Cascadian Therapeutics, Inc. - 10-K filing on 2015-03-10

Note 3 - Fair Value Measurements

12 Months Ended

Dec. 31, 2014

3. FAIR VALUE MEASUREMENTS

The Company measures certain financial assets and liabilities at fair value in accordance with a hierarchy which requires an entity to maximize the use of observable inputs which reflect market data obtained from independent sources and minimize the use of unobservable inputs. There are three levels of inputs that may be used to measure fair value:

•	Level 1 — quoted prices in active markets for identical assets or liabilities;

•

Level 2 — observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

•	Level 3 — unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s financial assets and liabilities measured at fair value on a recurring basis consisted of the following as of December 31, 2014 and 2013:

	December 31, 2014								December 31, 2013
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial Assets:
Money market funds	$	4,103	$	—	$	—	$	4,103	$	6,058	$	—	$	—	$	6,058
Debt securities of U.S. government agencies		—		43,844		—		43,844		—		49,890		—		49,890
Corporate bonds		—		9,416		—		9,416		—		13,393		—		13,393
	$	4,103	$	53,260	$	—	$	57,363	$	6,058	$	63,283	$	—	$	69,341
Financial Liability:
Restricted Share Units	$	310	$	—	$	—	$	310	$	337	$	—	$	—	$	337
Warrants		—		—		128		128		—		—		924		924

If quoted market prices in active markets for identical assets are not available to determine fair value, then the Company uses quoted prices of similar instruments and other significant inputs derived from observable market data obtained from third-party data providers. These investments are included in Level 2 and consist of debt securities of U.S government agencies and corporate bonds.

There were no transfers between Level 1 and Level 2 during 2014.

The Company classifies its warrant liability within Level 3 because the warrant liability is valued using valuation models with significant unobservable inputs. The estimated fair value of warrants accounted for as liabilities was determined on the issuance date and are subsequently remeasured to fair value at each reporting date. The change in fair value of the warrants is recorded in the statement of operations as other income or other expense by using the Black-Scholes option-pricing model with the following inputs:

	As of December 31, 2014
	September 2010 Warrants
Exercise price	$	4.24
Market value of stock at end of period	$	1.90
Expected dividend rate		0.0	%
Expected volatility		60.3	%
Risk-free interest rate		0.2	%
Expected life (in years)		0.78

	As of December 31, 2013
	May 2009 Warrants			September 2010 Warrants
Exercise price	$	3.74		$	4.24
Market value of stock at end of period	$	1.76		$	1.76
Expected dividend rate		0.0	%		0.0	%
Expected volatility		45.3	%		77.4	%
Risk-free interest rate		0.1	%		0.3	%
Expected life (in years)		0.40			1.78

The table below shows the reconciliation of warrant liability measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3):

	Years Ended December 31,
	2014			2013
	(In thousands)
Balance at beginning of period	$	924		$	3,251
Change in fair value of warrant liability included in
Other expense (income)		(796	)		(2,327	)
Balance at the end of period	$	128		$	924

Expected volatility is an unobservable input that is inter-related with the market value or price of the Company’s stock, since the calculation of volatility is based on the Company’s historical closing prices. If volatility were to increase by 10%, the value of the warrant liability would increase by approximately $64,000 or if volatility were to decrease by 10%, the value of the warrant liability would decrease by approximately $32,000.