|
January
3, 2011
|
Jim B.
Rosenberg
Senior
Assistant Chief Accountant
Division
of Corporation Finance
Securities
and Exchange Commission
100 F
Street, NE
Washington,
DC 20549
|
Re:
|
Hemispherx
Biopharma, Inc.
|
||
|
Form
10-K for the year ended December 31, 2009
|
|||
|
Form
10-K/A for the year ended December 31, 2009
|
|||
|
(SEC filing No. 1-13441)
|
Dear Mr.
Rosenberg:
We hereby
respond to the comments contained in your December 29, 2010 comment letter (the
“Comment Letter”) related to the above referenced Form 10-K and Form 10-K/A of
Hemispherx Biopharma, Inc. (the "Company").Draft revised disclosure for
inclusion in the next amended Form 10-K (the “10-K/A-2”) is attached hereto as
Appendix A. Once the comments below are resolved, we will file the 10-K/A-2
reflecting the revisions in our responses below as well as the revisions
contained in draft text attached to our prior responses.
Appendix A to your December
23, 2010 response
Critical Accounting
Policies
Comment
1: We note you identify warrant liability as a
critical policy in your proposed revised disclosure to be included in an
amendment to your December 31, 2010 Form 10-K. The intent of
identifying critical policies is to identify those that require material
assumptions and estimates which if different assumptions and estimates were made
would materially affect the financial statements. Please revise your
proposed disclosure to explain how this policy requires significant estimates
and quantify the effect on the financial statements of changes in estimates in
each year presented and the reasons for those changes. Please also
disclose why you selected the volatility measure that you
selected. If the volatility assumption is based on an average method,
please disclose why you chose not to rely exclusively on your historical
volatility. Please also disclose the peer group of companies used to
determine the average volatility assumption, the weight given to companies in
the peer group in computing the average volatility assumption and whether the
companies in the peer group of companies are similar to you in terms of size,
product and market capitalization.
|
Corporate
Headquarters
|
||
|
One
Penn Center, 1617 JFK Blvd., Philadelphia, PA19103
|
t:
215-988-0080
|
f:
215-988-1739
|
Jim B.
Rosenberg
January
3, 2011
Page -
2
Response:
Please
see the revised disclosure in the “Critical Accounting Policies” subsection
(A-1). As noted therein, we exclusively rely upon historical volatility so there
is no need for disclosure of a calculation that utilized peer group companies.
In addition, while we note that the computation is redone on each valuation
date, the method of computing each assumption is described, thereby providing an
understanding of how the estimates resulting from such assumptions change from
computation date to computation date and specific disclosure in this section as
to the quantitative changes in the years presented in the 10-K/A does not
provide any additional insight to the reader.
(17) Fair
Value
Comment
2: Please revise your disclosure regarding the
warrant liability classified as level 3 to include a description of the inputs
and valuation technique(s) used to measure fair value and a discussion of
changes in valuation techniques and related inputs, if any, during the period as
well as a reconciliation of the beginning and ending balances, separately
presenting changes during the period. Refer to ASC
820-10-50.
Response:
Note 17
has been revised as requested by the Staff (A–1 - A-3).
Comment
3: Please provide us supplementally with the
inputs used in the Black Scholes model at each valuation date (March 2010, June
2009/2010, September 2009/2010), to determine the fair value of the warrant
liability, similar to that provided for the period ended December 31,
2009. In your response, explain why any assumptions remained
consistent from those used at December 31, 2009 (i.e. volatility), if true, and
the accounting literature that supports your accounting treatment.
Response:
Expected
volatility is computed in accordance with FASB ASC 718 (formerly FAS 123R) using
the Black- Scholes Pricing Model. The exercise period is based on the
remaining life of the warrants at the date of each periodic
computation. The computation utilizes yield rates based on U.S
Treasury constant maturities for periods commensurate with the exercise periods
of the warrants. Expected stock volatility in the exercise period is
based exclusively on the Company’s historical publicly traded stock values for a
period commensurate with the exercise period ending on the last day of the
period for which the computation is made. For each quarterly
financial reporting period, the exercise period is updated for the remaining
life of the warrants and the expected volatility is recomputed using the
Company’s historical stock values on the NYSE Amex for a period commensurate
with the updated exercise period. Thus while the source of data and
application of assumptions remains consistent from period to period, the results
of the related computation change from computation date to computation
date.
Jim B.
Rosenberg
January
3, 2011
Page -
3
The
following are the computation for the all the periods requested.
|
6/30/2009
|
6/30/2009
|
6/30/2009
|
6/30/2009
|
Total
Warrants
|
||||||||||||||||
|
WARRANTS
OUTSTANDING
|
6,136,364 | 750,000 | 2,272,440 | 654,884 | 9,813,688 | |||||||||||||||
|
INPUT
VARIABLES
|
||||||||||||||||||||
|
Stock
Price
|
$ | 2.54 | $ | 2.54 | $ | 2.54 | $ | 2.54 | ||||||||||||
|
Purchase
Price
|
$ | 1.65 | $ | 1.38 | $ | 1.31 | $ | 1.34375 | ||||||||||||
|
Term
(period option expires)
|
3.00 | 3.00 | 2.50 | 2.75 | ||||||||||||||||
|
Volatility
|
126.531118 | % | 126.531118 | % | 126.531118 | % | 126.531118 | % | ||||||||||||
|
Annual
Rate of Quarterly Dividends
|
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||||
|
Discount
Rate-Bond Equivalent Yield
|
1.6300 | % | 1.6300 | % | 1.6300 | % | 1.6300 | % | ||||||||||||
|
INTERMEDIATE
COMPUTATIONS
|
||||||||||||||||||||
|
Present
Value of Stock Ex-dividend
|
$ | 2.54 | $ | 2.54 | $ | 2.54 | $ | 2.54 | ||||||||||||
|
Present
Value of Exercise Price
|
$ | 1.57 | $ | 1.31 | $ | 1.26 | $ | 1.29 | ||||||||||||
|
Cumulative
Volatility
|
219.16 | % | 219.16 | % | 200.06 | % | 209.83 | % | ||||||||||||
|
CALL
OPTION
|
||||||||||||||||||||
|
Proportion
of Stock Present Value
|
90.57 | % | 91.87 | % | 91.17 | % | 91.53 | % | ||||||||||||
|
Proportion
of exercise Price PV
|
-19.03 | % | -21.33 | % | -25.81 | % | -23.44 | % | ||||||||||||
|
Call
Option Value
|
2.00143433 | $ | 2.0532048 | $ | 1.9911035 | $ | 2.0235265 | |||||||||||||
|
PUT
OPTION
|
||||||||||||||||||||
|
Proportion
of Stock PV
|
-9.43 | % | -8.13 | % | -8.83 | % | -8.47 | % | ||||||||||||
|
Proportion
of Exercise Price PV
|
80.97 | % | 78.67 | % | 74.19 | % | 76.56 | % | ||||||||||||
|
Put
Option Value
|
$ | 1.03 | $ | 0.83 | $ | 0.71 | $ | 0.77 | ||||||||||||
|
NUMBER
OF WARRANTS SHARES
|
6,136,364 | 750,000 | 2,272,440 | 654,884 | ||||||||||||||||
|
VALUE
OF WARRANTS SHARES
|
$ | 12,281,530 | $ | 1,539,904 | $ | 4,524,663 | $ | 1,325,175 | ||||||||||||
|
TOTAL
|
$ | 13,821,433 | $ | 5,849,838 | $ | 19,671,271 | ||||||||||||||
Jim B.
Rosenberg
January
3, 2011
Page -
4
|
9/30/2009
|
9/30/2009
|
9/30/2009
|
9/30/2009
|
Total
Warrants
|
||||||||||||||||
|
WARRANTS
OUTSTANDING
|
6,136,364 | 750,000 | 2,272,440 | 654,884 | 9,813,688 | |||||||||||||||
|
INPUT
VARIABLES
|
||||||||||||||||||||
|
Stock
Price
|
$ | 2.00 | $ | 2.00 | $ | 2.00 | $ | 2.00 | ||||||||||||
|
Purchase
Price
|
$ | 1.65 | $ | 1.38 | $ | 1.31 | $ | 1.34375 | ||||||||||||
|
Term
(period option expires)
|
2.75 | 2.75 | 2.35 | 2.47 | ||||||||||||||||
|
Volatility
|
121.159235 | % | 121.159235 | % | 121.159235 | % | 121.159235 | % | ||||||||||||
|
Annual
Rate of Quarterly Dividends
|
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||||
|
Discount
Rate-Bond Equivalent Yield
|
1.1200 | % | 1.1200 | % | 1.1200 | % | 1.1200 | % | ||||||||||||
|
INTERMEDIATE
COMPUTATIONS
|
||||||||||||||||||||
|
Present
Value of Stock Ex-dividend
|
$ | 2.00 | $ | 2.00 | $ | 2.00 | $ | 2.00 | ||||||||||||
|
Present
Value of Exercise Price
|
$ | 1.60 | $ | 1.34 | $ | 1.28 | $ | 1.31 | ||||||||||||
|
Cumulative
Volatility
|
200.92 | % | 200.92 | % | 185.73 | % | 190.42 | % | ||||||||||||
|
CALL
OPTION
|
||||||||||||||||||||
|
Proportion
of Stock Present Value
|
86.77 | % | 88.58 | % | 87.91 | % | 88.01 | % | ||||||||||||
|
Proportion
of exercise Price PV
|
-18.58 | % | -21.05 | % | -24.61 | % | -23.31 | % | ||||||||||||
|
Call
Option Value
|
1.43816014 | $ | 1.4899044 | $ | 1.4441696 | $ | 1.4554964 | |||||||||||||
|
PUT
OPTION
|
||||||||||||||||||||
|
Proportion
of Stock PV
|
-13.23 | % | -11.42 | % | -12.09 | % | -11.99 | % | ||||||||||||
|
Proportion
of Exercise Price PV
|
81.42 | % | 78.95 | % | 75.39 | % | 76.69 | % | ||||||||||||
|
Put
Option Value
|
$ | 1.04 | $ | 0.83 | $ | 0.72 | $ | 0.76 | ||||||||||||
|
NUMBER
OF WARRANTS SHARES
|
6,136,364 | 750,000 | 2,272,440 | 654,884 | ||||||||||||||||
|
VALUE
OF WARRANTS SHARES
|
$ | 8,825,074 | $ | 1,117,428 | $ | 3,281,789 | $ | 953,181 | ||||||||||||
|
TOTAL
|
$ | 9,942,502 | $ | 4,234,970 | $ | 14,177,473 | ||||||||||||||
Jim B.
Rosenberg
January
3, 2011
Page -
5
|
12/31/2009
|
12/31/2009
|
12/31/2009
|
12/31/2009
|
Total
Warrants
|
||||||||||||||||
|
WARRANTS
OUTSTANDING
|
6,136,364 | 750,000 | 2,272,440 | 654,884 | 9,813,688 | |||||||||||||||
|
INPUT
VARIABLES
|
||||||||||||||||||||
|
Stock
Price
|
$ | 0.56 | $ | 0.56 | $ | 0.56 | $ | 0.56 | ||||||||||||
|
Purchase
Price
|
$ | 1.65 | $ | 1.38 | $ | 1.31 | $ | 1.34375 | ||||||||||||
|
Term
(period option expires)
|
2.50 | 2.50 | 2.20 | 2.20 | ||||||||||||||||
|
Volatility
|
138.000000 | % | 138.000000 | % | 146.000000 | % | 146.000000 | % | ||||||||||||
|
Annual
Rate of Quarterly Dividends
|
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||||
|
Discount
Rate-Bond Equivalent Yield
|
1.4200 | % | 1.4200 | % | 1.1400 | % | 1.1400 | % | ||||||||||||
|
INTERMEDIATE
COMPUTATIONS
|
||||||||||||||||||||
|
Present
Value of Stock Ex-dividend
|
$ | 0.56 | $ | 0.56 | $ | 0.56 | $ | 0.56 | ||||||||||||
|
Present
Value of Exercise Price
|
$ | 1.59 | $ | 1.33 | $ | 1.28 | $ | 1.31 | ||||||||||||
|
Cumulative
Volatility
|
218.20 | % | 218.20 | % | 216.55 | % | 216.55 | % | ||||||||||||
|
CALL
OPTION
|
||||||||||||||||||||
|
Proportion
of Stock Present Value
|
72.97 | % | 75.61 | % | 75.86 | % | 75.49 | % | ||||||||||||
|
Proportion
of exercise Price PV
|
-5.82 | % | -6.84 | % | -7.16 | % | -7.01 | % | ||||||||||||
|
Call
Option Value
|
0.31593977 | $ | 0.3323654 | $ | 0.3332923 | $ | 0.3309604 | |||||||||||||
|
PUT
OPTION
|
||||||||||||||||||||
|
Proportion
of Stock PV
|
-27.03 | % | -24.39 | % | -24.14 | % | -24.51 | % | ||||||||||||
|
Proportion
of Exercise Price PV
|
94.18 | % | 93.16 | % | 92.84 | % | 92.99 | % | ||||||||||||
|
Put
Option Value
|
$ | 1.35 | $ | 1.10 | $ | 1.05 | $ | 1.08 | ||||||||||||
|
NUMBER
OF WARRANTS SHARES
|
6,136,364 | 750,000 | 2,272,440 | 654,884 | ||||||||||||||||
|
VALUE
OF WARRANTS SHARES
|
$ | 1,938,721 | $ | 249,274 | $ | 757,387 | $ | 216,741 | ||||||||||||
|
TOTAL
|
$ | 2,187,995 | $ | 974,127 | $ | 3,162,123 | ||||||||||||||
Jim B.
Rosenberg
January
3, 2011
Page -
6
|
3/31/2010
|
3/31/2010
|
3/31/2010
|
3/31/2010
|
Total
Warrants
|
||||||||||||||||
|
WARRANTS
OUTSTANDING
|
6,136,364 | 750,000 | 2,272,440 | 654,884 | 9,813,688 | |||||||||||||||
|
INPUT
VARIABLES
|
||||||||||||||||||||
|
Stock
Price
|
$ | 0.74 | $ | 0.74 | $ | 0.74 | $ | 0.74 | ||||||||||||
|
Purchase
Price
|
$ | 1.65 | $ | 1.38 | $ | 1.31 | $ | 1.34375 | ||||||||||||
|
Term
(period option expires)
|
2.17 | 2.17 | 1.67 | 1.92 | ||||||||||||||||
|
Volatility
|
144.306080 | % | 144.306080 | % | 144.306080 | % | 144.306080 | % | ||||||||||||
|
Annual
Rate of Quarterly Dividends
|
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||||
|
Discount
Rate-Bond Equivalent Yield
|
1.0200 | % | 1.0200 | % | 1.0200 | % | 1.0200 | % | ||||||||||||
|
INTERMEDIATE
COMPUTATIONS
|
||||||||||||||||||||
|
Present
Value of Stock Ex-dividend
|
$ | 0.74 | $ | 0.74 | $ | 0.74 | $ | 0.74 | ||||||||||||
|
Present
Value of Exercise Price
|
$ | 1.61 | $ | 1.35 | $ | 1.29 | $ | 1.32 | ||||||||||||
|
Cumulative
Volatility
|
212.41 | % | 212.41 | % | 186.30 | % | 199.78 | % | ||||||||||||
|
CALL
OPTION
|
||||||||||||||||||||
|
Proportion
of Stock Present Value
|
75.65 | % | 78.20 | % | 73.70 | % | 76.12 | % | ||||||||||||
|
Proportion
of exercise Price PV
|
-7.65 | % | -8.93 | % | -10.95 | % | -9.89 | % | ||||||||||||
|
Call
Option Value
|
$ | 0.44 | $ | 0.46 | $ | 0.40 | $ | 0.43 | ||||||||||||
|
PUT
OPTION
|
||||||||||||||||||||
|
Proportion
of Stock PV
|
-24.35 | % | -21.80 | % | -26.30 | % | -23.88 | % | ||||||||||||
|
Proportion
of Exercise Price PV
|
92.35 | % | 91.07 | % | 89.05 | % | 90.11 | % | ||||||||||||
|
Put
Option Value
|
$ | 1.31 | $ | 1.07 | $ | 0.95 | $ | 1.01 | ||||||||||||
|
NUMBER
OF WARRANTS SHARES
|
6,136,364 | 750,000 | 2,272,440 | 654,884 | ||||||||||||||||
|
VALUE
OF WARRANTS SHARES
|
$ | 2,677,559 | $ | 343,613 | $ | 918,672 | $ | 283,509 | ||||||||||||
|
TOTAL
|
$ | 3,021,172 | $ | 1,202,181 | $ | 4,223,353 | ||||||||||||||
Jim B.
Rosenberg
January
3, 2011
Page -
7
|
6/30/2010
|
6/30/2010
|
6/30/2010
|
6/30/2010
|
Total
Warrants
|
||||||||||||||||
|
WARRANTS
OUTSTANDING
|
6,136,364 | 750,000 | 2,272,440 | 654,884 | 9,813,688 | |||||||||||||||
|
INPUT
VARIABLES
|
||||||||||||||||||||
|
Stock
Price
|
$ | 0.47 | $ | 0.47 | $ | 0.47 | $ | 0.47 | ||||||||||||
|
Purchase
Price
|
$ | 1.65 | $ | 1.38 | $ | 1.31 | $ | 1.34375 | ||||||||||||
|
Term
(period option expires)
|
1.92 | 1.92 | 1.42 | 1.67 | ||||||||||||||||
|
Volatility
|
144.040336 | % | 144.040336 | % | 144.040336 | % | 144.040336 | % | ||||||||||||
|
Annual
Rate of Quarterly Dividends
|
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||||
|
Discount
Rate-Bond Equivalent Yield
|
1.7900 | % | 1.7900 | % | 1.7900 | % | 1.7900 | % | ||||||||||||
|
INTERMEDIATE
COMPUTATIONS
|
||||||||||||||||||||
|
Present
Value of Stock Ex-dividend
|
$ | 0.47 | $ | 0.47 | $ | 0.47 | $ | 0.47 | ||||||||||||
|
Present
Value of Exercise Price
|
$ | 1.59 | $ | 1.33 | $ | 1.28 | $ | 1.30 | ||||||||||||
|
Cumulative
Volatility
|
199.41 | % | 199.41 | % | 171.44 | % | 185.96 | % | ||||||||||||
|
CALL
OPTION
|
||||||||||||||||||||
|
Proportion
of Stock Present Value
|
64.97 | % | 68.23 | % | 60.80 | % | 64.83 | % | ||||||||||||
|
Proportion
of exercise Price PV
|
-5.37 | % | -6.42 | % | -7.49 | % | -6.96 | % | ||||||||||||
|
Call
Option Value
|
$ | 0.22 | $ | 0.23 | $ | 0.19 | $ | 0.21 | ||||||||||||
|
PUT
OPTION
|
||||||||||||||||||||
|
Proportion
of Stock PV
|
-35.03 | % | -31.77 | % | -39.20 | % | -35.17 | % | ||||||||||||
|
Proportion
of Exercise Price PV
|
94.63 | % | 93.58 | % | 92.51 | % | 93.04 | % | ||||||||||||
|
Put
Option Value
|
$ | 1.34 | $ | 1.10 | $ | 1.00 | $ | 1.05 | ||||||||||||
|
NUMBER
OF WARRANTS SHARES
|
6,136,364 | 750,000 | 2,272,440 | 654,884 | ||||||||||||||||
|
VALUE
OF WARRANTS SHARES
|
$ | 1,347,962 | $ | 176,240 | $ | 431,992 | $ | 140,093 | ||||||||||||
|
TOTAL
|
$ | 1,524,202 | $ | 572,085 | $ | 2,096,287 | ||||||||||||||
Jim B.
Rosenberg
January
3, 2011
Page -
8
|
9/30/2010
|
9/30/2010
|
9/30/2010
|
9/30/2010
|
Total
Warrants
|
||||||||||||||||
|
WARRANTS
OUTSTANDING
|
6,136,364 | 750,000 | 2,272,440 | 654,884 | 9,813,688 | |||||||||||||||
|
INPUT
VARIABLES
|
||||||||||||||||||||
|
Stock
Price
|
$ | 0.56 | $ | 0.56 | $ | 0.56 | $ | 0.56 | ||||||||||||
|
Purchase
Price
|
$ | 1.65 | $ | 1.38 | $ | 1.31 | $ | 1.34375 | ||||||||||||
|
Term
(period option expires)
|
1.67 | 1.67 | 1.17 | 1.42 | ||||||||||||||||
|
Volatility
|
142.712990 | % | 142.712990 | % | 142.712990 | % | 142.712990 | % | ||||||||||||
|
Annual
Rate of Quarterly Dividends
|
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||||
|
Discount
Rate-Bond Equivalent Yield
|
1.2700 | % | 1.2700 | % | 1.2700 | % | 1.2700 | % | ||||||||||||
|
INTERMEDIATE
COMPUTATIONS
|
||||||||||||||||||||
|
Present
Value of Stock Ex-dividend
|
$ | 0.56 | $ | 0.56 | $ | 0.56 | $ | 0.56 | ||||||||||||
|
Present
Value of Exercise Price
|
$ | 1.62 | $ | 1.35 | $ | 1.29 | $ | 1.32 | ||||||||||||
|
Cumulative
Volatility
|
184.24 | % | 184.24 | % | 154.15 | % | 169.86 | % | ||||||||||||
|
CALL
OPTION
|
||||||||||||||||||||
|
Proportion
of Stock Present Value
|
63.54 | % | 67.12 | % | 59.06 | % | 63.48 | % | ||||||||||||
|
Proportion
of exercise Price PV
|
-6.73 | % | -8.09 | % | -9.47 | % | -8.79 | % | ||||||||||||
|
Call
Option Value
|
$ | 0.25 | $ | 0.27 | $ | 0.21 | $ | 0.24 | ||||||||||||
|
PUT
OPTION
|
||||||||||||||||||||
|
Proportion
of Stock PV
|
-36.46 | % | -32.88 | % | -40.94 | % | -36.52 | % | ||||||||||||
|
Proportion
of Exercise Price PV
|
93.27 | % | 91.91 | % | 90.53 | % | 91.21 | % | ||||||||||||
|
Put
Option Value
|
$ | 1.30 | $ | 1.06 | $ | 0.94 | $ | 1.00 | ||||||||||||
|
NUMBER
OF WARRANTS SHARES
|
6,136,364 | 750,000 | 2,272,440 | 654,884 | ||||||||||||||||
|
VALUE
OF WARRANTS SHARES
|
$ | 1,516,307 | $ | 199,943 | $ | 473,814 | $ | 156,858 | ||||||||||||
|
TOTAL
|
$ | 1,716,250 | $ | 630,673 | $ | 2,346,922 | ||||||||||||||
Jim B.
Rosenberg
January
3, 2011
Page -
9
|
|
The
Company acknowledges that:
|
|
|
·
|
the
Company is responsible for the adequacy and accuracy of the disclosures in
the filing;
|
|
|
·
|
the
Staff comments or changes to disclosure in response to Staff comments do
not foreclose the Commission from taking any action with respect to the
filing; and
|
|
|
·
|
the
Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
|
The
Company further acknowledges, that the action of the Commission or the staff,
acting pursuant to delegated authority, in reviewing the filing does not relieve
the Company from its full responsibility for the adequacy and accuracy of the
disclosure in the filing.
If you
have any questions or comments with regard to the filing, please contact me at
the above address.
|
Very
truly yours,
|
|
/s/ Charles T. Bernhardt
|
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Charles
T. Bernhardt
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|
Chief
Financial Officer
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Appendix
A
Critical
Accounting Policies
. .
..
Redeemable
Warrants
We
utilize the guidance contained ASC 480 (formally SFAS 150) in the determination
of whether to record warrants and options as Equity and/or
Liability. If the guidance of ASC 480 is deemed inconclusive, we
continue our analysis utilizing ASC 815 (formally EITF 00-19).
Our
method of recording the related value attempts to be consistent with the
standards as defined by the Financial Accounting Standards Board utilizing the
concept of “Fair Value” from ASC 820-10-55-1 that states that any fair value
measurement requires that the reporting entity to determine the valuation
technique(s) appropriate for the measurement, considering the availability of
data with which to develop inputs that represent the assumptions that market
participants would use in pricing the asset or liability and the level in the
fair value hierarchy within which the inputs fall.
We recomputed the value of
the redeemable warrants at the end of each quarterly period. We use the
Black-Scholes-Merton Pricing Model which includes subjective input assumptions
that are consistently applied each quarter. If we were to alter our
assumptions or
the numbers input based on such assumptions, the resulting fair value could be
materially different. The significant assumptions using this model are: (i)
yield rates based on U.S. Treasury constant maturities for periods commensurate
with the exercise periods of the warrants;
(ii) exercise periods based on the remaining life of the warrants at each
valuation date; and (iii) expected stock volatility in the exercise period based
on our historical stock values for a period commensurate with the
exercise period ending on the last
day of the period for which the computation is made. While the
assumptions remain consistent from period to period (e.g., utilizing historical
stock prices), the numbers input change from period to period (e.g., the actual
historical prices input for the
relevant period).
(17)
Fair Value
The
Company is required under GAAP to disclose information about the fair value of
all the Company’s financial instruments, whether or not these instruments are
measured at fair value on the Company’s consolidated balance sheet.
The
Company estimates that the fair values of cash and cash equivalents, other
assets, accounts payable and accrued expenses approximate their carrying values
due to the short-term maturities of these items. The Company also has
certain warrants with a cash settlement feature (in the event of a change in
control to a non-public company) that are carried at fair value. Management
estimates the fair value using a model which determines the probability that the
cash
settlement feature conditions will arise. The Company recomputes the
value of these warrants at the end of each quarterly period utilizing the
Black-Scholes-Merton Pricing Model, which includes subjective input assumptions
that are consistently applied each period. If the Company
were to alter its assumptions or the numbers input based on such assumptions,
the resulting fair value could be materially different. The significant
assumptions using this model are: (i) yield rates based on U.S Treasury
constant maturities for periods
commensurate with the exercise periods of the warrants; (ii) exercise periods
based on the remaining life of the warrants at each valuation date; and (iii)
expected stock volatility in the exercise period based on the
Company’s historical stock values for a
period commensurate with the exercise period ending on the last day of the
period for which the computation is made. While the assumptions
remain consistent from period to period (e.g., utilizing historical stock
prices), the numbers input change from
period to period (e.g., the actual historical prices input for the relevant
period). The carrying
amount and estimated fair value of the above warrants was zeroapproximately
$3,162,000 at December 31,
2009. There were no other financial instruments at December 31, 2009
or 2008.
A-1
On
January 1, 2008, the Company adopted new accounting guidance (codified at FASB
ASC 820 and formerly Statement No. 157 Fair Value Measurements) that
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. The guidance does not impose any new requirements
around which assets and liabilities are to be measured at fair value, and
instead applies to asset and liability balances required or permitted to be
measured at fair value under existing accounting pronouncements. The
Company measures its warrant liability for those warrants with a cash settlement
feature at fair value. As of December 31, 2009, the Company had no
derivative assets or liabilities.
FASB ASC
820-10-35-37 (formerly SFAS No. 157) establishes a valuation hierarchy based on
the transparency of inputs used in the valuation of an asset or
liability. Classification is based on the lowest level of inputs that
is significant to the fair value measurement. The valuation hierarchy
contains three levels:
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|
·
|
Level
1 – Quoted prices are available in active markets for identical assets or
liabilities at the reporting date.
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|
|
·
|
Level
2 – Observable inputs other than Level 1 prices such as quote 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.
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|
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·
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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. Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models, discounted
cash flow methodologies, or other valuation techniques, as well as
instruments for which the determination of fair value requires significant
management judgment or estimation. As of December 31, 2009, the
Company has classified the warrants with cash settlement features as Level
3. Management evaluates a variety of inputs and then estimates
fair value based on those inputs. The primary inputs
evaluated by management to determine the likelihood of a change
in
control to a non-public company (thereby triggering the cash settlement
feature) were the Company’s FDA approval
status including the additional requirements including required cash
outflows prior to resubmission to the FDA (observable), the industry
and market conditions
(unobservable), litigation matters against the Company (observable) and
statistics regarding the number of company’s going private
(observable)As discussed above,
the Company utilized the Black-Scholes-Merton Pricing Model in valuing
these
warrants.
|
The table
below presents the balances of assets and liabilities measured at fair value on
a recurring basis by level within the hierarchy as of December, 31,
2009:
|
Total
|
Level
1
|
Level
2
|
Level 3
|
|||||||||||||
|
Liabilities
|
||||||||||||||||
|
Warrants
|
$ | 3,162,000 | $ | - | $ | - | $ | 3,162,000 | ||||||||
A-2
There was a change in the
fair value of the Level 3 item of $3,162,000 during the year ended December 31,
2009,
The changes in Level 3
Liabilities measured at fair value on a recurring basis are summarized as
follows:
|
Fair
Value
of
Redeemable
Warrants
(
in
thousands)
|
||||
|
Value
at
issuance
|
$ | 15,233 | ||
|
Less:
value of warrants exercised in May and June
2009
|
(3,260 | ) | ||
|
Fair
value adjustment at June
30,2009
|
7,698 | |||
|
Balance
at June 30,
2009
|
19,671 | |||
|
Fair
value adjustment at September
30,2009
|
(5,494 | ) | ||
|
Balance
at September 30,
2009
|
14,177 | |||
|
Fair
value adjustment at December 31,
2009
|
(11,015 | ) | ||
|
Balance
at December
31,2009
|
$ | 3,162 | ||
A-3