Note 8. Warrants

In connection with certain of its redeemable convertible preferred stock issuances, convertible debt financings and other financing arrangements, the Company has issued warrants for shares of its common stock and various issues of its redeemable convertible preferred stock.

On August 22, 2014, in connection with the Company’s entry into the Growth Term Loan, the Company issued to the lenders Series E Loan Warrants exercisable for an aggregate of 2,512,562 shares of Series E preferred stock at a price of $0.2189 per share. The warrants provided for cashless exercise at the option of the holders, and also contained provisions for the adjustment of the number of shares issuable upon the exercise of the warrant in the event of stock splits, recapitalizations, reclassifications, consolidations or dilutive issuances. In connection with the completion of the initial public offering in May 2015, the Series E Loan Warrants became exercisable for an aggregate of 23,396 shares of the Company’s common stock at an exercise price of $23.51 per share. The Series E Loan Warrants expire by their terms on August 22, 2024, provided that the warrants will be automatically exercised on a cashless basis upon expiration if not previously exercised if the fair market value of a share of the Company’s common stock exceeds the per share exercise price.

The Company allocated the total proceeds of the Growth Term Loan and the Series E Loan Warrants based on the residual value method. Assumptions used to determine the initial fair value included fair value of shares of Series E Stock on grant date $0.31; Exercise price $0.2189; Expected risk-free interest rate 1.6%; Expected volatility 70.0%; Expected term 4.5 years; and Expected dividend yield 8.0%. The fair value of the Series E Warrants of $0.12 per share, or $301,507, was recorded as a discount on the Growth Term Loan to be accreted over the term of the Growth Term Loan using the effective interest method. The Company has historically accounted for the Series E Loan Warrants as liabilities as such warrants were indexed to shares that could be redeemed for cash outside the control of the Company. The preferred warrants were valued using the Black-Scholes option pricing model as of December 31, 2014. At December 31, 2014, the fair value of the Series E Loan Warrants was $301,507. Refer to Note 4 for assumptions used to value these warrants.

On December 30, 2014, in connection with the Company’s Note and Warrant Purchase Agreements (Note 5) the Company agreed to issue warrants (the “Convertible Note Warrants”) exercisable for an aggregate of 9,311,586 shares of Series E Stock at a price of $0.2189 per share, for aggregate consideration of $1,354. The Convertible Note Warrants were issued on January 15, 2015. The warrants provide for cashless exercise at the option of the holders, and also contained provisions for the adjustment of the number of shares issuable upon the exercise of the warrant in the event of stock splits, recapitalizations, reclassifications, consolidations or dilutive issuances. The Convertible Note Warrants expire by their terms on January 15, 2022. As the Convertible Note Warrants were issued in conjunction with and in order to establish a lending facility commitment, they were being accounted for as a debt discount to be amortized over the life of the Note Agreements using the effective interest method and as a warrant liability, at fair value, as they were indexed to shares that could be redeemed for cash outside the control of the Company.

The Company recorded the initial $741,828 of the Convertible Note Warrants using the Black-Scholes option pricing model and assumptions further described in Note 4, specifically using a 7 year term, a 1.6% risk free interest rate, 75% volatility, 0% dividend yield and a common stock price of $0.13 which is a pre-IPO equivalent to the Company’s $14.00 per share offering price in May 2015, which the Company considered to approximate the fair value at January 14, 2015 as the operations of the business had not changed during the intervening period.

Upon closing of the IPO, the Company’s preferred stock warrants expired, were exchanged for equity warrants or were exercised by the holders, depending on the terms of the respective agreements and actions of the holders. The Company computed the fair value of the warrants just prior to the conversion date and the change in fair value was recorded to loss from change in stock warrant valuation within the statements of operations.

The Company’s Series C-1 preferred stock warrants expired upon closing of the IPO as they were not exercised prior to or contemporaneously with the closing of the IPO. As of May 11, 2015, 1,290,350 Series C-1 preferred stock warrants were forfeited and cancelled as they were not exercised prior to the initial public offering.

The Company resolved that, in accordance with the Conversion Agreement, dated December 22, 2014, effective immediately prior to the closing of the IPO, each share of preferred stock of the Company then outstanding and unexpired would automatically be converted into shares of the Company’s common stock. Due to the conversion of the underlying Series C-2 Stock and Series E Stock into common stock, the Series C-2, Series E and Convertible Note preferred warrants became exercisable for common stock. Following conversion to common stock warrants, these warrants were determined to meet the criteria for equity classification. Upon completion of the IPO, and the conversion of the Company’s Series C-2 preferred stock into common stock, the Series C-2 preferred stock warrants converted to warrants for purchase of 1,488 shares of the Company’s common stock at an exercise price of $24.23 per share. The Convertible Note Warrants converted to warrants for the purchase of 144,772 shares of the Company’s common stock at the initial public offering price of $14.00 per share. Series E Loan Warrants converted to warrants for the purchase of 23,396 shares of the Company’s common stock at the initial public offering price of $14.00 per share.

During 2015, all series D preferred stock warrant holders elected to exercise their warrants, contingent and effective upon closing of the IPO. Upon completion of the IPO, the Company issued 723,050 shares of its Series D preferred stock upon the exercise of 769,059 outstanding warrants, for which it received aggregate cash consideration of approximately $1,752 for such exercises. Certain warrant holders elected to exercise pursuant to the terms of the net exercise provision of the warrant. For purposes of such net exercise, the fair market value of the Company’s common stock was equal to the initial public offering price of $14.00. The Series D preferred stock converted into 6,729 shares of the Company’s common stock on May 11, 2015.

Security	Number of Preferred and Common Warrants at December 31, 2014		Number of Common Warrants at June 30, 2015		Exercise Price/Share		Expiration Date
Series C-1 redeemable convertible preferred stock warrants		1,290,350		—	$	37.16	2016-2017
Series C-2 redeemable convertible preferred stock warrants		157,912		1,488		24.23	2015
Series D redeemable convertible preferred stock warrants		769,059		—		1.07	2020
Series E redeemable convertible preferred stock warrants		2,512,562		23,396		23.51	2024
Convertible note warrants		—		144,772		14.00	2022
Common stock warrants		931		931		6.45	2019

The fair value of the preferred stock warrant liability was $0 and $730,543 at June 30, 2015 and December 31, 2014, respectively. During the three and six months ended June 30, 2015 the Company recorded a loss of $628,643 and $239,383, respectively, on the change in fair value of the preferred stock warrants, as the fair value of all preferred stock warrants was updated prior to conversion at IPO, with the fair value change being charged to loss from change in stock warrant valuation in the statements of operations. A loss of $56,322 and $56,322, respectively, was recorded during the three and six months ended June 30, 2014 on the change in fair value of the preferred stock warrants. The preferred stock warrant liability for outstanding Series C-2, Series D and Series E warrants was reclassified to additional paid-in-capital and recorded as common stock warrants upon the closing of the Company’s IPO.