Fair Value

9 Months Ended

Sep. 30, 2011

Fair Value

Fair Value

Note 12: Fair Value

The Company is required under U.S. Generally Accepted Accounting Principles ("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.

In connection with equity financings on May 11 and 19, 2009, the Company issued warrants (the "Warrants") that are single compound derivatives containing both an embedded right to obtain stock upon exercise (a "Call") and a series of embedded rights to settle the Warrants for cash upon the occurrence of certain events (each, a "Put").  Generally, the Put provisions allow the Warrant Holders liquidity protection; the right to receive cash in certain situations where the Holders would not have a means of readily selling the shares issuable upon exercise of the Warrants (e.g., where there would no longer be a significant public market for our common stock).  However because the contractual formula used to determine the cash settlement value of the embedded Put requires use of certain assumptions, the cash settlement value of the embedded Put can differ from the fair value of the unexercised embedded Call option at the time the embedded Put option is exercised.  Specifically, the Put rights would be triggered upon the happening of a "Fundamental Transaction" (as defined below) that also is (1) an all cash transaction; (2) a "Rule 13e-3 transaction" under the Exchange Act (where the Company would be taken private); or (3) a transaction involving a person or entity not traded on a national securities exchange.  "Fundamental Transactions" include (i) a merger or consolidation of the Company with or into another person or entity; (ii) a sale, lease, license, transfer or other disposition of all or substantially all of the Company's assets; (iii) any purchase offer, tender offer or exchange offer in which holders of Company Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property, which offer has been accepted by the holders of 50% or more of the Company's outstanding Common Stock; (iv) a reclassification, reorganization or recapitalization of the Common Stock pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property; or (v) a stock purchase or other business combination with another person or entity is effected pursuant to which such other person or entity acquires more than 50% of the outstanding shares of Common Stock.  Pursuant to the Warrants, the Put rights enable the Warrant Holders to receive cash in the amount of the Black-Scholes value is obtained from the "OV" function on Bloomberg, L.P. ("Bloomberg") determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Warrant expiration date, (B) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such calculation shall be the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any, being offered in such Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Warrant expiration date.

The Company recomputes the fair value of the Warrants at the end of each quarterly reporting period.  Such value computation 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.

Fair value at September 30, 2011, was estimated using the following assumptions:

Underlying price per share	$0.31
Exercise price per share	$1.31-$1.65
Risk-free interest rate	0.35%-1.58%
Expected holding period	2.63-3.63 yrs.
Expected volatility	114.9%-120.6%
Expected dividend yield	None

The significant assumptions using the Monte Carlo Simulation approach for valuation of the Warrants are:

(i)        Risk-Free Interest Rate.  The risk-free interest rates for the Warrants are based on U.S Treasury constant maturities for periods commensurate with the remaining expected holding periods of the warrants.

(ii)      Expected Holding Period. The expected holding period represents the period of time that the Warrants are expected to be outstanding until they are exercised.  The Company utilizes the remaining contractual term of the Warrants at each valuation date as the expected holding period.

(iii)     Expected Volatility.  Expected stock volatility is based on daily observations of the Company's historical stock values for a period commensurate with the remaining expected holding period on the last day of the period for which the computation is made.

(iv)     Expected Dividend Yield.  Expected dividend yield is based on the Company's anticipated dividend payments over the remaining expected holding period.  As the Company has never issued dividends, the expected dividend yield is $-0- and this assumption will be continued in future calculations unless the Company changes its dividend policy.

(v)      Expected Probability of a Fundamental Transaction.  The possibility of the occurrence of a Fundamental Transaction triggering a Put right is extremely remote.  As discussed above, a Put right would only arise if a Fundamental Transaction 1) is an all cash transaction; (2) results in the Company going private; or (3) is a transaction involving a person or entity not traded on a national securities exchange.  The Company believes such an occurrence is highly unlikely because:

a. The Company only has one product that is FDA approved;

b. The Company will have to perform additional clinical trials for FDA approval of its flagship product;

c. Industry and market conditions continue to include a global market recession, adding risk to any transaction;

d. Available capital for a potential buyer in a cash transaction continues to be limited;

e. The nature of a life sciences company is heavily dependent on future funding and high fixed costs, including Research & Development; and

f. The Company's Rights Agreement makes it less attractive to a potential buyer.

With the above factors utilized in analysis of the likelihood of the Put's potential Liability, the Company estimated the range of probabilities related to a Put right being triggered as:

Range of Probability	Probability
Low		0.5	%
Medium		1.0	%
High		5.0	%

The Monte Carlo Simulation has consistently incorporated a 5.0% probability of a Fundamental Transaction from the initial valuation of May 2009 through September 30, 2011.

(vi)     Expected Timing of Announcement of a Fundamental Transaction.  As the Company has no specific expectation of a Fundamental Transaction, for reasons elucidated above, the Company utilized a discrete uniform probability distribution over the Expected Holding Period to model in the potential announcement of a Fundamental Transaction occurring during the Expected Holding Period.

(vii)    Expected 100 Day Volatility at Announcement of a Fundamental Transaction.  An estimate of future volatility is necessary as there is no mechanism for directly measuring future stock price movements.  Daily observations of the Company's historical stock values for the 100 days immediately prior to the Warrants' grant dates, with a floor of 100%, were utilized as a proxy for the future volatility.

(viii)   Expected Risk-Free Interest Rate at Announcement of a Fundamental Transaction.  The Company utilized a risk-free interest rate corresponding to the forward U.S. Treasury rate for the period equal to the time between the date forecast for the public announcement of a Fundamental Transaction and the Warrant expiration date for each simulation.

(ix)    Expected Time Between Announcement and Consummation of a Fundamental Transaction.  The expected time between the announcement and the consummation of a Fundamental Transaction is based on the Company's experience with the due diligence process performed by acquirers, and is estimated to be six months.  The Monte Carlo Simulation approach incorporates this additional period to reflect the delay Warrant Holders would experience in receiving the proceeds of the Put.

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 approximately $1,247,000 at September 30, 2011.  There were no other financial instruments at September 30, 2011.

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 September 30, 2011, 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:

· Level 1 – Quoted prices are available in active markets for identical assets or liabilities at the reporting date.

· 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.

· 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 September 30, 2011, 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.  As discussed above, the Company utilized the Monte Carlo Simulation 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 September 30, 2011:

	Total		Level 1		Level 2		Level 3
Assets
Marketable Securities - unrestricted	$	30,160,000	$	21,600,000	$	8,560,000	$	0
Marketable Securities-restricted		3,142,000		0		3,142,000		0
Liabilities
Warrants		1,247,000		0		0		1,247,000
Total	$	34,549,000	$	21,600,000	$	11,702,000	$	1,247,000

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)
	2010			2011
Balance at January 1	$	3,684		$	2,805
Fair value adjustment at March 31		1,336			(302	)
Balance at March 31	$	5,020		$	2,503
Fair value adjustment at June 30		(2,260	)		(643	)
Balance June 30	$	2,760		$	1,860
Fair value adjustment at September 30		583			(613	)
Balance September 30	$	3,343		$	1,247