Fair Value
Platinum-Montaur Life Sciences, LLC (Platinum) has the right to convert all or any portion of the unpaid principal or unpaid interest accrued on any draws subsequent to the second quarter of 2013 under the Platinum credit facility, under certain circumstances. Platinum’s option to convert such subsequent draws into common stock was determined to meet the definition of a liability and is included as part of the value of the related notes payable on the consolidated balance sheets. The estimated fair value of the Platinum notes payable is $6.9 million at March 31, 2015, and will continue to be measured on a recurring basis. See Note 8.
MT issued warrants to purchase 300 shares of MT Common Stock in connection with the sale of 10 shares of MT Preferred Stock in March 2015. In accordance with current accounting guidance, the warrants are required to be accounted for as a derivative liability at fair value, with subsequent changes in fair value included in earnings. The estimated fair value of the MT warrants is $63,000 at March 31, 2015, and will continue to be measured on a recurring basis. See Notes 6 and 9.
The following tables set forth, by level, financial liabilities measured at fair value on a recurring basis:
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Liabilities Measured at Fair Value on a Recurring Basis as of March 31, 2015 |
Description |
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Quoted Prices in Active Markets for Identical Liabilities (Level 1) |
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Significant Other Observable Inputs
(Level 2)
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Significant Unobservable Inputs
(Level 3)
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Total |
Platinum notes payable |
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$ |
— |
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$ |
— |
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$ |
6,888,661 |
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$ |
6,888,661 |
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Liability related to warrants |
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— |
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— |
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63,000 |
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63,000 |
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Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2014 |
Description |
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Quoted Prices in Active Markets for Identical Liabilities (Level 1) |
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Significant Other Observable Inputs (Level 2) |
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Significant Unobservable Inputs
(Level 3) |
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Total |
Platinum notes payable |
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$ |
— |
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$ |
— |
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$ |
5,615,764 |
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$ |
5,615,764 |
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a. |
Valuation Processes-Level 3 Measurements: Depending on the instrument, the Company utilizes discounted cash flows, option pricing models, or third-party valuation services to estimate the value of their financial assets and liabilities. Valuations using discounted cash flow methods and certain option pricing models such as Black-Scholes are generally conducted by the Company or by third-party valuation experts. Valuations using complex models such as a Monte Carlo simulation are generally provided to the Company by third-party valuation experts. Each reporting period, the Company provides significant unobservable inputs to the third-party valuation experts based on current internal estimates and forecasts.
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b. |
Sensitivity Analysis-Level 3 Measurements: Changes in the Company’s current internal estimates and forecasts are likely to cause material changes in the fair value of certain liabilities. The significant unobservable inputs used in the fair value measurement of the liabilities include the amount and timing of future draws expected to be taken under the Platinum Loan Agreement based on current internal forecasts, management’s estimate of the likelihood of actually making those draws as opposed to obtaining other sources of financing, and management’s estimate of the likelihood of those draws ultimately resulting in Platinum exercising their conversion option under the Platinum Loan Agreement. Significant increases (decreases) in any of the significant unobservable inputs would result in a higher (lower) fair value measurement. A change in one of the inputs would not necessarily result in a directionally similar change in the others.
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There were no Level 1 liabilities outstanding at any time during the three-month periods ended March 31, 2015 and 2014. There were no transfers in or out of our Level 2 liabilities during the three-month periods ended March 31, 2015 or 2014. The change in the estimated fair value of our Level 3 liabilities relating to unrealized gains was $1.7 million and $394,000, respectively, which were recorded as changes in fair value of financial instruments during the three-month periods ended March 31, 2015 and 2014.
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