Note 3.Fair Value Measurements

2017 Warrants associated with Registered Direct Offering

In accordance with ASC820, Fair Value Measurements and Disclosures, financial instruments were measured at fair value using a three-level hierarchy which maximizes use of observable inputs and minimizes use of unobservable inputs:

Level 1—Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly.

Level 3—Inputs that are unobservable for the asset or liability.

In connection with the Company’s December 4, 2017 registered direct offering (the “Registered Direct Offering”), the Company issued common stock warrants (“Common Warrants”) to certain investors to purchase an aggregate of 1,783,587 shares of its common stock. The Common Warrants are exercisable at $5.25 per share and expire on December 11, 2018. Additionally, as part of the Registered Direct Offering, the Company issued warrants (the “Placement Agent Warrants’) to certain investors affiliated with H.C. Wainwright & Co., LLC, the placement agent in the Registered Direct Offering to purchase an aggregate of 107,015 shares of its common stock. The Placement Agent Warrants are exercisable at $6.6562 and expire on December 11, 2018. The Common Warrants and Placement Agent Warrants were analyzed and it was determined that they require liability treatment. Under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the consolidated balance sheet as a current liability.

The fair value of the Common Warrants at December 4, 2017, the date these warrants were issued, and December 31, 2017 were determined to be approximately $2,064,000 and $2,683,000, respectively, as calculated using Black-Scholes with the following assumptions: (1) stock price of $5.00 and $5.60, respectively; (2) a risk-free rate of 1.66% and 1.76%, respectively; and (3) an expected volatility of 61% and 62%, respectively. The fair value of the Common Warrants were reported as a warrant liability on the balance sheet and the change in the fair value between December 4, 2017 and December 31, 2017 is reported as a change in fair value of the warrant liability on the statement of operations.

The fair value of the Placement Agent Warrants at December 4, 2017, the date these warrants were issued, and December 31, 2017 were determined to be approximately $81,000 and $108,000, respectively, as calculated using Black-Scholes with the following assumptions: (1) stock price of $5.00 and $5.60, respectively; (2) a risk-free rate of 1.66% and 1.76%, respectively; and (3) an expected volatility of 61% and 62%, respectively. The fair value of the Placement Agent Warrants were reported as a warrant liability on the balance sheet and the change in the fair value between December 4, 2017 and December 31, 2017 is reported as a change in fair value of the warrant liability on the statement of operations.

Level 3 Fair Value Sensitivity

Warrant liability

As of December 31, 2017, the fair value of the warrant liability utilizes inputs including: share price, expected volatility and risk-free rate.

A 10% plus/minus change in share price will result in an estimated increase/decrease of $0.7 million in the value of the warrant liability,

A 10% plus/minus change in the expected volatility will result in an estimated increase/decrease of $0.2 million in the value of the warrant liability, and

A 10% plus/minus change in the risk-free interest rate will result in an immaterial change in the value of the warrant liability.

There were no financial liabilities measured at fair value on a recurring basis as of December 31, 2016 and 2015.

The following table sets forth a summary of changes in the fair value of Level 3 liabilities for the years ended December 31, 2017, 2016, and 2015:



December 31, 2017	Beginning of period		Issuances		Change in fair value (3)		Extinguishments		End of period
Warrant liability	$	—	$	2,145,000	$	646,000	$	—	$	2,791,000
Embedded derivative liabilities		—		—		—		—		—
Total	$	—	$	2,145,000	$	646,000	$	—	$	2,791,000

December 31, 2016	Beginning of period		Issuances		Change in fair value (3)		Extinguishments		End of period
Warrant liability	$	—	$	—	$	—	$	—	$	—
Embedded derivative liabilities		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—


December 31, 2015	Beginning of period		Issuances		Change in fair value (3)		Extinguishments		End of period
Warrant liability (1)	$	136,235	$	—	$	108,539	$	(244,774)	$	—
Embedded derivative liabilities (2)		496,400		871,000		(274,800)		(1,092,600)		—
Total	$	632,635	$	871,000	$	(166,261)	$	(1,337,374)	$	—

(1) Prior to the close of the Company’s IPO on November 24, 2015, the Company considered its convertible note related warrant liability as a Level 3 financial instrument. On the grant date and in subsequent periods, the Company estimated the fair value of the warrant liability using the Black‑Scholes option pricing model, which requires inputs such as the expected volatility based on comparable public companies, the estimated fair value of the common stock, and the estimated time to liquidity. The Company determined the fair value of the liability immediately prior to the Company’s IPO and then reclassified the balance to additional paid-in capital upon the closing of the IPO. Immediately prior to the close of the Company’s IPO, the following inputs were used for the warrant liability:


	Immediately prior to close of IPO

Expected volatility based on comparable public companies		70	%
Estimated fair value of the common stock	$	9.20
Remaining contractual term		4 years

(2) Prior to the amendment of the Company’s outstanding convertible notes in September 2015, the Company considered its convertible note related embedded derivative liabilities as Level 3 financial instruments. The fair value of the embedded derivative liabilities related to the Company’s outstanding convertible notes was estimated on the grant date and at each reporting period using a probability weighted estimated returns method, which incorporated the “with‑and‑without” method to bifurcate the embedded derivatives. The amendment was deemed to be a substantive change and resulted in extinguishment accounting, which included the extinguishment of the embedded derivative liabilities. The Company used three different exit scenarios in valuing the embedded derivative liabilities: an initial public offering, a private equity financing, and a liquidation. A Monte Carlo simulation was run for the exit scenario immediately prior to the effective date of the note amendment, with the following inputs:


	Immediately prior to
	note amendment

Expected volatility based on comparable public companies	70	%
Estimated time to liquidity	0.1 - 0.2 years

(3) The change in the fair values of the warrant and embedded derivative liabilities are recorded in the statements of operations.