12. DERIVATIVE INSTRUMENTS

The Outstanding 2014 Warrants 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 September 30, 2017 and 2016, the Company recorded a loss of $3.1 million and $336,000, respectively, in other income (expense) in the statement of operations. For the nine-month periods ended September 30, 2017 and 2016, the Company recorded a loss of $2.3 million and $788,000, respectively, in other income (expense) in the statement of operations.

The fair value of these derivative instruments, net of the impact of the August 2017 warrant exchange discussed above, at September 30, 2017 and December 31, 2016 was $41,000 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:


	September 30,		December 31,
	2017		2016
Risk free interest rate	1.5	%	1.2	%
Expected dividend yield	—	%	—	%
Contractual term (in years)	1.6		2.4
Expected volatility	86	%	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 nine-month periods ended September 30, 2017 and 2016:


	Three Months Ended September 30,
	2017		2016
Balance at June 30,	$	519	$	2,359
Increase in derivative liability prior to warrant exchange		3,029		—
Reduction in derivative liability due to warrant exchange		(3,537)		—
Increase (decrease) in the fair value of warrants		30		336
Balance at September 30,	$	41	$	2,695


	Nine Months Ended September 30,
	2017		2016
Balance at December 31,	$	1,314	$	1,907
Increase in derivative liability prior to warrant exchange		3,029		—
Reduction in derivative liability due to warrant exchange		(3,537)		—
Increase (decrease) in the fair value of warrants		(765)		788
Balance at September 30,	$	41	$	2,695

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 Company’s August 2017 warrant exchange resulted in a repricing of the Outstanding 2014 Warrants. The exercise price of the Outstanding 2014 Warrants was decreased from $3.87 per share to $0.83 per share. In addition, the number of Outstanding 2014 Warrants increased from 10,403 to 48,507. The decrease in the liability for the nine-month period ended September 30, 2017 was primarily driven by the impact of the warrant exchange and to a lesser degree due to the decrease in the fair value of the underlying stock price since December 31, 2016.