Cellectar Biosciences, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE

FAIR VALUE

9 Months Ended

Sep. 30, 2016

2. FAIR VALUE

In accordance with the Fair Value Measurements and Disclosures Topic of the FASB ASC 820, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

	·	Level 1: Input prices quoted in an active market for identical financial assets or liabilities.
	·	Level 2: Inputs other than prices quoted in Level 1, such as prices quoted for similar financial assets and liabilities in active markets, prices for identical assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
	·	Level 3: Input prices quoted that are significant to the fair value of the financial assets or liabilities which are not observable or supported by an active market.

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The Company issued warrants to purchase an aggregate of 82,500 common shares in a February 2013 public offering (the “February 2013 Public Offering Warrants”). On February 20, 2014, 27,500 of the February 2013 Public Offering Warrants expired. On May 20, 2016, 16,250 warrants were exercised. The remaining 38,750 warrants are classified within the Level 3 hierarchy.

In August 2014, as part of an underwritten public offering, the Company issued 494,315 warrants to purchase common stock (the “August 2014 Warrants”). The August 2014 Warrants are listed on the NASDAQ Capital Market under the symbol “CLRBW,” however, there are certain periods where trading volume is low; therefore, they are classified as Level 2 within the hierarchy.

The Series A Warrants issued on October 1, 2015 were previously considered financial instruments; however, they were amended on April 20, 2016 in such a manner that they no longer contain a price protection clause, which was the characteristic that had initially resulted in their being accounted for as derivative financial instruments at fair value. As a result, they have been removed from the financial instruments table below for the period ended September 30, 2016.

The Series B Warrants issued on October 1, 2015 were all exercised by the holders during the nine months ended September 30, 2016; therefore, they have been removed from financial instruments table presented below as of June 30, 2016. See Note 3 for further discussion of the warrants issued as part of the October 1, 2015 offering.

The following tables set forth the Company’s financial instruments carried at fair value using the lowest level of input applicable to each financial instrument as of September 30, 2016 and December 31, 2015:

	September 30, 2016
	Level 1		Level 2		Level 3		Fair Value

Liabilities:
February 2013 Public Offering Warrants	$	—	$	—	$	66,650	$	66,650
August 2014 Warrants		—		121,000		—		121,000
Total	$	—	$	121,000	$	66,650	$	187,650

	December 31, 2015
	Level 1		Level 2		Level 3		Fair Value

Liabilities:
February 2013 Public Offering Warrants	$	—	$	—	$	209,000	$	209,000
August 2014 Warrants		—		2,714,000		—		2,714,000
October 2015 Warrants		—		—		1,858,000		1,858,000
Total	$	—	$	2,714,000	$	2,067,000	$	4,781,000

To estimate the value of the February 2013 Public Offering Warrants considered to be derivative instruments, the Company uses a modified option-pricing model together with assumptions that consider, among other variables, the fair value of the underlying stock, risk-free interest rate, volatility, remaining contractual term, future financing requirements and dividend rates. The future financing estimates are based on the Company’s estimates of anticipated cash requirements over the term of the warrants as well as the frequency of required financings based on its assessment of its historical financing trends and anticipated future events. Due to the nature of these inputs and the valuation technique utilized, these warrants are classified within the Level 3 hierarchy.

The following table summarizes the modified option-pricing assumptions used:

	Nine Months			Twelve Months
	Ended			Ended
	September 30,			December 31,
	2016			2015
Volatility		92.72-120.0	%		87.3-90.0	%
Risk-free interest rate		0.53-0.73	%		0.82-1.10	%
Expected life (years)		1.39-1.89			2.14-2.89
Dividend		—	%		—	%

To estimate the value of the October 2015 Warrants considered to be derivative instruments, the Company used a modified option-pricing model together with assumptions that consider, among other variables, the fair value of the underlying stock, risk-free interest rate, volatility, the contractual term of the warrants, future financing requirements and dividend rates. The future financing estimates were based on the Company’s estimates of anticipated cash requirements over the term of the warrants as well as the frequency of required financings based on its assessment of its historical financing trends and anticipated future events. Due to the nature of these inputs and the valuation technique utilized, these warrants were also classified within the Level 3 hierarchy.

As is noted above, none of the October 2015 Warrants are considered financial instruments as of September 30 2016; however, they were considered financial instruments for a portion of the current fiscal year, and the following table summarizes the modified option-pricing assumptions used during the period they were outstanding:

	Nine Months
	Ended			Twelve Months Ended
	September 30,			December 31,
	2016			2015
Volatility		89.73	%		97.57	%
Risk-free interest rate		1.65	%		1.70	%
Expected life (years)		4.50			4.75
Dividend		—	%		—	%

The following table summarizes the changes in the fair market value of the Company’s warrants which are classified within the Level 3 fair value hierarchy.

	Nine Months
	Ended		Twelve Months Ended
	September 30,		December 31,
	2016		2015
Beginning balance – Fair value	$	2,067,000	$	1,127,500
Fair value of warrants issued in connection with the October 2015 offering		—		3,272,000
Gain on derivatives resulting from change in fair value or extinguishment		(2,000,350)		(2,332,500)
Ending balance – Fair value	$	66,650	$	2,067,000

To estimate the fair value of the August 2014 Warrants, the Company calculated the weighted average closing price of the August 2014 Warrants for the trailing 10 day period with trades that ended on the balance sheet date.

- 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.

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