Annual report pursuant to Section 13 and 15(d)

Note 9 - Fair Value

v3.7.0.1
Note 9 - Fair Value
12 Months Ended
Mar. 25, 2017
Notes to Financial Statements  
Fair Value Disclosures [Text Block]
9
Fair Value
 
Pursuant to the accounting guidance for fair value measurement and its subsequent updates, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The accounting guidance establishes a hierarchy for inputs used in measuring fair value that minimizes the use of unobservable inputs by requiring the use of observable market data when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on active market data. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.
 
The fair value hierarchy is broken down into the
three
input levels summarized below:
 
 
Level
1
—Valuations are based on quoted prices in active markets for identical assets or liabilities and readily accessible by us at the reporting date. Examples of assets and liabilities utilizing Level
1
inputs are certain money market funds, U.S. Treasuries and trading securities with quoted prices on active markets.
 
 
Level
2
—Valuations based on inputs other than the quoted prices in active markets that are observable either directly or indirectly in active markets. Examples of assets and liabilities utilizing Level
2
inputs are U.S. government agency bonds, corporate bonds, commercial paper, certificates of deposit and over-the- counter derivatives.
 
 
Level
3
—Valuations based on unobservable inputs in which there are little or
no
market data, which require us to develop our own assumptions.
 
The carrying amounts of the Company’s cash and cash-equivalents and line of credit approximate their fair values at each balance sheet date due to the short-term maturity of these financial instruments, and generally result in inputs categorized as Level
1
within the fair value hierarchy. The fair values of term debt are based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company, and generally result in inputs categorized as Level
3
within the fair value hierarchy.
 
At
March 25, 2017
and
March 26, 2016,
the carrying amounts of the Company’s term debt was
zero
and
$379,000,
respectively. The estimated fair value totaled
$384,000
at
March 26, 2016,
the fair value at
March 25, 2017
was
zero
as the loan was paid in full in fiscal
2017.
The fair value at
March 26, 2016
was calculated using a discounted cash flow model and utilized a
20%
discount rate. The rate was commensurate with market rates given the remaining term, principal repayment schedule, the Company’s creditworthiness and outstanding loan balance.
 
The Company’s derivative warrant liability is measured at fair value on a recurring basis and is categorized as Level
3
in the fair value hierarchy. The derivative warrant liability is valued using a Monte Carlo simulation model, which used the following assumptions as of
March 25, 2017: (
i) the remaining expected life of
2.0
years, (ii) the Company’s historical volatility rate of
101.1%,
(iii) risk-free interest rate of
1.26%,
and (iv) a discount rate of
twenty four
percent.
 
The aforementioned derivative warrant liability is the Company’s only asset and liability recognized and measured at fair value on a recurring or non-recurring basis and was follows:
 
Fair Value Measurements as of Mar. 25, 2017
(In Thousands):
                 
 
 
Level
1
   
Level
2
   
Level
3
 
Warrant Liability
  $
     
    $
222
 
Total
  $
     
    $
222
 
 
Fair Value Measurements as of March 26, 2016
(In Thousands):
                 
 
 
Level 1
   
Level 2
   
Level 3
 
Warrant Liability
  $
     
    $
353
 
Total
  $
    $
    $
353
 
 
There were
no
transfers between Level
1,
Level
2
or Level
3
for the fiscal years ended
March 25, 2017
and
March 26, 2016.
 
The table below summarizes changes in gains and losses recorded in earnings for Level
3
assets and liabilities that are still held at
March 25, 2017:
 
   
Years Ended
 
(In thousands)
 
Mar. 25,
2017
 
 
Mar. 26,
2016
 
Warrant liability at beginning of year
  $
353
    $
341
 
Gains on adjustment of warrant liability to fair value
   
(136
)    
 
Losses on adjustment of warrant liability to fair value
   
5
     
12
 
Warrant liability at end of period
  $
222
    $
353
 
 
There were
no
assets measured at fair value on a recurring basis and there were
no
assets or liabilities measured on a non- recurring basis at
March 25, 2017
and
March 26, 2016.
 
The following table presents quantitative information about recurring Level
3
fair value measurements at
March 25, 2017
and
March 26, 2016:
 
March 25, 2017
 
Valuation Technique(s)
 
Unobservable Input
 
Warrant liability
 
Monte Carlo
 
Discount rate
24%
           
March 26, 2016
 
Valuation Techniques(s)
 
Unobservable Input
 
Warrant liability
 
Monte Carlo
 
Discount rate
20%
 
The discount rate of
twenty four
percent is management’s estimate of the cost of capital given the Company’s credit worthiness. A significant increase in the discount rate would significantly decrease the fair value, but the magnitude of this decrease would be less significant in a scenario where the Company’s stock price is significantly higher than the exercise price since the holder’s option to take a cash payment at maturity represents a smaller component of the total fair value when the Company’s stock price is higher.
 
The Monte Carlo simulation model simulated the Company’s stock price through the maturity date of
March 31, 2019.
At the end of the simulated period, the value of the warrant was determined based on the greater of (
1
) the net share settlement value, (
2
) the net exercise value, or (
3
) the fixed cash put value.