Note 6 - Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2016

Note

–

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

●

Level 1

– Quoted prices in active markets for identical assets and liabilities.


	●	Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

●

Level 3

– Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Fair Value on a Recurring Basis

The tables below categorize assets and liabilities measured at fair value on a recurring basis for the periods presented:

	Fair Value		Fair value measurement using
	September 30, 2016		Level 1		Level 2		Level 3

Assets:
Cash and cash equivalents	$	12,383	$	12,383	$	–	$	–
Certificate of deposit		225		225		–		–
Total assets	$	12,608	$	12,608	$	–	$	–

	Fair Value		Fair value measurement using
	December 31, 2015		Level 1		Level 2		Level 3

Assets:
Cash and cash equivalents	$	38,722	$	38,722	$	–	$	–
Certificate of deposit		225		225		–		–
Total a ssets	$	38,947	$	38,947	$	–	$	–

Liabilities:
Common stock warrant liability	$	223	$	–	$	–	$	223

The tables below summarize the activity of Level 3 inputs measured on a recurring basis for the

nine months ended September 30, 2016 and 2015:

(in thousands)	Fair Value Measurements of Common Stock Warrants Using Significant Unobservable Inputs (Level 3)

Balance at December 31, 2015	$	223
Change in fair value of common stock warrant liability		(223	)
Balance at September 30, 2016	$	–

(in thousands)	Fair Value Measurements of Common Stock Warrants Using Significant Unobservable Inputs (Level 3)

Balance at December 31, 2014	$	1,258
Exercise of warrants		(184	)
Change in fair value of common stock warrant liability		(577	)
Balance at September 30, 2015	$	497

The significant unobservable inputs for a trinomial model used in the fair value measurement of the common stock warrants measured on a recurring basis are the historical volatility of our common stock market price, expected term of the applicable warrants, and the risk-free interest rate based on the U.S. Treasury yield curve in effect at the measurement date. In addition to the significant unobservable inputs noted above, certain fair value measurements also take into account an assumption of the likelihood and timing of the occurrence of an event that would result in an adjustment to the exercise price in accordance with the anti-dilutive pricing provisions in certain of the warrants. Any significant increases or decreases in the unobservable inputs, with the exception of the risk-free interest rate, may result in significantly higher or lower fair value measurements.

The change for the nine months ended September 30, 2016 represents the write-off of the derivative liability upon expiration of the underlying warrants in February 2016.

Significant Unobservable Input Assumptions of Level 3 Valuations	September 30, 2016		September 30, 2015

Historical volatility		–		99	%
Expected term (in years)		–		0.4
Risk-free interest rate		–		0.05	%

Fair Value of Long-Term Debt

September 30, 2016 and December 31, 2015, the estimated fair value of the Deerfield Loan (

see,

Note 7, “Deerfield Loan”) approximated the carrying value of $25.0 million. The estimated fair value of the Deerfield Loan is based on discounting the future contractual cash flows to the present value at the valuation date. This analysis utilizes certain Level 3 unobservable inputs, including current cost of capital. Considerable judgment is required to interpret market data and to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts we could realize in a current market exchange. The use of alternative market assumptions and estimation methodologies could have a material effect on these estimates of fair value.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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