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FAIR VALUE
 6 Months Ended
Jun. 30, 2014
Fair Value  
FAIR VALUE
3. FAIR VALUE

 

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, 2013 (in $000s):

 

    Level 1     Level 2     Level 3     Total  
                         
ASSETS                                
Cash equivalents   $ 26,476     $ —     $ —     $ 26,476  
Financial instrument associated with stock Purchase Agreement     —       397       —       397  
Total assets   $ 26,476     $ 397     $ —     $ 26,873  
                                 
LIABILITIES                                
Other liabilities measured at fair value:                                
Scottish Enterprise agreement     —       —       20       20  
Other liabilities measured at fair value     —       —       20       20  
Total liabilities   $ —     $ —     $ 20     $ 20  

 

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, 2014 (in $000s):

 

    Level 1     Level 2     Level 3     Total  
ASSETS                                
Cash equivalents   $ 22,677     $ —     $ —     $ 22,677  
Financial instrument associated with stock purchase agreement     —       286       —       286  
Total assets   $ 22,677     $ 286     $ —     $ 22,963  

 

The following table reconciles the beginning and ending balances of Level 3 inputs for the six months ended June 30, 2014 (in $000s):

 

    Level 3  
Balance as of December 31, 2013     20  
Change in valuation of Scottish Enterprise agreement     (20 )
Balance as of June 30, 2014     —  

 

Financial Instrument Associated with Stock Purchase Agreement

 

On November 14, 2013, the Company entered into a common stock purchase agreement with Aspire Capital Fund, LLC (“Aspire”) (the “Purchase Agreement”) under which Aspire purchased 511,509 shares of common stock for an aggregate purchase price of $2.0 million and committed to purchase up to an additional 3,042,038 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 (see Note 8 – Stockholders’ Equity).

 

The Company has accounted for the right to sell additional shares under the Purchase Agreement 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 had a fair value of $0.5 million at the date of the transaction and a fair value of $0.4 million and $0.3 million as of December 31, 2013 and June 30, 2014, respectively. The $0.1 million decrease in the fair value of the Purchase Agreement during the six months ended June 30, 2014 was recognized as a loss in the consolidated statements of operations. The primary inputs used to determine fair value are the price of the Company’s common stock, the remaining term, and aggregate share purchases on the measurement date. The fair value of the Purchase Agreement is remeasured each reporting period and gains or losses will continue to be reported until the agreement is exhausted or expired.

 

Liabilities Measured at Fair Value

 

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 1, 2014 without SE’s prior consent, the Company would have been 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, 2013 and $6.8 million at June 30, 2014) 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 $6.3 million) and approximately £3.9 million (approximately $6.6 million) at December 31, 2013 and June 30, 2014, 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 concluded the fair value of this liability was approximately $20,000 and $0 at December 31, 2013 and June 30, 2014, 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 December 31, 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 June 30, 2014, the Company determined that the probability of falling below a minimum staffing level was 0% given the proximity to the expiration of the agreement on July 1, 2014 and staffing levels had not fallen below the minimum level as of that date. Changes in the value of this liability have been recorded in the consolidated statement of operations.