9. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE

12 Months Ended

Jul. 31, 2012

Assets And Liabilities Measured At Fair Value

ASSETS AND LIABILITIES MEASURED AT FAIR VALUE

Financial instruments which are measured at estimated fair value on a recurring basis in the consolidated financial statements include marketable securities, a embedded share conversion feature and non-compensatory warrants. The fair value of the marketable securities was determined by the market price as quoted on the OTC. The fair value of the share conversion feature and warrants was determined by an independent expert valuation specialist using the Black-Scholes Option Pricing Model.

Assets and liabilities measured at estimated fair value and their corresponding fair value hierarchy is summarized as follows:

July 31, 2012

Fair Value Measurements at Reporting Date Using

Quoted Prices in

Significant

Active Markets for

Unobservable

Identical Assets

Inputs

Total

(Level 1)

(Level 3)

Fair Value

Marketable securities

–

Total assets

–

Share conversion feature

–

Warrants

–

262,800

Total liabilities

–

262,800

July 31, 2011

Fair Value Measurements at Reporting Date Using

	Quoted Prices in		Significant
	Active Markets for		Unobservable
	Identical Assets		Inputs		Total
	(Level 1)		(Level 3)		Fair Value
Marketable securities	$	36,800	$	–	$	36,800
Total assets	$	36,800	$	–	$	36,800


Share conversion feature	$	–	$	–	$	–
Warrants		–		299,600		299,600
Total liabilities	$	–	$	299,600	$	299,600

The Company has categorized its assets and liabilities measured at fair value into the three-level fair value hierarchy, as defined in Note 2, based upon the priority of inputs to respective valuation techniques. Assets included in the level 1 of the fair value hierarchy include marketable securities which are fair valued on a recurring basis using quoted market prices. Liabilities included within level 3 of the fair value hierarchy presented in the preceding table include a share conversion feature and noncompensatory warrants. The valuation methodology for liabilities within level 3 uses a combination of observable and unobservable inputs in calculating fair value.

The Company recorded an unrealized loss of $36 thousand and $443 thousand on its marketable securities for the years ended July 31, 2012 and 2011. These losses have been included in the Statement of Operations caption “Loss on change in fair value of marketable securities.”

The changes in level 3 liabilities measured at fair value on a recurring basis during the years ended July 31, 2012 and 2011 are summarized as follows:

Fair Value Measurements

Using Significant Unobservable Inputs

(Level 3)

Warrants

	Balance Beginning of Period		Reclassification of Liability Warrants to Equity		Issuance		(Gain) Loss Recognized in Earnings from Change in Fair Value			Balance End of Period
For the Year Ended July 31, 2011
Share conversion feature	$	–	$	–	$	–	$	–		$	–
Warrants	$	299,600	$	–	$	–	$	(36,800	)	$	262,800

	Balance Beginning of Period		Reclassification of Liability Warrants to Equity		Issuance		(Gain) Loss Recognized in Earnings from Change in Fair Value			Balance End of Period
For the Year Ended July 31, 2011
Share conversion feature	$	462,013	$	–	$	–	$	(462,013	)	$	–
Warrants	$	6,370,000	$	–	$	24,000	$	(6,094,400	)	$	299,600

For the year ended July 31, 2011, an unrealized gain of approximately $462 thousand is included in earnings within the Statement of Operations caption “Gain on change in fair value of share conversion feature.”

On May 8, 2012, the Company and Infusion entered into a Stock Purchase Agreement (the “Infusion Purchase Agreement”) whereby the Company purchased 15.2 million shares of the Company’s common stock from Infusion. Pursuant to the Infusion Purchase Agreement, the Company paid to Infusion a purchase price equal to $100 thousand.

Furthermore, in connection with the Infusion Purchase Agreement, Infusion forgave and surrendered for cancellation that certain promissory note in principal amount of $2,000,000 (the “Note”) along with accrued interest of $818 thousand and unrealized gain on the conversion feature of $593 thousand for the year ended July 31, 2012, were written off to gain from extinguishment of debt. The Note was issued by the Company to Infusion in connection with that certain License and Marketing Agreement, dated October 9, 2009, by and between the Company and Infusion. Lastly, Infusion terminated and released any and all of Infusion’s security interest arising out of that certain Security Agreement, dated December 2, 2010, by and between the Company and Infusion.

For the years ended July 31, 2012 and 2011, an unrealized gain of $37 thousand and an unrealized gain of $6.1 million, respectively, are included in earnings within the Statement of Operations caption “Gain (loss) on change in fair value of warrants.” The unrealized gains for the year ended July 31, 2011 from the change in the fair value of warrants is a result of a decrease in the Company’s share price from $0.24 to $0.04 which is used as an input in the share price used in valuing the warrants.

Fair Value of Financial Instruments

The fair values of accounts receivable, accounts payable and accrued expenses approximate their carrying values due to the short term nature of these instruments. The fair values of notes payable approximate their carrying amounts as interest rates on these obligations are representative of estimated market rates available to the Company on similar instruments.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

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+ Details

Zurvita Holdings, Inc. 10-K/A