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Fair Value Measurements | 6 Months Ended
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Jun. 30, 2014
Fair Value Measurements [Abstract] |
Fair Value Measurements |
(8) | Fair Value Measurements
Derivative Warrant Liability As disclosed in Note 7 Stockholders’ Equity of these Condensed Consolidated Financial Statements, the Company allocated part of the proceeds of public offerings in 2009, 2012 and 2013 of the Company’s common stock to warrants issued in connection with those transactions. The valuation of the warrants was determined using an option pricing model. This model uses inputs such as the underlying price of the shares issued when the warrant is exercised, volatility, risk free interest rate and expected life of the instrument. The Company has determined that the warrants should be classified as liabilities and has accounted for them as derivative instruments in accordance with ASC 815. Additionally, 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 option pricing 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. There are six inputs: closing price of Delcath 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 the Company’s historical practice of not granting dividends. The closing price of Delcath stock would fall under Level 1 of the fair-value hierarchy as it is a quoted price in an active market (ASC 820-10). The riskless rate of return is a Level 2 input as defined in ASC 820-10, while the historical volatility is a Level 3 input as defined in ASC 820. Since the lowest level input is a Level 3, Delcath determined the warrant derivative liability is most appropriately classified within Level 3 of the fair value hierarchy. For the three and six months ended June 30, 2014, the Company recorded pre-tax derivative warrant income of $1.3 million and $1.1 million, respectively. The resulting derivative warrant liabilities totaled $1.1 million at June 30, 2014. In the event of a hypothetical 10% increase in the market price of our common shares on which the June 30, 2014 valuation was based, the value of the derivative liability would have increased by $0.2 million. Management expects that the warrants will either be exercised or expire worthless. The fair value of the warrants at June 30, 2014 was determined by using an option pricing model with the following assumptions:
|  | 2013 Warrants |  |  | 2012 Warrants |
Expected volatility |  |  | 94.18% |  |  |  | 111.35% |
Risk-free interest rates |  |  | 1.34% |  |  |  | 0.11% |
Expected life (in years) |  |  | 4.33 |  |  |  | 0.92 |
Money Market Funds The Company has determined that the inputs associated with the fair value determination of its money market funds are based on quoted prices (unadjusted) and, as a result, the investments have been classified within Level 1 of the fair value hierarchy. The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2014, 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 |
(in thousands) | Level 1 |  | Level 2 |  | Level 3 |  | Balance at June 30, 2014 |
Assets |  |  |  |  |  |  |  |
Money market funds |  | $ | 1,945 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,945 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Warrant liability |  | $ | — |  |  | $ | — |  |  | $ | 1,075 |  |  | $ | 1,075 |
The table below presents the activity within Level 3 of the fair value hierarchy for the six months ended June 30, 2014:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
(in thousands) |  | Warrant Liability |
Beginning balance as of December 31, 2013 |  | $ | 2,310 |
Total change in the fair value of the liability included in earnings, including warrant expirations |  |  | (1,092 | )
Fair value of warrants exercised |  |  | (143 | )
Ending balance as of June 30, 2014 |  | $ | 1,075

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13504-108611 + Details
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