Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.6
Fair Value Measurements
 6 Months Ended
Jun. 30, 2012
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 paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies ASC 820, which establishes a framework for measuring fair value and a fair value hierarchy that prioritizes the inputs used in valuation techniques. ASC 820 describes 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.

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 June 30, 2012 and December 31, 2011.

Financial assets and liabilities carried at fair value as of June 30, 2012 and December 31, 2011 were classified as follows (in thousands):
 
 
Fair Value Measurements at June 30, 2012 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)
 
$
30,036
 
 
$
-
 
 
$
-
 
 
$
30,036
 
U.S. treasury securities (1)
 
 
26,992
 
 
 
-
 
 
 
-
 
 
 
26,992
 
Foreign exchange options
 
 
-
 
 
 
591
 
 
 
-
 
 
 
591
 
Total
 
$
57,028
 
 
$
591
 
 
$
-
 
 
$
57,619
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
             Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Contingent warrant liabilities
 
$
-
 
 
$
-
 
 
$
23,293
 
 
$
23,293
 
 
 
Fair Value Measurements at December 31, 2011 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)
 
$
27,222
 
 
$
-
 
 
$
-
 
 
$
27,222
 
Foreign exchange options
 
 
-
 
 
 
1,202
 
 
 
-
 
 
 
1,202
 
Total
 
$
27,222
 
 
$
1,202
 
 
$
-
 
 
$
28,424
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
             Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Contingent warrant liabilities
 
$
-
 
 
$
-
 
 
$
379
 
 
$
379
 
                                                                                                                                          
                        (1) 
Included in cash and cash equivalents                                                                                                                                            
 
The fair value of the foreign exchange options at June 30, 2012 and December 31, 2011 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 was determined at June 30, 2012 and December 31, 2011 using the Black-Scholes Model, which requires inputs such as the expected term of the warrants, volatility and risk-free interest rate. These inputs are subjective and generally require significant analysis and judgment to develop. At March 31, 2012, the Company changed its expected volatility assumption in the Black-Scholes Model from an estimate of volatility based on historical stock price volatility observed on XOMA's underlying stock to a volatility estimate based on the volatility implied from warrants issued by XOMA in recent private placement transactions. A market-based volatility rate was determined to be a more precise indicator for the fair value calculation of the Company's warrants.

The fair value of the contingent warrant liabilities was estimated using the following range of assumptions at June 30, 2012 and December 31, 2011:
 
June 30,
2012
 
 
December 31,
2011
 
Expected volatility
 
 
40
 %
 
 
102.1% - 103.2
 %
Risk-free interest rate
 
 
0.3% - 0.7
 %
 
 
0.4
 %
Expected term
 
2.4 - 4.7 years
 
 
2.9 - 3.1 years
 


The following table provides a summary of changes in the fair value of the Company's Level 3 financial liabilities for the six months ended June 30, 2012 (in thousands):

Contingent warrant liabilities
 
June 30, 2012
 
Balance at December 31, 2011
 
$
379
 
Initial fair value of warrants issued in March 2012
 
 
6,390
 
Reclassification of contingent warrant liability to equity upon exercise of warrants
 
 
(14
 )
Net increase in fair value of contingent warrant liabilities upon revaluation
 
 
16,538
 
Balance at June 30, 2012
 
$
23,293
 

For the three and six months ended June 30, 2012, the Company recognized net increases of $2.2 million and $16.5 million, respectively, in the estimated fair value of the contingent warrant liabilities resulting in recognized losses in the revaluation of contingent warrant liabilities line of the condensed consolidated statements of comprehensive loss.

For the three and six months ended June 30, 2011, the Company recognized net decreases of $0.5 million and $2.9 million, respectively, in the estimated fair value of the contingent warrant liabilities resulting in recognized gains in the revaluation of contingent warrant liabilities line of the condensed consolidated statements of comprehensive loss.