Annual report pursuant to Section 13 and 15(d)

Fair Value Hierarchy

v2.4.0.8
Fair Value Hierarchy
 12 Months Ended
Dec. 31, 2013
Fair Value Disclosures [Abstract]  
Fair Value Hierarchy
Fair Value Hierarchy

Beginning in the second quarter of 2013, 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 future draws under the Platinum credit facility, under certain circumstances. Platinum’s option to convert future 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 sheet. The estimated fair value of the Platinum notes payable is $4.3 million at December 31, 2013, and will continue to be measured on a recurring basis. See Note 10.

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 derivative liabilities with an estimated fair value of $7.7 million on the date the warrants were issued. The estimated fair value of the liability was $7.7 million as of December 31, 2013, and will continue to be measured on a recurring basis. See Note 11 and 12.

The following table sets forth, by level, financial liabilities measured at fair value on a recurring basis:
Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2013
 
 
Quoted Prices
in Active
Markets for
Identical
Assets and
Liabilities
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs (a)(b)
 
Balance as of
December 31,
Description
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
2013
Platinum notes payable
 
$
—

 
$
—

 
$
4,268,062

 
$
4,268,062

Derivative liabilities related to warrants
 
$
—

 
$
7,692,087

 
$
—

 
$
7,692,087


There were no financial assets or liabilities measured at fair value on a recurring basis as of December 31, 2012.

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 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.
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 are 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.

There were no Level 1 liabilities outstanding at any time during the years ended December 31, 2013 and 2012. A total of $484,419 of our Level 2 liabilities were reclassified to equity related to modifying certain outstanding warrants to remove the language that had previously required them to be classified as derivative liabilities during the year ended December 31, 2012. There were no transfers in or out of our Level 2 liabilities during the year ended December 31, 2013.
 
There were no Level 3 liabilities outstanding at any time during the year ended December 31, 2012.