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Fair Value Measurements
 9 Months Ended
Sep. 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 nine months ended September 30, 2014, the Company recorded pre-tax derivative warrant income of $0.5 million and $1.6 million, respectively. The resulting derivative warrant liabilities totaled $0.6 million at September 30, 2014. In the event of a hypothetical 10% increase in the market price of our common shares on which the September 30, 2014 valuation was based, the value of the derivative liability would have increased by approximately $0.1 million. Management expects that the warrants will either be exercised or expire worthless. The fair value of the warrants at September 30, 2014 was determined by using an option pricing model with the following assumptions:

  
2013
Warrants
  
2012
Warrants
 
Expected volatility
  
90.32%
  
77.31%
 
Risk-free interest rates
  
1.43%
 
  
0.08%
 
Expected life (in years)
  
4.08
   
0.67
 

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 September 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
September 30, 2014
 
Assets
    
Money market funds
 
$
1,945
  
$
—
  
$
—
  
$
1,945
 
Liabilities
                
Warrant liability
 
$
—
  
$
—
  
$
555
  
$
555
 
 
The table below presents the activity within Level 3 of the fair value hierarchy for the nine months ended September 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
  
(1,612
)
Fair value of warrants exercised
  
(143
)
Ending balance as of September 30, 2014
 
$
555