Warrants

In connection with the Hercules Term Loan (see Note 5, Debt), the Company issued a warrant to purchase 128,231 shares of Series C convertible preferred stock. The convertible preferred stock warrant was recorded as a liability and is adjusted to fair value at each balance sheet date, with the change in fair value being recorded as a component of other income (expense), net in the condensed consolidated statements of operations. At issuance, the fair value of the warrant was estimated to be $158 thousand. During the three and nine months ended September 30, 2015, the Company recorded a loss of $6 thousand and a gain of $45 thousand related to the change in fair value of preferred stock warrant liability. The warrant to purchase Series C convertible preferred stock was converted into a warrant to purchase 128,231 shares of the Company’s common stock upon the consummation of the Merger in July 2015. As a result, the fair value of the preferred stock warrant liability of $93 thousand was reclassified into additional paid-in capital. At September 30, 2016 and December 31, 2015, the warrant had not been exercised and was still outstanding.

The Company used the Black-Scholes option-pricing model to estimate the fair value of the convertible preferred stock with the following weighted-average assumptions:

	Upon the closing of the Merger on July 23, 2015
Series C Warrant:
Expected term (in years)		5.0
Expected volatility		31.8%
Risk-free interest rate		1.7%
Expected dividend yield		0%

In connection with the Merger and the 2015 Private Placement, in July and August 2015, the Company issued the 2015 Private Placement warrants that provide the option holder the right to purchase 198,760 shares of common stock at an exercise price of $5.00 per share to private placement agents as payment for services provided. These 2015 Private Placement warrants are exercisable at any time at the option of the holder until the five year anniversary of its date of issuance.

The Company estimated the aggregate fair value of the 2015 Private Placement warrants on the issuance date to be $316 thousand which was recorded in additional paid-in-capital as an offering cost against the total proceeds from the 2015 Private Placement. The 2015 Private Placement warrants were accounted for as equity awards. At September 30, 2016 and December 31, 2015, no 2015 Private Placement warrants had been exercised and all remain outstanding.

The fair value of the 2015 Private Placement warrants was estimated at their grant dates =using the Black-Scholes pricing model and the following weighted-average assumptions:

	Upon Issuance
Common Stock Warrant:
Expected term (in years)		5.0
Expected volatility		31.8%
Risk-free interest rate		1.6%
Expected dividend yield		0%

In connection with the 2016 Private Placement, in August and September 2016, the Company issued the 2016 Placement Warrants that provide the option holder the right to purchase 1,380,745 shares of common stock at an exercise price of $2.95 per share. These 2016 Placement Warrants are exercisable at any time at the option of the holder until the seven year anniversary of its date of issuance. The 2016 Placement Warrants also contain protection whereby warrants will expire immediately prior to the consummation of a Change of Control and holders have the right to receive cash in the amount equal to the Black-Scholes value of warrants. A Change of Control is defined as (i) a merger or consolidation of the Company with another corporation, (ii) the sale, transfer or other disposal of substantially all of the assets or a majority of the Company’s outstanding shares of capital stock, (iii) a purchase or exchange offer accepted by the holders of a majority of the outstanding voting shares of the Company’s capital stock, or (iv) a “person” or “group,” as defined by Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, is or will become the beneficial owner, directly or indirectly, of at least a majority of the voting power of the Company’s capital stock. The 2016 Placement Warrants were accounted for as a liability at the date of issuance and are adjusted to fair value at each balance sheet date, with the change in fair value recorded as a component of other income (expense), net in the condensed consolidated statements of operations.

As separate classes of securities were issued in a bundled transaction, the gross proceeds from the 2016 Private Placement of $13.8 million was allocated first to the 2016 Placement Warrants based on its fair value upon issuance, and the residual was allocated to the common stock. The fair value upon issuance of $2.7 million for the 2016 Placement Warrants was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected term of seven years, expected volatility of 61.6%, risk-free interest rate of 1.4% and expected dividend yield of 0%.

During the three and nine months ended September 30, 2016, the Company recorded a loss of $1.6 million related to the change in fair value of the 2016 Placement Warrants. The fair value of the 2016 Placement Warrants of $4.4 million was estimated using the Black-Scholes option pricing model and the following weighted-average assumptions:

	September 30, 2016
2016 Placement Warrant:
Expected term (in years)		6.9
Expected volatility		64.3%
Risk-free interest rate		1.4%
Expected dividend yield		0%

At September 30, 2016, the 2016 Placement Warrants had not been exercised and were still outstanding.