DERIVATIVE FINANCIAL INSTRUMENTS

Since 2013, the Company has issued five tranches of common stock purchase warrants to secure financing, remediate covenant violations and provide consideration for amendments with respect to a credit facility extinguished in 2015.

Historically, the Company accounted for these instruments, which do not have fixed settlement provisions, as derivative instruments in accordance with FASB ASC 815-40, Derivative and Hedging – Contracts in Entity’s Own Equity. This was due to an anti-dilution provision for the warrants that provides for a reduction to the exercise price if the Company issues equity or equity linked instruments in the future at an effective price per share less than the exercise price then in effect for the warrant ("down round provision"). As such, the warrants were re-measured at each balance sheet date based on estimated fair value. Changes in estimated fair value were recorded as non-cash adjustments within other income (expenses), net, in the Company’s accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss. The Company recorded a loss on the change in the estimated fair value of warrants of $1.3 million and less than $0.1 million for the three and six months ended June 30, 2017, respectively.

As of January 1, 2018 the Company early adopted ASU 2017-11, which revised the guidance for instruments with down round provisions. As such the Company treats outstanding warrants as free-standing equity linked instruments that will be recorded to equity in the Consolidated Balance Sheet.

In accordance with the guidance presented in the ASU, the fair value of the derivative liability balance as of December 31, 2017 of $15.7 million was reclassified by means of a cumulative-effect adjustment to equity as of January 1, 2018.

The Company calculated the fair value of the warrants using the Black-Scholes Model as of December 31, 2017, using the following assumptions:



	December 31, 2017
Fair value of common stock	$	21.07
Remaining life of the warrants (in years)	0.1 - 2.0 years
Risk-free interest rate*	1.39 - 1.89%
Expected volatility**	33 - 43%
Dividend yield	—		%

*The risk-free interest rate is based on the U.S. Treasury security rates for the remaining term of the warrants at the measurement date.

**Expected volatility is based on an analysis of the Company’s historical volatility.