 private placement offering, the Company allocated the proceeds to each of the common shares and the one-half of one common share purchase warrants. Because the warrants were classified as a liability and are subsequently marked to fair value through earnings in each reporting period, the Company allocated the proceeds of $1,311,141 to the warrants at inception with the residual proceeds of $3,773,946 allocated to common stock.

During the three months ended July 31, 2010, the Company entered into a warrant agreement with a customer whereby the Company issued 1,000,000 stock purchase warrants as part of a contract that the Company entered into with the customer. The fair value of 320,000 stock purchase warrants that was charged to revenue during the three months ended July 31, 2011 was $136,934. The warrants expired unexercised on July 30, 2012.

Fair Value Measurement

When available, the Company uses quoted market prices to determine fair value, and classifies such measurements within Level 1. In some cases where market prices are not available, the Company makes use of observable market–based inputs to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market–based parameters such as interest rates, yield curves and currency rates. These measurements are classified within Level 3.

Fair value measurements are classified according to the lowest level input or value–driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.

 

 

Fair value measurement includes the consideration of non–performance risk. Non–performance risk refers to the risk that an obligation (either by a counterparty or us) will not be fulfilled. For financial assets traded in an active market (Level 1), the non–performance risk is included in the market price. For certain other financial assets and liabilities (Level 2 and 3), our fair value calculations have been adjusted accordingly.

   
  The fair value of the derivative instrument is primarily based on standard industry accepted binomial model.

  As at July 31, 2012     Fair Value     Level 1     Level 2     Level 3  
  Derivate Warrant Liability   $   (1,244,876 ) $ -   $   -   $   (1,244,876 )
  Forward exchange contracts     57,700   $ 57,700     -     -  
  Total Liabilities   $   (1,187,176 ) $ 57,700   $   -   $   (1244,876 )

  As at April 30, 2012     Fair Value     Level 1     Level 2     Level 3  
  Derivative Warrant Liability   $   (2,026,944 ) $   -   $   -   $   (2,026,944 )
  Forward exchange contracts     -     -     -     -  
  Total Liabilities   $   (2,026,944 ) $   -   $   -   $   (2,026,944 )