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 $5.6 million at December 31, 2014, and will continue to be measured on a recurring basis. See Note 9.
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 did not require the warrants to be settled in cash, did 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 $7.7 million on the date the warrants were issued. Crede exchanged their warrants for common stock in November 2014. See Notes 11 and 12.
The following tables set forth, by level, financial liabilities measured at fair value on a recurring basis:
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Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2014 |
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Quoted Prices
in Active
Markets for
Identical
Assets and
Liabilities
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Significant
Other
Observable
Inputs
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Significant
Unobservable
Inputs (a)(b)
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Balance as of
December 31,
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Description |
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(Level 1) |
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(Level 2) |
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(Level 3) |
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2014 |
Platinum notes payable |
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$ |
— |
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$ |
— |
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$ |
5,615,764 |
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$ |
5,615,764 |
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Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2013 |
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Quoted Prices
in Active
Markets for
Identical
Assets and
Liabilities
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Significant
Other
Observable
Inputs
|
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Significant
Unobservable
Inputs (a)(b)
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Balance as of
December 31,
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Description |
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(Level 1) |
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(Level 2) |
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(Level 3) |
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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 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 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 years ended December 31, 2014 and 2013. There were no transfers in or out of our Level 2 liabilities during the years ended December 31, 2014 and 2013. The net increase in the estimated fair value of our Level 3 liabilities was $1.3 million, which was recorded as a non-cash change in fair value of financial instruments during the year ended December 31, 2014.
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