Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.8
Fair Value Measurements
 9 Months Ended
Sep. 30, 2014
Fair Value Measurements [Abstract]  
Fair Value Measurements
4. Fair Value Measurements

Fair value is defined as the price that would be received from selling an asset or the amount that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies accounting standards, which establish a framework for measuring fair value and a fair value hierarchy that prioritizes the inputs used in valuation techniques. Accounting standards describe a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices in active markets for similar assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets and liabilities, therefore requiring an entity to develop its own assumptions.

The following tables set forth the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013.

Financial assets and liabilities carried at fair value as of September 30, 2014 and December 31, 2013 were classified as follows (in thousands):

 
  
Fair Value Measurements at September 30, 2014 Using
    
 
 
  
Quoted Prices in Active Markets for Identical Assets
    
Significant Other Observable Inputs
    
Significant Unobservable Inputs
    
 
 
  
(Level 1)
    
(Level 2)
    
(Level 3)
    
Total
  
Assets:
  
   
   
   
 
Money market funds (1)
 
$
34,566
    
$
-
    
$
-
    
$
34,566
  
U.S. treasury securities
    
5,000
      
-
      
-
      
5,000
  
Foreign exchange options
    
-
      
35
      
-
      
35
  
Total
  
$
39,566
    
$
35
    
$
-
    
$
39,601
  
                                 
Liabilities:
                                
Contingent warrant liabilities
  
$
-
    
$
-
    
$
33,658
    
$
33,658
  

 
  
Fair Value Measurements at December 31, 2013 Using
    
 
 
  
Quoted Prices in Active Markets for Identical Assets
    
Significant Other Observable Inputs
    
Significant Unobservable Inputs
    
 
 
  
(Level 1)
    
(Level 2)
    
(Level 3)
    
Total
  
Assets:
  
   
   
   
 
Money market funds (1)
 
$
82,759
    
$
-
    
$
-
    
$
82,759
  
U.S. treasury securities
    
19,990
      
-
      
-
      
19,990
  
Foreign exchange options
    
-
      
361
      
-
      
361
  
Total
  
$
102,749
    
$
361
    
$
-
    
$
103,110
  
                                 
Liabilities:
                                
Contingent warrant liabilities
  
$
-
    
$
-
    
$
69,869
    
$
69,869
  

(1)  Included in cash and cash equivalents
 
The fair value of the foreign exchange options at September 30, 2014 and December 31, 2013 was determined using readily observable market inputs from actively quoted markets obtained from various third-party data providers. These inputs, such as spot rate, forward rate and volatility have been derived from readily observable market data, meeting the criteria for Level 2 in the fair value hierarchy.

The fair value of the contingent warrant liabilities at September 30, 2014 and December 31, 2013 was determined using the Black-Scholes Model, which requires unobservable inputs such as the expected term of the warrants, volatility and risk-free interest rate. Changes in this liability are primarily related to fluctuations in the market price of XOMA’s common stock. These inputs are subjective and generally require significant analysis and judgment to derive.

The fair value of the contingent warrant liabilities was estimated using the following range of assumptions at September 30, 2014 and December 31, 2013:

   
September 30, 2014
    
December 31, 2013
  
Expected volatility
    
43.0% - 68.7
%
    
66.1% - 86.6
%
Risk-free interest rate
    
0.0% - 0.6
%
    
0.1% - 0.8
%
Expected term
  
0.2 - 2.4 years
    
0.9 - 3.2 years
  

The following table provides a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the nine months ended September 30, 2014 (in thousands):

Contingent warrant liabilities
  
September 30, 2014
  
Balance at December 31, 2013
  
$
69,869
  
Reclassification of contingent warrant liability to equity upon exercise of warrants
    
(2,526
)
Net decrease in fair value of contingent warrant liabilities upon revaluation
    
(33,685
)
Balance at September 30, 2014
  
$
33,658
  

The net decreases of $5.7 million and $33.7 million in the estimated fair value of the contingent warrant liabilities were recognized as gains in the revaluation of contingent warrant liabilities line of the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2014, respectively.

For the three and nine months ended September 30, 2013, the Company recognized net increases of $11.1 million and $25.7 million, respectively in the estimated fair value of the contingent warrant liabilities as losses in the revaluation of contingent warrant liabilities line of the condensed consolidated statements of comprehensive loss.