DERIVATIVE INSTRUMENTS

6 Months Ended

Jun. 30, 2017

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

12.DERIVATIVE INSTRUMENTS

The warrants issued in connection with the Company’s May 2014 public offering to purchase 1,750,156 shares of common stock have anti-dilution protection provisions and, under certain conditions, require the Company to automatically reprice the warrants. Accordingly, these warrants are accounted for as derivative warrant liabilities. The Company used the Binomial Lattice option pricing model and assumptions that consider, among other factors, the fair value of the underlying stock, risk-free interest rate, volatility, expected life, and dividend rates in estimating fair value for the warrants considered to be derivative instruments. Changes in the fair value of the derivative warrant liabilities are recognized currently in the Company’s consolidated statement of operations as a non-cash derivative gain or loss. For the three-month periods ended June 30,  2017 and 2016, the Company recorded a gain of $554,000 and $595,000, respectively, in other income (expense) in the statement of operations. For the six-month periods ended June 30, 2017 and 2016, the Company recorded a gain of $795,000 and a loss of $452,000, respectively, in other income (expense) in the statement of operations.

The fair value of these derivative instruments at June 30, 2017 and December 31, 2016 was $519,000 and $1.3 million, respectively, and included as a derivative warrant liability in current liabilities on the balance sheet. The assumptions used principally in determining the fair value of the warrants were as follows:

	June 30,		December 31,
	2017		2016
Risk free interest rate	1.4	%	1.2	%
Expected dividend yield	—	%	—	%
Contractual term (in years)	1.9		2.4
Expected volatility	82	%	89	%

The primary underlying risk exposure pertaining to the warrants is the change in fair value of the underlying common stock for each reporting period.

The table below presents the changes in the derivative warrant liability during the three-month and six-month periods ended June 30,  2017 and 2016:

	Three Months Ended June 30,
	2017		2016
Balance at March 31,	$	1,073	$	2,954
Fair value of warrants issued		—		—
Reduction in derivative liability due to exercise and modification of warrants		—		—
Increase (decrease) in the fair value of warrants		(554)		(595)
Balance at June 30,	$	519	$	2,359

	Six Months Ended June 30,
	2017		2016
Balance at December 31,	$	1,314	$	1,907
Fair value of warrants issued		—		—
Reduction in derivative liability due to exercise and modification of warrants		—		—
Increase in the fair value of warrants		(795)		452
Balance at June 30,	$	519	$	2,359

The Company’s March 2016 public offering resulted in a repricing of the existing warrants. The warrants’ prices were decreased from $5.75 per share to $3.87 per share. In addition, the number of warrants increased from 395,716 to 587,950. The decrease in the liability for the six-month period ended June 30, 2017 was primarily driven by the decrease in the fair value of the underlying stock price since December 31, 2016.