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Fair Value Measurements
 12 Months Ended
Dec. 31, 2011
Fair Value Measurements [Abstract]  
Fair Value Measurements
4.
Fair Value Measurements

Fair value measurements are market-based measurements, not entity-specific measurements. Therefore, fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. We follow a three-level hierarchy to prioritize the inputs used in the valuation techniques to derive fair values. The basis for fair value measurements for each level within the hierarchy is described below:

·  Level 1: Quoted prices in active markets for identical assets or liabilities.
·  Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
·  Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable in active markets.

The following table provides a summary of the recognized assets and liabilities that we measure at fair value on a recurring basis:

   
Balance as of
  
Basis of Fair Value Measurements
 
   
December 31, 2011
  
Level 1
  
Level 2
  
Level 3
 
Assets:
            
Cash equivalents
 $30,646,000  $30,646,000  $-  $- 
                  
Liabilities:
                
Put option liability
 $(1,910,000) $-  $-  $(1,910,000)
Warrant liability
 $(627,000) $-  $-  $(627,000)


   
Balance as of
  
Basis of Fair Value Measurements
 
   
December 31, 2010
  
Level 1
  
Level 2
  
Level 3
 
Assets:
            
Cash equivalents
 $39,807,000  $39,807,000  $-  $- 
                  
Liabilities:
                
Put option liability
 $(1,170,000) $-  $-  $(1,170,000)
Warrant liability
 $(4,987,000) $-  $-  $(4,987,000)

We use quoted market prices to determine the fair value of our cash equivalents, which consist of money market funds and therefore these are classified in Level 1 of the fair value hierarchy.

We value our put liability (see note 3) using an option pricing theory based simulation analysis (i.e., a Monte Carlo simulation). Assumptions are made with regard to the market value of Cytori and the estimated fair value of the Joint Venture, the expected correlation between the values of Cytori and the Joint Venture, the expected volatility of Cytori and the Joint Venture, the bankruptcy recovery rate for Cytori, the bankruptcy threshold for Cytori, the probability of a change of control event for Cytori, and the risk free interest rate. Because some of the inputs to our valuation model are either not observable quoted prices or are not derived principally from or corroborated by observable market data by correlation or other means, the put option liability is classified as Level 3 in the fair value hierarchy.

The following table summarizes the change in our Level 3 put option liability value:

   
Year ended
  
Year ended
 
Put option liability
 
December 31, 2011
  
December 31, 2010
 
        
Beginning balance
 $(1,170,000 ) $(1,140,000 )
Decrease (increase) in fair value recognized in operating expenses
  (740,000 )  (30,000 )
Ending balance
 $(1,910,000 ) $(1,170,000 )

Common stock purchase warrants issued in connection with our August 2008 private equity placement do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the option pricing model. Some of the significant inputs are observable in active markets, such as common stock market price, volatility, and risk free rate. The fair value of these warrants also incorporate our assumptions about future equity issuances and their impact to the down-round protection feature. Because some of the inputs to our valuation model are either not observable quoted prices or are not derived principally from or corroborated by observable market data by correlation or other means, the warrant liability is classified as Level 3 in the fair value hierarchy.
 
The following table summarizes the change in our Level 3 warrant liability value:

   
Year ended
  
Year ended
 
Warrant liability
 
December 31, 2011
  
December 31, 2010
 
        
Beginning balance
 $(4,987,000 ) $(6,272,000 )
Decrease (increase) in fair value recognized in operating expenses
  4,360,000   1,285,000 
Ending balance
 $(627,000 ) $(4,987,000 )

No other assets or liabilities are measured at fair value on a recurring basis, or have been measured at fair value on a non-recurring basis subsequent to initial recognition, on the accompanying consolidated balance sheet as of December 31, 2011.