| Fair Value Hierarchy |
Fair Value Hierarchy
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 $4.4 million at September 30, 2014, and will continue to be measured on a recurring basis. See Note 8.
In September 2013, in connection with a Securities Purchase Agreement with Crede CG III, Ltd. (Crede), we issued warrants containing certain features that, although they do not require the warrants to be settled in cash, do require the warrants to be classified as liabilities under applicable accounting rules. As a result, the Company recorded a derivative liability with an estimated fair value of $7.7 million on the date the warrants were issued. The estimated fair value of the liability remained at $7.7 million as of September 30, 2014, and will continue to be measured on a recurring basis. See Notes 1b(3), 9 and 11.
The following tables set forth, by level, financial liabilities measured at fair value on a recurring basis:
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Liabilities Measured at Fair Value on a Recurring Basis as of September 30, 2014 |
Description |
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Quoted Prices in Active Markets for Identical Liabilities (Level 1) |
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Significant Other Observable Inputs
(Level 2)
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Significant Unobservable Inputs
(Level 3)
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Balance as of
September 30, 2014
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Platinum notes payable |
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$ |
— |
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$ |
— |
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$ |
4,372,518 |
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$ |
4,372,518 |
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Derivative liabilities
related to warrants
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— |
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7,697,130 |
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— |
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7,697,130 |
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Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2013 |
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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Balance as of
December 31, 2013 |
Platinum notes payable |
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$ |
— |
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$ |
— |
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$ |
4,268,062 |
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$ |
4,268,062 |
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Derivative liabilities
related to warrants |
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— |
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7,692,087 |
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— |
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7,692,087 |
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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. Valuations using complex models such as Monte Carlo simulations 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 the 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 and nine-month periods ended September 30, 2014 and 2013. There were no transfers in or out of our Level 2 liabilities during the three-month and nine-month periods ended September 30, 2014 or 2013.
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