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FAIR VALUE
 6 Months Ended
Jun. 30, 2013
FAIR VALUE  
FAIR VALUE

3.    FAIR VALUE

 

Fair Value Measurements

 

As defined in ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

 

·                  Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

 

·                  Level 2: Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

·                  Level 3: Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considering counterparty credit risk in its measurement of fair value.

 

The fair value of the Company’s financial assets and liabilities that are measured on a recurring basis were determined using the following inputs as of December 31, 2012 (in $000s):

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

5,523

 

$

6,799

 

$

—

 

$

12,322

 

Total assets

 

$

5,523

 

$

6,799

 

$

—

 

$

12,322

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Financial instrument associated with stock purchase agreement

 

$

—

 

$

—

 

$

—

 

$

—

 

Economic rights

 

—

 

—

 

1,120

 

1,120

 

Other liabilities measured at fair value:

 

 

 

 

 

 

 

 

 

Warrants liability

 

—

 

—

 

—

 

—

 

Scottish Enterprise agreement

 

—

 

—

 

20

 

20

 

Other liabilities measured at fair value

 

—

 

—

 

20

 

20

 

Total liabilities

 

$

—

 

$

—

 

$

1,140

 

$

1,140

 

 

The fair value of the Company’s financial assets and liabilities that are measured on a recurring basis were determined using the following inputs as of June 30, 2013 (in $000s):

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

31,404

 

$

800

 

$

—

 

$

32,204

 

Total assets

 

$

31,404

 

$

800

 

$

—

 

$

32,204

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Financial instrument associated with stock purchase agreement

 

$

—

 

$

—

 

$

—

 

$

—

 

Other liabilities measured at fair value:

 

 

 

 

 

 

 

 

 

Warrants liability

 

—

 

—

 

—

 

—

 

Scottish Enterprise agreement

 

—

 

—

 

20

 

20

 

Other liabilities measured at fair value

 

—

 

—

 

20

 

20

 

Total liabilities

 

$

—

 

$

—

 

$

20

 

$

20

 

 

The following table reconciles the beginning and ending balances of Level 3 inputs for the six months ended June 30, 2013 (in $000s):

 

 

 

Level 3

 

Balance as of December 31, 2012

 

$

1,140

 

Change in valuation of Economic Rights

 

(570

)

Movement of valuation of Economic Rights from Level 3 to Level 2

 

(550

)

Balance as of June 30, 2013

 

$

20

 

 

Financial Instrument Associated with Stock Purchase Agreement

 

On December 14, 2012, the Company entered into a common stock purchase agreement with Aspire under which Aspire purchased 158,982 shares of common stock for an aggregate purchase price of $1.0 million and committed to purchase up to an additional 1,455,787 shares from time to time as directed by the Company over the next two years at prices derived from the market prices on or near the date of each sale. However, such commitment is limited to an additional $19.0 million of share purchases. In consideration for entering into the purchase agreement, concurrent with the execution of the purchase agreement, the Company issued 74,548 shares of its common stock to Aspire in lieu of paying a commitment fee. The fair value of the 74,548 shares of common stock along with the direct costs incurred in the connection with the Aspire transaction have been allocated to the shares sold at inception of this agreement and the right to sell additional shares in the future based on the ratio of shares sold at inception to the total shares subject to this agreement. As a result, the Company recorded an expense of $0.4 million on its consolidated statements of operations for the year ended December 31, 2012.

 

During the first quarter of 2013, the Company sold 650,000 shares of its common stock to Aspire under the Common Stock Purchase Agreement in consideration for aggregate proceeds of $3.4 million.

 

The Company has accounted for the right to sell additional shares based on the guidance of ASC 815, Derivative Financial Instruments (“ASC 815”), which requires the instrument to be measured at fair value with changes in fair value reported in earnings. The instrument was deemed to have had minimal fair value at inception and such value is not expected to change throughout the term of the agreement as shares sold upon exercise are priced at an amount slightly lower than the fair value at the time of sale.

 

Economic Rights

 

On March 22, 2012, the Company entered into a financing agreement with certain existing institutional stockholders. Under the terms of the agreement, investors received contractual rights to receive cash equal to 10% of any future litigation settlement related to specified intellectual property, subject to a cap. In certain defined situations, the Company may have to issue either additional shares of common stock or warrants (collectively, the “Economic Rights”). The Economic Rights were accounted for as a derivative financial instrument under ASC 815 and are measured at fair value. Changes in fair value are recognized in earnings.

 

On April 3, 2013, the Company entered into a definitive agreement with Celgene Corporation (“Celgene”) to sell to Celgene four Cyclacel-owned patents related to the use of romidepsin injection, intellectual property to which the Economic Rights relates. In connection with the agreement, Celgene has made to Cyclacel a one-time payment of $5.5 million and the litigation was dismissed. As a result, the holders of the Economic Rights were paid approximately $0.6 million in April 2013 in full satisfaction of the Company’s obligation under Economic Rights. The fair value of this liability was approximately $1.1 million as of December 31, 2012. The $0.6 million decrease in the fair value of the Economic Rights during the six months ended June 30, 2013 was recognized as a gain in the consolidated statements of operations.

 

Up to December 31, 2012, the fair value of the Economic Rights was estimated using a decision-tree analysis method. This was an income-based method that incorporates the expected benefits, costs and probabilities of contingent outcomes under varying scenarios. Each scenario within the decision-tree was discounted to the present value using the Company’s credit adjusted risk-free rate and ascribed a weighted probability to determining the fair value. As of March 31, 2013, the Company had sufficient information available to estimate the fair value of the economic rights based on the actual amount paid under the Economic Rights agreement, which was 10% of the $5.5 million one-time payment from Celgene. The Company’s obligation under the Economic Rights was satisfied in April 2013.

 

Other Liabilities Measured at Fair Value

 

Warrants Liability

 

The Company issued warrants to purchase shares of common stock under the registered direct financing completed in February 2007. These warrants are being accounted for as a liability in accordance with ASC 815. At the date of the transaction, the fair value of the warrants of $6.8 million was determined utilizing the Black-Scholes option pricing model utilizing the following assumptions: risk free interest rate — 4.68%, expected volatility — 85%, expected dividend yield — 0%, and a remaining contractual life of 7 years. As of December 31, 2012 and June 30, 2013, the fair value of the warrants was approximately zero based on the high exercise price of the warrants relative to the Company’s stock price at December 31, 2012 and June 30, 2013, respectively, and the remaining term of less than 1 year. The fair value of the warrant is remeasured each reporting period, with a gain or loss recognized in the consolidated statement of operations. Such gains or losses will continue to be reported until the warrants are exercised or expired.

 

The Company recognized the change in the value of warrants as a gain on the consolidated statement of operations of approximately $8,000 and $50,000 for the three and six months ended June 30, 2012. There was no change in the value of warrants for the three and six months ended June 30, 2013.

 

Scottish Enterprise Agreement

 

On June 22, 2009, the Company amended the Agreement with Scottish Enterprise (“SE”) (the “Amendment”), in order to allow the Company to implement a reduction of the Company’s research operations located in Scotland in exchange for the parties’ agreement to modify the payment terms of the Agreement in the principal amount of £5 million (approximately $8.0 million at December 31, 2009), which SE had previously entered into with the Company. The Agreement provided for repayment of up to £5 million in the event the Company significantly reduced its Scottish research operations. Pursuant to the terms of the Amendment, in association with Cyclacel’s material reduction in staff at its Scottish research facility, the parties agreed to a modified payment of £1 million (approximately $1.7 million at June 22, 2009) payable in two equal tranches. On July 1, 2009, the first installment of £0.5 million (approximately $0.8 million) was paid and the remaining amount of £0.5 million (approximately $0.8 million) was paid on January 6, 2010.

 

In addition, should a further reduction below current minimum staff levels be effectuated before July 2014 without SE’s prior consent, the Company may be obligated to pay up to £4 million to SE, which will be calculated as a maximum of £4 million (approximately $6.5 million at December 31, 2012 and $6.1 million at June 30, 2013) less the market value of the shares held by SE at the time staffing levels in Scotland fall below the prescribed minimum levels. If the Company were to have reduced staffing levels below the prescribed levels, the amount potentially payable to SE would have been approximately £3.8 million (approximately $6.1 million) and approximately £3.8 million (approximately $5.9 million) at December 31, 2012 and June 30, 2013, respectively.

 

This arrangement is accounted for as a liability under ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”), and is measured at fair value. Changes in fair value are recognized in earnings. Due to the nature of the associated contingency and the likelihood of occurrence, the Company has concluded the fair value of this liability was approximately $20,000 at December 31, 2012 and June 30, 2013, respectively. The most significant inputs in estimating the fair value of this liability are the probabilities that staffing levels fall below the prescribed minimum and that the Company is unable or unwilling to replace such employees within the prescribed time period. At both December 31, 2012 and June 30, 2013, the Company used a scenario analysis model to arrive at the fair value of the Scottish Enterprise Agreement and assumed a 30% probability of falling below a minimum staffing level and a 1% probability that the occurrence of such an event would not be cured within the prescribed time period. At each reporting period, the inputs used to determine the fair value of the liability will be evaluated to determine whether adjustments are appropriate. Changes in the value of this liability are recorded in the consolidated statement of operations.