Cellectar Biosciences, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

FAIR VALUE

FAIR VALUE

12 Months Ended

Dec. 31, 2014

3. FAIR VALUE

In accordance with 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 had issued warrants to purchase 1,365 shares of common stock (see Note 8) prior to the Acquisition (the “Legacy Warrants”) which are classified within the Level 2 hierarchy. Additionally, the Company issued warrants to purchase an aggregate of 825,000 common shares in a February 2013 public offering (the “February 2013 Public Offering Warrants”). On February 20, 2014, 275,000 of the February 2013 Public Offering Warrants expired. The remaining 550,000 warrants are classified within the Level 3 hierarchy. The 4,943,023 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 within the Level 2 hierarchy.

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 December 31, 2014 and 2013:

	December 31, 2014 (Restated)
	Level 1		Level 2		Level 3		Fair Value

Liabilities:
Legacy Warrants	$	—	$	999	$	—	$	999
February 2013 Public Offering Warrants		—		—		1,127,500		1,127,500
August 2014 Warrants		—		4,048,416		—		4,048,416
Total	$	—	$	4,049,415	$	1,127,500	$	5,176,915

	December 31, 2013
	Level 1		Level 2		Level 3		Fair Value

Liabilities:
Legacy Warrants	$	—	$	4,363	$	—	$	4,363
February 2013 Public Offering Warrants		—		—		3,355,000		3,355,000
Total	$	—	$	4,363	$	3,355,000	$	3,359,363

In order to estimate the fair value of the Legacy Warrants considered to be derivative instruments, the Company uses the Black-Scholes option pricing model and assumptions that consider, among other variables, the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates. Assumptions used are generally consistent with those disclosed for stock-based compensation (see Note 9).

In order 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 rates ranging from 1.07% to 2.63%, volatility ranging from 100% to 115%, the contractual term of the warrants ranging from 3.14 to 3.89 years, 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 changes in the fair market value of the Company’s warrants which are classified within the Level 3 fair value hierarchy.

	Year Ended December 31,
	2014		2013

Beginning fair value of warrants	$	3,355,000	$	—
Fair value of warrants issued in connection with February 2013 public offering		—		5,720,000
Gain on derivatives resulting from change in fair value		(2,227,500)		(2,365,000)
Ending fair value of warrants	$	1,127,500	$	3,355,000

To estimate the fair value of the August 2014 Warrants, the Company calculated the weighted average trading price for the trailing 10 trading day period 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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