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Assets and Liabilities Measured at Fair Value
 3 Months Ended
Mar. 31, 2013
Assets and Liabilities Measured at Fair Value [Abstract]  
Assets and Liabilities Measured at Fair Value
(7)
Assets and Liabilities Measured at Fair Value

Derivative Warrant Liability
The Company allocated part of the proceeds of a private placement and a public offering of the Company's common stock to warrants issued in connection with such transactions. The Company determined that these warrants should be classified as liabilities rather than equity.  The valuation of the warrants is determined using an option pricing model. This model uses inputs such as the underlying price of the common stock on the date of valuation, the exercise price of the warrant, volatility, risk free interest rate and expected life of the instrument.  The Company has determined that the warrant derivative liability should be classified within Level 3 of the fair-value hierarchy by evaluating each input for the model against the fair-value hierarchy criteria and using the lowest level of input as the basis for the fair-value classification as called for in ASC 820-10-35. There are six inputs: the closing price of the Company's common stock on the day of evaluation; the exercise price of the warrants; the remaining term of the warrants; the volatility of Delcath's stock over that term; annual rate of dividends; and the riskless rate of return. Of those inputs, the exercise price of the warrants and the remaining term are readily observable in the warrant agreements. The annual rate of dividends is based on our historical practice of not granting dividends. The closing price of the Company's common stock would fall under Level 1 of the fair-value hierarchy as it is a quoted price in an active market (ASC 820-10-35-40). The riskless rate of return is a Level 2 input as defined in ASC 820-10-35-48, while the historical volatility is a Level 3 input as defined in ASC 820-10-55-22. Since the lowest level input is a Level 3, the Company determined the warrant derivative liability is most appropriately classified within Level 3 of the fair value hierarchy.
 
In June 2009, the Company completed the sale of 0.9 million shares of its common stock and the issuance of warrants to purchase approximately 1.0 million common shares (the "2009 Warrants") pursuant to a subscription agreement with a single investor. The Company received gross proceeds of $3.0 million, with net cash proceeds after related expenses from this transaction of approximately $2.7 million. Of those proceeds, the Company allocated an estimated fair value of $2.2 million to the 2009 Warrants. As required by the 2009 Warrant agreement, the exercise price of the warrants was adjusted following the Company's December 2012 sale of common stock. At March 31, 2013, the 2009 Warrants were exercisable at $1.20 per share with approximately 1.0 million warrants outstanding.  The 2009 Warrants have a five-year term. The shares and warrants were issued pursuant to an effective registration statement on Form S-3 (333-143280 and 333-159857).
 
In May 2012, the Company completed the sale of 15.3 million shares of its common stock and the issuance of warrants to purchase 4.6 million common shares (the "2012 Warrants") pursuant to an underwriting agreement. The Company received proceeds of $21.5 million, with net cash proceeds after related expenses from this transaction of approximately $21.1 million. Of those proceeds, the Company allocated an estimated fair value of $3.4 million to the 2012 Warrants. As required by the 2012 Warrant agreement, the exercise price of the warrants was adjusted following the Company's December 2012 sale of common stock. At March 31, 2013, the 2012 Warrants were exercisable at $1.20 per share with approximately 4.4 million warrants outstanding. The 2012 Warrants have a three-year term. The shares and warrants were issued pursuant to an effective registration statement on Form S-3 (333-178819).
 
For the three months ended March 31, 2013, the Company recorded pre-tax derivative instrument expense of $2.3 million. The resulting derivative instrument liabilities totaled $5.5 million at March 31, 2013. Management expects that the warrants will either be exercised or expire worthless. The fair value of the Warrants at March 31, 2013 was determined by using an option pricing model assuming the following:
 
 
 
2012 Warrants
 
2009 Warrants
Expected volatility
 
 
83.33
%
 
 
83.43
%
Risk-free interest rates
 
 
0.27
%
 
 
0.16
%
Expected life (in years)
 
 
2.25
 
 
 
1.25
 

Money Market Funds
 
The table below presents the Company's assets and liabilities measured at fair value on a recurring basis as of March 31, 2013, aggregated by the level in the fair value hierarchy within which those measurements fall:

Assets and Liabilities Measured at Fair Value on a Recurring Basis at March 31, 2013
(in thousands)

 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Balance at
March 31,
2013
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
1,956
 
 
$
—
 
 
$
—
 
 
$
1,956
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Warrant liability
 
$
—
 
 
$
—
 
 
$
5,485
 
 
$
5,485
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(in thousands)

 
Warrant Liability
 
Beginning balance as of December 31, 2012
 
$
3,427
 
Total change in the liability included in earnings
 
 
2,272
 
Fair value of warrants exercised
 
 
(214
)
Ending balance as of March 31, 2013
 
$
5,485