4. FAIR VALUE

U.S. GAAP establishes a fair value hierarchy which has three levels based on the reliability of the inputs used to determine the fair value. These levels include: Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and short-term investments) measured at fair value on a recurring basis as of December 31, 2011 and 2010 (in thousands):


	Total		Fair Value Measurements at Reporting Date Using
December 31, 2011	Total		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	1,614	$	1,614	$	—	$	—
Corporate notes		500				500		—
Total	$	2,114	$	1,614	$	500	$	—


December 31, 2010	Total		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	562	$	562	$	—	$	—
US government agencies		1,631		—		1,631		—
Total	$	2,193	$	562	$	1,631	$	—

Financial liabilities carried at fair value as of December 31, 2011 and 2010 were classified as follows (in thousands):


	Total		Fair Value Measurements at Reporting Date Using
December 31, 2011	Total		(Level 1)		(Level 2)		(Level 3)
Warrant liability	$	2,515	$	—	$	—	$	2,515


December 31, 2010	Total		(Level 1)		(Level 2)		(Level 3)
Warrant liability	$	1,843	$	—	$	—	$	1,843

As discussed in Note 2, “Summary of Significant Accounting Policies,” the fair value of the warrant liability was initially recorded on each grant date and remeasured at each reporting period using the Black-Scholes Model, which requires inputs such as the expected term of the warrants, share price volatility and risk-free interest rate. These inputs are subjective and generally require significant analysis and judgment to develop. The fair value of the warrant liability was estimated using the following range of assumptions at December 31, 2011, February 2, 2011 (the date of grant) and December 31, 2010:


	October 2010 Warrants						February 2011 Warrants
	December 31, 2011			December 31, 2010			December 31, 2011			February 2, 2011
Expected volatility		134	%		126	%		131	%		125	%
Risk-free interest rate		0.55	%		1.91	%		0.62	%		2.10	%
Expected life		3.8 years			4.8 years			4.1 years			5.0 years

The following table provides a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the twelve month period ended December 31, 2011 (in thousands):


Balance at December 31, 2010	$	1,843
Initial fair value of warrants issued in February 2011		10,786
Net decrease in fair value of warrant liability on remeasurement		(10,114	)
Balance at December 31, 2011	$	2,515

The net decrease in the estimated fair value of the warrant liability was recognized as income under other income (expense) in the consolidated statements of operations.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

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+ Details

BIONOVO INC 10-K